Which House Buyer Is Best In 2021? iBuyers vs Local Investors
In 2014, a company called Opendoor was founded and they began the iBuyer wave as a premier house buyer. In the past few years the concept has gained traction and popularity. Zillow, Redfin and several other companies launched their own versions of this in the years since Opendoor was founded.
An iBuyer, or instant buyer, is a real estate house buyer that uses online valuation tools to determine what your home is worth, and then makes an all-cash offer to purchase your home. The company then makes necessary repairs and relists the property for sale.
A local real estate investor is an individual or small business who purchases property in a given area with the intent to either repair and sell for a profit (house flipper) or hold the property as a rental (buy and hold).
The purpose of this article is to explain in detail the business models for iBuyers and Local Investors, and dive into when it makes sense to use one over the other. There are certainly pros and cons for each of them and there are situations where one will likely lead to a better outcome than the other. Ready to learn which house buyer is best for you?
Let’s dive in!
House Buyer #1: The iBuyer Business Model
We will primarily be looking at Opendoor and Zillow Offers in this article as they are two of the largest iBuyers and have most of the market share. To receive an offer from a house buyer such as these, you go to their website, fill out a questionnaire, and within 48 hours most people will receive a cash offer.
Opendoor’s Property Criteria, Assessment Process, and Fees
According to Opendoor, here are the main criteria they have that the home must meet:
(1) Single family or townhouse (they’ll buy condos in certain markets)
(2) Typical value between $100k and $600k
(3) 2 acre maximum lot size
(4) Typically homes must be built after 1930
(5) Typically they will not purchase homes with mold, private well/septic system, dated materials, foundation issues, or un-permitted additions.
For Opendoor, assuming the property meets these criteria, once this offer is accepted, they will send an estimator to your house. The estimator will confirm the information submitted was accurate and they will examine the condition of the home.
Having a fee-based model is how iBuyers operate and for Opendoor, they charge 5% of the sale price as a fee when they purchase a seller’s home. These fees used to be higher for Opendoor, but in September, 2020 they capped them at 5%.
If Repairs Are Necessary
Opendoor will then decide what needs to be repaired and how much it will cost. According to their website, “5-7 days after the assessment, we’ll let you know if repairs are needed. If they’re needed, we’ll ask for a credit and deduct the costs from your net proceeds. You’ll have the opportunity to review the amount with your Experience Partner. If you disagree with our repair asks or think it’s too high, you can cancel your contract with no penalty prior to closing.”
They also have a page on their website where they give examples of common repairs they request. If you’re considering selling your house to an iBuyer, it is a very good idea to read through this to predict if any repair requests will come up on your home.
Do iBuyers Offer Full Retail Value?
When I say “full retail value” I am referring to the price someone would get for their home if it were all fixed up. The answer to this question is not straightforward at all, and is both yes and no depending on the situation. Allow me to elaborate.
Here is a link to a great study done on this. The study concludes that iBuyers only pay about 1.4% below full retail value on average for the homes they buy. In my opinion, this study fails to factor in the true costs associated with iBuyers and how their “net” purchase price is much lower than what it seems.
iBuyer Fees Affect The True Offer Price
They claim in this study above that 7.5% is the average fee charged by most iBuyers, however I have found in my research that lots of iBuyers are consistently higher than this. In fact, Opendoor is the only one I see below this on a regular basis, and they recently lowered their fee. Prior to September 2020 they said their fee could be as high as 14%.
7.5% just seems a little on the low side for me based on what I have read and stories of people who have used a house buyer such as Opendoor, but even so, this is substantially higher than the 4-6% that realtors charge. This is not reflected in the offer price. If I am selling a $300,000 property and a realtor offers to sell it for a 4.5% fee vs an iBuyer offering the same amount with a 7.5% fee, this is a $9,000 difference, which is substantial.
Repair Costs Lower The Offer Price Even Further
One of the biggest drawbacks I see is the handling of repairs the iBuyers deem necessary. For many people, the reason they choose to sell their house as is would be to avoid having to worry about repairs. A lot of iBuyers advertise how you can sell to them without doing repairs, but there seems to be some confusion on this topic.
I went through the process of putting in my property information and requesting an offer from Opendoor and here is what I found. The offer price didn’t seem far off from full retail value, however this is before the estimator factors in the repair costs they will either have to deduct, or that I will have to do myself.
The Required Repairs Defeat The Purpose For Some People
The purpose of selling a house to a professional house buyer such as Opendoor or Zillow seems to be to go through a much less frictional transaction compared to having a realtor sell it. However, when they require a credit for certain repair items or even worse, make the seller do these themselves, this defeats the purpose of going with an iBuyer in the first place.
There is plenty more information on iBuyers that can be found online, but this should provide a baseline level of understanding for someone. Now, let us examine a local real estate investor, and then compare and contrast the two.
House Buyer #2: The Local Investor Business Model
Local real estate investors who purchase properties as is have been around for a long time and the model has remained relatively constant. These house buyers look to purchase properties on or off market, and then either rent them out (buy and hold), or repair and sell for a profit (fix and flip).
The Local Investor’s Property Criteria
Local investors are usually individuals, or small companies (less than 20 people), so having a rigid property criteria is not common. At Home Sale Solutions (our company), we focus on residential properties in Virginia.
All properties are different in some way, so being adaptive and creative is something a lot of local real estate investors are good at. I would always joke that real estate transactions are snowflakes because no two are exactly alike.
Examining everything on a “case by case” basis is exactly what most local real estate investors do, especially the experienced ones.
The Local Investor’s Assessment Process
This might be slightly different depending on who you’re talking to, but for most local investors, they will visit the property to examine the condition, and determine what repairs will be needed. From here they will analyze what the home would be worth if it were brought to current market standards, and then deduct the repair costs and closing costs.
A local house buyer will almost always be able to move much faster and make quicker decisions than an iBuyer. Opendoor is a billion-dollar company and provides a great value to whom they work with, however a house buyer of this size cannot outmaneuver a local investor.
If there is some kind of “unique” characteristic to a property, Opendoor would have to get approval and this takes time. A local house buyer, on the other hand, isn’t a large company constrained by procedures and policy. This makes it much easier for them to quickly analyze something and make a decision on it.
Fees Charged By Local Investors
Local investors will not have a fee-based model and therefore won’t charge fees. They make money by purchasing a home at a price where they can either rent it out for a profit, or repair and sell it for a profit.
In a lot of cases local investors will actually pay the closing costs for the sellers they purchase property from. This makes it a “cleaner” sale for the seller where they end up walking away with an amount very close to what the offer price was.
Do Local Investors Pay Full Retail Value?
I gave a complex answer to this question for the iBuyers, so it is only fitting that I give a complex answer here too for the local house buyer! The short answer to this question is no, however there is more to it and some context is necessary.
Local investors are trying to make a profit and are incentivized to buy properties at a price that accomplishes this. To do this, they focus on a certain type of property where it can be accomplished.
Local Investors Typically Focus On Properties That Need Lots Of Work
If a local investor and someone who intends to buy a property to live in are competing to purchase a home, 99 times of 100 the local investor will not be able to compete. They simply cannot pay as much as the person buying the property to live in it and expect to make any profit.
On the flip side (no pun intended), people who are looking to buy a property to live in will typically stay away from properties that need lots of work. Speaking from personal experience, there is no way my wife would ever let me move into a fixer-upper (trust me, I’ve tried!).
But, for an investor, they would love to buy a fixer-upper and are not scared away by it at all. So, they focus primarily on these types of properties.
Repair Costs Are Built Into The Price With No Additional Fees
The beauty of working with a local house buyer is that they will factor the repair costs into their initial price and typically won’t adjust the price down the road. Compare this to the iBuyer process where someone comes out to determine what repairs need to be made and you can see what a convenience this is.
If a property is being sold that needs some work but not a ton, a buy and hold investor could possibly pay around 90% of the property’s full-retail value. When factoring in iBuyer fees (7.5% +) as well as the repairs they would require, this would likely be a higher offer price then an iBuyer!
When It Makes Sense To Use One House Buyer Over The Other
We’ve now gone over the business model for both local investors and iBuyers. It is now time to look at when it might make sense to use one over the other.
When It Makes Sense To Use An iBuyer
There seems to be a “sweet spot” where someone will benefit from selling to an iBuyer. They certainly are not the best choice for everyone, but here are some situations where it makes sense to use an iBuyer instead of a local investor:
When The Property Is In Decent Shape
If the property you are looking to sell is in decent shape, then it probably makes sense to go with an iBuyer as opposed to a local investor. The repairs they will require are likely minimal (if any) and they will simply be able to pay more in this situation than an investor.
iBuyers make money by their huge scale. Opendoor purchases tens of thousands of properties per year, which allows them to operate on very small margins. Local investors don’t buy anywhere close to these numbers and therefore they don’t focus on properties that are in great shape.
When You Are Looking To Avoid Realtor Headaches
Selling with an iBuyer seems to be a much less frictional process than selling with a realtor. With a realtor you have to get the house cleaned up, take pictures, entertain showings and open houses, and deal with retail buyers who may or may not be experienced.
Having an iBuyer purchase the house is certainly a good way to avoid all of this. They buy tens of thousands of properties per year and do not need any of this to take place.
When It Makes Sense To Use A Local Investor
Just like iBuyers, local investors have their “sweet spot” as well where it makes sense to go with them. Here are some situations where that is the case:
When The Property Needs A Good Amount Of Work
Properties that need a lot of work are a local investor’s dream. This is where they can offer the most value to a seller, because they are best suited for these types of properties. Since they are typically dealing with these types of properties on a regular basis, they have systems in place and are able to get their costs down.
Since this falls outside of the sweet spot for iBuyers, they are likely not able to be as competitive as local investor would be. iBuyers will require repairs to be made when the property is in this kind of condition, but local investors expect this and will factor it into the initial offer as opposed to requiring it after the contract is signed.
When There Is Pressure To Move Quickly And You Can’t Risk It Falling Through
When Covid-19 forced the U.S. to begin lockdowns, Opendoor and almost all the other iBuyers made the decision to cancel the contracts of the properties they were in process on. This negatively affected a lot of people and put them in tough situations.
Obviously Covid-19 is a rare occurrence, but this is what can happen when dealing with an iBuyer, and there are plenty of stories I found online saying this same thing. iBuyers are large companies with lots of smart attorneys working for them. Their contracts they use will ensure they are protected above anyone else in the transaction.
Local investors operate differently in that they know what they are getting into when they are purchasing a property that needs work. They’re aware of the risks associated with purchasing these types of houses and usually do not have contracts a mile long.
This helps the seller and ensures that what they are signing is a sure thing. Check out this case study where a seller we worked with in the past explains how he couldn’t risk dealing with a buyer who might back out.
Local investors have a certain area of expertise where they can add value, and iBuyers certainly do as well. Understanding the difference between the two is important when you are determining who will be better to sell your home to.
In summary, it is my opinion that iBuyers are best when the property is in decent shape with minimal repairs needed, and local investors are best when the property needs substantial work and a fast, guaranteed home sale is necessary.
Selling with a realtor seems to be a fairer comparison than selling to an investor, when talking about iBuyers. These companies understand this as well and it is the reason they partner with real estate brokerages.
Zillow Offers is a good example of this. Zillow generates a lot of revenue by sending leads to realtors and lenders when people complete forms on their site. For all of the people that request an offer from their iBuyer program, the vast majority decline these offers. However, they can then attempt to refer that person to a realtor, and monetize it in that manner.
People attempting to sell their property as is when it needs a significant amount of repairs fall outside of this and won’t get much benefit when dealing with an iBuyer. But on the other hand, an iBuyer can be a fantastic option when you have property in decent shape that you want to sell without dealing with the traditional process.
We hope this helps. Reach out with any additional questions you might have and good luck!