How do iBuyers profit?
Updated: Mar 27
Are iBuyers a good deal for sellers?
That’s the question of the year in real estate and the answer is: it depends!
For some sellers, iBuyers can be a great deal, allowing them to achieve their goals quickly. Other sellers are better off listing their property and letting the market determine their price.
Remember, an iBuyer is a large-scale company that uses pricing algorithms to make offers on houses. Their offer is only as accurate as their data, so it’s vital that sellers get advice from a certified agent before they proceed.
To explore the financials of iBuyers, let’s start by looking at how they make money. That will help us better understand when iBuying is a good fit.
They Profit from Calculated Risks
iBuyers use their data to mitigate the risks that they take. Every offer an iBuyer makes is a calculated risk, and so iBuyers will profit to the extent that:
They keep risks low through precise offers on homes and
They are compensated for taking on this risk.
The risks that iBuyers take on include:
The risk of when (or if) the house will sell, which includes demand issues and the market changing
Taking on holding costs, meaning they will pay money every month they hold the house
Paying costs that might emerge from the negotiation process, such as additional repairs
Once a seller accepts an iBuyer offer, the iBuyer takes on the risk. To do that, iBuyers get compensated, both by taking a fee from sellers, and by capturing the upside when they buy correctly.
Economies of Scale
iBuyers also profit through economies of scale. This plays out in several ways.
First, by having regional or national marketing campaigns, iBuyers are able to lower their cost of client acquisition by targeting broad areas.
Second, by scaling up and creating a more predictable product, iBuyers are also able to earn better funding terms. A huge portion of the costs of running an iBuyer is the cost of capital, including interest, so the better and more predictable the iBuyer business, the better terms they can earn.
Third, as iBuyers scale, they can also negotiate better deals from vendors, especially as they grow in a particular geographic area. This can lead to lower costs for a range of services, such as inspections, appraisals, contractors, and more.
Finally, by growing expertise (and thus improving their data) in a certain area, iBuyers can also make more precise offers, leading to more targeted offers and a higher acceptance rate. iBuyers thrive in areas with homogeneous houses. Think subdivisions with similar houses. They are likely to have common repair issues, regular selling cycles, and more stable prices.
iBuyers can increase their profit by maximizing what they get out of every transaction. Once they have acquired a seller (or their house), there are many opportunities to create additional sources of value from these opportunities.
There are opportunities to serve the seller further. Many sellers want to buy as well, and iBuyers are increasingly trying to connect these clients with their new houses, through trade-ins or simply by connecting them to houses the iBuyer already has in its portfolio.
Additionally, there are many elements of a real estate transaction that lead to additional service opportunities. iBuyers are promoting their in-house or affiliate mortgage companies to sellers looking to buy a different property or to buyers looking at iBuyer-owned properties. Additional services like title, insurance, inspections, and more are increasingly being promoted to those in the iBuyer ecosystem. iBuyers are building as many connections through their services as possible to maximize profit.
All of these help to tell the story of how iBuyers profit, yet the simplest reason is this: they provide a service otherwise missing in real estate.
Convenience and certainty have value in the real estate arena. Transactions can be stressful for sellers, especially when a sale is unexpected, such as an inherited house in another state, or when circumstances necessitate a timely move. When jobs change, or a dream house becomes available, time and convenience can trump the need to maximize net proceeds.
Want to Explore iBuying?
Every seller should align with a certified iBuyer specialist to ensure that they are fully aware of the cost of using an iBuyer. The convenience and certainty can come at a cost, but for many sellers, it can be well worth it. Working with an expert is the only way to ensure that an iBuyer is a good deal. Otherwise, it’s you who is taking on the risk. A Keller Offers Certified iBuyer Expert is ready to help!