Real estate instant offer companies

There are several variables that a seller considers when selling a house: price, sale timeline, effort, comfort with the experience, and uncertainty. Now, the ‘default’ path taken by a novice seller is to hire a realtor to sell the house, but this is changing fast.

Realtors take on effort on behalf of the client and provide comfort in exchange for a 6% commission split between the seller’s agent and buyer’s agent. The realtor also has tools to reach a broader market than the home owner does, and can generally provide a faster sales timeline.

Cash buyer companies are nothing new in real estate. However, they have historically offered prices so far below market value that they were only taken by the most financially desperate sellers or by those in a terrible time crunch.

A new generation of cash buyer companies have entered the market, offering prices far more palatable than their decrepit counterparts. They estimate the market value (usually a lower estimate), and then subtract fees (usually euphemistically named an experience fee) that are slightly higher than that of a realtor. If we assume that on average, a realtor can sell the property at market value, the home owner who chooses a cash buyer company is giving up 2% to 5% of the home value in exchange for a faster timeline, less uncertainty, and less effort.

In addition, real estate instant offer companies remove the effort required in selecting a realtor, and the uncertainty involved in realtor quality.  An excellent realtor may be able to sell above market value. However, the reality is that it is difficult for a first time seller to get a high performing realtor. High performing realtors tend to be busy and delegate new clients to their more junior team members who may lack the knowledge of the high performing realtor who attracted the seller.  With a mediocre or below average relator, the 2% or 5% “realtor benefit” may not exist, and the seller may actually walk away with more cash if he sold to a real estate instant offer company.

A comparison of the real estate instant offer company industry with their substitutes

*All sales involve other transaction costs such as title costs and potential repairs. Since the value of other closing costs does not defer significantly between the different options, I have not discussed them in analysis.
**FBSO is short for ‘For Sale by Owner’

Opendoor, Offerpad, Perch, Zillow, Redfin Instant Buy, and Knock are among the main companies who provide instant offers. They are often referred to as iBuyers. I personally sold my house to Offerpad and contacted all 5 firms discussed above so I am well aware of how this market works. My home was a half-duplex so only Offerpad and Zillow were interested in making an offer on the home. Zillow then backed out due to foundation issues despite my house coming with transferable Foundation warranties.

My house was located in Irving, Texas, a suburb in the Dallas-Fort Worth metroplex. I sold it to Offerpad on early May 2019.

A comparison of real estate instant offer companies

*For Offerpad, I used the number of days it took to close for my home rather than the number of days mentioned on the site. My house had a HOA and companies acknowledge they take longer to close when there is a HOA, usually 3 to 4 days extra. Some companies also have different closing times for properties in different states
**Zillow includes title cost in the fees. Other companies don’t do that. Title costs are usually around 1% to 2%. Zillow follows a different process from the other companies in that they only give you a contract and make an official offer after the home inspection. Zillow, unlike other companies did not display their fee % on their website. The amount in the table is the fee they would have charged me for the transaction (13.9%).

I didn’t include Knock in the table because when I looked at their website on the date this article was written, I noticed that they only offer trade-ins and you can’t sell your home to them without buying one. When I was selling my home, you could sell to Knock without buying from them. At the time, Knock offered a hybrid model of putting the house on the market for 6 weeks and then buying it from you if they failed to sell it during that time frame.

Depending on the city that you live in, you may have less choices on the companies that operate in your area. Almost all the companies started of buying homes in the Phoenix, Arizona area. They often then move to cities like Dallas, Texas and Houston, Texas.  In April 2019, Zillow Offers did not buy homes in Dallas yet but when I asked them for another offer in May 2019, they had entered the Dallas market and made me an offer.

There are also concierge services like Zavvie. They call the 5 companies for you and put in the information on your behalf, help you decide on the best offer, and in theory walk through the process. By the time I found Zavvie online, I had already contacted Perch, Zillow, Redfin, Opendoor, and Offerpad so they couldn’t provide any value to me. They had a friendly customer service representative though.

I sold my house to Offerpad after a long excruciating process of interviewing a few realtors, hiring a realtor, terminating the realtor, contacting all the real estate instant offer companies, signing a contract to sell directly to a friend, having my friend’s financing fall through at the last minute, re-contacting the companies, and finally signing with Offerpad and selling to them.

If you would like to know about hidden pitfalls in real estate, or if you simply enjoy reading about my experience which is best described as a comedic nightmare, join my mailing list.

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