iBuyer Beware - The Costs of Selling to Startups

With all the technology that's out there now, it seems like some jobs are becoming obsolete. Machines have replaced assembly line workers, and even self-checkout machines are taking over grocery stores. But will there be a technology to replace the Realtor?

Some services on the market now that claim to do so, letting sellers "skip" the negotiation process and the work with a real estate agent. These iBuyers, such as Knock, OpenDoor, and OfferPad aim to sell your home quickly and conveniently, often allowing homeowners to close on their home in a matter of days. But does speed and convenience beat out the quality of a trained Realtor? Many industry experts say no.

Most of the iBuyers operate in a similar fashion. A seller contacts the company about selling their home, and the investors use what's called an automated valuation model to determine an approximate value of the home. According to MetroBrokers, this model uses tax records and comps to determine the home's value. Many of the companies make the offer site-unseen, although Knock will make an in-home valuation if requested.

If the iBuyer's offer is accepted, an inspector is sent out to the home to note changes that they feel need to be made before the home is sold. The seller can choose to repair the problems on the list or deduct the costs out of the final price of the home. Once the repairs are addressed, the home is sold to the iBuyer and the seller can close.

For those looking to move quickly for a job or other house, an iBuyer may be the right fit. But as they say, if something sounds too good to be true, it probably is.

As Forbes notes in their analysis of iBuyers, there isn't a person on the other side of the transaction, there's an investor - and investors like to make money. Although the iBuyers claim to skip the fees of going through a Realtor, they still charge a 6% commission, the same commission as most Georgia realtors. Additionally, they charge more fees to account for the risk they are taking in buying a home unseen, having costs potentially add up, or being unable to sell the property for a profit. Though Forbes states there isn't a lot of data on this, they estimate that the cost could be "up to more than 10% of the fair market value of a home.

One local Atlanta agent put the iBuyers to the test. In his article on Inman and also published on WFG National Title Insurance, Chad Schernikau used his own home in the Atlanta area to compare the offers from Knock, OfferPad, and Open Door.

The home, a 1950's renovated ranch style, was updated to add more than 1,500 square feet to the home along with a basement, and was valued at $495,000. Knock's final purchase price offer came in at $373,00 after Schernikau asked for an in-home valuation, and included approximately $22,000 in fees, leaving him with $351,000. OfferPad's purchase price offer came in at $265,000 with fees of more than $15,000. On OpenDoor, a different home was used because the company doesn't buy old homes, but the final difference between the company and a traditional realtor totaled a little more than $45,000.

Clearly, based on price alone, there is cause for concern to sell to these properties. But in addition to low valuations, as Schernikau mentions, these iBuyers lack the human component of real estate. An agent is better qualified to value your home with their knowledge of the local market and what buyers are looking for. They can also help you negotiate the cost of repairs and other fees associated with closing, rather than just paying what an appraiser asks out right. Not only that, but many agents we've spoken to said it's also difficult to get in touch with these companies, and they aren't always available like many Realtors.

For some sellers who are in a rush or need cash quickly, an iBuyer may be the right choice, but it's hard to deny the expertise and quality that a Realtor can provide. After all, both buying and selling a home can be an emotional and important step in life, and it's important to have someone physically by your side to help you through the process.