What is an iBuyer, and should I use one to purchase a home?

Erik J. Martin
The Mortgage Reports contributor

iBuyers: Simplifying real estate transactions

Even if you haven’t heard the term “iBuyer,” you likely know the names of popular iBuying companies like Zillow, Offerpad, and Opendoor.

These web-based companies use technology to make instant cash offers to home sellers. They make repairs or improvements on properties if needed, then sell them to prospective home buyers.

In many ways, iBuying is simpler and faster than traditional home sales. But there are drawbacks to be aware of, too.

Here’s what you should know about the iBuyer process if you’re considering buying a home from one of these companies.

Verify your home buying eligibility (Jun 23rd, 2021)

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What is an iBuyer?

An iBuyer is a company that purchases homes from sellers who accept a cash offer, without the company necessarily seeing or inspecting the property first.

iBuyers are technology-based; they use an ‘automated valuation model’ or AVM to determine the home’s value and generate an instant offer for the seller.

This is much faster and simpler than a traditional sale; which involves open houses, competing offers, and negotiation between buyer and seller.

Vishal Gupta, owner of We Buy Houses in the Triangle LLC, explains: “[iBuyers] often purchase homes that are in at least decent condition and which only require basic minor cosmetic upgrades or repairs.”

“Their business model follows the principle of purchasing at a price lower than what the home seller would likely get if they sold in a traditional way,” Gupta says. “Next, the iBuyer company lists the purchased home for sale at a list price that’s often above comparable homes so that a profit can be made.”

For homeowners, the advantage of selling to an iBuyer company is that you can unload your property quickly, with some platforms promising a guaranteed offer in 24 hours or less.

The seller doesn’t have to renovate, enlist a real estate agent, stage and show the home, or worry about the transaction collapsing because the buyer can’t get a mortgage loan. They can get cash quickly, which comes in handy if they are looking to purchase their next home.

Buying a home from an iBuyer

Sellers aren’t the only ones who can benefit from working with an iBuyer. The houses iBuyers purchase, improve, and list for sale can be bought by prospective home buyers.

Benefits of purchasing a home from an iBuying app can include:

  • New homes listed frequently
  • Easy to schedule viewings
  • Homes are often in turn-key condition
  • No hassles with the seller; can be a smoother process

“The instantaneous nature of iBuying means that new inventory is constantly being added to the market,” notes Jarred Kessler, CEO of EasyKnock, a sales leaseback company.

“With buyer demand so high and home supply so low, this makes iBuyer properties for sale enticing to home shoppers who are looking to buy now.”

Another plus of working with an iBuyer is that their listed properties are usually immediate occupancy. That means it’s easy to schedule a home showing, often on very short notice.

“Also, you don’t have to worry about emotions getting involved on the selling side. In a usual transaction between a home seller and buyer, a deal can collapse if either side gains a negative impression of the other,” explains Gupta.

“Most iBuyers go out of their way to ensure the property was renovated properly, and they want a reputation for providing quality homes” –Brandon Brown, Broker/owner, Baybrook Realty

You can likely trust that an iBuyer has made the necessary repairs and improvements to ensure a speedy and hassle-free sale.

However, it’s still recommended you get your own independent home inspection to make sure there aren’t any hidden issues with the home that you could end up paying out of pocket to repair.

“Most iBuyers go out of their way to ensure the property was renovated properly, and they want a reputation for providing quality homes,” says Brandon Brown, broker/owner of BayBrook Realty.

Some iBuyer businesses even provide the peace of mind of a money-back guarantee.

For instance, Opendoor gives buyers 90 days in which to return their new home and get a refund (after a small fee is assessed and conditions are met).

Verify your home buying eligibility (Jun 23rd, 2021)

Downsides of using an iBuyer

For sellers, the downside of using an iBuyer to sell your home is that fees can be high. Homeowners often pay a convenience fee of up to 9.5% or more to an iBuyer.

By contrast, traditional real estate agent fees are around 5-6% of the purchase price.

Buyers, on the other hand, usually don’t pay extra to acquire a property from an iBuyer.

One drawback for home buyers is that iBuyers aren’t as willing to negotiate or haggle regarding price or contingencies. They desire a rapid sale with as little red tape and bargaining as possible.

That means you can probably expect to pay more for an available iBuyer property than you would for a comparable property listed by an individual home seller.

The iBuying process

To find an available iBuyer property, you can search directly on an iBuyer’s website or app for listed properties in your area.

Or, you can recruit a real estate agent who can search through your local multiple listing service for iBuyer homes for sale.

“A buyer’s agent can represent your interests and offer valuable advice. Your agent can help you find, negotiate and purchase an iBuyer home,” says Brown.

The majority of iBuyer sales companies are registered brokers… In many cases, the homebuyer doesn’t know that it’s an iBuyer company who is selling the home.” –Brandon Brown, Broker/owner, Baybrook Realty

“But even if you are not specifically searching for an iBuyer property, it’s possible that you may find a home for sale that has been listed by an iBuying company,” he explains.

“The majority of iBuyer sales companies are actually registered brokers. Most list their homes for sale with a licensed agent who works for the company. In many cases, the homebuyer doesn’t know that it’s an iBuyer company who is selling the home.”

iBuyer properties can commonly be toured most hours of the day without having to make an appointment, which is a nice convenience.

Making an offer

Note that you’ll still need mortgage lender preapproval before making an offer on an iBuyer property, unless you intend to pay all cash.

You can either make an offer via your agent or by contacting the iBuyer directly, after which time you can attempt to negotiate price and terms with the company.

You should make your offer contingent on the results of a home inspection; you want to be able to back out of the agreement if any deal-breaker issues are found by the inspector.

If you are not working with your own buyer’s agent, you’ll be assigned an agent who works for the iBuyer company. The agent will help you structure a competitive offer and purchase agreement.

Closing on the home sale

You are typically allowed to pick a closing date within 10 to 60 days after you sign a purchase agreement.

Purchasers of an iBuyer home can choose their own mortgage lender, professional home inspector, real estate attorney, and title company, as well.

Some iBuyers offer mortgage financing if you need it, and others may provide in-house title and escrow services, making the transaction and closing simpler for buyers.

“Don’t skimp on inspections, and be sure to shop around for the best mortgage before purchasing an iBuyer home,” recommends Kessler.

Check your mortgage options (Jun 23rd, 2021)

Which iBuyer is best?

iBuyer companies come in sizes large and small. Among the biggest and most popular iBuyer platforms are:

  • Offerpad
  • Opendoor
  • Knock
  • KellerOffers
  • Zillow Offers
  • RedfinNow

Each iBuyer company has its pluses and minuses and terms of service.

All have a robust online presence, and most provide a user-friendly app that answers most questions and includes listings of properties for sale, if available in your area.

You’re free to shop around on as many iBuyer platforms as you like; and it makes sense to do so, since each one lists properties it’s purchased and you’ll see a different selection from each company.

It’s important to perform your due diligence as a buyer, whether you are interested in purchasing from an iBuyer or a traditional seller.

That means enlisting a Realtor or real estate agent, or at least conducting your own comparative market research.

Remember that there is often a trade-off involved in purchasing an iBuyer home: You will likely pay a higher price in exchange for greater convenience and a quicker, smoother transaction.

iBuyer FAQ

What is an iBuyer in real estate?

An iBuyer is a real estate company that purchases and sells homes via an online platform. iBuyers use valuation algorithms that allow them to make instant cash offers to home sellers. Then they quickly improve and list the property for sale to buyers. Popular iBuyer businesses include Opendoor and Offerpad.

Is iBuying safe?

Yes. Purchasing a home for sale from an iBuyer company isn’t much different from a traditional home buying transaction. It’s best to enlist a real estate agent and attorney who can review the purchase contract carefully and look out for your needs.

“iBuyers sell homes just like any other seller. Many are becoming real estate brokerages and, in theory, could be subjected to even higher standards per your state’s Real Estate Commission,” says Vishal Gupta, owner of We Buy Houses in the Triangle, LLC.

Should I sell my home to an iBuyer?

Selling a home to an iBuyer has its advantages and disadvantages.

You can get an instant cash offer, with no surprises. You won’t have to improve, list, stage, or show your home to shoppers — you sell “as is.” You may be able to avoid having to pay a real estate agent commission fee. And if you are in a hurry to sell, this option provides speed and convenience.

However, you will likely receive less money for your home than if you sold it the traditional way. And “convenience fees” charged by iBuyers can be high.

Should I buy a home from an iBuyer?

Purchasing a home from an iBuyer could be a smart decision if you fit the right profile.

“People who don’t have time to work with a traditional agent and those who are looking for a move-in ready property, as well as those who want to avoid having to make repairs and upgrades, are good candidates,” says Jarred Kessler with EasyKnock.

However, be prepared to likely pay more for an iBuyer home for sale than a comparable property on the market.

Is Zillow an iBuyer?

Yes. Zillow’s iBuying service is called Zillow Offers. Its selling process involves completing an online application, receiving a market value, scheduling a free in-person evaluation, and reviewing a final offer made by Zillow. Advertised charges involved include 6% for selling costs, 1-2% for closing costs, and 2.5% (on average) for service charges.

Is Redfin an iBuyer?

Yes. Redfin’s iBuying service is called RedfinNow. Its selling process involves requesting an offer online, receiving an offer after an evaluation, arranging for an inspection if you accept the offer, scheduling a closing date of your choice, and getting paid. It charges a service fee of 6-12% and estimated closing costs of 1%, but no real estate agent fees.

Is it easier to buy a home using an iBuyer?

It may be easier to purchase a home using an iBuyer. That’s because the iBuyer company has presumably made the needed improvements to ensure a happier buyer and quicker sale. Note that the iBuyer company may not be willing to negotiate much on price or terms. If this is acceptable to you, it can speed up the transaction.

“Some aspects may be easier, like being able to view the home whenever because it is vacant or closing in a shorter time period. However, negotiations may take a little longer, and the iBuyer may be less flexible in pricing,” says Vishal Gupta, owner of We Buy Houses in the Triangle, LLC.

 

How do I get preapproved for a mortgage?

As with any home purchase, you need a pre-approval letter from a mortgage lender before you can make an offer on an iBuyer platform.

There are three main steps involved in getting preapproved for a mortgage:

  1. Fill out a lender’s home loan application online, over the phone, or in person
  2. Prove your income and assets by providing key documentation, including the last two years’ worth of W-2s and/or 1099s, the last two years’ tax returns, paycheck stubs for the last 30 days, financial account statements, and more
  3. Wait for your lender to approve your mortgage loan

Many lenders use automated pre-approval systems, which can return an approval letter to borrowers in a day or less.

This letter will outline the terms of the mortgage you qualify for, including your interest rate, annual percentage rate (APR), closing costs, and other homeownership costs like mortgage insurance.

Your pre-approval letter will also verify your maximum loan amount, so you know exactly how much house you can afford.

What are today’s mortgage rates?

Today’s mortgage rates are very low, which helps to boost home buyer’s borrowing power. Check rates from a few different lenders to see how much house you can afford, and who can give you the best deal on your mortgage.

Verify your new rate (Jun 23rd, 2021)