The other big ibuyer has begun operations in San Diego County.
How are they doing? The P is for pending sale, and the S is their first sold:
Three of the homes aren’t on the market yet, but let’s look at 14 properties that are.
They are happy to offer you a sales price that is close to the retail book value on paper, but then when they come out to visit in person, they find stuff wrong and have to deduct a big chunk to compensate.
Cash purchases: $9,418,000. Their 8.5% repairs/commissions fee: $800,530.
Net proceeds to sellers: $8,617,470.
How does it compare to selling the old analog way? Let’s assume the sellers Got Good Help, and reap the benefit of the frenzy conditions (instead of the ibuyer) when their sales price gets bid up. Let’s apply the standard 5% over-list premium to the total of the list prices above:
Difference between selling to OD, and selling with me: $1,268,616/14 = average $90,615 more per seller.
How are they selling their properties? The first few were listed with an Orange County broker, but now they have gone in-house and are listed with their Phoenix-based brokerage and agent – who got his California license less than a year ago. Hey, it’s Frenzy-2021 so they don’t have to try too hard to get properties into escrow. They offer 2% commissions with a brief description and boom – off to escrow:
The frenzy is helping to accelerate the dumbing-down of the real estate business.
There are sellers who get a postcard in the mail that offers quick cash and because the price is more than it used to be, they roll over and take it, all in the name of convenience.
Spence has gotten involved with Offerpad, joining the other disrupters who lead with lies and insults about traditional realtors.
He said, “The real competition for Offerpad isn’t Zillow or Opendoor, it’s the fact that 99.5% of the time people sell their home the old analog way.”
But at the same time, these consumers are also relying more and more on services like Uber, Instacart and Amazon. “They’ve become conditioned to wanting an ease of use,” Rascoff said. “They’ve been conditioned to pressing a button on their phone and having some magic happen.”
His magic costs 7.5%.
They don’t mention their percentage, but even analog people have a calculator handy. To offset, they pack their Traditional Offer with concessions and costs that add up to 9%, which makes theirs look like a deal.
But the worst part for any seller who makes their home-selling decision based on the cost is that they assume that everyone will sell the home for the same price. Offerpad will try to convince you that their ‘team of real estate experts’ will pay the full retail value for your home, and then hit you with the testimonials:
Will consumers go for it?
Will people ignore the math, not speak to a traditional realtor, and not know the real value of their home – and instead just press the button to have some magic happen?
P.S. They aren’t the only ones using that photo, though not sure who went first:
This is a good summary of the Zillow Offers homebuying machine. Like Amazon, they are hoping that consumers are willing to overpay for convenience:
The website that allows you to imagine living in homes you could never afford is out to do to real estate sales what Amazon did to retail.
“Our vision with Zillow Offers and Zillow is a one-stop shop, buy, rent, sell, lending and closing service,” says spokeswoman Jordyn Lee, who says the company is working toward a more streamlined approach to cumbersome real estate transactions.
It’s even partnering with homebuilders to buy their customers’ old homes, with closings scheduled to coincide with completion of the new property. The inability to sell a home is a primary source of new home purchase cancellations, experts say.
“It makes complete sense for an entity like Zillow, that is a dominant force in the housing market with its listing and information service,” says Dr. Vivek Sah of UNLV’s Lied Real Estate Institute. “Expanding into its own brand of residential brokerage will align its services together and provide a one-stop shop to its customer base.”
It also eliminates the awkward process sellers face of showing their home while living in it, and synching the timing of buying and moving to a new property.
A variety of “iBuying” services on the market cater to different niches. Some provide loans to facilitate deposits on new homes before existing home sales have closed. Others allow buyers to design new construction. Zillow is branding itself as the choice for stressed buyers seeking an immediate, hassle-free transaction.
“For the convenience of not doing repairs and holding open houses, we do charge a service fee of seven to nine percent,” says Zillow spokesman Viet Shelton, adding the fee is the primary source of revenue and profit from Zillow Offers.
That’s more than a conventional commission of six percent, generally split between agents for the buyer and seller.
In addition to the higher fee, Zillow deducts the costs of repairs the property needs from the amount it pays the seller.
Still, DelPrete says, it’s not a moneymaker for the biggest iBuyers, such as Zillow and Opendoor.
“The average percentage increase of a home purchased and resold by Zillow in 2019 and 2020 was 1 percent,” Del Prete said via email. “The iBuyers are not trying to profit on the resale value or appreciation of a home. This is part of the reason the model is so unprofitable and why the iBuyers are losing tens of thousands of dollars on each home sold.”
Hat tip to RK for sending in this article – an excerpt:
I asked a realtor there that I know to do a CMA on the property. When she was done, her number came out to $460,000. Zillow’s offer was $440,000. This is where things got interesting. Their pitch is that with Zillow’s service, you would be provided with a dedicated selling advisor, the ability to sell without showings, the buyer would make repairs, and you get to choose your closing date. Zillow then proceeds to inform you, the client, that “all you receive” in a traditional sale is a dedicated selling advisor. When you continue to scroll down, Zillow quotes the average realtor’s commission at 6% and then says their Zillow Service Charge is 12.9%. To their credit, they don’t hide the fact that you will pay substantially more money using their service. At the bottom of the email, it estimated my net proceeds would be $383,240 using Zillow, and if I used a realtor proceeds would be roughly $413,600.
We ended up with 12 offers on my listing in Rancho Penasquitos, with SIX of them over $900,000. Donna and I did some expert maneuvering to coach the buyer-agents higher on price, and we may have gotten an assist from Zillow too.
This was their zestimate before the listing hit the market:
This was their zestimate after the listing went on the MLS for $869,000. Zillow has no shame – they just hit the number. At least Redfin tries to hide it by changing their estimate to within 1%:
Then we RAISED our list price to $899,000 because we were getting such good action, and Zillow rasied their zestimate right back up:
They have no qualms about manipulating the zestimates right before your eyes.
Think of what they will do to you when they try to buy your house.
The ibuyer’s quote will be a curiosity, but unless it is close to the homeowner’s expected value, then selling on the open market will seem like a better option for those who want max money.
Would a homeowner who has found another house to buy be an exception? Rather than trying to convince a seller to take an offer that would be contingent upon them selling their current home, they could sell their house instead to an ibuyer in order to purchase the next home non-contingent.
I just had a case like this, so we tried it out.
The house that needed to be sold was in Los Angeles, and the homeowners were confident about its value being in the low-$900,000s – or at least $900,000. Though it was an older home, it had been updated – and they felt that if it went on the open market that it would sell within two weeks.
The zestimate was $875,000, and when I ran the comps, most were under $900,000.
They pursued a reseller called Fast Offer, and I ran it through my source.
Their guy quoted $830,000, and because they would likely get beat up again once the reseller did a home inspection, they figured their net would be $820,000-ish…..which was insulting!
My automated source processed the address and asked three yes-or-no questions (with my answers):
Have you seen the inside of the property? Yes
Is it a fixer? No
Would you consider a discounted, quick, no-hassle cash offer based on condition? Yes
Their response was immediate:
The home doesn’t qualify.
The ibuyers have to be looking for realistic homeowners with houses that can be flipped easily and for a decent profit. They only have to ask the second question to gauge their chances – unless the homeowner admits that they own a fixer, it’s probable that they would hold out for a retail price…..or higher!
We did discuss that the $820,000 could have been close to the amount that an open-market sale would net. But in this case, the people gave up on buying the next house, rather than be ‘lowballed’ in their mind. Homeowners aren’t going to give it away!
The Compass Bridge Loan will be a better solution – and should be available this month!
We saw an example yesterday of a seller who didn’t have a problem finding a cash buyer who was willing to pay 10% below their original list price.
For the homeowners who are fascinated by the idea of selling quick and easy and might take a discount for such a convenience, I can now offer an ibuyer option as well as my retail estimate of value.
The ibuyer quote is from an independent third-party, not from me or Compass, and frankly, I think you should sell using my traditional method because I think you’ll come out ahead in the end. But if you can’t wait, I’ll set you up with an ibuyer who can cash you out right away.
I’m not crazy about the idea, but I think it is inevitable that every realtor will have to offer every option as part of their fiduciary duty to the seller.
I still think it is a conflict of interest for the agent to offer to sell the property traditionally AND make an offer to purchase with their own money.
If you’re interested, I can deliver a cash offer to you today!
Here’s research on the costs:
But what, exactly, do iBuyers bring to the table for home sellers? And, can this business model survive the housing market downturn so many are predicting?
That’s what Collateral Analytics sought to answer in a recent paper on the topic, which offered a deep dive into the strength of the iBuying concept.
First introduced in Phoenix by Opendoor in 2014, the iBuying concept offers home sellers the opportunity to sell and close on their home within days, hassle-free. The iBuyer then completes any necessary repairs and lists the home for sale.
“For motivated sellers who want a predictable sale date and need to move, perhaps a long distance from the current location, there is no question that iBuyers have provided a welcome alternative to traditional brokerage,” Collateral Analytics pointed out.
But all that convenience comes at a cost. The paper dissected the math behind the model, estimating that sellers end up paying between 13% to 15% more when they work with an iBuyer. This covers a difference in fees that ranges from 2% to 5% greater than a traditional real estate agency, plus an allowance for repairs and another 3% to 5% to cover the iBuyer’s liquidity risks and carrying costs.
The paper also noted that the iBuying model makes these companies susceptible to a number of risks, including the need to safeguard vacant homes and the possibility that the automated valuation models they rely on will overvalue a property, resulting in a loss.
They could also face troubles if home prices decline.
“A downturn in home prices, not forecast by the iBuyer market analysts, could be devastating as they ramp up their business platforms, particularly if the cost of capital increases,” the paper stated. “At the same time, downturns are precisely when the most sellers would want this option.”
While Collateral Analytics lists several companies that are investing big in the iBuyer model – including Opendoor, OfferPad, Zillow Offers, Redfin, Realogy CataLIST, Perch and Keller Offers from Keller Williams – it also states that only the most efficient firms with enough capital and market share are likely to survive.
And of course, this all depends on how appealing the concept turns out to be, mainly, how many home sellers are willing to pay for convenience.
“For some sellers, needing to move or requiring quick extraction of equity, this is certainly worthwhile,” the paper stated, “but what percentage of the market will want this service remains to be seen.”
The big money and heavy competition is causing ibuyers to juice their offerings.
Opendoor will buy your house for cash, they will buy your next house, they have rebates, and now they will even buy your house back within 90 days if you don’t like it.
Our belief is that everyone should love the home they just purchased, and we are going to stand behind that. Opendoor guarantees buyers will love the experience and purchase the home of their dreams at the best price, or we will buy the home back within 90 days. This guarantee extends to qualifying homes in Phoenix, Dallas-Fort Worth, and Raleigh-Durham.
There are conditions, of course. This is the most intriguing (bold added):
In the case of a Third Party Home, we require a copy of a licensed general inspection report, and reserve the right not to offer the guarantee if there is any material defect identified in the report (e.g., foundation issues, roof damage, inoperable HVAC systems, unpermitted additions) or if Opendoor determines the purchase price is materially above the fair market value of the home. We will contact you within 24 hours of receipt of the report if this is the case.
They don’t have experienced, professional agents to represent you. Nope, just ‘tour assistants’ who open the door – so how will you know if you paid fair market value?
People will believe what they want to believe, and the company will help sway your opinion by having comments like this on their website:
A really good price, and a really good deal?
There will be buyers who jump at that!
These companies don’t want to get realtors involved, and the excuse is always because we cost too much.
But these disrupters don’t want the customer to know too much – either buyer or seller – so they can skim a few more bucks off them. It has the potential of creating an artificial market, where the companies tell you what the houses are worth – and you better like it!
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