Canadian Real Estate Is Changing FOREVER | Selling Your House to an iBuyer 2021

The iBuyer model has the potential to seriously change the Canadian real estate market, for good. What is it, and what does it mean for Canadian buyers and sellers? 

In this article: 

● What is the old ‘we buy houses for cash’ model? 

● How do iBuyers make money? 

● Why should you use an iBuyer? 

● What are the cons of using an iBuyer? 

● What are implications for Canadian buyers and sellers? 

● What are the implications for Canadian realtors? 

● Is there any untapped potential in the industry? 

The Old Model 

‘We buy houses for cash’ companies have been around since the 1990s. The basis of their business is similar to today’s iBuyers: they buy your home for slightly below market value, but they do it quickly. These companies used representatives with local expertise to buy up as many properties in an area, and sell them for a profit. 

IBuyers have changed the game by eliminating or diminishing the role of the local experts. Instead, they rely on algorithms that analyze home sale data in specific areas. This allows them to value homes much quicker than the old school cash companies, and gives them increased profitability and reliability. 

How iBuyers make money 

Firstly, the crux of their business is based on volume. Because iBuyers save so much time with their algorithms, they can buy up more properties in a shorter amount of time. 

The next part of their business reveals how they can guarantee a profit. They only buy houses that fit their specified criteria. The segment they tend to focus on is single-family homes with a value between $200,000 and $600,000. 

From there, they tack on an additional service fee, because of course they do, they’re trying to make a profit here. Service fees can range from around 6 to 12%, which is higher than the standard realtor fee of 3 to 7% in Canada.

Lastly, iBuyers work with realtors to sell their recently-bought homes, and cover the commission from that point on. Normally, when they sell the home for a profit, they keep that for their troubles. 

Why sell our home to an iBuyer? 

The most enticing reason to sell your home to an iBuyer is simply to eliminate the waiting period typically associated with selling a home. Some companies will even let you set the move out date to suit your needs. 

IBuyers also take the hassle out of fixing up your home, making it presentable, and making it available for viewings. For someone on a busy schedule, with three children, hockey practice, and figure skating to get to, the peace of mind involved in this aspect can be invaluable. 

In addition, the entire process is simple and easy; most iBuyers simply ask a few questions, ask you to take a few photos, and you could get an offer almost immediately. Others like to do a simple house inspection, but either way, the process is relatively easy. 

For the most part, iBuyers will offer slightly below market value for your home. Some will offer just 2% less than your home’s apparent market value. Although this point is contested, there are certainly some situations where this seems possible, and when you factor in the volume of houses they buy, they still make a profit with this business strategy. 

When you factor in the speed and convenience, it’s easy to see why iBuyers would be attractive to sellers. Some of the companies allow their customers to buy their next home before listing their old one on the market, which makes closing day easier than ever. 

Cons of selling with iBuyers 

Although all of those positives sound like cupcakes and rainbows, there are certainly some negatives associated with iBuyers. 

Obviously, you will not always get fair market value for your home. Even, if you get slightly less than market value, the fees related to selling with an iBuyer can leave you with over 10% less than market value.

Furthermore, some iBuyers don’t buy houses as quickly as others. In some cases, it can take up to a month or more to sell your home. This may not seem like a lot in the grand scheme of things, but if your goal is to sell fast and you know you’re losing out on potential profit, this can be a tough pill to swallow. At some point it makes more sense to sell with your standard realtor. 

Most iBuyers have higher fees than real estate agents. Although this seems like a fair exchange for the speed of the sale, sometimes a realtor brings more value to you. They can inform you about small fixes that can increase the value of your home instantaneously, otherwise you’d be leaving more money on the table. 

Lastly, iBuyers don’t seem to take advantage of the pool of buyers that is available to you if you use a realtor instead. Well, they do take advantage; it’s just not your advantage. The open market simply has more buyers, and sometimes results in bidding wars, especially in Canada’s larger real estate markets. 

But interestingly enough, the Canadian iBuyer companies are attempting to remedy this drawback. 

Implications for Canadian buyers and sellers 

There are two companies in Canada using the iBuyer strategy: Properly and Sweetly Real Estate. The larger companies in the US like OpenDoor and Zillow, have not made a footprint in Canada. 

Properly operates out of Calgary, Ottawa and Toronto, and has plans to expand to most major Canadian markets by 2022. 

Their buying criteria denies detached homes valued at over $1.5 million, condos valued at over $1 million, and homes that are over 20 years old. This last stipulation in particular eliminates an immense amount of homes across Canada. 

Their process is as follows: first, after describing and determining whether your home qualifies, they offer you an initial guaranteed price. 

Next, they give you time to buy your next home. 

Then, they list your home on the open market, and cover the mortgage costs until it is sold. If it doesn’t sell within a couple months, they buy your home for the initial guaranteed price, regardless of whether your home gained or lost value since the initial price was guaranteed. 

If they sell the home during the listing period for more than the guaranteed price, some of the profit is given back to the seller. 

In addition, they claim that they take the standard 5% commission on the sale, which means that in the end, you lose around 7% based on the fees they tack on. 

Sweetly Real Estate works out of Edmonton. 

The criteria they require is that none of the properties were previously rented out. Although it’s obvious that not every home that fits this criteria would be of interest to them. 

The way they differentiate themselves from Properly is firstly, that they claim to provide an offer on your home within 24 hours of your first contact with them. 

They admit to initially offering around 78 to 86% of your homes market value, and then they freshen up your home, relist it, and sell it themselves. 

If any profit is made, they pay the owner up to 92% of the final price on the sale. 

If you’re a buyer on the other hand, the infiltration of iBuyers in your area may not make a big difference to you. It may simply mean that there’s another real estate app or marketplace to find the place you need. 

Implications for Canadian real estate agents 

The influx of iBuyers into the market surely means that realtors are more expendable than ever. The fact is, more people than ever seem to be interested in selling their home quickly rather than waiting a few months and getting the absolute maximum profit they can. 

But not all hope is lost. The key for agents may just be to join the cause rather than fight against it. 

The good news is that not every seller wants to replace their trusted real estate agent for some app or large scale company. They value the work that agents put in, the local expertise, and the human touch.

But if they don’t value these things, you might as well learn about the iBuyers in your area and find a way to make money with them. 

Realtors can make the iBuying platform part of their process with their clients. They can inform sellers about their options, which now include iBuyers. That doesn’t mean you give up at that point. Agents can reason with their clients, to inform them about the value that they can still provide, outside of the framework of iBuyers. 

And if all else fails, and the sellers employ the services of an iBuyer to sell their home, well, they still need to buy one, so you can make yourself available for that side of the process. 

All in all, the service provided by iBuyers is certainly attractive to sellers, and it’s here to stay; so it’s easier if everyone, including realtors, adapts. 

But lastly, there may be some untapped potential in the market, especially here in Canada, that is worth addressing. 

Untapped potential in the industry 

There seems to be a segment of the market just waiting to be pounced on. 

We’ve talked about the criteria that iBuyers employ in their initial conversations with sellers. A lot of homes are left on the table after iBuyers deems them too risky to undertake. 

But if we look at the criteria, not all of these homes seem especially risky. Properly doesn’t buy homes that are more than 20 years old. Sweetly doesn’t buy previously rented homes. But are these homes inherently risky? I’d argue that they aren’t. There are tons of good quality homes built 25 years ago, and a previously rented home doesn’t necessarily have more damage than a family home. 

According to Zillow, one of the larger iBuyers in the US, around 20,000 people attempted to sell their home on their platform as of 2018. Numbers are surely much higher now. 

Zillow purchased just 1% of these homes, leaving tens of thousands of homes on the table. Many of these homes denied by Zillow were still sold, maybe not as quickly, but sold nonetheless.

Perhaps, in this gap in the market, there’s an opportunity for a company to buy up those homes. In addition, there may be an opportunity for Zillow, or one of Canada’s iBuyers to sell those leads to an agent, for the standard 1% referral fee. 

Perhaps if you have some money and are looking for the next big idea, this could be your big break. 1% of thousands of homes comes out to quite a big number. 

It’s an exciting emerging industry here in Canada that iBuyers are infiltrating. If I wasn’t a broke writer, I’d consider it.

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Who Is Matt McKeever?

Matt McKeever is a CPA, CA and Real Estate Entrepreneur in London, Ontario. On his YouTube Channel with over 70,000 subscribers and 4,000,000 views Matt discusses a variety of real estate and personal finance strategies and tactics. Including: How to BRRRR Real Estate, The Importance of Investing for Cash Flow, How to Reach Financial Independence Retire Early, Safe Withdrawal Rates, Frugality and Reducing Personal Consumption & Embracing Minimalism.  

Matt began investing in real estate at age 25 by purchasing a student rental near Fanshawe College