98% of all iBuyer offers are declined. Instead, iBuyers often sell your information to “partner” brokers for referral fees.
Direct Cash Buyers (dubbed as iBuyers) are private real estate investors who do not have a legal obligation to represent consumers in a real estate transaction. The primary legal responsibility of an iBuyer is to shareholders, not to consumers. During the recent PropTech (Property Technology) boom, the iBuyer trend has become a highly-contested residential real estate issue. The iBuyer proposition requires careful consideration from consumers because it directly affects how Americans buy and sell homes, how much the process costs, and how transparent it is.
iBuyers claim that their service adds convenience, speed, liquidity and saves on costs when selling a home. In this overview, we examine these propositions based on facts. It should be noted that all iBuyer models operate in a “black box.” The exact fees associated with iBuyers’ past transactions are effectively hidden from the public and can only be verified with a full audit. Failure rates, referral fees, service fees, market discount home offers, and assessed repair costs associated with iBuyer models in this article are estimated based on consumer feedback, public sources, and companies’ statements about their business models.
HomeOpenly never recommends selling a home without real estate agent representation to a private real estate investor. As a consumer, you should only approach iBuyers with help from a qualified and impartial real estate agent – each and every iBuyer has this exact advice written into their own Terms of Service.
iBuyers often proclaim saving consumers on fees, but this is not true. The primary revenue source for iBuyers, such as Zillow Offers and Opendoor, are broker-to-broker referral fees that make buying and selling homes more expensive. Zillow Offers operates on a 98% failure rate, with only about 2% of all instant offer requests ending up with a sale. In 2018, out of 60,000 instant offer requests, only 600-700 homes actually got sold with Zillow Offers. Zillow Offers receives 35% to 40% referral fee commissions by feeding the 98% of rejected inquiries into the Premier Broker program.
This process is known as a bait-and-switch sales tactic, where consumers are effectively sold as leads to random brokers, instead of receiving a fair and an instant offer the company promises to deliver. Zillow Offers sees this process as a $20 Billion opportunity because referral fees typically command 32x more in revenue than regular ads. Referral fees charged by iBuyers like Zillow Offers and Opendoor are highly disadvantageous to consumers with excessive commissions, hidden fees, reverse competition, and lack of transparency.
According to Opendoor:
“Agent Partners only pay a referral fee to our brokerage if they close on a transaction with a referred seller or buyer. The fee is a percentage of the agent’s commission, and averages 1% of property sale price unless otherwise noted in agent partner agreement."In this case, if a consumer is selling a home worth $500,000 using an Opendoor Agent Partner, the Opendoor is paid a fee of $5,000 by the referred broker for effectively failing to deliver a convenient and easy home selling experience.
Of course, the referred broker has to account for Opendoor Brokerage referral fees via an excessive commission rate. It doesn’t cost anything for the broker in this situation to inflate their commission – if the consumer declines their high fees, they’ll just move on to the next lead.
A qualified competitive listing agent is able to list and sell the same home on much better terms, but only if there are no referral fees attached to their pricing agreement. The $5,000 referral fee paid to Opendoor, in this case, is as big the entire commission that may be offered by competitive flat fee real estate agents.
Using an iBuyer is not as easy as clicking a button. In fact, deciding to sell to an iBuyer may be just as difficult as placing a home on the open market, minus having to hold the open homes. If your home has major defects or large items to be repaired, iBuyers will likely pass on the home after the inspection. iBuyers will examine the condition of your home in as much detail as any other buyer.This is why it is important to speak to a real estate agent before approaching an iBuyer.
"We receive listing and buyer referrals directly from Zillow's Premier Broker concierge services. These leads have been scrubbed and vetted before they are directly handed off to you."Source: Sonoma County RE/MAX Marketplace, Zillow Premier Broker participant.
Nothing says consumer focus like being “scrubbed, vetted and handed off” to a random broker willing to pay 25%-40% in referral fees. Zillow Group still declines to state the exact broker-to-broker referral fees amounts it collects. The iBuyer model is simply heavy, as a private real estate investor, it has to take excessive risks, hire an immense workforce, and deliver systematic returns to investors. The iBuyer model is unable to deliver transparency on fees either.
The referral fee policy of all major iBuyers really provides a better way to make money than actually buying homes. Once an iBuyer refers their user to a Partner Agent, that referral fee becomes a much more attractive proposition than having to take the risk of selling your home in the first place. Yes, programs like Zillow Offers operate on a 98% failure rate, where the real cost of using this model actually ends up being hidden in excessive “partner” broker commissions.
The iBuyer model may be right for some people and depending on the situation simply because there is a liquid cash offer. The question you should ask yourself, as a consumer, is why 98% of the time you are getting sold for referral fees instead of the seamless experience you were promised?
If iBuyers are so confident that you will sell your home to them, why are they massively referring consumers to “partner” brokers?
Despite Billions of funding in 2018, all combined iBuyers transact only about 0.2% of all homes sold in the United States each year. 99.8% of the entire residential real estate market remains out of reach for this process. House-flipping is incredibly expensive because it doubles the amount of work required to make a single transaction, it is also risky and labor-intensive. iBuyers pay commissions to real estate agents like any other real estate investor. iBuyers often compare their own exigent transaction fees to a high 6% commission rate charged by traditional brokers. The truth is iBuyers negotiate for a much lower commission rate when they are the ones paying it.
Opendoor claims that it saves an average homeowner from having to show their home to sixty people in open houses, but sixty people, in this case, are all potential buyers.
As a consumer looking to sell a home, there is no equal substitute for hiring a competitive agent to sell a home on the open market. The savings associated with competitive commissions to properly list a home end up working only for you because the mortgage company takes the exact same remaining mortgage sum out of the total equity regardless of what method you choose to sell your home. No iBuyer ever pays a “standard” commission when they work to flip your property. As a consumer, take a lesson from iBuyers and negotiate real estate agent commission fees to increase your net equity - this is what iBuyers do.
For your benefit, the following is a list of the most commonly known real estate Direct Cash Buyers that operate in the United States:
Zillow Offers, RedfinNow, Perch, Opendoor, Offerpad, and HomeVestors.
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Feel free to contact us if you need further assistance. At HomeOpenly we aim to make the opportunity of homeownership transparent, affordable and an open experience.