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7 Reasons Instant Home Purchase Offers Are Not Good For Sellers
Sue stood in her parents' San Diego garage, overwhelmed by the years of stuff they'd accumulated and the volume of repairs needed. Add to the fact that she lived out of state, this sale wasn't going to be easy. It was certainly tempting to entertain an instant offer to buy the house and walk away from all of it. But her parents needed every dollar they could get out of the house sale. So, they found an agent and the home sold to a cash buyer for full price. Like Sue, many homeowners and property custodians find themselves in difficult situation.
Time sensitive situations, such as job loss or homes in disrepair because of finances or health, create a desire to quickly dispose of real estate. Companies such as Opendoor and Zillow are making it very simple to get a valuation and accept an offer online. But what seems like a convenient and easy solution masks some serious drawbacks for the homeseller and the real estate market.
Let's look at the seven reasons to pass on the instant home purchase offer.
1. Inaccurate valuations
For years, homebuyers and sellers have been lured by the Zestimate, Zillow's estimation of property's value. What real estate pros know is that Zestimates aren't accurate. Zillow's Zestimate is "calculated from public and user submitted data, taking into account special features, location, and market conditions" and is what Zillow calls "a starting point". And according to Stan Humphries, creator of the Zestimate home valuation and Zillow's chief analytics officer, the error rate is about 5% nationwide. Zillow, in an indirect affirmation of the problem, has launched a competition to create a better valuation model. So for now skip the Zestimate. With any valuation model, you should find out what factors are part of the equation. At minimum, you want official filed records and recent sold prices of comparable homes in the neighborhood. For the most accurate valuation, nothing beats an in-home consultation by a local agent. Because the home is unique, there may be upgrades, layout features and other factors that can have a direct impact on a home's market value. Sellers need to know what their home is actually worth; the computer's best guess is only a starting point.
2. Low offers
An investor or a real estate company that purchases your home outright isn't going to give you market value. Their goal os to make a profit on your property. They will have to put money into the property to make it salable, plus cover their overhead. Like a trade in at the car dealership , you give up top dollar for ease. But we're not talking about mere hundreds of dollars, we're talking thousands, maybe tens of thousands. Are you willing to give up this kind of money for "convenience"?
3. The fees add up
The highest agent commission structure in the U.S. is 6 percent (split between the buyer's and seller's agents). That could be a reason people look at the idea of a company or investor stepping in. They think that the loss found in a low offer will be offset by not paying agent fees. That's not how this works. Not only will sellers get a lower than market value offer, they'll likely be paying fees as well. In some cases, they will cost more than an agent. Companies that buy homes outright, such as OfferPad and Opendoor, charge for various services - including service fees and "experience fees". Zillow's current test of its Instant Offers program, which presents sellers with investors bids alongside an agent's comparative market analysis (CMA), doesn't charge any fees; the company would likely need an active broker's license to do so. But should it find a way around the legality or get a license - and if the program is successful - why wouldn't Zillow monetize it? Homesellers should think about fees this way: When you sell your home, would you rather pay an agent who represents your interests or a company that represents itself?
4. Most markets don't need this service
In a downturn market, you'd expect to see investors swooping in with lowball offers. But in the current housing market, there's little need for homesellers to take such a drastic measure. In many metros, given tight inventory, homeowners don't even have to put money into updates or upgrades. IBuyers (a moniker for platforms using new technology to make offers on homes and close quickly) like to show sellers what they'll "save" selling right away versus the cost of staying on the market. So, what are they paying for while their house is on the market? Oh, that's right, they're paying what it already costs to live in their home (while they earn equity). Depending on the market, their mortgage could be a lot less than rent. It's not an additional cost or burden unless they have no money. Even then, there are more options for hard pressed homeowners than renters, such as refinancing and mortgage assistance. If sellers decide to sell their home, the market in most metros will reward them with a sale.
5. Reducing inventory raises prices
Home inventory in the U.S. continues to set record lows. As a result, many homebuyers are frustrated trying to get into a home and prices continue to escalate. Although this doesn't affect the homesellers who don't plan to buy immediately, it does impact the community and the people they know. The more homes that go off the market via instant offers, the tighter the inventory becomes for homebuyers. Sure some of those homes will get put back on the market, but expect the price point to go up. This especially impacts those looking for affordable homes.
6. Investments don't always bring buyers
Investors don't always flip houses for buyers. They often rent them out. Although not all renters are poor caretakers, there isn't much incentive to put effort and care into the property. Get enough renters on a street, and the curb appeal drops significantly. What do you think that does to home values? In addition, renters come and go. The community makeup of a neighborhood changes with renters. People who aren't in a place to stay, rarely make long term relationships with those around them. As a result, the neighborhood suffers from a lack of community. This doesn't make the neighborhood bad or of less value per se. But it does change the benevolent feeling of a caring, connected community. If you know someone on the street who needs to sell, but is having some difficulty getting the home ready to sell, it might be in your best interest to organize some help to get a buyer in. You'll be helping your neighbor and protecting the street's quality of life.
7. The negative effect of low offers
Imagine two or three homes on a street taking an instant offer. If this becomes a trend, appraisers may not be able to disregard the data. So, if you, the seller, take an instant offer, you're messing with your neighbors' home values. That might not be your problem today, but it could be in the future. When you go to sell your next home, you're going to be pretty upset if a bunch of people on your future street sell out to an investor for convenience. Who benefits from instant home purchase offers? When an agent sells a home, it's a mutually beneficial transaction. The agent gets a fee or commission, and the sellers get the best possible price for their home. Instant home purchases are designed to benefit the iBuyer or investor under the guise of convenience to the seller. At the very least, sellers should get a CMA from a licensed real estate agent before considering an instant offer.
Sources: Inman, Chris Redigerco
I grew up on the Monterey Peninsula, about 5 hours drive from Reno. I moved to San Diego in 1990 to begin my career in the golf business. While in San Diego, I worked at Torrey Pines, Balboa Park and ....