Are you concerned that your home is 'unsellable' and looking for some advice?
Here is some good news. If a home is clean and priced right, it will sell! But, let's all admit this is easier said than done, and get into the nitty gritty details for a full understanding.
Your potential homebuyer can generally be categorized as either a consumer or a professional investor.
Traditionally, consumers tended to buy move-in ready homes, and professional investors, referred to as “fix and flippers”, bought homes where there was a large spread between the move-in ready value of the home and the value in its current condition.
This left a large underserved market, for homes that needed only a little bit of work. The solution for sellers used to be to find that scarcer consumer buyer that was willing to take on this work and would pay a discounted price for the home.
The problems with this is that it still takes a lot of work and effort to market to these buyers. They may make emotional decisions instead of economic ones; their offers may be contingent on financing and third party appraisals; they may be slow to complete diligence, get financing, or sell an existing property; and, ultimately they may not close at all.
During the past 5 years, a new category of professional investors has rapidly grown, known as iBuyers, that offer a solution to some of these problems involved in selling a home that needs only a moderate amount of repairs, if any.
1. Understand nearby comparables
2. Make necessary and impactful renovations
1. Ignore surrounding homes and how they relate to your home’s value
2. Don’t do the bare minimum cleaning and de-cluttering to make the home presentable to normal buyers
If your home isn’t in mint condition, you have two choices - do the work to make it move-in ready, or sell it as-is.
If you're in a hot sellers market, there is a higher likelihood that a consumer buyer will overlook some small repairs and buy as-is. For these purposes, we will assume that is not the case, and selling as-is to a consumer is off the table. You will need to do a cost-benefit analysis to decide whether to fix up your home to sell the traditional route, or sell as-is to an iBuyer.
Sell to an iBuyer if the expected sale price of the fixed-up home, minus the cost of fixing up your home, minus the cost of hiring a real estate agent to sell it, minus the $-value you personally place on the time and hassle of completing these steps, is less than the net price from the iBuyer.
For example, a $300k home might cost you $5k to fix, $5k to stage, $16.5k in commission costs, and you believe the time and effort of having to move around all your furniture, come and go for showings, keep the home clean and tidy for months straight, is worth $5k.
An iBuyer typically charges a 5% - 8% service fee, an assessed cost for repairs, and a discount to market value which, if you shop around, can be within 1-2% of what a traditional offer might be expected to produce; assuming the midpoint of 6.5% + 1.5% leads to an 8% total cost, plus $5k for fixes (same as traditional, but no cost of staging) and a $271k net price, which is higher than the $268.5k value from selling the traditional route, because of the savings on staging and showing.
That being said, there are frequently examples where the iBuyer net proceeds will be less than the traditional proceeds; for instance, some iBuyers can i) base their offers 5-10% below the traditional fixed-up value; ii) assess costs for unnecessary repairs that traditional buyers wouldn’t have required; iii) charge higher service fees in slower markets. In fact, most iBuyers are fairly candid that sellers choose them for convenience and control over the exact closing date (sellers can usually pick the exact closing date from 14 – 90 days) rather than highest price.
For example, Zillow Group, Inc. (Nasdaq: ZG) is a publicly traded company with iBuying operations that has the most transparency regarding its economics. Publicly traded Redfin Corp. (Nasdaq: RDFN) had very little activity in its iBuying operations in 3Q20, entering the quarter with only 17 homes in inventory, so their results are not as instructive here.
In 3Q20, Zillow reported that it lost $2,868 per home in its iBuying operations, before interest expense; however, this does not mean that you would have made $2,868 by selling to them. Further analysis shows that the average acquisition price was $290,369, the renovations were $13,772, they had $4,693 of holding costs, $12,909 of selling costs, and then they sold the home for $318,875. Suppose you received an offer from Zillow for $290,369 on this home, net of $13,772 of repairs they had assessed – how would you make a decision?
In order to make a decision, you would need to have a view on how your ultimate selling price, selling costs, holding costs, and renovations would differ from theirs.
Below, we will discuss how to get the numbers to do this math. In summary, you need to analyze comparable sales, estimate your cost to make the home look like the comparables, and include the cost of using a real estate agent on both sides of the deal.
Let’s assume that after analyzing the comparable sales, you came up with the identical $318,875 expected sale price. You analyzed the cost of cleaning, decluttering, and upgrading, and you determined it would only cost $10,000 to get it to the appropriate level. Your holding costs are likely not a real factor for you – because regardless of where you live, you will likely have home maintenance expenses. You should only include any extra holding expenses here – such as if you already purchased your new home you are moving to, and have started incurring double sets of expenses for landscaping, utilities, cleaning bills, etc.
Your selling costs are likely around 5.5% to cover a selling and a buying agent, or $17,538 in this example; this is higher than Zillow’s 4.04%, which makes sense because Zillow might be able to negotiate bulk sale discounts with agents or use internal agents at lower cost. Summing up, your net proceeds from this traditional estimate is $291,337, which is only about $1k more than the Zillow estimate. This seems like a no-brainer to take the Zillow offer in this example and forego the hassle of marketing the home over multiple months.
However, what if your analysis of the comparables shows that the home should be worth $325,000 if marketed traditionally (and you have a selling agent who agrees)? In that case, your net proceeds would be $297,125 ($325,000 x 94.5% - $10,000), and you would be leaving close to $6k on the table taking the Zillow offer; for $6k less, you might still decide to take the Zillow offer, if you place a similar value on the uncertainty and hassle of marketing the home.
One additional note - iBuyers focus their operations in areas where the homes are somewhat “average” - as you can see from the average acquisition price by Zillow above. Their models work best when homes are as similar as possible. The top iBuyers operate in about 20-25 major cities. Unfortunately, if your home isn’t in one of these cities, or is a higher priced enclave - the iBuyer route just won’t apply to you yet.
You need numbers to plug into the above formula. Here is how you get them...
You will need a prediction for the fixed-up home value, and an estimate of the cost to get it there.
a. Type your home address into at least 4-5 real estate portals that can provide an estimate of the home’s value (Zillow, Redfin, ZeroDown, Realtor.com, Movoto).
b. Ask a local real estate agent for an estimate of the home’s value in mint condition.
c. Bonus credit – look at photos of neighbors’ homes on real estate portals and note any differences in the style and condition of their home versus yours. If nearby homes have an updated look that your home doesn’t possess, you will need to build in the cost of redesigning your home in order to get full value.
a. You will need to clean the following areas of the home to make it seem ready-to-be-bought and take a potential expense off of the buyer’s checklist:
b. You will need to repaint any rooms or exterior parts of the house that don’t look brand new, and you'll need to do some landscaping.
c. You'll need to de-clutter your home to make it seem bigger, more homey, and easier for your buyer to imagine their stuff being in there:
d. Look at neighboring homes (bonus points if you visit them in person!) and focus on the following parts of the home to identify if any aspects of your home need to be upgraded:
(These are meant to be minor, quick projects that can nevertheless have a major impact on your home’s selling price, and not total kitchen and bathroom renovations; note the costs of any upgrades needed.)
e. You might need to stage your home. Not all homes benefit from staging - if your rooms and existing furniture look good and photograph well, it may not be worth the extra cost to stage; but, know that with your home hopefully selling soon, now may be the time to at least rent that perfect piece of furniture or art that shows the buyer the full potential beauty of your home. Learn more about the pros and cons staging here.
f. Build in a 5-6% real estate commission cost assuming you hire a real estate agent and your buyer uses a real estate agent. The formula above assumes 5.5%. The pros of hiring a selling agent are that they will help you set the listing price, make suggestions about how to efficiently clean, de-clutter, stage, and screen and negotiate with potential buyers.
For an offer from an iBuyer, you will not have to pick up a broom or a paintbrush at first.
Just go to the nearest website or app (Opendoor, Zillow Offers, Redfin Now, Offerpad) and submit basic information about the property, such as the address, age, square footage and features. The process takes only a few minutes. The iBuyer estimates your home's value and sends you a preliminary offer if they are interested. In order to get a final offer, the company will do an in-person evaluation.
As opposed to having to keep your home clean and de-cluttered for months if selling the traditional route, you will only have to do this once for the iBuying evaluation; and you can skip the repairs and upgrades because the iBuyer will account for any necessary repairs in its final price. iBuyers have a tendency to call out repairs that regular consumers wouldn’t typically demand, and there may be some types of repairs that you are confident you can complete on your own for less money than their price quote; in that case, you definitely have an opportunity to negotiate this point and get a more favorable deal.
You’ve done the math, and the traditional route seems like it will get you a higher price.
You’re now going to review again the list of reasons why people sell to iBuyers even for a lower price. Is it critical that you sell your home quickly (<30 days) for any specific reason (buying a new house; need the money for other reasons)? Are you absolutely incapable of managing a sale process because of other responsibilities?
These reasons are hard to place a $-value on, and they are common reasons that people decide to sell to iBuyers and leave money on the table. If these reasons don’t apply to you, and you’ve done the math on comparable sales and marketing costs, then even though you think your home is “unsellable” right now, I encourage you to get it clean and priced right, and it will sell!
The trend in iBuying has been lower service fees over time. iBuyers use a lot of data and models to make their offers, and the more transactions they do, the less error margin they need to build into their next round of offers. Also, as they grow, they get scale efficiencies, and they add ancillary revenue sources (mortgage, title, escrow, commissions on buying and selling, home warranty, remodeling services, home insurance, moving services) which help with the profit margins on each deal. This means that there may come a time in the not so distant future where iBuyer offers are consistently within 1-3% of the net proceeds of a traditional offer. The seller’s decision at that point will be between taking the iBuyer offer of cash in 14 days, or holding out for an extra 1-3% in 45-60 days.
I think selling agents are going to have to be super persuasive to convince potential clients to go the traditional route in the future!
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