Is Selling Your Home to an iBuyer a Smart Financial Move?

iBuyers could be a good option -- but only in limited situations.

Most people who sell their homes list their property and find an interested person to buy it. But that's not the only option available to you. You could also sell to an iBuyer.

An iBuyer is an online company that makes an instant cash offer on your house. Essentially, real estate investors have harnessed the power of technology to be able to make a snap determination about what properties are worth. As a result, you can now enter your information on an iBuyer's website and get a quick all-cash offer for your home (in most markets).

If you decide to take an offer from an iBuyer, the purchasing company will arrange for an inspection. If repairs are needed, the company will reduce their offer accordingly. You'll agree on a final price and will close on your schedule and get the money quickly to pay off your mortgage.

iBuyers can simplify the home sales process, but working with one isn't necessarily the best financial move in every situation. Here's how to decide if this approach to selling your home is right for you.

Selling to an iBuyer comes at a price

There are clear benefits to selling your home to an iBuyer. You'll know right away how much money you'll get for your home, rather than having to wait potentially weeks or months for buyers to come through the property and make an offer. You also won't have the uncertainty of waiting to find a buyer, and you won't have to take the buyer's schedule into account. That means you can close on your home quickly and on your own schedule.

But there are a few big downsides. First, iBuyers aren't purchasing your property out of the goodness of their heart. They are doing it because they intend to flip the property or turn around and resell it to someone else. They obviously want to make a profit by doing that, so they aren't going to be able to pay you the full fair market value of the house -- otherwise, they wouldn't be able to make money on the deal.

In many cases, you'll actually end up being offered substantially less than you might get if you sold to a private buyer. Research from Collateral Analytics in 2019 found that the median discount from some iBuyers is close to 7%.

iBuyers also typically charge a host of fees. While you avoid real estate commission by selling to an iBuyer, their convenience or transaction fees can add up to more than you'd pay an agent. In fact, the same Collateral Analytics research revealed that sellers usually end up paying direct costs of around 7% to 10% with iBuyers, versus 5% to 9% in a traditional sale.

And that's not including repair credits. iBuyers often find something wrong with the house. And, unlike in a traditional sale, you can't just choose to make the fixes yourself or negotiate on a reduced amount with the buyer for repairs. Your offer price will be reduced based on what the iBuyer deems is necessary and you'll either have to accept it or walk away.

Because you will likely end up getting less money for your house and incur higher costs, you typically should avoid iBuyers unless you have a specific reason you need to pay for the convenience and certainty that they provide.