iBuyers vs. Flippers

"iBuyers, are just flippers, right?"

We'll often hear this statement as sellers, agents, and other cash buyers try to categorize what iBuyers are. The comparison is understandable, you see someone or some company buying a property, only to turn around and resell it. However, once you dig into the details of each, you can see that there are many differences between iBuyers and home flippers.

The Business Model

Flippers operate on a high-margin, low-volume business model.

Flippers are in the game of high risk, big discounts, and big profits. Most flippers work on a low volume, handling a handful of properties a year. There are some exceptions to this that have scaled up, such as "We Buy Ugly Houses." However, most flipping is done on a small scale.

iBuyers operate on a low-margin, high-volume business model.

iBuyers seek to mitigate their risk by operating at a high volume and pursue smaller discounts per property. Because they work on such a large scale, iBuyers are able to achieve things flippers would have a hard time doing, such as negotiating great rates with their contractors for consistent high volumes of work. To frame it another way, iBuyers are comfortable with a lower spread between acquisition price and After Repair Value (ARV).

Risk Profile

Flippers tend to have a higher risk profile.

They're willing to tackle larger and more expensive repairs and operate in transitioning neighborhoods. Often, flippers are seeking a distressed or challenging property that is available for a reason.

iBuyers seek to mitigate risk.

iBuyers have set criteria for what they'll purchase to help mitigate their risk. They like to buy properties with which they're familiar. The more homogenous the homes in a neighborhood, the happier iBuyers are, giving preference to a master planned community over more eclectic areas. Homes over a certain age are often not considered, in order to limit the amount of surprises during updates.

Cost of Money

Flippers tend to have a high cost of money.

Flippers borrow money at a higher rate than iBuyers. They take on more risk over fewer properties, which also makes them riskier to a lender. Hard money loans, cash, and return expectations from outside investors are high.

iBuyers are well funded.

iBuyers are funded by larger companies and funds. As "disruptors" in the industry, plenty of funds are flowing to them. In fact, most iBuyers can't start without significant funding. As they gain a track record successfully doing this on a large scale, money will continue to be cheaper than for the flipper working on a smaller scale.

Offer Price

Flippers are looking for big discounts.

There's an adage that says that flippers make or lose money on the purchase, not the later sale. Flippers are looking for great deals to help protect their bottom line. Their risk mitigation is done on the purchase price, which usually requires the house or the homeowner to be in serious distress. A market that is heating up (and thus has significant appreciation) can allow a flipper to give a more competitive offer, but most of the time offers have to have a discount built in. Typically, it doesn't make sense for a homeowner with a house in good condition to consider a flipper.

iBuyers look to earn a profit in exchange for convenience.

iBuyer offers will likely come in below what a home will command on the open market, but the difference is not as big as you'd think. iBuyers are in a business and need to have a profit margin too, and much of their margin comes from the resale of their acquired properties. Because iBuyers stand in a middle ground, a seller whose home is in good condition may find this option to be a good fit.

Repairs

Flippers have a high tolerance for repairs.

Flippers leave all repair options on the table as long as the numbers work in their favor. These can range from foundation repair, to bad pipes, to an old roof, to new electrical, the list goes on. They'll tackle it if there's enough profit margin.

iBuyers have a narrow tolerance for repairs.

iBuyers, on the other hand, have a more limited scope of repairs and updates they'll consider. Think of it as getting a house ready for its next owners vs. gutting the house and starting over. Because iBuyers do a large number of transactions in an area, they often work out deals with contractors, thus having the ability of giving guaranteed work at discounted rates.

What It Means for Sellers

In today's market, we're seeing more and more residential buyers who are not willing to do much to a house; they want it fully updated. Buyers don't want to mess with new carpet or light fixtures. This is opening the door for iBuyers to offer opportunities to sellers who are short on cash to tackle these repairs themselves or short on time to make them happen. If you're interested in learning more, contact a Keller Offers Certified Agent.