iBuyers falling flat

David Goldsmith

All Powerful Moderator
Staff member
Opendoor projects revenue plummeted 45% in 2020

iBuyer also discloses it's looking to raise $700M in stock offering​

After Covid forced Opendoor into a five-month homebuying limbo in 2020, the newly public company is projecting a 45 percent drop in annual revenue.
The instant homebuying startup projected $2.58 billion in 2020 revenue, down 45 percent year-over-year from $4.7 billion, it said in a regulatory filing Tuesday. It anticipates losing between $98 million and $103 million on an EBITDA basis. That’s compared to a net loss of $339 million in 2019.
Opendoor shared the preliminary financials in conjunction with a disclosure that it is looking to raise more than $600 million through a stock offering, just six weeks after it went public via a SPAC. It plans to offer 24 million shares of its common stock.

Opendoor is yet to price the shares, but estimated net proceeds based on a closing price of $26.12 on January 29. The company could raise just under $700 million if underwriters at Citigroup and Goldman Sachs exercise their shares.

Opendoor currently operates in 21 markets around the U.S. It sold nearly 19,000 homes in 2019. In the filing, Opendoor said it plans to invest in existing and new markets, and will add to its working capital. “The principal purposes of this offering are to increase our capitalization and financial flexibility,” the filing stated. In addition, the Company plans to continue to invest to double the markets it serves in 2021.”

Like other iBuyers, Opendoor suspended homebuying in March when the pandemic threw the housing market into disarray. Between February and July 2020, Opendoor reduced its inventory to $172 million from over $1 billion, according to previous financial reports.
For the first nine months of 2020, Opendoor generated $2.3 billion in revenue, compared to $3.5 billion during the same period in 2019. Its net loss was $198.9 million, down from $247.4 million.

Led by CEO Eric Wu, Opendoor buys homes from owners who want the certainty of a quick closing. After making minor improvements, it aims to sell at a premium and also make money on ancillary services.
The San Francisco-based startup went public in December after merging with a blank-check firm sponsored by Chamath Palihapitiya. Ahead of trading, Opendoor’s valuation soared to $18 billion, about three times its enterprise value of $5 billion in September when it struck the deal with Palihapitiya. The stock closed at $31.25 per share on December 21.

The shares have dipped over the past six weeks. Opendoor’s stock closed at $28.47 per share on Tuesday, up from $26.25 a day prior, giving it a market cap of just over $15 billion.
After going public, Opendoor had $1 billion in cash. But homebuying is an extremely capital-intensive business, and the startup is likely looking to build on its momentum and the liquidity in the financial markets to grow its market share. Earlier Tuesday, brokerage giant Realogy announced a $200 million offering of senior notes, adding to $1 billion raised over the past 12 months.

Opendoor has projected $10 billion in revenue by 2023. It said by capturing 4 percent of the U.S. housing market, it can be a $50 billion company.
 

David Goldsmith

All Powerful Moderator
Staff member
www.mikedp.com/articles/2021/3/9/the-ibuyer-financial-bloodbath-continues

Screen+Shot+2021-03-08+at+10.33.53+AM.png

Massive iBuyer Financial Losses Continue​


The “Reinvention of Real Estate” comes with a staggering price tag. In 2020, the two largest iBuyers, Opendoor and Zillow, lost a total of $607 million buying and selling houses. That’s a loss of about $40,000 on each home bought and resold, about $1.6 million every single day, or about $1,100 per minute in 2020.
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And that $607 million is on top of the $650 million lost in 2019 — well over $1.2 billion in the past two years.

Opendoor's Challenging 2020​

Opendoor accumulated losses at a quickening pace during a challenging 2020. Like Zillow, it stopped buying houses earlier in the year, and its recovery since has been slow. This has corresponded to a striking decline in the number of homes sold throughout the year, especially compared to last year.
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As expected, Opendoor’s decision to pause listing new homes for sale in late 2020 led to a dramatic drop in home sales in Q4 2020. Without a corresponding drop in corporate overhead expenses, Opendoor’s financial metrics reached a new milestone: a net loss of over $100k per home.
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But it's almost certainly a temporary setback. On the plus side for Opendoor, and as a result of building up inventory in late 2020, it's going to have a blowout Q1 2021.

A Revealing Fourth Quarter​

The key financial drivers for each iBuyer were quite different in the last quarter of 2020. Opendoor managed to blow Zillow away with a gross margin of 15.4 percent — which is a combination of service fees, price appreciation, renovation expenses, and ancillary revenue streams. Opendoor was better able to monetize the transaction.
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The subsequent cost drivers show an equally revealing story. Especially Opendoor’s record-low selling costs of 2.1 percent. The bulk of this fee is brokerage commissions. The drop from 3 percent earlier in the year is notable, and is likely the result of Opendoor continuing to push down the buyer agent commissions offered on its houses.

Holding costs and interest expense are also lower — by about half — from earlier in the year, and both iBuyers appear evenly matched (aside from a slight interest expense advantage to Opendoor).

Good for Consumers​

Despite their staggering financial losses, the evidence suggests that Zillow and Opendoor remain staunchly pro-consumer. Both businesses are determined to pass a financial benefit on to consumers alongside a streamlined experience:
  • Opendoor lowering its service fee for homeowners, now down to 5 percent.
  • Zillow Rewards offers savings when consumers bundle its services together.
  • Opendoor offering savings when using its in-house services.
  • Both iBuyers paying very close to fair market value.
Contrast this with another real estate tech disruptor, Compass, which is self-admittedly obsessed with agents (and not consumers). The difference shows. Compass’ strategy of gaining market share and promoting exclusive listings available only on its platform is good for business, but not for consumers.
 

David Goldsmith

All Powerful Moderator
Staff member
Opendoor revenue bounces back in Q1

iBuyer reported $747M in revenue, down from $1.2B in 2020​

Opendoor had some good news to share in its second earnings call as a publicly traded company.
The company reported $747 million in revenue in the first quarter of 2021, an increase of 200 percent from the previous quarter, it announced Tuesday. The earnings were a result of Opendoor reselling 2,462 homes, a 190 percent jump from the previous quarter.

The quarterly growth was driven by more homes on the market and transactions moving at a faster pace, according to chief financial officer Carrie Wheeler. The average resale price was also higher, due to low rates, a record low number of homes available and pent-up demand.

“Our teams are working hard and are focused on expanding the buybox and launching new markets,” said Eric Wu, Opendoor CEO and founder. “We’re expanding the types of homes we’re operating in, the different price points, and really the goal is to serve every home in all the markets we offer it in.”

Still, Opendoor’s first quarter revenue was down from the same period last year, when revenue hit $1.25 billion. Its net loss during the first quarter of 2021 was $270 million, up from $63 million during the first quarter of 2020.

The company also announced that it expanded into six new markets in the first quarter, including San Diego, California, and Asheville, North Carolina. It’s on track to reach its goal of being in 42 markets by the end of the year.
The company bought 3,594 homes, a 24 percent year-over-year increase and a 78 percent increase from the fourth quarter. Offer requests were up 175 percent, and buybox coverage increased by 25 percent from the fourth quarter of 2020.

Opendoor is a leader in the nascent-but-growing iBuyer sector. It makes cash offers for homes, and recently launched a program that helps buyers land homes by providing the capital upfront. It went public in December after merging with a blank-check firm backed by investor Chamath Palihapitiya.
 

David Goldsmith

All Powerful Moderator
Staff member
Bad news for agents: Buyers warming to algorithms

Survey on iBuying shows homeowners more likely to trust Zillow than humans​

An iBuyer revolution is still percolating in the residential real estate market, but homeowners are certainly becoming more trustworthy of the sector.
A new survey from 1000watt of 600 homeowners across the United States found 82 percent of them prepared to respond positively to an iBuyer pitch, Inman reported.
That bodes well for firms such as Zillow, Opendoor and Offerpad.
An iBuyer is typically willing to pay fair value for a home in cash, closing the transaction in just days. There are still fees involved, but sellers and buyers don’t have to deal with showings and open houses — or agents.

Most survey respondents said they would trust information from Zillow as much as from a real estate agent, and 27 percent said they would trust Zillow more. Only 18 percent said they would trust an agent more than Zillow.

“We were somewhat surprised at the high level of receptivity to the iBuyer proposition at a high level,” 1000watt CEO Brian Boero told Inman.

Growing interest in iBuying has not yet correlated with an actual surge in iBuying transactions: Redfin reported that just 0.5 percent of home sales in the first quarter of 2021 went through iBuyers. But homeowners are growing comfortable with various ideas that could ultimately contribute to more iBuying.
The survey showed that 77 percent of homeowners were willing to consider taking 5 percent to 10 percent less on a sale in favor of an instant cash offer. Additionally, 44 percent of homeowners expressed frustration with open houses and showings.
 

David Goldsmith

All Powerful Moderator
Staff member

Opendoor stock spikes following strong Q2 earnings​

After iBuyer reported $1.2B in revenue, price jumped 17%​

Opendoor’s stock jumped 17 percent from Wednesday’s market closing after it reported strong second quarter earnings.
Its shares closed at $14.50 on Wednesday but leaped to $16.98 when markets opened the next morning. Investors pushed the price close to $18 Thursday afternoon. Bloomberg reported in the late morning that Opendoor is seeking a $2 billion revolving credit facility to buy more homes.
The iBuyer reported $1.2 billion revenue in the second quarter, up from the $740,000 it took in around this time last year.
Opendoor, which makes cash offers for homes, acquired a record 8,494 homes in the second quarter, the highest quarterly acquisition in its history by 50 percent, Wu added. It was driven by its buy box expansion, which allows it to underwrite most of the homes in its existing markets.
 

David Goldsmith

All Powerful Moderator
Staff member
This reminds me of several rounds of late stage buying and subsequent disaster for more than a few flippers I have known.

iBuyers: Paying Above Market and Reselling For More Upside

With unprecedented demand and constrained supply, house prices are rising across the U.S. Consequently, the iBuyers -- led by Opendoor, Zillow, and Offerpad -- are paying record-high, above market values for the homes they’re purchasing from homeowners. But they're also reselling them for more money than ever before.

Purchase Price-to-AVM​

Purchase Price-to-AVM is a comparison of the price an iBuyer pays for a house compared to what an AVM (automated valuation model) determines the house is worth at the time of purchase. This study uses the ATTOM Data AVM.

Historically, iBuyers paid a point or two below “market value.” My previous research study, conducted in 2019, found a median Purchase Price-to-AVM of 98.6 percent for Opendoor and Zillow. But things have radically changed in 2021; the number is well over 100 percent, with Opendoor paying a median of 107.7 percent in Q2 2021.

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To be fair, most of the market is paying above "market value" in the housing frenzy of 2021. And for iBuyers, this trend has accelerated over the past six months, led by Opendoor. As a newly-listed public company, Opendoor needs to demonstrate strong revenue growth, and the only way to do that is by buying and selling more houses.

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This shift -- and Opendoor’s strategy -- is clearly visible when analyzing its Purchase Price-to-AVM distribution compared to Zillow. In 2020, both companies were nearly identical, with a median Purchase Price-to-AVM of around 98 percent.

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But in the first half of 2021, Opendoor materially shifted to the right, paying, on average, significantly higher prices for houses.

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Over the past 18 months, Opendoor has clearly shifted to paying more for homes, with a much looser price distribution than the past.

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The above chart can be interpreted a number of ways: houses are getting more expensive (they are), Opendoor is paying more for houses (it is), and pricing is becoming harder to predict with an AVM. But there also appears to be a shift from the tight pricing discipline of 2020 to a free-for-all, acquire at any cost strategy.
The trends adhere to the fundamental principles of supply and demand: with housing in short supply, iBuyers need to increase the quality of their offers. But this doesn't negatively affect their margins; in fact, iBuyers are reselling homes for more money than ever before.

Rising Price Appreciation​

Once an iBuyer purchases a house, they quickly spruce it up and resell it -- ideally for more than they bought it for. This difference, the spread between the purchase and resale price, is price appreciation.
In 2021, the median price appreciation for iBuyer transactions is 8.1 percent -- a record high -- up from 4.7 percent in 2020 and 3.3 percent for Opendoor and Zillow in 2019. And it continues to climb, with Opendoor hitting 9.2 percent in May 2021.

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Combined with 2021's 40 percent increase in the median value of homes purchased by iBuyers, price appreciation approaching 10 percent is financially significant.

Consider: median price appreciation of 3.3 percent on a $250k home in 2019 is $8,250, compared to 9.2 percent (Opendoor's price appreciation in May 2021) on a $350k home, which is $32,000.
And the results vary by market. An analysis of 262 iBuyer transactions in Phoenix during May and June shows a median price appreciation of 11.5 percent, or $39,000, after a median of just nine days on the market (total hold time is about two months).

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It's no wonder that iBuyers are happy to pay more for houses and abandon their tight price discipline; they're more than making up for it on the resale.

 

David Goldsmith

All Powerful Moderator
Staff member

After pandemic pause, iBuyers bounce back in frenzied housing market​

Opendoor, Offerpad, Zillow Offers and RedfinNow made bids that averaged 104% of market value in the first half of the year, Zavvie research shows​

The three biggest iBuyers — Opendoor, Offerpad and Zillow Offers — hit new highs for buying activity during the second quarter of 2021, according to research by Mike DelPrete, a scholar-in-residence at the University of Colorado.

Defying predictions that the iBuying concept wouldn’t work in an intense seller’s market, this new breed of homebuyers has ramped up property acquisitions to record levels.
“iBuyers,” short for “instant buyers,” mostly stopped buying homes in mid-2020 as COVID-19 injected uncertainty into the housing market. Now, iBuyers have come back strong. They’re wooing home sellers by making aggressive offers and cutting fees.

As a result, the three biggest iBuyers — Opendoor, Offerpad and Zillow Offers — hit new highs for buying activity during the second quarter of 2021, according to research by Mike DelPrete, a scholar-in-residence at the University of Colorado.

“For anyone concerned that the iBuyer model wouldn’t be popular in a seller’s market, the evidence shows that it is resonating with consumers more than ever, and market conditions are in fact fueling its growth,” DelPrete says.
DelPrete himself was among the skeptics. With many homes attracting multiple offers, the thinking was sellers would have no trouble finding buyers — and the iBuyer pitch would fall flat.

iBuyers pay aggressive prices​

Part of the reason iBuyers are finding so many takers: They’re paying a premium (as if home sellers needed any more good news in an era of super-low inventory and record-high prices).
The four major iBuyers — Opendoor, Offerpad, Zillow Offers and RedfinNow — made bids that averaged 104.1 percent of market value during the first half of the year, according to research by Zavvie, a real estate technology company that works with brokerages to help sellers compare offers from iBuyers. That’s up from 97.6 percent of market value last year.

“iBuyers are paying way over market prices for homes now to buy more of them,” DelPrete says. “Why? I think a big part of it is Opendoor is a public company and needs to demonstrate strong revenue growth.”
How iBuying works
iBuyers position themselves as a fast way to sell. Homeowners avoid the hassle of painting and staging their homes. Sellers need not clean and clear out for showings. iBuyers give a cash offer, and the seller can pick a closing date. The iBuyers then spruce up the homes and quickly put them on the market for sale.
While the companies are paying full price for homes, they had been collecting fees that ranged as high as 12 percent of the sale price. The average commission for a traditional real estate sale, by contrast, is 5 percent.

However, iBuyers have been reducing fees so that they’re more competitive with traditional transactions. According to Zavvie, iBuyers’ average service fees dropped from 7.2 percent in 2020 to 5.1 percent by mid-2021.
The average concession charged for home repairs fell from 3.6 percent to 1.9 percent. In other words, the average hit for selling to an iBuyer is now just 7 percent, down from nearly 11 percent last year. Those fee cuts bring iBuyers’ fees in line with traditional sales.
Soaring home prices also have played in iBuyers’ favor. Many homeowners can’t close on another place until they retrieve the equity from their current home, and iBuyers promise fast, predictable sales.
“With supply constrained and demand so high, certainty becomes everything,” says Kerry Melcher, Opendoor’s head of real estate.
The pitch seems to be working. Zillow Offers reported that it bought a record 3,805 homes in the second quarter of 2021. That was more than twice its first-quarter volume.
“I confess to being quite excited by how well Zillow Offers is doing in such a hot seller’s market,” Zillow Group Chief Executive Rich Barton told Wall Street analysts in early August.
----------------------------------------

iBuyer Profits At Risk With Falling Home Price Appreciation​


U.S. iBuyers are closer than ever to profitability. Offerpad just posted a profitable quarter, and if stock-based compensation is excluded, so did Opendoor. But the overwhelming majority of profits are coming from record home price appreciation, which is temporary, and appears to be falling.
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Home price appreciation (HPA) has always been a component of an iBuyer's gross profit; it is the spread between the purchase and resale price of a home. And it's significant: In Q2 2021, home price appreciation accounted for 70 percent of Opendoor's gross profit margin.
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Over time, home price appreciation is becoming a larger component of Opendoor's gross profit margin -- rising from 50 percent in 2019 to 70 percent in Q2 2021.
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What Goes Up Must Come Down?​


Home price appreciation rates are beginning to cool in major markets across the U.S., including Phoenix, where the median iBuyer home price appreciation has fallen 50 percent since May. Opendoor's median home price appreciation for homes sold in August is just 2.7 percent, down a massive 75 percent from 10.7 percent in May.
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The decline will certainly have a material impact on iBuyer gross profit margins, which have reached record highs during 2021.
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Opendoor's gross margins have increased an impressive 700 basis points, from 6.4 percent to 13.4 percent, between 2019 and Q2 2021. But 84 percent of that improvement is from rising home price appreciation (3 percent → 9.2 percent).
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Strategic Implications​


Gross profit margin includes an iBuyer's service fees, home price appreciation, and repair costs (and in the case of Opendoor and Offerpad, also includes revenue from ancillary services like title insurance, mortgage, and brokerage services).

The iBuyers' recent profitability is being driven by record home price appreciation -- a temporary artifact of a hot housing market. As the market eases off its red hot highs, slowing price appreciation may have an adverse affect on iBuyer profit margins.
 

Noah Rosenblatt

Talking Manhattan on UrbanDigs.com
Staff member

After pandemic pause, iBuyers bounce back in frenzied housing market​

Opendoor, Offerpad, Zillow Offers and RedfinNow made bids that averaged 104% of market value in the first half of the year, Zavvie research shows​

The three biggest iBuyers — Opendoor, Offerpad and Zillow Offers — hit new highs for buying activity during the second quarter of 2021, according to research by Mike DelPrete, a scholar-in-residence at the University of Colorado.

Defying predictions that the iBuying concept wouldn’t work in an intense seller’s market, this new breed of homebuyers has ramped up property acquisitions to record levels.
“iBuyers,” short for “instant buyers,” mostly stopped buying homes in mid-2020 as COVID-19 injected uncertainty into the housing market. Now, iBuyers have come back strong. They’re wooing home sellers by making aggressive offers and cutting fees.

As a result, the three biggest iBuyers — Opendoor, Offerpad and Zillow Offers — hit new highs for buying activity during the second quarter of 2021, according to research by Mike DelPrete, a scholar-in-residence at the University of Colorado.

“For anyone concerned that the iBuyer model wouldn’t be popular in a seller’s market, the evidence shows that it is resonating with consumers more than ever, and market conditions are in fact fueling its growth,” DelPrete says.
DelPrete himself was among the skeptics. With many homes attracting multiple offers, the thinking was sellers would have no trouble finding buyers — and the iBuyer pitch would fall flat.

iBuyers pay aggressive prices​

Part of the reason iBuyers are finding so many takers: They’re paying a premium (as if home sellers needed any more good news in an era of super-low inventory and record-high prices).
The four major iBuyers — Opendoor, Offerpad, Zillow Offers and RedfinNow — made bids that averaged 104.1 percent of market value during the first half of the year, according to research by Zavvie, a real estate technology company that works with brokerages to help sellers compare offers from iBuyers. That’s up from 97.6 percent of market value last year.

“iBuyers are paying way over market prices for homes now to buy more of them,” DelPrete says. “Why? I think a big part of it is Opendoor is a public company and needs to demonstrate strong revenue growth.”
How iBuying works
iBuyers position themselves as a fast way to sell. Homeowners avoid the hassle of painting and staging their homes. Sellers need not clean and clear out for showings. iBuyers give a cash offer, and the seller can pick a closing date. The iBuyers then spruce up the homes and quickly put them on the market for sale.
While the companies are paying full price for homes, they had been collecting fees that ranged as high as 12 percent of the sale price. The average commission for a traditional real estate sale, by contrast, is 5 percent.

However, iBuyers have been reducing fees so that they’re more competitive with traditional transactions. According to Zavvie, iBuyers’ average service fees dropped from 7.2 percent in 2020 to 5.1 percent by mid-2021.
The average concession charged for home repairs fell from 3.6 percent to 1.9 percent. In other words, the average hit for selling to an iBuyer is now just 7 percent, down from nearly 11 percent last year. Those fee cuts bring iBuyers’ fees in line with traditional sales.
Soaring home prices also have played in iBuyers’ favor. Many homeowners can’t close on another place until they retrieve the equity from their current home, and iBuyers promise fast, predictable sales.
“With supply constrained and demand so high, certainty becomes everything,” says Kerry Melcher, Opendoor’s head of real estate.
The pitch seems to be working. Zillow Offers reported that it bought a record 3,805 homes in the second quarter of 2021. That was more than twice its first-quarter volume.
“I confess to being quite excited by how well Zillow Offers is doing in such a hot seller’s market,” Zillow Group Chief Executive Rich Barton told Wall Street analysts in early August.
----------------------------------------

iBuyer Profits At Risk With Falling Home Price Appreciation​



U.S. iBuyers are closer than ever to profitability. Offerpad just posted a profitable quarter, and if stock-based compensation is excluded, so did Opendoor. But the overwhelming majority of profits are coming from record home price appreciation, which is temporary, and appears to be falling.

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Home price appreciation (HPA) has always been a component of an iBuyer's gross profit; it is the spread between the purchase and resale price of a home. And it's significant: In Q2 2021, home price appreciation accounted for 70 percent of Opendoor's gross profit margin.

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Over time, home price appreciation is becoming a larger component of Opendoor's gross profit margin -- rising from 50 percent in 2019 to 70 percent in Q2 2021.

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What Goes Up Must Come Down?​



Home price appreciation rates are beginning to cool in major markets across the U.S., including Phoenix, where the median iBuyer home price appreciation has fallen 50 percent since May. Opendoor's median home price appreciation for homes sold in August is just 2.7 percent, down a massive 75 percent from 10.7 percent in May.

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The decline will certainly have a material impact on iBuyer gross profit margins, which have reached record highs during 2021.

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Opendoor's gross margins have increased an impressive 700 basis points, from 6.4 percent to 13.4 percent, between 2019 and Q2 2021. But 84 percent of that improvement is from rising home price appreciation (3 percent → 9.2 percent).

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Strategic Implications​



Gross profit margin includes an iBuyer's service fees, home price appreciation, and repair costs (and in the case of Opendoor and Offerpad, also includes revenue from ancillary services like title insurance, mortgage, and brokerage services).


The iBuyers' recent profitability is being driven by record home price appreciation -- a temporary artifact of a hot housing market. As the market eases off its red hot highs, slowing price appreciation may have an adverse affect on iBuyer profit margins.

add in Blackrock housing portfolio on top of this ibuyer layer. crazy times.
 

David Goldsmith

All Powerful Moderator
Staff member
iBuyers and Wall Street hook up.


It’s a house, not a home: Inside the commodification of residential real estate​

Is it time for the single-family home to finally act like an institutional asset?​

In July, Dallas Tanner, the CEO of single-family rental behemoth Invitation Homes, announced that his company had spent $569 million buying up houses in the preceding six months. Tanner expected to roughly double that number by year-end, touting the firm’s ability to scale in its chosen markets and its portfolio’s high occupancy rates, low turnover and satisfied residents.
“Together with you, we make a house a home,” Tanner said.

In fact, Tanner and his Wall Street and Silicon Valley-backed compatriots might be doing the opposite. If they have their way, U.S. housing — one of the country’s largest asset classes with a total value of more than $36 trillion — will become the most mechanized, institutionalized asset there is.

Already, houses are being assessed algorithmically, marketed remotely, bought and sold in bulk and increasingly bypassing the individual homebuyer to land straight in the hands of institutional-scale landlords and investors.
The nation’s largest homebuilders and landlords are investing in iBuyers, sell-side startups that specialize in rapidly buying up homes, and the relationship is beginning to influence the ways homes are built, marketed and sold. These iBuyers, in turn, are teaming up with other venture-backed startups offering add-on services such as insurance, title and escrow, and mortgages.

Meanwhile, a growing pack of buy-side startups is enabling more transactions by using tactics seen in the auto industry, such as cash offers, rent-to-own and trade-in programs. Those startups are also getting love from builders and investors.
Fueled by cheap debt, venture capital and enormous potential profits, the home — the most emotionally resonant purchase the average American makes in their lifetime and for decades a largely peer-to-peer asset — is on its way to becoming a truly tradeable and transparently valued commodity. The implications for investors, homeowners and renters are immense.

Wall Street bets

company better exemplifies Wall Street’s shifting approach to residential real estate than Opendoor.

In August, Bloomberg reported that the iBuying pioneer, led by CEO Eric Wu, was in talks with lenders for a new $2 billion revolving credit facility. Opendoor wants the funds to fuel more home purchases following a whirlwind second quarter in which it more than doubled its closed acquisitions to 8,500 and placed an additional 8,100 homes under contract.

Although iBuyers collectively accounted for just 0.3 percent of U.S. existing home sales last year, according to BTIG, the rate of growth is worth watching. Opendoor, which went public in a SPAC merger last year, had drawn $1.8 billion on just under $4 billion in existing revolving credit facilities as of the end of June, according to Bloomberg.
Those numbers illustrate how hungry Opendoor is for homes. A separate analysis shows how its diet is changing.

For several years, Opendoor and its two closest iBuying rivals, Zillow and Offerpad, had been buying homes with a median price of about $250,000, according to a study by industry analyst Mike DelPrete. In May, however, that median purchase price spiked to $350,000.
DelPrete attributed that 40 percent jump to the hot housing market. But he also noted that in the past 18 months, 24 percent of iBuyer purchases were of homes that cost more than $500,000, up from just 3 percent historically. So iBuyers are not only looking to buy more homes than ever before, they’re prepared to buy pricier ones, setting them up to compete with more aspiring homeowners.

They’re no longer the discount buyer, either. Historically, Opendoor (and other iBuyers) paid a fraction below market rate for homes, compensating sellers for the haircut by providing speed, certainty of closing and a hassle-free experience. Now, they’re willing to pay a premium to boost their holdings, DelPrete found, after comparing iBuyers’ purchase prices to those generated by property data provider Attom’s automated valuation model (AVM).

In the second quarter, Opendoor’s purchase price-to-AVM ratio was 107.7 percent. Bolstered by billions of dollars in revolving credit facilities and eager to show its investors major revenue growth, Opendoor seems happy to leave the bargain-hunting to others. That strategy isn’t without its risks: If the end of Covid-related forbearance does lead to a wave of foreclosures, as some predict, the market could see a rush of supply, and iBuyers — and their investors — might find that they had overpaid.

For now, though, Opendoor and its competitors have a captive audience in single-family rental giants, who are making a huge bet that remote work, with its attendant demand for more residential space, will increase migration to the suburbs, and that high-earning millennials are more likely to prize the flexibility of renting over the anchors of homeownership. So far this year, the numbers certainly bear that out: Asking rents for professionally managed houses rose nearly 13 percent for the year to date through July, the highest annual increase in the past five years, according to Yardi Matrix data cited by the Wall Street Journal.

iBuyers are selling more and more homes directly to such landlords, effectively bypassing the homebuyer market. Between 5 and 6 percent of Invitation Homes’ 700 first-quarter acquisitions came from iBuyers, Tanner said during an April earnings call. The following month, during an investor presentation, the company, which owns about 80,000 homes across 16 markets, said it was positioned to be the “buyer of choice” as the “iBuying market continues to grow.”


Recent comments by Doug Brien, CEO of Mynd, a property management firm catering to single-family rental investors, hint at this. Mynd plans to buy 20,000 homes across the U.S. over the next three years on behalf of Invesco, with a predicted price tag of $5 billion.
Up to a fifth of those homes, Brien told Insider, would come through iBuyers.

“You have to be playing in every channel there is,” he said.

Customer-investors

At the top of a June earnings call, Stuart Miller, executive chairman of Lennar, the nation’s largest homebuilder, took a long view on the booming housing market. He spoke of low interest rates and tight supply. Then he got to Opendoor.
The company and its peers, Miller said, “are becoming more than just a home sale option.” The value proposition offered by iBuyers, he explained, “is becoming the core of a coordinated closing without double moves or double housing costs.”

Miller was speaking as both a student of the housing market and a key backer of the startup. Lennar provided Opendoor with $100 million in debt financing in January 2018 through a deal structured by its venture partner Fifth Wall. That June, Lennar also co-led Opendoor’s $325 million funding round. Another investor in that round? Invitation Homes.

Viewed as a straight investment, Lennar’s bet paid off in spades when Opendoor went public through a merger with Chamath Palihapitiya’s blank-check firm in December 2020. But it’s clear that Lennar sees the iBuyer as more than a return: It’s treating the investment as a learning lab, testing various initiatives such as a trade-up program, in which homeowners buying a new Lennar house can sell their existing home to Opendoor, with the companies working to coordinate closings. Miller described Opendoor as a partner in facilitating “the fragile dance of selling an old home.”

Opendoor and Lennar have a trade-in partnership (Source: Opendoor)
Invitation Homes, too, sees iBuyers as petri dishes. In 2018, Tanner said they could help the company find new customers and create a sale-leaseback program, through which owners would sell their homes to the company and then rent them back until “they make their next life decision.” In September 2020, the Journal reported that Invitation Homes had updated investors about the program, though the company insisted plans were still in the early stages.

In March, Lennar formed a single-family rental vehicle, Upward America Venture, backed by institutional players such as Centerbridge and Allianz Real Estate. The vehicle hopes to acquire $4 billion worth of new homes and townhomes from Lennar and other builders, offering some up through a rent-to-own option.
“We have a distinct opportunity to create upward mobility in the housing market through this initiative,” Lennar co-president Rick Beckwitt said at the time. If it needs to figure out how to move fast, it may turn to Opendoor, creating another B2B channel for single-family homes.

Attachment theory

On Aug. 16, Offerpad announced its first profitable quarter, reporting $9.2 million in net income, and disclosed a contribution margin — defined as the per-unit selling price less the variable cost — of $31,500 per home. (The company went public this month, in a SPAC merger with Zillow co-founder Spencer Rascoff’s Supernova Partners)

The dream scenario for iBuyers, however, isn’t simply making a profit on a home sale. Instead, it’s an ecosystem play, monetizing adjacent services such as title and escrow, mortgages and insurance. It’s those gains from packaging offerings together — known as the “attach rate” — that will really boost profitability. For example, according to its September 2020 investor presentation, Opendoor is targeting a contribution margin of $1,750 for title and escrow services and a contribution margin of $5,000 for mortgages.
 
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