Review of all things Real Estate

What is an I-buyer and what should consumers know about them?

i-Buyers are investment buyers who look to purchase inexpensively below market value then turn around and resale the property at prevailing prices. There are differences in some of the programs but mostly they do not intend to hold the property for rental purposes. An i-Buyer will generally offer to pay cash for the home, sight unseen. If the offer is accepted, the transaction can often close in as little as a few days.

Selling directly to i-Buyers sounds very attractive especially when they advertise that there are no agents involved so there are no commissions to pay, which equates to saving the seller money. While it sounds attractive, please refer to my article from last week which indicated the Federal Trade Commission and Open Door, the industry's largest i-Buyer with assets exceeding $2.5 billion, agreed to a fine for Open Door of $63 million for deceptive advertising.

The FTC decided the savings of no commission was exceeded by the requirement to pay a 7.5% "convenience fee, but the consumer was not advised that the aggregate of the fees charged by Open Door actually gave the sellers less total proceeds from the sale of the property."

Other i-Buyers charge different amounts, some actually have fees up to 11% which is certainly impactful in comparison to saving 6% in commissions. I will show a side by side comparison below which visibly demonstrates the difference using "just" a 7.1% convenience fee.

Realtor i-Buyer

Price $750,000 (list/ sold price) $705,000 (94%of list price)

Balance of mortgage $350,000 $350,000

Closing costs (based on sale price) $9,834 $9,715.50

Prorated taxes (based on sale price) $1,642.19 $1,230.76

Commission (6%) $45,000 $0.00

Service/ convenience fee $0.00 $50,055

Repairs $3,000 $3,000

Holding costs (escrow length) $1,510.27 $748.66

Final net to seller ($350,000 payoff) $339,013.54 $290,250.08

Net gain with traditional sale $48,763.46, 16.8% more than i-buyer proceeds to seller

*Above analytics courtesy of Fidelity National Insurance comparison calculator

While i-Buyers are cash offers which will close faster than traditional methods, using just a 7.1% service fee, the seller in the i-Buyer example will make considerably more proceeds using traditional sales method (16.8%). The i-Buyer programs that charge higher service/ convenience fees only make the differences that much more stark.

Another benefit to using traditional sales methods (employing a real estate brokerage/agent) is protection for the seller. Agents know what disclosures are required to be provided from the seller to the buyer. If there are no agents involved, how does the seller know what they are required by law to provide? It's not the escrow or title's job to know these disclosures, much less to provide them to the seller. Lack of or incomplete disclosures are the leading cause of real estate law suites.

Here's a direct sale i-Buyer scenario to be concerned about. Mary sells her home to an i-Buyer that pays cash and the deal is closed without any agents or agent commissions. Mary gets her proceeds and heads to the beach. The i-Buyer turns around and sells the house to Jose who later discovers there is a cracked slab, so Jose contacts the i-Buyer regarding lack of disclosure. I-buyer informs Jose they have no responsibility since they never received disclosures from Mary (no agents involved so who knew?). Jose sues Mary who is laying on the beach in Mexico completely unaware that she has legal trouble.

Can this happen? Without agents in the transaction, it certainly can. I suspect this is why Zillow got out of the i-Buyer business because they wisely foresaw future, costly legal issues. Even if a lawsuit isn't successful, it is stressful, time consuming and expensive to have to prepare to defend against a lawsuit.

In short, when a homeowner gets an unsolicited offer to purchase the home for cash and a quick closing, the homeowner must think that it is too good to be true. And when things appear too good to be true, they often are.

Here in the Fallbrook/ Bonsall area there are lots of knowledgeable, experienced and honest real estate agents. Should you get an i-Buyer solicitation, I strongly suggest that you get at least one (two would be better) opinion of value to include a net proceeds amount from a reputable local agent who knows this market. Saving the expense of commission but leaving money on the table and losing the protections that working with an agent provides is not a good deal. I suspect that you will be glad that you did consult with local real estate agents.

Next week, we'll discuss the recent "partnership" of Open Door and Zillow; what does that mean for the consumer?