Today you can order people to drive you around, bring you your food, get the right company, they will cook for you in your home. Why can’t you have technology simplify selling and managing real estate? What’s that? The fictional person I am pretending to talk to has informed me that you can in fact use technology to sell real estate, they are called iBuyers.
In this post, I will explain what iBuyers are, how they can be useful compared to traditional real estate agents, and if you should use them.
What Are iBuyers?
iBuyers are companies that purchase real estate by quicker methods using technology-based interfaces. They have simplified real estate selling. If you want to use one to sell your real estate, you need to tell them about the property. The company will predict the value and offer a price (if they make an offer). You can accept or reject the offer. If you accept it, then congrats you sold real estate. You can never find a simpler way to sell a house. It is like the ride sharing of real estate. All you have to do is touch a few buttons and someone will come to take care of your need, it is the embodiment of convenience.
Appropriate Times To Use iBuyers
If you have sold a house before, you know about the hassle of selling a house. You must find an agent, hire an inspector to learn about repairs you need, make those repairs, and clean then make it presentable. Then you must find someone who is willing to buy the place and to be approved for a loan unless you found one of the few Americans who will buy your house with cash. This will take on average 68 days, or 140 days if the market is bad. This can be expensive and tedious.
On the contrary, if you use an iBuyer, those tasks are someone else’s, and it could be useful if your time is needed more elsewhere.
Companies like iBuyers are enterprises that provide convenience and luxuries even royalty could only dream of. Those luxuries come at a price. Much like how the newer generations, millennials and Gen Zer’s, these new tech companies are attractive and will cost money. According to Collateral Analytics Research, traditional brokers cost anywhere from 5-7% of the price, meanwhile an iBuyer will cost 13-15% of the price. Some even report that the fees may be higher. Furthermore, iBuyers take risks with buying a home quicker and they will usually sell the house at a lower price. They could deduct more, anywhere from 2%-7% lower in price.
Since iBuyers take a higher risk, they will also be less likely to purchase your house, so not everyone’s property can be put on an iBuyer. Some places do not use iBuyers at all.
Equity Purchase Companies
You may know these better as cash for house buyers. These are companies that will purchase your house with cash very quickly and sell it on the traditional market for a higher price. To do this, they usually try to find people who want to sell quickly for personal, and financial reasons and buy the house at prices that are less than the market price.
Why am I bringing these up? Better question, how are these any different from iBuyers? I have even tried to look up the differences between iBuyers and equity purchase companies. Nothing came up that says they are very different.
While I am sure there are some differences, I believe that the difference between cash for house buyers and iBuyers is equivalent to taxi companies and ride sharing companies. In the end there is next to no difference. However, because ride sharing and iBuyers are the tech savvy version run by (apparently) hip people, typical consumers are more attracted to them. Even when deep down you know they are the same types of companies with a new coat of paint.
They Know You Are Desperate
If you are not desperate, why are you even considering a cash for house buyer? Oh sorry, I meant iBuyer. Wait, is there a difference? If you were not desperate to sell a house, you would be using a traditional method to sell the home. You may feel the need to move suddenly and if you bought a house, you will have a very hard time trying to qualify for a new mortgage. Most lenders require a debt to income ratio of less than 43%. In other words, your monthly recurring debt payment must be less than 43% of your monthly income. Frankly, it is hard for anyone to follow that debt to income with only one mortgage. Ok, let’s face it, some cannot follow the <43% debt to income ratio with no mortgage. Imagine if you had to try that with two mortgages. You will likely not qualify for a different mortgage. Furthermore, if your first mortgage was bad and you had a hard time paying it, that will reflect on your credit score and you may not even be able to obtain a lease for an apartment.
The point is, equity purchase companies and iBuyers will know that if you are settling with their services, you are in need to get rid of the house/property you have. You will not feel like you have profited off the house. Many times when you sell your property to an equity purchase company or iBuyer, they will ask you how much your mortgage is. If you have one still, that may be the cash offer, IF YOU ARE LUCKY. Most of these buyers will not take over your mortgage, in fact, it is likely illegal for them to. Therefore, you will be lucky to pay the mortgage off with the cash you are offered.
You Just Lost A Lot Of Money
What about the equity?
But what about the costs to inspect the house?
What about the closing costs?
That was all money you have just wasted if you use an iBuyer. That is why I highly recommend that you never buy a house unless you plan to live in it long term or use it as an investment. If you cannot, then either this happens, or you may have to delay your move for 2-5 months.
If you are desperate to sell the property, these companies see this opportunity in two ways. They will pay you as little as possible so they can own it, or they will wait for the property to be foreclosed on and they will buy it cheaper. Either way, they win, you lose.
While iBuyers are an upcoming business model, they are merely a different form of cash for home buying. These are completely legit businesses, and the reason they are making money is because people do not understand the costs of owning a home or selling it but buy them when it would be unwise. Therefore, when you move, not if, but when, the equity you have built was wasted if you go the iBuyer route or any other form of equity purchase companies.
Even if your property was an investment property, using an iBuyer will take off a large chunk of your gains. Remember, over 15% will easily be lost, maybe more. This will negate the average rate of return in investment for real estate. If you want your real estate to be an investment and not a failed one, AVOID iBUYERS AT ALL COSTS.
Life does throw curve balls at us. For instance, I have to keep a lease longer than I want because I graduated earlier than I expected. I did try to find someone else to take the lease. It worked, until the potential tenant backed out on the re-letting process at the last minute. He signed the lease, but pulled out within the grace period. My lease is a legal contract I must uphold unless I AND THE NEW TENANT meet the conditions where it is no longer my legal contract. Worst case scenario, I only have to pay an additional 5 months in an area that my wife is currently working and I will likely be working. I can live with that.
Now imagine the same situation happened, but this time instead of 5 months, it could be 5 years, maybe 10, or even longer. That is the case if you need to pull out of a mortgage. It would be hard to live with holding onto a house that you cannot or will not live in anymore. But you owe hundreds of thousands on the mortgage. A mortgage is a legal contract, which means you live with it for years. That or you will need to find someone else who will, or pay off the contract completely. If you do not have the time nor money to do that, then it is best to find options where the legal contract has as short of a period as possible, such as renting or leasing. Using iBuyers are an almost sure way to destroy your wealth, not forge it.