I’ve been seeing and hearing a lot of ads recently from the ‘instant offer’ real estate companies like Opendoor, Offerpad, Zillow instant offers and several smaller startups. It’s not a new concept, just a more polished version of the old ‘We Buy Ugly Houses’ home flipping model where investors buy properties at a discount, the homeowners move out, they make the highest return improvements and then resell it for a profit.
I’m not against ‘instant offers’. Even my own brokerage, Keller Williams is planning on rolling them out later this year. It’s advertised as a more convenient way to sell your home and you get a ‘competitive offer’. I don’t doubt it’s the more convenient way to sell but I’ve been doing real estate long enough to know that in order to get top dollar for your house when it sells, it does take some work. What I was curious about was just how much did it cost home sellers for that convenience.
While I don’t think anyone considering an ‘instant offer’ is expecting to get full market value for their house, there are two big issues I’ve been seeing with the process.
First – who has Fiduciary duty?
Marketers want to make everything seem simple. Opendoor’s CEO said “you should be able to sell a home within a handful of clicks.” That sounds great. I love using Uber and ordering from Amazon. Why should selling a home be any different? For starters, according to the US Census Bureau, on average the equity homeowners have in their primary residence is greater than any other asset they own including stocks, bank and retirement accounts.
‘Instant offer’ companies are using convenience as camouflage for who they’re really working for. In a traditional real estate brokerage relationship, the broker has fiduciary duty (legal obligation to act on behalf of) the home seller while an ‘instant offer’ company’s fiduciary duty is to the investors buying the house, not the home owner.
What difference does this fiduciary duty make? When using a broker, the seller has a real estate expert on their side negotiating with another real estate expert on the buyer side. In the ‘instant offer’ scenario you have a real estate expert on the buyer side negotiating with most likely a seller who has very little expertise on the market, repairs, laws, contracts, mortgages, title, etc. This has always been a big red flag to me when I hear a company equate a very complicated transaction involving the largest investment most people have to requesting an Uber ride.
In the traditional compensation model real estate brokers get a percentage of whatever the house sells for. The more money the seller makes, the more money the broker makes; however, for ‘instant offer’ companies the roles are reversed. The less money the house sells for the more money the ‘instant offer’ company makes.
A great example of this was a recent client of mine who received a reasonable initial offer amount from an ‘instant offer’ company. During the in-home visit from the company there were significant reductions made to the original offer amount as a list of all the updates needing to be done to get the house up to ‘selling condition’ were compiled. Thankfully the sellers called me and we ended up making no updates and still sold it for more than the initial offer amount.
Second – what is a ‘competitive offer’?
‘Instant offer’ companies advertise they are making competitive offers. In Texas, sales data (sold price, repair costs, seller concessions, etc.) reported by Realtors in the Multiple Listing Service is not made public. Even the county tax appraisers don’t have access to this sold data.
If sales information is not public how can a home seller determine how competitive the offer is? When an ‘instant offer’ company makes an offer they will typically include a few sales comparables. That’s fine but as we know, ‘instant offer’ companies have a fiduciary duty to the investors buying the house not to the seller. If you’re counting on the competing bidder to tell you what your property is worth, you’re in trouble.
One easy way to find a value is the county tax appraised value. Unfortunately this is not very accurate since tax appraisers don’t have access to sales data and have no specific knowledge about the property (condition, upgrades, desirable floorplan, etc.)
The other easy way to find a value is using an online ‘home value’ website like Zillow. They also have the same problems as tax appraisers in a lack of sold data and no specific knowledge about the property.
To test the accuracy of Zestimates, I decided the see how close the Zestimates were on the last 6 listings I sold in NW Austin (May/June on Tantara, Tantivy, Osborne, Darwin, Partridge Bend and Avella streets).
Actual sold price range: $328,000-$420,000
Zillow Zestimate range: $316,131-$383,145
Actual sold price average: $379,917
Zillow Zestimate average: $344,665
Average difference between Zestimate and actual sold price: $35,252 or 10.23%
- Every Zestimate came in below the actual sold price. From between 3.8%-16.8% below final sales price
With such inaccurate information available how is it possible for home owners to actually know if they’re getting a competitive offer? For around $500 they could hire an appraiser who would give them a very accurate assessment. They could also reach out to a Realtor who is experienced in their neighborhood.
Finally – the offer
Knowing all this I went ahead and got an ‘instant offer’ from Opendoor on an upcoming property I may be putting on the market in NW Austin that should sell for a little over $300,000. The Tax Record showed a $277,000 value and the Zestimate was around $285,000. The Opendoor initial offer came in at $283,400 (before any adjustments for repairs) with an additional 9% fee (about 2% higher than all the costs typically charged when using a Realtor – commissions, seller concessions, holding costs, etc.)
At first it seems like a very competitive offer since it’s higher than the tax record and almost the same as the online value. If the home owner didn’t do any further research then they’d probably be satisfied with the offer. After considering my assessment of around $303,000 the owner realized they were going to be giving up $25,000 by going with the ‘instant offer’.
There is no magic formula a flip company can do to make a property worth more than it is. All the work an ‘instant offer’ company puts in to buying, holding, taxes, insurance, maintenance, repairing, closing a second time (double the title fees) and adding in the profit they need to make (this isn’t a charity after all) is coming directly out of the seller’s pocket.
Convenience usually comes at a cost. If you’re considering taking an ‘instant offer’ and are relying on suspect data like tax appraisals, online home value estimates or ‘comparable homes sales’ provided by the company making the offer, please consider contacting me or any other Realtor who is an expert in your area. We are happy to share with you just how much your property is really worth. If you still decide to take the ‘instant offer’ then you will have peace of mind that you made the decision with full understanding of the cost of convenience.