Since the launch of Opendoor in 2014, motivated home sellers have become increasingly likely to consider selling their home to a so-called iBuyer.
Short for “instant buyer,” iBuyers use an algorithm to make a “fair market” offer on a home. Should the seller accept the offer, they can close the transaction in a matter of days and have a flexible move-out date. It also allows sellers to tap the equity in their existing home so they can bid on the next house they buy.
The added convenience to what is traditionally a long and stressful process of buying and selling homes comes at a price, though. It’s long been suspected that the offers iBuyers extend to sellers are below market rate so they can make more money when they fix up the home and sell it on the open market.
This perception has dogged the industry since its inception. iBuyers, however, say the vast majority of their money comes from the roughly 7.5 percent transaction fee they charge, not from the difference between what they pay for the house and what they sell it for.
But to what degree is this true? A new study by real estate technology consultant Mike DelPrete reviewed more than 20,000 iBuyer transactions, which accounts for more than 95 percent of all iBuyer transactions from 2018 to present.
His analysis focuses on Opendoor and Zillow, which account for 86 percent of all iBuyer volume. He concludes that the median price appreciation between what those two companies buy and sell a house for is 3.3 percent.
DelPrete also makes two key adjustments to this number. First, he subtracts the natural price appreciation that’s occurring in the market. In 2019, that number is 3.8 percent, according to Black Knight. The average time between when an iBuyer buys and sells a house is 90 days, so adjusting price appreciation for that time period is 0.9 percent. That leaves the difference at 2.4 percent.
DelPrete then tries to account for the home price appreciation related to the renovation and repair costs iBuyers put into homes before they sell them. Zillow puts an average of $12,575 into repair and renovations. Opendoor averages 2 to 2.5 percent of the value of the home. DelPrete assumes that half of the remaining appreciation is related to renovations and repairs.
This leads to a final estimate: iBuyers purchase houses for 1.2 percent less than what they sell them for.
There are a few caveats. The numbers can vary from market to market, although they don’t deviate much. And because the estimates are based on medians, there are outliers in the data where the number is both much less and much lower.
“The evidence in this research study strongly suggests that iBuyers are offering close to fair market value for the homes they purchase,” DelPrete writes.
DelPrete tries a different methodology and comes to a similar conclusion. Using a third-party home valuation model from First American, he concludes iBuyers buy homes at a price 1.4 percent below what they sell it for.
What does this mean for the consumer? For a $270,000 house, selling to an iBuyer would net $3,500 less than if you sold it on the open market. You’d also pay a transaction fee of 7.5 percent, slightly more than the traditional 6 percent that realtors charge. That would add another $4,050 to the $3,500 that you’d leave on the table by selling to an iBuyer.
However, there are two costs you wouldn’t have to pay by selling to an iBuyer. One is the cost of cleaning, renovating, or repairing the house before sale. The second is holding costs like property taxes that you have to pay while you wait for the home selling process to play out.
Depending on how much those are, the difference between selling to an iBuyer and selling traditionally through a realtor might be negligible. And if it’s not, the added cost may be worth it if you’re in a situation where you need to move as soon as possible, or if you value the convenience of selling to an iBuyer enough that you don’t care how much extra it costs.