Seller beware: Digital platforms come at a cost

I want to begin by sharing an important — some could say alarming — statistic about what’s been happening with Americans’ home equity in recent years.

Research shows that homeowners leave up to $100 billion on the table annually due to mismanagement and poorly timed decisions about their property. This trend is consequential for all of us, but especially for older Americans. That’s because homeowners over 65 depend on their homes to generate 83 percent of their retirement income, according to Homebot, a real estate wealth software service.

Why do I bring this up?

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Because there’s an emerging service in real estate — becoming known as an iBuyer platform — that provides homeowners in Colorado with a seemingly simple, convenient means to sell their property. Homeowners get the convenience of receiving a cash offer from a buyer without having to list or prepare their property for the open market by listing with a traditional real estate brokerage.

But as the statistics above reflect, there’s much at stake for Americans when making decisions about real estate holdings. And the short-term convenience of the iBuyer approach may not necessarily work for the long-term financial interests of a seller.

Additionally, a recent RealTrends blog cautions:

• The speed and convenience is often overstated as the property is subject to inspection and potential repairs.

• Only 1 in 10 iBuyer prospects actually goes through with the transaction.

• A study by MarketWatch found sellers actually earn 11 percent less through iBuyers for their homes than selling on the open market.

Zillow Offers — What’s the Deal? 

The iBuyer trend made headlines recently in Colorado when the digital real estate service Zillow announced it was expanding its Zillow Offers program on the Front Range. In addition to Denver, Zillow Offers is now available in Fort Collins and Colorado Springs.

Companies such as Zillow, Opendoor, Offerpad and others have developed a thin-margin, high-frequency real estate transaction model. Once the homeowner commits to the price from one of these buyers, these companies may make minor cosmetic repairs and place the properties on the open market and sell for a profit. This might sound like a model you have seen or heard advertised in the past. And the iBuyer movement is really nothing new. Established real estate companies — including The Group Inc. — have been providing similar services for years.

What homeowners need to know and consider

There is a market and customer for whom this model can be convenient and helpful — someone who needs to move quickly and is willing to pay extra for that convenience. The objective of the buyer is to reduce the time that the homeowner might otherwise spend listing and selling their homes. But this does come at a price. The downside that needs to be considered is missing out on the potential of the open market.

Most of these companies explain that they will provide you with a price for your property that’s as close to market value as possible.  But a significant amount of knowledge and market data is needed to understand supply, demand, and absorption for all the subsets and neighborhoods in a city or community — a wisdom that we call “hyperlocal.” For iBuyer companies relying on algorithms to identify market value, this data comes with a degree of error.

Caveat Emptor

Look at Zillow’s own published accuracy of its Zestimate home valuation model by state. In Colorado for properties off the market, the Zillow Zestimate says it is within 20 percent of the home’s open market selling price 78 percent of the time, and within 5 percent of this price range 46 percent of the time.  That is potentially a heavy risk or cost for convenience especially if a consumer does not have a solid grasp on current market conditions. (Each of the iBuyer platforms do continue to work to improve their valuation models.)

It isn’t a coincidence that the cities where these platforms have launched are those that have seen some of the largest national price appreciations in this expansionary economy.  If homeowners are willing to share more of their equity, there are institutional investors who will trade you convenience for your money.  There certainly is a market of consumers that will take that trade. And I for one love new models that make industries evolve and adapt to provide more value and service to their customers.

New approaches to real estate provide new opportunities. But as you consider your decisions about what is likely your most important investment, be aware the convenience can mean missing out on the opportunity to maximize your wealth.

Brandon Wells is president of The Group Inc. Real Estate, founded in Fort Collins in 1976 with six locations in Northern Colorado.