Every homeowner who’s thought about selling their house imagines this dream scenario.
Your home goes on the market with a high listing price. Within a few days, would-be buyers flock to open houses or take individual tours. Almost immediately, the offers start flooding in – you have a bidding war, and all of the offers are above your asking price. It certainly was the right time to sell!
Sadly, it doesn’t always work out that way. In fact, it usually doesn’t.
Perhaps the market is slow, and lowball offers just trickle in. Or there are similar homes on the market for lower prices, and you sit by your phone waiting for offers that don’t show up. Or there’s just something about your house that buyers don’t like, and you have to lower your asking price. Several times. In any event, your dream scenario turns out to have been a fantasy.
That’s a disappointment, of course. But the situation can be even worse.
You may have to get rid of the home in just weeks or even days – with no opportunity to get it ready for a traditional sale with a realtor.
When that happens, homeowners have a relatively-new alternative: so-called iBuyers like Offerpad and Opendoor. The companies offer to purchase homes for quick cash, and close in a flash.
Are those companies reputable? Are they worth considering? And which one is better?
Why People Would Sell Their Home to an iBuyer
The normal home selling process takes a long time, but it usually provides the best possible payoff for the seller. The house is put into good shape (and may be staged to look more attractive to buyers), a selling price is chosen, it’s listed on the market, prospective buyers tour it and make offers, the homeowner negotiates with the highest bidder, the house is sold and everyone is happy.
Life sometimes interferes with that process.
No one expects to run into serious financial difficulties, but it can happen. In that case you may have to sell your house in a hurry. Another possibility: you have to sell your house but it’s in terrible shape, and you can’t afford to make the necessary renovations and repairs necessary to get decent offers on the open market.
You might have to sell your home in a hurry for a different reason. Perhaps you have an attractive job offer in another state, but you have to start in two weeks and the school year is about to start. Perhaps you have to sell due to illness or divorce. Perhaps you have to move without warning because of a family emergency. Perhaps you’ve inherited a house that you simply want to get off your hands.
In all of those cases, getting the best price for the home becomes secondary. It can’t be fixed-up and listed; there’s not enough time, and there may not be enough money. Even if the house is in move-in shape, there’s still not enough time for the home buying process to unfold. That could take at least several months.
What’s the alternative? In recent years, real estate companies have found that they can profit by offering home owners immediate cash in return for a quick sale. The best-known of these companies are called iBuyers.
Bottom Line: Homeowners in financial trouble, or those who can’t wait months to find a buyer for their home and close a sale, may need to find someone to take their house off their hands in a hurry. Companies that simply purchase homes for a quick cash payout, and close the sale in only week or two, have mushroomed in recent years. There are several different models these home buyers use, but the one that’s attracted the most attention is called the “iBuyer” model.
How Do i-Buyers Operate?
We’ve already mentioned the key features of the way iBuyers purchase homes. They buy houses quickly for cash, they pay less than the home might fetch on the open market if it were in pristine condition, and they close with lightning speed (compared to the normal home sale process).
There’s a lot more to know about iBuyers, however.
First of all, big-name iBuyers are large and reputable companies. Some, like Offerpad and Opendoor, have deep pockets thanks to investors (Opendoor is a publicly traded company). Others, like Zillow Offers and RedfinNow, are parts of larger real estate giants. Most smaller competitors are well-capitalized as well, but it’s best to check the background of any iBuyer you may do business with.
The bigger issues involve how these real estate investors operate. The way to illustrate the potential problems a seller might face is to walk through the typical iBuyer transaction.
- You request an offer, usually via the company’s website. They’ll only ask for basic information about your home, like its address, age, size, condition and major features. They may also ask for photos.
- They get back to you, usually within 24 or 48 hours, with an offer – if they’re interested in purchasing your home.
Here’s the first issue to be aware of: that offer isn’t a firm one. They simply use computer algorithms to come up with a ballpark value for your house. If you “accept” their offer, they’ll send someone to the house to actually look at it and “adjust” the offer based on the repairs they think are needed.
Here’s the second issue: they may automatically reject your application. iBuyers generally want homes in very good condition, which only require minimal work before they’re ready for sale. They only want houses that fit their specific buying criteria, such as newer or single-family homes. And they only operate in select markets, which are different for each company. If your home isn’t “nice” enough for them, or it’s too old, or you don’t live in the right area, they’ll say “thanks, but no thanks.”
- If they want your house and you agree to the “adjusted” offer, they’ll close in short order (a couple of weeks is standard) and you’ll get your payout.
That’s where the final issues come into play. The payout will be less than market value, although it may come close. You expected that one. The bigger issue is that even though they don’t charge commissions, they charge a service fee – a big one. Some iBuyers may charge more in service fees than you’d pay a realtor in commissions.
So “We make an offer, and if you accept it, we’ll buy your home for quick cash” doesn’t quite sum up the ins-and-outs of an iBuyer transaction. That’s why the people most likely to sell to one of these buyers are homeowners who are anxious (or desperate) to get rid of their homes. The deal is much less attractive than selling their house on the open market.
Each iBuyer has different criteria for the houses they’ll purchase, charges different fees, and handles transactions in different ways. That makes it crucial to compare iBuyers before choosing one to purchase your home.
Bottom Line: Major iBuyers are reliable to deal with. They make their process sound like a simple and smart way to sell a home, even if the payout will be somewhat lower. However, they’re not interested in all homes, their first offer isn’t their real offer, and they charge huge service fees that can be even larger than commissions on a traditional sale would be.
Offerpad vs. Opendoor: How Do They Compare?
Despite the drawbacks of selling a home to iBuyers, Offerpad and Opendoor are both reputable companies in the iBuyer market. They operate in similar ways, pretty much in line with the typical transaction timeline we outlined in the last section.
You apply on their website, they make an initial offer within 24 hours, and if you accept, they send an inspector to your home to actually look at it and revise their offer.
The best way to compare the two is to examine the areas in which their processes differ.
Where They Buy Houses
Opendoor currently purchases homes in 27 cities, most of them in the West and South. They serve most big cities in Arizona, California, Colorado, Florida, Georgia, Idaho, Minnesota, North Carolina, Nevada, Oregon, Tennessee, Texas and Utah. But they don’t buy in all cities in those states; for example, San Francisco and Miami aren’t on the list as of now.
Offerpad has a much smaller service area. They only purchase houses in the Atlanta, Austin, Birmingham, Charlotte, Dallas-Fort Worth, Houston, Jacksonville, Las Vegas, Orlando, Phoenix, Raleigh, San Antonio, Tampa and Tucson areas.
What Types of Houses They Buy
Opendoor is only interested in single-family homes and townhouses (they’ll buy condos in some states) that are in good condition and were built after 1960, worth between $100,000 and $500,000.
Offerpad will just purchase single-family houses (they may be interested in some townhouses and condos) in good condition that were built after 1960, located on no more than acre of land, and worth less than $600,000.
What Happens If They Offer To Buy Your Home
Both iBuyers promise an offer (or a decline) within 24 hours. If you accept, both will send an inspector to your home. That’s where the companies take slightly different approaches.
Opendoor will reach a decision on what repairs must be made to your house, and then deduct the amount they’ll charge for that work, to come up with an “adjusted” offer for your home. They may allow you to have the work done on your own, but only by an approved vendor at a cost they approve. Or, they may insist on doing the repairs themselves.
Offerpad always offers you the choice. They’ll do the work and deduct the cost from your original offer, or you can have the work done and they’ll re-inspect before moving forward.
If you refuse to have the work done, the companies will usually withdraw their offers. Otherwise, the offers are only valid for a few days. If you decide not to move forward, there’s no penalty. The one exception is that you have to give Offerpad a “yes” or “no” within four days. If you decide to back out after that time, Offerpad charges a 1% cancellation fee; they say that’s because you accepted their original offer and didn’t change your mind in time.
Closing, Fees and Payouts
Both Offerpad and Opendoor can close quickly if you accept their adjusted offers. Offerpad can close the deal and pay cash in as few as ten days; for Opendoor, it’s as soon as two weeks from the date you accept the offer. If you’ve having the repairs done yourself, both companies will do a walk-through before they’ll move ahead with the closing.
Now, for the biggest issue of all. Neither iBuyer charges commissions on the sale, but both charge service fees.
Opendoor’s fees are 5% of the sales price – but until recently, they charged as much as 15%. They only lowered their fees because of competition.
Offerpad’s fees are somewhat higher; the company claims they average 5%, but most sellers say they were charged as much as 6-10%, and very few say they paid less than that.
Aside from the fees, you should still expect to pay closing costs that are approximately the same as you’d pay on a traditional home sale.
But how much less than true market value will they pay for your house? One study found that Opendoor’s offers were only 1-2% below market average, but another study looking at deals in three cities reported that Opendoor’s offers were 4-13% lower and Offerpad’s were 16-18% lower than market value.
What really matters, though, is the final payouts that homeowners would receive. To get a better picture, the second study compared the two iBuyers in cities where they both operate.
Researchers first looked at offers the companies made on homes in those cities, and factored in the service fees that the seller would have to pay. But none of the homeowners accepted the offers. Their houses were sold on the open market, by realtors who charged standard commission rates.
Here’s what the study found. The final check that sellers would have received from Opendoor was between 3% and 12% less than the amount they actually received at the closing of their traditional sale. The numbers were even more telling when comparing Offerpad’s net payout to the real payout; the seller would have received 15-18% less by selling to Offerpad.
Other Services Offered by Offerpad and Opendoor
Each iBuyer touts the additional services it provides to clients.
- Rebates: If you buy a new home from Opendoor after you sell your old house to them, they’ll rebate 1% of the new home’s purchase price, or provide 1% cash back at the closing.
- Trade-In and Trade-Up: You can “trade-in” your old house for a new one from Opendoor’s inventory, closing simultaneously and receiving a 1.25% rebate. You can also buy a newly-constructed home from one of their partners, and close on both homes the same day.
- Title and Mortgages: Opendoor offers both services in-house, and may provide a credit to clients who sell and buy through the company.
- Trade-In: This isn’t the same type of trade-in program that Opendoor offers. But if you buy a new home, whether it’s from Offerpad or any other seller, they will coordinate their closing with the one for your new house.
- Free Local Move: Offerpad will provide moving services to any location within 50 miles of the house they’re buying from you.
- Extended Stay: Once you’ve closed, Offerpad allows you stay in your house for three extra days at no charge. If you take advantage of the offer, the company holds back $3,000 from your payout as a damage deposit, and returns it after they’ve done a post move-out inspection.
Bottom Line: Offerpad and Opendoor provide similar services, but there are differences in the way they operate and the cities where they’ll purchase houses. Perhaps the biggest difference is in the service fees they charge; Opendoor currently charges a smaller fee than Offerpad to complete the transaction. And when a small survey sample was compared, Offerpad’s final payout would have been lower than Opendoor’s, and dramatically less than the seller received on the open market.
Offerpad vs. Opendoor: Which to Choose?
There’s no harm in asking both companies for offers, as long as you refuse to move forward before the deadlines they set. The reason is simple: there’s no way to judge ahead of time which iBuyer will make the better offer for your house. Both should come somewhat close to the home’s market value, but one will almost always offer more than the other.
Aside from price, each company has its pros and cons.
Opendoor’s service area is twice the size, their offers are usually higher than Offerpad’s, and as of this writing, their service fees are lower than Offerpad’s. However, they may not give you the option of making your own repairs, which will probably be less expensive than letting Opendoor determine how much they’ll deduct from their offer to cover the cost. They also won’t buy houses worth between $500,000 and $600,000.
Offerpad offers more flexibility on repairs, which may save you money if you do them yourself. Their free local move and extended stay “extras” are also nice perks. But the Offerpad service area is smaller, they may not buy townhouses or condos, their service fee is higher, and their payouts are usually lower. You also have to be sure to give them a relatively-quick answer on their final offer, or you’ll face a cancellation fee.
Opendoor would seem to be the better overall choice, thanks to its larger service area and lower service fees. But as long as you’re in the right city to take advantage of these iBuyers’ services, the amount each one offers for your home will probably be the most important factor of all, and Opendoor is probably the winner there as well.
Bottom Line: Deciding between Opendoor and Offerpad requires considering the different advantages and disadvantages of each service – but the amount they offer for your house will have the biggest impact on your bottom line. Small studies have shown that Opendoor pays more for a house than Offerpad.
Not All Home Buying Companies are iBuyers
You’ve certainly gathered by now that the biggest drawback of selling your house to an iBuyer is the service fee they charge. In many cases, it can cost you even more than the real estate commissions you’d pay for a sale on the open market.
There are alternatives you might want to consider.
Home flippers like “We Buy Ugly Houses” (a franchise operation run by a company called HomeVestors) aren’t interested in homes that only need minor repairs. They want to purchase homes in fair-to-poor condition that they can rehab and sell at a big profit. They don’t charge commissions or service fees, but they usually offer considerably smaller cash payouts than iBuyers.
“New-age” home buyers like SellYourHome.com combine many of the best features of iBuyers and flippers. They’ll purchase houses in any city or town, and in any condition. They don’t require repairs. They don’t charge commissions or service fees. They can close in just days, in many cases, for fast cash. And very often, they pay even more for homes than iBuyers do.
Bottom Line: You’ll almost always receive less for your house when you sell it for quick cash, than you will through a traditional home sale. But home flippers could be a better option if your home isn’t in great condition – and “new-age” buyers will buy any house in any location, and may pay more than iBuyers and flippers.
Offerpad vs. Opendoor FAQ
Q: Is the difference in service fees between Offerpad and Opendoor really that big a deal?
A: It definitely can be. If the two iBuyers make a $250,000 offer for your house, the 5% service fee from Opendoor will be $12,500. The 6-10% fee that most clients say they’ve been charged by Offerpad would range from $15,000 to $25,000.
Q: How much less than full market price will Opendoor and Offerpad offer?
A: It’s impossible to say, because every case is different. A MarketWatch study found that iBuyers offer about 10% less than full market value. They also compared Opendoor and Offerpad in two cities where they both operate, and when they factored in fees and repair costs, the final payout from Offerpad would have been 5-15% lower than the one from Opendoor.
Q: Do either of these companies try to “trick” you by offering one number, but then actually paying less?
A: “Trick” isn’t a fair way to put it. Both Opendoor and Offerpad are up front with how they operate once you start dealing with them, even though they skimp on some of the details on their website. They tell you that the offer will be “adjusted” after an inspection, they tell you about their service fee and repair costs, and they do live up to what they promise. Just go into the transaction understanding that their “initial” offer isn’t really what you’ll receive in cash after the entire process is complete.