Are Knock, Open Door, and Offer Pad really the wave of the future?  I have heard a lot about these three companies over the last six months.  There was an article about all three in Inman called ICNY18: The iBuyers are Coming for Real Estate.  This article talks about how these three companies are going to be the wave of the future.  I do feel they have a market, not to the degree that is being reported.

How These Companies Work

All three are very similar and have similar process.  The idea is that a buyer fills out the information about their house.  Then Knock, Opendoor, and Offerpad do research based on comps and tax records.  Then they offer the buyer a price to buy the home and includes all their fees. If the seller agrees to sell their home, a closing date is set.  This is essentially the basics. There are more details which I will talk about later. One thing to remember, they are for profit companies. This means they are going to offer you a lower price for you home,  Then will relist it at a higher price and sell it to make that profit. Let’s break down the three companies.

I chose to use my house as a test house.  My house was a ranch build in the late 1950’s.  We renovated it in July of 2015. We gutted it and rebuilt it.  It is essentially a new home. We only kept three existing walls and the foundation.  The house was originally 1198 sq feet with an approximate 505 square foot exterior entrance basement.  When finished, it was a 3071 sq ft house with a 505 sq ft unfinished basement. We had an appraisal completed in December 2017 and it was valued at $495,000.  

I went onto all three sites and put my information about my house.  They asked all the relevant information and wanted pictures. I then received offers from all three.  The breakdown is as follows.

Knock

Their initial offer was a price range from $323,000-409,000.  I asked a Knock representative how they came up with the evaluation.  They said it was through the tax records and comps. When I looked at the comps they chose, they picked homes outside of my subdivision and then adjusted them.  All the homes they compared to my house were smaller and had less upgrades. At the bottom of the offer there is a way to rate the offer. I rated it as a poor evaluation.  I got a call from a representative, at Knock, and we had a long talk about the house. They decided to send someone out to take pictures. I had also mentioned that I had an appraisal done two months earlier at $495,000.   Below is the final offer from Knock.

Their final offer was $373,000, which is $122,000 lower than the appraisal.  They gave me a suggested list price and a guaranteed sale price which was $24,500 lower.  The guaranteed price is approximately 6.6% lower. These are not the final numbers. There was approximately $22,000 in fees which includes the Realtor fee for Knock buying your home, holding costs while they resell your home, and a fee for the “Knock” experience.  After the seller signs the purchase contract with Knock, they send out an inspector to inspect the home. Knock will send you a repair list of items they feel need to be fixed. The difference is that in a traditional sale repairs are negotiated, not with Knock. Knock gives you the list and prices and either you can fix the items, or they will take it off the price of the house.  There is no negotiating. The repairs will add more to the overall fees paid by the seller. When you look at the overall sale of the house, the true number is $351,000 not including repairs.

Breakdown of Knock vs. Traditional Realtor

Knock

Purchase price – $373,000
Fees – ~$22,000
Total – $351,000 – not including repairs
Difference from appraisal and final price – $122,000

Traditional Realtor

Purchase price – $495,000
Fees – 6% commission – $29,700
Total – $465,300 – not including repairs
Difference from appraisal and final Price – $29,700

Difference between the Knock offer and a traditional Realtor – $114,300

Knock also has a trade in program.   How it works, is a buyer will get the offer on their house and then identify another property they want to buy.  Knock will buy the new home and make improvements, move the buyer in, and they then sell the buyers home. It sounds great, but it is not all it is cracked up to be.  I gave Knock a luxury home, that I wanted to buy, for the trade in program. Here is how it works:

The subject home was an $800,000 home.  Knock will purchase that home and then sell the home to you and charge you fees.  The fees are below – These are typical types of fees but some of them are high.

Fees from Knock

Knock Origination Fee (1% of loan amount) – $6,080.00
Interest ((8% of Loan Amount/365) X 60 days) – $9,994.52
Estimated Knock Closing Costs – $4,757.00
Other Cost Assumptions (Insurance, utilities, etc that you have to pay on your home that you are selling – $2,115.40

Total Acquisition and Hold Costs during Temporary Occupancy – $22,946.92

If you notice, Knock charges an 8% interest rate for at least 60 days. That is almost double what the current interest rate is.  This fee could be higher if you home takes longer to sell. They also charge closing costs that the buyer must pay.  In a traditional sale closing fees are negotiated. So, you take the fees from the sale and add them to the fees for the purchase it would be 44,946.92.  That is a ton of fees.   The three fees that stand out the most are:

• Holding costs while they try to sell your home
• “Knock experience” fees
• The incredibly high interest rate to purchase the home you are going to buy from Knock, while they are selling your home

Total Acquisition and Hold Costs during Temporary Occupancy – $22,946.92

If you notice, Knock charges an 8% interest rate for at least 60 days. That is almost double what the current interest rate is.  This fee could be higher if you home takes longer to sell. They also charge closing costs that the buyer must pay. In a traditional sale closing fees are negotiated.  So, you take the fees from the sale and add them to the fees for the purchase it would be 44,946.92. That is a ton of fees. The three fees that stand out the most are:

• Holding costs while they try to sell your home
• “Knock Experience” fees
• The incredibly high interest rate to purchase the home you are going to buy from Knock, while they are selling your home

OfferPad

OfferPad is very similar to Knock.  The big difference is that they will not come to your house if there is a valuation issue.  I submitted all my information on their website, pictures, and a detailed description of the renovations we did on our home.  The initial offer I received is below.

They were way off.  When asked how they determine a pricing, the Offer Pad representative said they look at tax records and comps.  The problem is, my tax records are not 100% accurate since I renovated my home. Also, they pulled lower comparable properties inside and outside of my subdivision.  I did let them know I had an appraisal that was done two months earlier, and that has the value at $495,000. The asked me to send it to them and I did. This is what their final offer price was and their response.  

“Ok, we’ve sent an updated offer over. They were able to increase the offer by $45,000 based on the additional information.  Comp wise, it looks like one of the primary ones they looked at was 3655 Hickory Circle.  It has no garage like yours, it is a little smaller w/ 3/2, but it is the same age. It sold for 275k in 72 days.  Based on that, we feel like we could sell your home for about the 290K mark, the difference being a factor of our costs to get the home “list ready” (honestly not much), but then our carrying and marketing costs as we work to sell it.”

Comparing 3655 Hickory Circle vs. My House

are pictures for comparison.  The house on the left is 3655 Hickory Circle and my house is on the right.  Do you see any comparison? I don’t.

Offerpad sent me an offer $10,000 lower than the sales price of Hickory Circle.  Hickory Circle is half the size and has no updates, compared to our house, which is essentially a new house.  Everything was replaced and rebuilt. How can Offerpad make such a low offer when they were given pictures of my house, a recent appraisal, and a detailed description of all the renovation?  After all that information, OfferPad still felt they could sell it for $295,000 and offered me $265,000. Not only was the offer ridiculous, they were going to charge me an additional $15,400 in fees.  These fees include commissions, their holding fee to sell the property, and the Offerpad experience fee of $2,200. So, lets breakdown their offer.

Offerpad vs. Traditional Realtor

Offer Pad
Purchase price – $265,000
Fees – ~$15,400
Total – $249,600

Difference from Appraisal and Final Price – $245,400

Traditonal Realtor
Purchase price – $495,000
Fees – 6% commission – $29,700
Total – $465,300 – not including repairs

Difference from Appraisal and Final Price – $29,700

Difference between Offerpad and Traditional Realtor – $219,900

OpenDoor

The final company is Opendoor.  Opendoor does not buy older homes, so I used a friend’s house.  How Opendoor works is like the other two. They base their pricing on comparable properties and tax records.  They make a cash offer on the house and if all parties agree they buy the home. Let’s look at the property that I used.

My Friend’s House 

• 5bd/3ba
• Two story traditional
• 4,855 square feet
• Finished Basement

I filled out the paperwork for Opendoor and submitted it to them.  This is the response I received.

Net Offer Details

• Valuation: $341,000
• Opendoor customer experience and risk fee, to cover holding costs and liability while finding a buyer: $18,755
• Net offer price: $322,245

Additional cost to seller to close:

• Co-broke due to buyer’s agent: $0
• Seller’s agent commission: (from your listing agreement)
• Repair request: (to be confirmed post inspection)
• Seller closing costs: (provided by you)
• Loan pay-off: (provided by you)
• Net to seller at close: Net offer less above fields

Opendoor will have inspections performed by a licensed, independent home inspector and will submit a repair request like a traditional Buyer. For the repair request, Opendoor will itemize the requested repairs with their cost to have the repair completed and will provide the Seller a credit in-lieu of repairs option.

Larger repair asks may result from roof, HVAC, foundation and/or pool issues.

The offered price is low.  The last two homes that sold in my friend’s subdivision sold for $335,000 and $337,500.  The $335,000 house is 2733 square feet with similar upgrades. The second home is 3,135 square feet with similar upgrades.  Both homes are on a slab. The sold homes are between 1720 – 2,122 square feet smaller than my friend’s house. That is a huge difference is square footage.  If I were to sell my friend’s home I would price it closer to 375,000. In additional to a lower offer, they are charging $18,755 in fees. These fees include a customer experience fee and risk free (Holding cost they charge while they are selling your home).  The fees don’t include closing costs and repairs. So, the fee could be $5,000-$10,000 or more depending on the repairs. Just like the other two, there is no negotiating on repairs. They will give you a repairs list and then ask you for a price reduction.

Break down Opendoor vs Traditional Realtor

Opendoor

Purchase price – $341,000
Fees – ~$18,755
Commission, repairs, and closing costs – ~10,000 (an estimate)
Total – $306,245

Traditional Realtor

Purchase price – $375,000
Fees – 6% commission – $220,500
Closing costs- average of current sales in neighborhood – $1,219
Total – $351,281 – not including repairs
Difference from Appraisal and final Price – $23,719

Difference between Opendoor and Traditional Realtor – $45,036

This is the best of the three by far.  Still, $45,036 is a lot of money to lose.

Summary of All Three

See below for a summary of all three companies and what a traditional Realtor does.  

There is a market for these companies.  The markets would include:

• Sellers that might be going in foreclosure or they cannot keep up with the payments
• Sellers that have a new job, need to leave quickly, and have a large amounts of equity in their house
• Sellers that don’t have any idea about the process
• Sellers that don’t want to haggle

The concerns that I have with all three companies

• They will offer you a lower offer price for a home.  They must, because if they offer market value, they would resell the home at a loss
• Make a seller pay holding costs why they try and sell your home – essentially – you are paying them to sell you house and get the profits
• Charge high fees, there is no negotiating on price, fees, or repairs
• Lack of experience of the market, as you see in the three case studies that I did.  These companies either do not know about the real estate markets or they just want to make a profit.  Either way, a seller could potentially lose a lot of money using them.
• It is a one-sided transaction – it benefits the Knock, OfferPad, and Opendoor

There always need to be a human element (non-biased) when selling a home.  

• To evaluate the property correctly so that it will sell and for the current value
• Negotiating price, terms, and repairs– having someone, on your side, to help with negotiations
• Having a Realtor to call when you have questions or concerns.  If you use any of the companies above they will not help you, because they are the buyer and the only interest they have is in their company and what profits they can make

Hope this helps.  If you have any questions or need anything let me know.

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