Texarkana Gazette

IBuyer myths: Don’t be misled

- RELATED LINKS: NerdWallet: What is an iBuyer? https://bit.ly/nerdwallet-understand­ing-ibuyers

IBuyers are one of the few true innovation­s to hit the real estate industry in recent years. Yet consumers haven’t fully embraced them because of misconcept­ions about how iBuyers work, and what types of problems they resolve for sellers and buyers.

An iBuyer (for “instant buyer”) is a company that uses technology to make an automated offer on a home. After buying the house, the company fixes what’s broken, makes cosmetic repairs and sells it. IBuyers market themselves as a fast, convenient way to sell.

Myths have grown around iBuyers: that they pay too little, inflate home prices and funnel owner-occupied homes to investors. A couple of those myths do have a grain of truth. Here’s what’s really going on with iBuyers.

MYTH 1: IBUYERS LOWBALL HOMEOWNERS In a TikTok that went viral in September, a real estate agent implied that an iBuyer was manipulati­ng house prices. In his hypothesis, the scheme was a two-stage process. The first step consisted of lowballing home sellers.

But iBuyers don’t pay significan­tly less than the market price, said Mike DelPrete , a real estate tech strategist and scholar in residence at the University of Colorado Boulder. “The biggest potential misconcept­ion is that iBuyers are gonna rip you off, and they’re gonna give you a lowball offer and you’re leaving money on the table,” he said by voice memo.

This misunderst­anding may grow out of a belief that iBuyers are the same as house flippers. There’s a difference. Flippers buy properties that need lots of work to get them in salable condition. They buy low, spend plenty on renovation­s and make a profit on the difference between the amount invested and the sale price. But iBuyers buy properties that are in good shape, usually make minor repairs and make much of their profit from fees they charge to sellers. (The eventual price an iBuyer pays is the accepted offer minus the renovation costs.)

DelPrete has researched prices paid by iBuyers. In 2019, iBuyers were paying about 98.5% of estimated market value; at times in 2021, they were overpaying. In contrast, house flippers often pay about 70% of value.

Yes, iBuyers often pay less than buyers would get by listing convention­ally. But not a lot less, and some sellers believe iBuyers are worth the financial tradeoff for a quick sale and convenienc­e of not opening the house to a parade of strangers.


As the TikToker described it, the second step of the “price manipulati­on” would consist of the iBuyer overpaying for one home after underpayin­g for dozens of other homes in a neighborho­od. This, the theory goes, would set a precedent for higher prices that appraisers and subsequent buyers would follow.

This hypothesis disregards human nature: When you buy a home, you’ll ignore the price paid by the only buyer who overpaid. You’ll pay attention to the prices that are consistent with fair market value.

Deliberate­ly overpaying for homes would be a disastrous strategy. In fact, Zillow Offers, the company’s iBuying division, acknowledg­es that it unintentio­nally paid too much for houses, based on faulty forecasts of future prices. Zillow lost hundreds of millions of dollars in the third quarter of 2021, laid off one-quarter of its workforce and shuttered Zillow Offers.

Mariya Letdin, associate professor of real estate at Florida State University, said by email that she sees “a few ideas floating around. One is a concern that big tech will use their informatio­nal advantage to take advantage of the individual sellers. Another is that somehow iBuyers will drive up home prices. None of these are supported by evidence.”

For iBuyers to push prices artificial­ly high, they would need to control a big chunk of the market, and they seldom do. According to DelPrete’s research, iBuyers accounted for 1.6% of U.S. homes bought in the third quarter of 2021, or around 28,000. IBuyers are busier in some markets than others, though. They bought 10.8% of the homes purchased in the Phoenix metro area in the third quarter.


There’s some truth to this belief, so it’s more exaggerati­on than myth. Most (not all) iBuyers sell a portion of their inventory to institutio­nal investors that rent the homes out.

Take Zillow Offers. After it shut down, Bloomberg reported that Zillow planned to sell 7,000 houses to corporate investors such as real estate investment trusts, or REITs. One critic tweeted , “I strongly suspect selling 7k homes to institutio­nal investors will hurt consumers (especially after driving up prices significan­tly in key markets).”

It’s a bummer that the mass sale to corporate landlords will shut out 7,000 would-be owner-occupants, but the evidence that Zillow drove up prices for anyone but Zillow is weak. Of the three biggest remaining iBuyers, two say they sell to investors and one says it doesn’t.

An Offerpad spokesman said in an email that the company typically sells 10% to 20% of its homes to institutio­nal investors. Opendoor’s head of real estate, Kerry Melcher , didn’t give percentage­s, but said in an email: “Some homes we purchase are resold to REITs; the vast majority are put back on the market and go to everyday consumers.”

RedfinNow says it is an exception. “We haven’t sold one house to a REIT,” says Jason Aleem , RedfinNow vice president.


IBuyers don’t lowball, they’re not responsibl­e for runaway house prices, and they sell most of their inventory to owner-occupants and only some to landlords. They’re not a diabolical force in the housing market, but what good do they do?

They can help home sellers set asking prices. It’s one thing to view an online estimate of your home’s value when you’re bored. It’s another thing to receive an iBuyer’s purchase offer. “It makes those estimates real,” Aleem says. He explains that getting an iBuyer offer can establish a baseline asking price even if you ultimately decide not to take it and opt for a traditiona­l home listing instead.

This article originally appeared on the personal finance website NerdWallet. Holden Lewis is a writer at NerdWallet. Email: hlewisnerd­wallet.com. Twitter: HoldenL

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