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Who Is An iBuyer And Why Does It Matter?
An iBuyer, or instant buyer, is a purchaser of real estate using various online assessment tools to determine property value. Fundamentally, iBuyers are companies seeking to simplify the complex, slow, and stressful nature of real estate transactions. One of the first and most successful iBuyers has been Opendoor.
Fundamentally, iBuyers are companies seeking to simplify the complex, slow, and stressful nature of real estate transactions.
The first iBuyer was Opendoor, a San Francisco-based company founded in 2014. At that time, co-founder Eric Wu set out to address the extremely inefficient real estate industry. He envisioned an industry where “home buying and selling is simple, instant, and hassle-free. If that means building the experience from the ground up, that’s what we’ll do… Our focus is on what’s going to produce the best customer experience.”
Opendoor is a digital real estate platform for buyers and sellers. As a real estate company, Opendoor also purchases homes to sell them at a profit. Opendoor makes money via seller fees when homes are sold through the platform, profits from homes bought by sellers and resold on the platform, and home loans in the form of interest income.
At the time, this vision provided the basis of the Opendoor mission statement. Which did not expect to pioneer a new movement that many real estate companies would later replicate.
While there are slight variations on the iBuyer business model today, every model uses algorithmic technology to make near-instant cash offers to homeowners at or around fair market value. Many also charge various fees to supplement their revenue generation.
How does an iBuyer purchase and then sell a home?
The process is relatively straightforward and can be explained in a few steps:
First, a homeowner approaches an iBuyer such as Opendoor intending to sell their home. This means the buyer visits a website and fills out a form. Offer requests are free and require no obligation to sell.
The iBuyer then uses algorithmic technology to value the home. Traditional valuation methods involve analyzing the sale price of similar homes in the area, but this does not capture the nuances of individual properties. Instead, iBuyers combine proprietary valuation models with information supplied by the seller. This includes details regarding specific features and upgrades or any other information about the overall condition of the home. A valuation can be further supported by appraisals from local pricing experts. In some cases, the iBuyer may feel confident enough to value the property without making a physical inspection. Fees are laid out clearly, as are the potential net proceeds for the seller.
The iBuyer will make a cash offer to the seller within 24-48 hours if the valuation falls within a predetermined price range. For example, Opendoor only considers homes built after 1960 with an estimated value of between $125,000-$500,000. Why? Because this constitutes most American homes. Properties falling outside this range cannot be valued accurately because there are fewer data points for the algorithm to consider.
Once the homeowner accepts the cash offer, the iBuyer charges a seller fee. This fee is invariably higher than the industry average of 6%. However, homeowners are essentially paying a premium to get their house sold quickly and without fuss. Any repair work is deducted from the net proceeds.
If required, renovations or other repairs are carried out on the property before it is put back on the market by the iBuyer. At this point, sellers stipulate a closing date specific to their circumstances. In most instances, payment is within a few business days of closing.
Key takeaways:
iBuyers are a new breed of online real estate companies using algorithmic technology to provide near-instant cash offers to those who want to sell their home.
The first iBuyer was Opendoor, a San Francisco company founded in 2014. Co-founder Eric Wu had the vision to simplify the real estate transaction process, inadvertently starting a trend involving the formation of many similar companies.
iBuyers differ slightly in their valuation methods or fee structures. However, they all use technology to make valuations at or near fair market value. Some companies, such as Opendoor, choose to supplement their valuation method with specific home features or upgrades.
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