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iBuyers… The Pawn Shops of Real Estate

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With every crank of the little metal arm, the tune to the song, “Pop Goes the Weasel”, advances until the little clown pops out of the box. Perhaps you remember playing with a Jack-In-The-Box toy when you were a child. That song is an English nursery rhyme, possibly dating back to the 18th century.

 

Over time, this song made its way to the United States, where the lyrics were changed. However, the popular tag line of the song, “Pop! Goes the weasel,” remained. When hearing this song, I never really understood what the words meant.

What does pop goes the weasel mean? During the time period in which this song was born, the term “pop” was commonly understood to mean pawning something. To pawn something means to use an item of value as security, to borrow money against.

WHAT IS A PAWN SHOP?

Typically, they are places where people can take a loan out using their personal property as collateral. These shops also buy items for cash. In the case of a loan, if the borrower doesn’t pay the loan back within the allotted time frame, they will loose the property they used as collateral. What about selling something to a pawn shop?

If a person is selling an item to a pawn shop, the pawnbroker is not going to pay full market value for the item. That’s because they will then turn around and sell the item at full retail, for a profit. That’s how pawn shops make their money. Sometimes, they will repair or restore an item they paid cash for, before selling it, in order to maximize their profits. 

Now that we know what it means to pawn something, naturally the next question is,  what is a weasel?

If you’re thinking of small furry animal or a sneaky person, like I did before doing research on this subject, you might be surprised! While some articles I read state that the “weasel” refers to a shoemaker’s tool, it seems that the term “weasel”, most likely refers to a coat or an article of clothing. In what situation would a person in the 18th century need to pawn some of their clothing? During that time period, and earlier, one of the principle assets people had were their clothes.  That was a time when clothes were not just something that could easily be thrown away, unlike much of the mass-produced clothing we wear today. Clothing, and especially fine clothing, was expensive. Money was hard to come by for most. Therefore, when a person needed  money, often they would use their fine clothing as collateral to secure a loan.

In the article, “Pawning Through The Ages”, on history.com (click for link), it states:

“The practice of pawning clothes on Monday and retrieving them on Friday–“payday”–was a common way for poor people to make it through the week during the 19th century.”

This way they could pay back the loan and get back their Sunday best to wear for worship or other special occasions that usually took place on the weekend.  But, how did pawn shops get started?

THE ORIGIN OF PAWN SHOPS

We have to travel back in time about 3,000 years, and travel to China, in order to find the first one. The first pawn shops were used to provide loans to peasants. Eventually, this type of business model spread to Greece, then Rome and beyond.

Outside of many pawnshops, you may notice a symbol with three spheres hanging from a bar. According to the article “Best Pawn & Jewelry, History of Pawn” (click for link), in Florence, Italy, in the province of Lombardy, there was a family named the Medici family. The symbol means “Lombard”, which is the province where the Medici family originated pawn shop brokering in Italy.  In Europe, pawn shops were referred to as “The “Lombard”. There’s more to that story. Check out it out at the link above. It’s interesting.

House of Lombard

The word pawn is derived from the Latin word “pannum”, which means clothing or cloth, at least based upon the articles that I read. As already mentioned, in days of yesteryear, people would pawn their clothes when they needed money.

 


Speaking of pawning things, here’s an interesting fact. According to the article, “Best Pawn & Jewelry, History of Pawn”, noted earlier, Evelyn Walsh McLean pawned the Hope Diamond to pay for her mortgage of $100,000. Today, it has been valued at $240,000,000!


THE PROCESS OF SELLING TO A PAWN SHOP

If a person wants to sell an item to a pawn shop, they will bring the item to the pawnbroker who will determine its value. If the pawnbroker is not able to determine the value of the item, they will sometimes seek the guidance of an expert to let them know what it’s worth. The pawnbroker has to be careful not to pay full retail. Otherwise, they are going to loose money. Most sellers understand this and are willing to give up some equity for the ease of selling the item for cash.

Over the years, pawn shops have been a place where those in need of quick cash can go to get out of a tight situation. Others have come into possession of something that they would like to sell quickly for cash, without the difficulty of trying to sell the item on their own.

While at times, pawn shops have been criticized for preying upon the poor with inflated interest rates and low-ball values, for many who are in need, this service can offer relief. Most pawn shops are now regulated by the states they are in, to ensure fair business practices.

Does this business model exist in real estate?

THE iBUYER MODEL

The concept of offering a cash deal on a home at a discounted price, in order to then sell it for a profit, is not a new concept. In fact, investors have been doing this very thing for many years. I have done a fair amount of appraisal work for investors who want to know what the market value of a home is before they purchase it, and then after they renovate it.

However, the iBuyer is being branded as something new.  While the business concept is like an investor who purchases something at a discount and then sells it for more, to make a profit, the iBuyer concept is designed to streamline the entire process of selling a home into one relatively easy transaction, using technology to assist in the valuation process.

It’s fast and easy. But it comes with a price. According to the article, What Is an iBuyer (A comprehensive Guide) | Clever Real Estate (click for link), some iBuyers’ charge fees that range “from 6-15%, and typically offer below fair market value to ensure a decent margin on each transaction.”

HOW iBUYERS DETERMINE THE VALUE OF THE PROPERTY

According to the aforementioned article, “an iBuyer leverages data and advanced algorithms to make near-instant cash offers on homes, then turn around and resell them for a small profit.”  Therefore, one of the things that is relatively new in this more modern approach to cash buyers, is the use of AVM’s, or Automated Valuation Models, to determine the value of the property the iBuyer is considering purchasing. This type of valuation system uses computer algorithms to derive a value for the property.

Here’s where a seller needs to be careful. In addition to paying the fees that the iBuyer will charge, a seller is at the mercy of the iBuyer’s AVM value determination. Most iBuyers will send out an inspector to determine the home’s condition.

I wonder if these inspectors measure the home or just inspect it for condition? I wonder if they consider things like view and location? Have they really analyzed the local market? 

iBuyers typically do not use traditional valuations completed appraisers, even though this is a much more accurate way of determining market value. Now, don’t get me wrong, AVM’s can be accurate at times. However, in many cases, they are not reflective of the market. For some good examples, please read my article, “Appraiser vs. AVM vs. Zestimate…Ten Properties” (click here) Especially if your property is in a unique area, such as on a lake, or other desirable location. Or, if your property is not similar to most of the properties in your immediate area.

iBuyer

What if the AVM comes in much lower than a home is really worth? Then, it gets further discounted by the iBuyer. Tack on the iBuyer’s fees, and the transaction could be quite costly to the seller. Something to think about.

iBuyers are in business to make money. That’s the whole idea. It’s a business model, just like pawn shops. There is a place for them in the market. Some people have inherited a home that they don’t want or need. Others may find themselves in a situation in which they need to sell a home quickly and are more than happy to give up some of the equity to do so. There’s nothing wrong with that. Some owners have homes that are in need of a lot of repairs. They may not be in a position to make them. An iBuyer is an option for selling the home without having to make the repairs.

BEFORE GOING THE IBUYER ROUTE

If you find yourself in a situation in which you are considering selling your home to an iBuyer, I highly recommend educating yourself on the process. Also do research on the iBuyer.  Find out what all of your options are.

Part of determining what you will be paying for this service, is to find out how much equity you are giving up.  The best way to do so, in my opinion, is to hire a state licensed or certified appraiser to appraise the home you would like to sell before calling the iBuyer. They have no skin in the game. Appraiser’s are disinteresed parties who can offer good advice to you. You may decide that the equity you are giving up is not worth it. On the other hand, you may find that it makes sense to move forward.

Where can you go to find an appraiser who can help you in this situation? www.FindMyAppraiser is an excellent resource! You can search for qualified appraisers in your area that can value the home you want to sell, before you call an iBuyer. You can search for an appraiser by city, state or zip code. You can also search for an appraiser within a certain radius. Even if you don’t need an appraiser now, you may at some time in the future! It used to be hard to find an independent appraiser in your area. Not anymore!

 

There are certainly situations in which the iBuyer model might be a good thing. Perhaps a person has inherited a home that they do not want to keep. What if they don’t need the money and would like to sell the property quickly, without worrying about showings and the whole selling process? 

The question a homeowner needs to determine is how fast would they like to sell their home, and how much equity are they willing to give up to sell it without having to go through the traditional selling process? It is convenient. It’s relatively fast and simple. But speed and convenience usually come at a cost.

Enjoy this episode of Pawn Stars in which the pawn shop offers a whole lot less for this jersey than what’s is likely to be worth. (Keep in mind that when selling to an iBuyer, there is no negotiation. Take the offer or leave it.)

 

This seller was informed. They were happy to take the cash and run, even though they lost out on a lot of money. That’s their decision. Was it a good one? It depends on your point of view. Either way, at least the seller was educated about what he was willing to loose. If this is the case with a jersey, how much more so with real estate?

Most people who go to buy a new car do some research before hand. They look up the Kelly Bluebook price to see what the car is worth. Then, they can go into the transaction armed with the information they need to make a wise decision.  The same is true with selling a home to an iBuyer. If you have the home appraised first, then you will know what you can potentially get on the open market. Especially, if you hire a real estate agent to help sell it. I think that hiring a good real estate agent is worth every penny!

Doing your homework will keep you from winding up being surprised by what you could have sold your home for, which is a lot less fun than a Jack-In-The-Box!

So, are iBuyers like pawn shops? In some ways they are. Pawn shops have helped many financially disadvantaged to get out of a pickle. But they pay a higher price. iBuyers can make selling a home quick and easy, even helping some who are in a financially bad situation. However, that comes with a price as well. The value of the iBuyer model is in the eye of the beholder. It’s up to you to decide.

The next time you hear the tune to “Pop! Goes the Weasel”, I bet you’ll have a whole new appreciation for the history and meaning of that song, like I do now. Hopefully I have given you some useful information to think about in the event that you are considering selling your home to an iBuyer. My best to you whatever path you decide take!

As always, thanks for being here!


Looking for a qualified real estate appraiser in your area? Go to http://www.FindMyAppraiser.com

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Are you a consumer looking for information on real estate? Go to http://www.ConsumerHomeValue.com

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If you enjoy listening to podcasts, check my new podcast out. I hope you enjoy it! You can find my on Apple Podcast, iHeart Radio, Spotify, Google Play Music, Sound Cloud, Radio.com, RadioPublic, Deezer, Breaker, Stitcher as well as other feeds.

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Here are some links to other articles and videos I enjoyed recently! I hope you will also…

In 2020, We Hope To Sled Down The Housing Market – Housing Notes by Jonathan Miller

Real estate trends to watch in 2020 – Sacramento Appraisal Blog

10 Years of Blogging and Birmingham Home Sales – Birmingham Appraisal Blog (Happy 10th Anniversary Tom!)

Don’t Be A Fancy Victim! – The Real Value Podcast

$65 Million Price Cut – No. of Bathrooms – Rate Forecast – APPRAISAL TODAY

I Think Something is Missing, But I’m Not Sure – The Appraiser’s Advocate with Time Andersen (PODCAST)

What’s the difference between using a custom home builder vs a production builder? – Gynell Vestal of Consumer Home Value

The Most Dangerous Appraisal Client – The Approach Coach (PODCAST)

Why Do I Need An Appraiser? – The APPRAI$AL Cast (PODCAST)

 

 

 

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8 thoughts on “iBuyers… The Pawn Shops of Real Estate”

  1. Great post Jamie! Really enjoyed learning the origin of “Pop Goes the Weasel.”

    It will be interesting to watch how the ibuyer model evolves in changing market conditions. The business is more forgiving when prices are increasing. However, with 3-4% annual growth over the past 12 months, the companies behind this model will be pressured even more to offer lower prices for homes. Get an independent appraisal before accepting any offer.

  2. Yeah, I agree with Joe above. Very modest appreciation requires lower offers. I saw one property where the iBuyer had a credit of over $50,000 for repairs alone. So the final price onlookers might see is not the real story.

    1. I also agree with you both. And as the market cools further, this will be interesting to watch. They don’t have a huge presence in the Cleveland yet, at least that I can see. That may be due to tighter margins due to pretty flat appreciation in the past year or so.

  3. Great article, Jamie! Offerpad, an iBuyer company, just announced that they will be offering their services in the Birmingham area. It will be interesting to see what happens. Also, thanks for he history lesson about “Pop Goes The Weasel”. I never new the history of that.

    1. Thanks so much Tom! I agree. It will be interesting to see how they change things. My pleasure on the history of the song. ! I discovered the origin of the song when doing my research on pawn shops. Who knew? Have a great weekend!

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