Opendoor (iBuyer) Vs. Traditional REALTOR® You Decide
I happened upon an article in Inc. Magazine regarding Opendoor and thought that the topic could be of interest here. I am posting the original link so that you can read the whole article if you have desire to do so. I will remain as impartial as I can for this article and I’ll leave it for you to decide if iBuying is right for you. Full disclosure, as a licensed REALTOR® I see a lot of misinformation regarding the way that these companies are portraying themselves and I will seek to dispel some of the incomplete information masquerading as absolute truth regarding the iBuyer and traditional real estate transaction.
As a side note, Opendoor has received over a billion dollars in investor funding to date. Lets put that in terms that we can all understand. A million seconds is equal to eleven- and one-half days. A billion seconds is thirty-one- and one-half years. What do we know of investors, they put their money where they can make the most profit. As such, when a company receives over a billion dollars in funding, the investment community thinks that there are huge profits to be made by that company.
Understanding the Market
According to Realtor.com; Recently Sold Homes in my area (Lake Nona, Orlando, FL) have a median listing price of $475,777 and a price per square foot of $194. There are 234 active, recently sold homes in the Lake Nona area, which spend an average of 81 days on the market.
The iBuyer Premise
According to the article; “Opendoor promises to alleviate many of the aggravations of moving, like the inconvenience of showings and open houses, and the average of 70 days that it takes to a sell a home from listing to close. You provide a few details of your home online. Opendoor generates an offer price and arranges inspections, and will complete necessary repairs once you choose your move-out date. Opendoor makes its money by reselling the home at a higher price than they purchased if from the seller for and by tacking on a fee, paid by sellers, between 6 and 13 percent. Note that the iBuyer does not call their fee a commission. Some refer to it as a ”service charge” and other’s refer to it as an “experience” fee. Either way, it comes out of the seller’s pocket after the offer price is extended. (an example will be illustrated below)
How Does the iBuyer Model Work
First of all, I need to call out the single biggest differentiator between the iBuyer and a REALTOR®. By the very nature of the iBuyer business model the iBuyer must buy your home for the lowest amount you will accept, so that they can resell it for a profit. There is nothing wrong with that, just understand that this is their model. If it helps to clarify, the iBuyer model is more like an investor, reseller or even a house flipper. A REALTOR® on the other hand has a fiduciary (legal) duty to serve the seller, even before their own needs. In other words, a REALTOR® is charged with the legal duty of selling your home for the highest price the market will justify in the least amount of time. This is why a REALTOR® and a home seller are aligned in their goals for selling the home and are positioned on the same side of the transaction. It also why the iBuyer and seller are on opposing sides of the negotiation table because they are in truth, seller and buyer.
For purposes of this article I am using Opendoor and basing my examples upon the FAQs found on their web site. Each of the iBuying programs have a little different spin but basically the mechanics are very similar with Opendoor, Offerpad and the growing number of iBuyers in the market. The iBuyer offers a price that provides them with a markup (for purposes of today’s example, lets call that 10%), they charge the seller a service or experience fee and they charge the seller for any repairs that the iBuyer will need to perform to sell the property. In their web site example, they start the home price out at the same level to make their pitch. The truth of the matter is, their offer price is generally going to be 10% (or more), lower than what a traditional REALTOR® will list the home for. They tack on their fees (which are not made up numbers) and give a worst-case example on the traditional side. By this I mean that often sellers do not make a concession and often sellers do not have to carry two mortgages at the same time so those amounts are misleading and are only used to make their side of the equation look better. You will see those in the line items below.
Here is an example which we’ve marked up with more likely numbers:
Impact to Your Bottom Line
In the iBuyer example above, the seller will likely take a hit of over $22,000. Clearly if you need to leave town quickly Opendoor or any of the other iBuying options could be for you. You need to do your own math and understand all of the facts before you make a decision that could potentially impact you by thousands of dollars. I’m here to assist you if you want to run the numbers with someone to see if iBuying makes sense in your particular case. Either way, I’ll leave it to you to determine if it an iBuyer is right for you. Personally, I think that the choice if obvious, but then I make my living by helping sellers to maximize their profit potential from selling their home.
Inc. Article: Open Door Wants to Win