iBuying costs sellers more, study shows

What’s iBuying? iBuyers purchase homes from sellers at a lower than market price based on proprietary algorithms, pay the seller almost immediately, make any needed improvements, then re-sell the homes.

The total cost of using iBuying for home sellers is 13-15 percent of a home’s sale price, according to research by Collateral Analytics.

That compares to a 5-7 percent commission, plus the costs of any needed home repairs or preparation, for a seller working with a traditional real estate agent. In addition, iBuying sellers are freed from the uncertainty of selling their home.

“Home sellers should carefully consider the high costs of iBuying before embracing it,” said Stephen Brobeck, senior fellow at the Consumer Federation of America. “Fortunately at present, sellers can explore iBuying and reject it, as most sellers do.”

iBuying is a very small portion of all home sales, but it’s growing rapidly. The largest iBuyer, OpenDoor, purchased more than 10,000 homes in 2018 and is now available in more than 19 major cities.

Other major real estate firms – including Keller Williams and Realogy – are now buying and re-selling homes. Through Zillow Offers, Zillow has the potential to iBuy in more markets than OpenDoor. Zillow can also benefit from iBuying by selling leads, for those rejecting its offers, to other brokers.

According to the Collateral Analytics report, “iBuyers: A New Choice for Home Sellers But at What Cost?”, the 13 percent to 15 percent estimated costs of iBuying to home sellers represents a:

• “Convenience fee” of 6 percent to 9.5 percent,
• Generous repair allowance.
• Sales price discount of 3 percent to 5 percent for liquidity risks and carrying costs.

Regardless of whether home sellers use an iBuying service or a traditional broker, CFA recommends comparison shopping and price negotiation.

“iBuying costs vary considerably among companies, so comparison shopping and negotiation can reduce these expenses substantially,” said Brobeck. “While traditional commission percentages are relatively fixed, home sellers can often negotiate a reduction of up to one percentage point, which can add up to thousands of dollars for the seller.”

For decades, CFA has argued that traditional real estate commissions are too high, mainly because of hidden commission splits to buyer brokers that limit price competition. Recent litigation has challenged these hidden splits, and the U.S. Department of Justice is investigating them.