You may have heard “instant offer” commercials aimed at homeowners who want to sell their home quickly online for a cash offer. The “instant offers” or iBuyers concept is not new. In 1978 when I started my real estate career, our company offered a guaranteed sales program for home sellers. The program was used to enable a home seller to move on to their next home without any worries about selling their old home. We would complete a market evaluation on their home and then the company would make an offer to them based on that evaluation, less commissions, fixup expenses, carrying costs, and closing costs. Often a seller would find the amount offered too low and elect to sell the home on the open market. The concept evolved and eventually the Colorado Real Estate Commission even developed a standard form called the “licensee Buyout agreement”.
The iBuyer concept is no different today; however, the platform and the amount of financial backing is much larger these days. The platform, of course, is the Internet. Financially, back in the ’70s, most guaranteed sales programs were backed by the real estate broker having a line of credit or cash on hand to make such an offer. Today, there are billions of dollars of investment and debt funding available to purchase homes in a similar manner. In fact, iBuyer is a misnomer. The iBuyer doesn’t really want to buy the home and keep it. iBuyers are groups of investors and/or entities that expect a return on their investment.
Another similarity to the past – which continues in the current market – is the Corporate Employee Home Buyout Program. In this case, a relocating corporate employee might receive an offer from the corporation to buy their home. This enabled the employee to have an efficient move to a new location without worries about getting their home sold. Again, these offers were typically below what the home could be sold on the open market. Corporations, usually in the business of doing something else, hire a corporate relocation company to handle the entire move for the transferring employee. In both of these examples, the home seller would just need to decide if the costs of these programs were equal to the convenience of the offer.
In 1996, another program started, which was marketed on everything from billboards to posters on telephone posts. That program is called “We buy ugly houses®”. Their website touts that they have purchased 75,000 homes since their inception.
All of these different programs, now grouped in the iBuyer business model, show that there is consumer demand for convenience. Nevertheless, convenience always has an expense and the home seller needs to be aware of what those fees will total up to be.
Is iBuying home flipping?
iBuying shouldn’t be confused with home flipping. In most cases, iBuyers are focusing on homes that are generally in good shape. iBuyers will usually do minimal repairs to accelerate the marketing of the home once they own it, but they are not adding square footage, decks, garages, etc.
Yet another way to look at iBuying is comparing it to a process that most of us are familiar with – the car trade-in buying process. A car dealership makes you an offer to just take away your old car, then you walk out of the dealership with a shiny new car. Many home builders across the country have partnered and funded iBuyer programs to help create a similar experience for the new home buyer.
When do these programs tend to be available?
It is easiest to turn a profit for any of these programs in a hot real estate market. Therefore, these types of programs surface in those conditions. In a slow market, they can quickly become a losing proposition. Investors funding the iBuyer program will want a return on their money. Just like any other investment, if the investment is not profitable, continued success is not likely. As a market slows, the offers will usually get lower than homeowners may be willing to accept. If offers from iBuyer companies are too low for homeowners to accept on a general basis, the iBuyer company will lose its customers. The exception to this is corporate relocation, especially back in the ’80s. Corporations would often take losses on an employee’s home as a cost of doing business in order to retain and assist a valuable employee.
The iBuyer concept has many considerations. In my next article, Part 2 of this topic, we will be exploring factors for homeowners to assess including which companies are offering iBuyer programs, participating housing markets, qualifications for a home, list of fees, and more.
By Duane Duggan. Duane has been a Realtor for RE/MAX of Boulder in Colorado since 1982 and has facilitated over 2,500 transactions over his career, the vast majority from repeat and referred clients. He has been awarded two of the highest honors bestowed by RE/MAX International: The Lifetime Achievement Award and the Circle of Legends Award. Living the life of a Realtor and being immersed in real estate led to the inception of his book, Realtor for Life. For questions, e-mail DuaneDuggan@boulderco.com, call 303.441.5611 or visit boulderco.com.