(An early version of this piece appeared in Forbes.com.)
One of the biggest trends in the residential real estate industry in recent years has been the introduction of the so-called “iBuyer” companies like Opendoor, OfferPad and Zillow Offers that buy houses directly from homeowners and then resell the houses.
Phoenix is ground zero for the iBuyer explosion. The two largest iBuyer companies, Opendoor and OfferPad, started their house buying and selling operations in Phoenix. The third largest iBuyer, Zillow Offers, is also very active in Phoenix. Today, Phoenix is the largest market for iBuyers with between 5% and 6% of houses being bought by iBuyers in recent months according to real estate tech expert Mike DelPrete. That’s over 1,000 homes a month.
How Phoenix real estate agents have been adapting to iBuyers may foreshadow the future in many other markets so let’s see what’s been going on in Phoenix.
But first, if you’re not familiar with iBuyers, a homeowner can fill out an online form and get an offer a day or two or three later from the iBuyer, including the price the iBuyer is willing to pay for the house.
If the homeowner accepts/signs the “instant” offer, the iBuyer will send out home inspectors and come back with a list of repairs and the estimated costs for the repairs the iBuyer wants done to the house before they will complete the purchase. The seller can make the repairs or the seller can agree to have the cost of the repairs added to the fees the seller will pay to the iBuyer at closing.
A common real estate agent complaint about iBuyers is that iBuyers tend to ask for a lot more repairs and a lot more money for repairs than traditional buyers. The seller can typically cancel the contract if they can’t come to an agreement with the iBuyer on the repairs.
Each iBuyer has a different set of fees they charge the seller and there are other differences between the different iBuyers which make it hard for homeowners to compare two or more iBuyer offers, or to compare them to selling the house the traditional way (by hiring a real estate agent and listing the house in the local MLS).
Traditional Sale = More Money
The one huge advantage of selling the traditional way is the seller typically makes a lot more money.
My impression looking at online forums of Phoenix real estate agents is the most common complaints about iBuyers are that iBuyers tend to offer lower prices, have high fees and demand higher repair allowances than in traditional sales. That is, Phoenix real estate agents tend to complain that home sellers make a lot less money overall when they sell to iBuyers.
Sell to iBuyer = More Convenient
Although net profit usually isn’t one of them, there are several advantages to selling the iBuyer way.
- You don’t have to get the house ready to sell, no disruptions to the family living in a house being painted, getting new carpeting installed, and so on.
- You don’t have any showings to prospective buyers like in a traditional sale. That means you don’t have to have the house in spic and span condition at all times and to be ready to leave the house for showings on short notice. Showings can be a pain in the neck, particularly if the family has small children, someone with special needs living in the house, or if they have a lot of pets.
- You can often choose the exact closing date. You don’t have to work around the buyer’s schedule, you can choose the date most convenient for you.
- Some iBuyers let you stay in the house for a little while after you close so moving out is less hurried, less stressful.
- No appraisal contingency. In a traditional sale, a low appraisal usually re-opens up the price negotiations which is stressful and sometimes ends up killing the sale.
- No financing contingency. Perhaps the biggest nightmare when selling a home the traditional way is when you find out right before closing that the buyer can’t get a mortgage for some reason and the deal is off. If the seller has already moved out of the house, it’s an even bigger nightmare. Fortunately, that nightmare is rare but when you sell to an iBuyer it’s not a possibility because there’s no financing contingency in the purchase contract.
Real Estate Agents Adapt to iBuyers
Okay, back to Phoenix. Some real estate agents have told stories about often going into listing appointments with homeowners and getting questions about selling to iBuyers, or the homeowner would already have an offer from an iBuyer printed out and they’d ask the agent about it. Or, sometimes, the homeowner never brought up the subject of iBuyers but a little while later the agent would notice they sold the house to an iBuyer.
IBuyer companies are spending huge amounts of money on advertising and homeowners have gotten the message and are asking questions. Mike DelPrete, mentioned above, estimates that about 40% of Phoenix sellers will get an iBuyer offer before they list their home.
The attitude among real estate agents in Phoenix seems to have shifted over the last year toward, “We need to get on top of this and become experts on all the different ways homeowners can sell their houses so we can give each home seller the information they need to make the best decision for their particular situation — whether to sell to one of the iBuyers, and if so, help them decide which one, or whether to sell the house the traditional way.”
So, the new thing that seems to be evolving in Phoenix is for real estate agents to represent the seller, get a bunch of iBuyer offers on the homeowner’s behalf, analyse the offers and advise the homeowner on the options, and coordinate everything with the iBuyer as directed by the seller, including the repair negotiations.
It also seems the system is evolving so the commission agents charge homesellers to represent them is less when the seller sells to an iBuyer because there’s less work for the agent when the seller sells to an iBuyer.
Some of the iBuyers will, in fact, pay the sellers’ agents a 1% referral fee. Or, of course, the seller and homeowner can sign an agreement before they start for the seller to pay the agent to represent them for a fee of X% if the seller sells to these iBuyers, Y% if the seller sells to those iBuyers, and Z% if the seller decides to list the house in the MLS and sell it the traditional way.
This idea of real estate agents becoming iBuyer experts as well as traditional home sale experts has become common enough in Phoenix that a couple of agents made a paid course to teach agents how to do it.
In a future post, I’ll discuss the other end of the transaction and give you some tips about buying homes FROM iBuyers. After all, iBuyers aren’t only buying over a thousand homes a month in Phoenix, they’re also selling over a thousand homes a month in Phoenix, and they behave differently than your average home seller.
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