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How iBuying Is Changing the Real-Estate Market

How iBuying Is Changing the Real-Estate Market

By    |   Monday, 28 October 2019 12:33 PM

Silicon Valley startups are shaking up the American real estate market with a system called iBuying. With iBuying, you contact an online company like Zillow or Opendoor and it gives you an offer nearly instantly, meaning you skip the entire process of listing your home and negotiating with sellers.

iBuying currently only makes up about 0.2% of U.S. home sales, but some analysts believe it could touch up to 10% of all transactions by 2022. Despite the hype, iBuying does have its share of disadvantages versus the traditional real estate agent system. Here’s how the process works, along with its effect on the value of your home — even if you never sign up.

How iBuying works

With iBuying, you visit one of the real estate startup websites and enter some basic information about your home, like the address, age and condition. The company will then run this data through an algorithm and compare it to the value of other similar listings.

Once the calculation is finished, the company will come up with a cash offer for your property. That’s it. You don’t have to hire a real estate agent, renovate your home, hold viewings or worry about whether the buyer will be able to qualify for a mortgage.

The real estate startup will then be responsible for selling the house to someone else, but you won’t be involved. You could complete the sale and receive your money in a matter of days.

What are the downsides?

Despite its speed, this new real estate system does have some considerable downsides. First, it’s a limited service that's only available in a few test markets, at least for now. Opendoor, one of the larger companies in this space, still operates in just 21 different cities throughout the country.

But this may be a blessing in disguise because iBuying, while convenient, isn’t always a great deal for homeowners. To complete the transaction, you’ll need to pay the iBuyer a sizable fee, around 6% to 14% of the sales price. In addition, you might not get the highest possible sales price because you’re only dealing with one company, versus taking bids from multiple potential buyers.

When you take all of this into account, homeowners who sold their home through iBuying received 11% less than those who sold on the open market, according to a MarketWatch investigation. Altogether, homeowners could be giving up tens of thousands of dollars in value by using this online system.

How will iBuying change the real estate market?

For homeowners not selling: iBuying could also have a financial effect on homeowners not looking to sell. If you plan on taking out a home equity loan or refinancing your mortgage (a move that might lower your interest rate by 0.5% or more), the lender will need to appraise your property value first.

As part of the application process, the lender will check comparable sales prices for nearby homes. If iBuying lowered the values, you may receive less money for your home equity loan or worse terms on your refinance.

For sellers: If the iBuying system takes off, it will give you another option to sell your home and receive a cash offer quickly. This could spare you from being stuck having to make a down payment on a new home while you still haven’t sold your original property. With iBuying, you’d have cash-in-hand that you could immediately put toward your next purchase. But as we discussed above, this convenience could mean selling your home at a much lower price.

That price depreciation could hurt you even if you don’t use iBuying. One way the real estate market determines the value of houses is through comparable sales: seeing what similar properties in the area have sold for. If neighboring properties sell for a discount because of iBuying, the value of your home could be dragged down too, even if you use traditional methods to sell your home.

With iBuying, Silicon Valley has its sights set on the real estate industry. Even though this new system has some interesting points, if it becomes mainstream it could end up creating more headaches than benefits for homeowners.

Joe Resendiz is a Research Analyst at ValuePenguin, where he focuses on personal finance and credit research to assist consumers. Previously, Joe specialized on public sector and infrastructure financing at Goldman Sachs. He graduated from the University of Texas at Austin with a BBA in Finance.

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With iBuying, Silicon Valley has its sights set on the real estate industry. Even though this new system has some interesting points, if it becomes mainstream it could end up creating more headaches than benefits for homeowners.
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Monday, 28 October 2019 12:33 PM
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