“iBuyers” & Instant Cash Offers

October-2019-MVP-Social-Media-Image

Technology is changing the way we do almost everything, and real estate transactions are no exception. In fact, a new crop of tech companies wants to revolutionize the way we buy and sell homes. iBuyer startups like Opendoor, Offerpad, and Properly are rapidly expanding into new territories, and now established players, like Zillow, are starting to get in on the action. Also known as Direct Buyers, or wholesale buyers, these companies use computer algorithms to provide sellers with a quick cash offer to buy their home. While the actual market share of iBuyers remains small, their big advertising budgets have helped create a noticeable buzz in the industry. This has left many of our clients curious about them and how they work. In this article, we explain their business model, weigh the pros and cons of working with an iBuyer, and share strategies you can use to protect yourself if you choose to explore this new option to buy or sell your home.

FIRST, HOW DOES THE iBUYER PROCESS WORK? 

While each company operates a little differently, the basic premise is the same. A seller (or seller’s agent) completes a brief online form that asks questions about the size, features, and condition of the property. Some also request digital photos of the home. The iBuyer will use this information to determine whether or not the home fits within their “buy box,” or set of criteria that matches their investment model. They are generally looking for houses they can easily value and “flip.” In most cases, their ideal property is a moderately priced, single-family home located in a neighborhood with many similar houses. The property shouldn’t require any major renovations before listing.1 These qualities make it easier to assess value (lots of comparable sales data) and help to reduce risk and minimize carrying costs. Once the iBuyer has used their algorithm to determine the amount they are willing to pay, they will email an offer to the seller, usually within a few days. The offer should also disclose the company’s service fee, which is typically between 7% and 12% of the purchase price.2 If the seller accepts, an in-person visit and inspection are scheduled. The iBuyer will ask for a reduction in price to cover any defects they find during the process. Once the sale closes, they will make the necessary updates and repairs and then resell the home on the open market.

WHAT ARE THE PROS AND CONS OF SELLING TO AN iBUYER? 

Of course, the biggest benefit of selling your home to an iBuyer is convenience. For some homeowners, the stress and disruption of preparing and listing their home can feel overwhelming. And what busy family with kids and pets wouldn’t want to skip the hassle of keeping their house “show ready” for potential buyers? Additionally, many sellers like the predictability of a cash buyer and the flexibility to choose their closing date. However, this added convenience does come at a cost. An iBuyer is an investor looking to make a profit. So their purchase offer is usually below true market value. When you tack on service fees of up to 12% and deductions for updates and repairs, studies show that sellers who work with iBuyers net a lower amount than those that list the traditional way.3 In fact, a MarketWatch investigation found that transactions involving iBuyers net the seller 11% less than if they would have sold their home with an agent on the open market.2

WHAT ARE THE PROS AND CONS OF BUYING FROM AN iBUYER? 

Buying a home from an iBuyer is a lot like buying a home from any investor. The pros are that it’s usually clean, neutral, and moderately updated. You’ll often find fresh paint and modern finishes. And because it’s uninhabited (no one is living there), you don’t have to work around a seller’s schedule to see the home. However, there are some pitfalls to avoid when working with iBuyers. Speed is of the essence, so sometimes the renovations are rushed and the quality can suffer. Also, their investment margins don’t leave much room for negotiating a price reduction or additional repairs. That leaves buyers —who have already invested hundreds of dollars in an inspection—little recourse if any issues are uncovered.4 That’s one of the reasons we always recommend viewing properties with an agent. During your visit, a real estate professional can point out any “red flags” at the home, provide background information about the neighborhood, and help you assess its true market value. That way, you don’t invest time and money in a high-risk or overpriced property. Safety is also a concern. Some companies allow buyers to access their homes via a smartphone app. While it may seem convenient, it provides an easy way for squatters and others to enter the home illegally.5 Luckily, since most iBuyers (and traditional sellers) pay a buyer agent’s commission, you can benefit from the guidance and expertise of a real estate professional … at no cost to you!

HOW CAN I PROTECT MYSELF IF I CHOOSE TO WORK WITH AN iBUYER? 

While it may seem like the “quick and easy” way to go, working with an iBuyer can present some unique challenges. For example, they are notorious for presenting a strong initial purchase offer and then whittling it down with a long list of costly updates and repairs once they complete their inspection.2 And unlike a traditional buyer who is incentivized to make a deal work, iBuyers can easily walk away if you don’t meet their demands. Just like you wouldn’t go to court without a lawyer, you shouldn’t enter into a real estate transaction without an advocate to represent you. Having a professional agent on your side can be especially important when negotiating with an iBuyer. Remember, they employ sophisticated representatives and a team of lawyers who are focused on maximizing their profits, not yours. You need someone in your corner who has the skills and knowledge to ensure you get a fair deal and who understands the terms of their contracts, so you don’t encounter any unpleasant surprises along the way. Overall, we think the emergence of new technology that helps to streamline the real estate process is exciting. And if we believe a client can benefit from working with an iBuyer, we present it as an option. But there is—inevitably—a cost to the convenience. After all, most iBuyers eventually list the properties they acquire on the open market, which is still the best place to find a buyer if you want to maximize the sales price of your home.

EXPLORE YOUR OPTIONS! 

Do you want to learn more about iBuyers and other options currently available in our area to buy or sell your home? We can help you determine the best path, given your unique circumstances. Contact us to schedule a free, no-obligation consultation!
Sources:

  1. The Dallas Morning News – https://www.dallasnews.com/business/real-estate/2019/07/11/so-called-ibuyer-real-estate-firms-pitch-programs-to-buy-your-house-help-you-hunt-for-another/
  2. MarketWatch – https://www.marketwatch.com/story/selling-your-home-to-an-ibuyer-could-cost-you-thousands-heres-why-2019-06-11
  3. Forbes – https://www.forbes.com/sites/alyyale/2019/08/16/study-shows-ibuyers-cost-home-sellers-thousands-is-convenience-worth-the-price/#697ac0c42269
  4. US News & World Report – https://realestate.usnews.com/real-estate/articles/what-to-expect-when-buying-a-home-from-an-ibuyer
  5. Inman – https://www.inman.com/2019/09/11/police-arrest-couple-found-squatting-in-opendoor-home-with-their-kids/

October 2019 Market Update

Asking Price Up 9% Over Last Year
Square Footage Drives Appreciation

October 2019 Market Update

For Buyers:

The news media is filled with short-term predictions regarding the economy and how it will, or will not, affect real estate prices. It’s understandable for buyers to want their home to appreciate in value after they purchase, who doesn’t? However there is far too much attention paid to short-term influences and fluctuations these days and not enough attention paid to the long view. Real estate is a long-term investment for many people. Despite the euphoria of 2005-2007 and the nightmare of 2008-2011, on average homes are selling 81.6% higher today than they were in the year 2000. That’s an average appreciation rate of 4.3% per year over the course of 19 years. Smaller homes appreciated the most over time while larger homes appreciated the least. Homes under 1,000sf have appreciated 122% since 2000, an average of 6.4% per year. Those between 1,000-2,000sf appreciated 106%, an average of 5.6% per year. 2,000-3,000sf appreciated 68% at 3.6% per year. 3,000-4,000sf appreciated 49% at 2.6% per year and homes over 4,000sf appreciated 11% at 0.6% per year.

For Sellers:

Average asking prices per square foot are up 9% over this time last year and they’re continuing to rise. However, not one individual price range has risen 9% or more; confusing, right?  That’s because the sharp increase in the average has more to do with a growing market share of luxury active listings over $500K as inventory has plummeted everywhere else. The highest increase is within $200K-$250K, where sellers are asking 5.6% more than they were last year.  That’s followed by listings over $1M where they’re asking 4.2% more and $500K-$1M at 4.0%.  All other price ranges are just 1-3% higher. But are buyers paying? Actually, many of them are! In the $200K-$250K range, the average sales price per square foot is still 0.8% higher than the average list price; and between $250-$300K the average sales price is 6.8% higher than the average list per square foot. Things change over $500K. Between $500K-$1M there’s a -6.3% gap between asking price and sales price and over $1M the average sales price is -15.1% below the average asking price.

Contact the real estate experts at NextHome Valleywide in Chandler, AZ at 480-621-6828 for more information.  If you are currently looking to Buy or Sell a home in the Phoenix metro , Scottsdale or East Valley area and are not sure where to turn we can help! Search for homes at Valleywide.realestate where you can find single family homes, golf and lakefront properties, 55+ communities, townhomes and much more. Visit our blog at NextHome Valleywide for a monthly Phoenix Market Update.

National Real Estate Snapshot

National Real Estate Snapshot

The U.S. unemployment rate is at a 50-year low, and consumer confidence remains high. In fact, the University of Michigan’s latest Surveys of Consumers found that Americans have their most positive personal finance outlook since 2003.1

However, if you follow national news, you’ve probably heard speculation that we could be headed toward a recession. Global trade tensions and a slow down in the GDP growth rate have sparked volatility in the stock market, leading to economic uncertainty.

Given these differing signals, you may be wondering: How has the U.S. housing market been impacted? Where is it headed? And more importantly … what does it mean for me?

MORTGAGE RATES ARE NEAR HISTORIC LOWS

In August, Freddie Mac reported that the average 30-year fixed mortgage rate hit its lowest level since November 2016, falling to 3.6%, down a full percentage point from a year earlier.2 Variable mortgage rates also fell when the Federal Reserve cut interest rates at the end of July for the first time since 2008.3

This was welcome news for many in the real estate industry. Freddie Mac predicts that low interest rates and a robust job market will help the housing market remain strong despite the threat of recession. 

“There is a tug of war in the financial markets between weaker business sentiment and consumer sentiment,” said Sam Khater, Freddie Mac’s chief economist. “Business sentiment is declining on negative trade and manufacturing headlines, but consumer sentiment remains buoyed by a strong labor market and low rates that will continue to drive home sales into the fall.”2

What does it mean for you? If you’re looking to buy a home, now is a great time to lock in a low mortgage rate. It will shrink your monthly payment and could save you a bundle over the long term. Or if you plan to stay in your current home for a while, consider whether it makes sense to refinance your mortgage at today’s lower rates.

PRICES CONTINUE TO RISE AT A MODEST PACE

According to the S&P CoreLogic Case-Shiller Indices, housing prices continue to rise. But the rate at which prices are rising is slowing down. For May 2019, the National Home Price Index rose by 3.4%, down from 3.5% the previous month.4

Of course, national averages often don’t present the whole picture. Some markets have seen modest declines, while other areas are witnessing double-digit increases. The key differentiating factor in most cases? Housing affordability.5

Since 2012, home prices have increased at about three times the pace of wages, according to National Association of Realtors chief economist Lawrence Yun.6  

“Housing unaffordability will hinder sales irrespective of the local job market conditions,” said Yun. “This is evident in the very expensive markets as home prices are either topping off or slightly falling.”5

But what about all this talk of a recession? Will we see housing values plummet like they did in 2008? Economists say no.

If we look at history, the real estate crash experienced during the Great Recession isn’t typical.

The recent Housing and Mortgage Market Review report from Arch Mortgage Insurance provides data to support this. “What we found is that the next recession is likely to be far less severe on the housing market than the last one. It’s not that this time is different; it’s that last time was really different from historic norms.”6

“A large decline in national home prices is unlikely in the next recession,” Arch economists write. “A persistent housing shortage should help cushion home price declines.”This factor is especially significant in our Phoenix market as builders rush to meet demand.

What does it mean for you? If you have the ability and desire to buy a home now, don’t let the threat of a recession hold you in limbo. The market is cyclical, and it will experience ups and downs. But over the long term, real estate has consistently proven to be a good investment.

STARTER INVENTORY REMAINS TIGHT WHILE LUXURY MARKET SOFTENS

As we’ve seen in the past, it’s become a tale of two sectors.

The low-end of the market remains highly competitive as buyers compete for affordable housing. A lack of new construction during the last recession led to an undersupply of starter homes. This trend continues—despite growing demand—due to a lack of skilled workers, rising land and material costs, and a slow permitting process in many areas.7

The result? There’s a shortage of homes for sale that Americans can actually afford to buy.

The luxury market, on the other hand, has softened. Economic uncertainty, changes to tax laws, and rising prices have slowed demand. Plus, to recoup their higher costs, builders flocked to this segment—causing an overabundance of supply in some areas.

“If you’re selling an entry level home, you’re probably still looking at a pretty competitive market in most places,” according to Danielle Hale, chief economist at Realtor.com. “But if you’re selling a more expensive home you probably have to adjust your expectations.”8

What does it mean for you? Move-up buyers, you’re in luck! If you’re ready to trade in your starter home for something more luxurious, you may get the best of both sectors. We’re still witnessing strong demand for entry-level homes, giving sellers the upper hand. At the same time, buyers of high-end homes are finding a greater selection (and more negotiating power) than they’ve had in years.

INVESTORS ARE BUYING HOMES AT RECORD LEVELS

There’s one group that hasn’t been slowed down by lack of affordability or economic uncertainty: investors.

According to CoreLogic, investors are purchasing homes at a record pace. In 2018, the share of U.S. homes bought by investors reached 11.3%—the highest level since the company began tracking nearly 20 years ago.9

Notably, this increased activity wasn’t led by institutional investors, but instead by small and individual investors focused on the starter-home segment.7 Declining interest rates and an uncertain stock market have led investors to flock to real estate as they seek out greater stability and higher returns.

“With declining mortgage rates … they’re searching for a better return for their money,” said NAR chief economist Lawrence Yun.10

What does it mean for you? If you’re looking for a way to “recession proof” your money, you might want to consider investing in real estate. People will always need a place to live, and (unlike the stock market) a rental property can provide a steady source of cash flow during uncertain economic times.

WE’RE HERE TO GUIDE YOU

While national real estate numbers can provide a “big picture” outlook, all real estate is local. As local market experts, we can guide you through the ins and outs of our market and the issues most likely to impact sales and home values in your particular neighborhood. 

If you have specific questions or would like more information about how market changes could affect you, contact us to schedule a free consultation. We’re here to help you navigate this shifting real estate landscape.

Sources:

  1. University of Michigan Surveys of Consumers – http://www.sca.isr.umich.edu/
  2. Freddie Mac – https://freddiemac.gcs-web.com/news-releases/news-release-details/mortgage-rates-drop-significantly?_ga=2.29332539.689041222.1565464527-928629548.1565464527
  3. CNN –  https://www.cnn.com/2019/07/31/business/fed-rate-cut-july-meeting/index.html
  4. S&P Dow Jones Indices – https://us.spindices.com/documents/indexnews/announcements/20190730-965771/965771_cshomeprice-release-0730.pdf?force_download=true
  5. National Association of Realtors – https://www.nar.realtor/newsroom/metro-home-prices-increase-in-91-of-metro-areas-in-second-quarter-of-2019
  6. Forbes – https://www.forbes.com/sites/alyyale/2019/04/18/with-a-recession-looming-is-now-the-time-to-sell-your-home/#7d3a21665bce
  7. CNN –  https://www.cnn.com/2019/08/09/economy/mortgages-home-buyers/index.html
  8. Forbes – https://www.forbes.com/sites/carolinefeeney/2019/07/01/halfway-into-2019-how-is-the-housing-market-holding-up/#7e656e3ec5d8
  9. CoreLogic – https://www.corelogic.com/blog/2019/06/special-report-investor-home-buying.aspx
  10. Fox Business – https://www.foxbusiness.com/economy/investors-snapping-up-homes-at-record-levels

September 2019 Market Update

New Listings Up 10% from July
Supply Down 73% in $200-250K

2019-09 Infographic

For Buyers:

A faint glimmer of good news for buyers, supply finally stopped declining and actually rose a tiny bit in the last week. While active listings are still 16% lower than they were this time last year, they’re 1% higher than 4 weeks ago. This rise can be attributed to a 10% increase in new listings from July to August, which is not uncommon as July is typically a low point in the year for new listings. However this August was 3% below last August in comparison and the lowest August since 2016. One price range that is still declining in supply is $200K-$250K, which has plummeted 51% since February. The Southeast Valley on the Maricopa County side has seen the largest decline of 73% in this price range for single family homes. Gilbert is especially low with only 5 listings in the entire city under $250K as of September 9th, all of them townhomes with an average size of 1,116 square feet.

For Sellers:

For some sellers the idea of listing their home is stressful, even if they really need to sell it.  The pressure of keeping their home clean for showings and open houses, enduring negative feedback, and the unknowns of the inspection report can send homeowners right into the arms of flip investors who will happily buy their home “as is” with significant fees attached. While there is nothing wrong with doing that (there is value in ease and certainty) sellers should understand that if their home lands within a frenzy price range for their area, where there are literally more homes under contract than there are for sale, they may be pleasantly surprised at how little they have to do to sell it on the MLS. Negotiable listing costs, multiple contracts and buyers willing to buy “as is” make this the perfect market for sellers who know their home is not so perfect. To find out if your property lands in a frenzy zone, contact us today!

Contact the real estate experts at NextHome Valleywide in Chandler, AZ at 480-621-6828 for more information.  If you are currently looking to Buy or Sell a home in the Phoenix metro , Scottsdale or East Valley area and are not sure where to turn we can help! Search for homes at Valleywide.realestate where you can find single family homes, golf and lakefront properties, 55+ communities, townhomes and much more. Visit our blog at NextHome Valleywide for a monthly Phoenix Market Update.

August 2019 Market Update

New Listings at Record Lows
Contracts in Escrow Up Over 15%

2019-08 Infographic

View Real Time ARMLS Market Gauges

For Buyers:

It’s slim pickings for buyers in Greater Phoenix these days unless your budget is over  $500,000. Overall supply is 14% lower than last August while contracts in escrow are 15.5% higher! There are a plethora of zip codes considered “frenzies”, where there are literally more properties under contract than there are active for sale; all of them with an average sale price below $400,000. This is unusual for August, which is typically a much softer month. Buyers  will have a slightly easier time in more expensive areas such as Central Phoenix, Ahwatukee,  South Tempe and the Northeast Valley, but not much unless they’re willing to go further out or increase their budget. Any projections of prices flattening out or coming down in Greater Phoenix this year have been obliterated.

For Sellers:

As supply plummets, fewer sellers are deciding to sell. July was THE lowest month for brand  new listings going all the way back to the year 2001. That’s significant because the population today is 50% larger and the number of housing units is 63% higher than it was 18 years ago.  19% of all MLS sales and 26% of sales between $100K and $250K sold over asking price last  July. Coincidentally (or not), 32% of sales within that same price range still included some form of seller-paid closing cost assistance. Despite the frenzy market, the annual appreciation rate for Greater Phoenix is just 6.4% and sales between $225K-$500K are clocking 3.5-4.0% on average. This may seem surprising given the widening gap between supply and demand; but appraisers remain conservative in their valuations and with at least 80% of buyers needing a loan, they’re riding the brakes on runaway appreciation thus far.

Contact the real estate experts at NextHome Valleywide in Chandler, AZ at 480-621-6828 for more information.  If you are currently looking to Buy or Sell a home in the Phoenix metro , Scottsdale or East Valley area and are not sure where to turn we can help! Search for homes at Valleywide.realestate where you can find single family homes, golf and lakefront properties, 55+ communities, townhomes and much more. Visit our blog at NextHome Valleywide for a monthly Phoenix Market Update.