iBuyers Making Moves

David Goldsmith

All Powerful Moderator
Staff member

Amid uncertainty, Zillow is latest iBuyer to press pause
Over past month, portal reduced its home inventory as coronavirus impact worsened

After watching rivals Opendoor and Redfin drop out of the iBuying game, Zillow Group said Monday that it would also suspend home-buying amid the coronavirus pandemic.

In a statement, co-founder and CEO Rich Barton cited emergency orders in New York, California, Illinois, Louisiana, Ohio and Nevada, which have instructed nonessential businesses to shutter. In New York, Gov. Andrew Cuomo specifically told real estate agents to stop in-person showings and open houses.

“Given the concerns for public safety and rapid developments by governments that restrict local real estate activities, we determined it was prudent to pause our home buying to preserve our capital,” Barton said in the statement. “We plan to restore Zillow Offers to full operations once health concerns pass and local health orders are lifted.”


Although it won’t be purchasing homes, Zillow will continue to sell homes through Zillow Offers, using virtual tours and other technology.

Over the past month, the company slowed its home-buying activity. At the end of 2019, Zillow owned 2,707 homes. As of March 19, it had 1,860 homes.

Barton has previously called iBuying a “moonshot” bet, saying that to ignore it would be an “existential threat.” In 2019, Zillow’s revenue more than doubled to $2.7 billion. Revenue from iBuying was $1.4 billion, compared to $52.4 million in 2018. Zillow’s losses were $305.4 million, up from $119.9 million.

Last week, Redfin, Opendoor and Realogy also suspended home-buying.

In a letter to shareholders, Redfin CEO Glen Kelman cited uncertainty in the market and economy overall. “We remain as committed as ever to giving homeowners the option of an instant offer,” he said, “but only when we can know what a fair price for an offer would be.”
 

David Goldsmith

All Powerful Moderator
Staff member

Is it over for iBuying? Pandemic causes major players to hit pause
With coronavirus spreading and the U.S. housing market exposed, America’s instant home-buying frenzy seems to be fading fast

It was just a few months ago that Zillow was being asked every five minutes to place an offer on someone’s home.

Demand was such that the listings giant — which historically made money off agent advertising — jumped headfirst into instant homebuying in 2018 and shifted its entire business model a year later. To ignore the burgeoning opportunity that iBuying represented would be an “existential threat” to the business, Zillow’s CEO, Rich Barton, said in a March 2019 interview.

A year later, and in the throes of massive economic turmoil sparked by the coronavirus pandemic, Zillow and other major players including Opendoor, Offerpad and Redfin have hit the brakes on iBuying — an industry that generated nearly $9 billion in sales last year.

“With whole cities shutting down nearly all commerce, no one can say what a fair price is right now,” Redfin CEO Glenn Kelman said in a statement last month, announcing his company’s withdrawal from homebuying for the time being.

But while some in the business say it’s a pause, others believe it could be a nail in the coffin for a risky model that’s saddled companies with thousands of properties on their balance sheets in addition to capital costs.

Generally speaking, iBuyers purchase homes at a discount from sellers who want the certainty of a sale, and after minor renovations, they look to flip the homes for a profit. Many of the larger companies, like industry leader Opendoor, have relied on outside funding to do so.

“It’s not clear these guys are going to survive,” said Gilles Duranton, an economist and dean’s chair in real estate professor at the University of Pennsylvania’s Wharton Business School, who was skeptical about the model in good times. “It’s as simple as that.”

To date, iBuying companies own a tiny fraction of the U.S. housing market — less than 1 percent, according to analysts. But with institutional investors eager to own a slice of the pie, the sector’s total dollar volume has doubled each year since 2017, and last year, the top four players closed $8.7 billion in deals across 60,000 home sales.

Opendoor — the venture capital-backed firm that has raised $3 billion in debt and $1.3 billion in equity from investors including SoftBank — was on track to close 30,000 deals in 2019. A year prior, the online real estate company bought 11,000 homes and sold 7,000.

And for publicly traded Zillow, iBuying injected $1 billion in revenue in 18 months’ time.

In 2019, its Zillow Offers platform accounted for about half of the company’s $2.7 billion in revenue, up from 4 percent a year prior. Zillow purchased 6,511 homes last year and sold 4,313.

(More)
 

David Goldsmith

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Staff member
Opendoor lays off 35% of staff
SoftBank-backed firm suspended iBuying last month

Opendoor, perhaps the most prominent and well-funded startup in the instant-homebuying business, just laid off about 600 employees, a month after the coronavirus pandemic forced it to abort home purchases.

“Though this was difficult news to deliver, our focus here at Opendoor remains the same,” Eric Wu, the company’s co-founder, told The Information, which broke the news. The layoffs equate to about 35 percent of the company’s staff.

The company was valued at $3.8 billion after a $300 million funding round led by SoftBank’s Vision Fund last March, and has also raised funds from the likes of homebuilding giant Lennar and Fifth Wall Ventures.

In October, Wu told Recode that he has discussed the possibility of going public with his board. His company, he said, looks to at least partly replace agents, and lets buyers “get a personal open house without a realtor.”

The coronavirus pandemic, however, has dealt a crippling blow to the iBuying business, which also includes players like Redfin, Realogy, Zillow and Keller Williams. Many of these firms have suspended their iBuying activity during the pandemic. Since Opendoor’s main source of revenue is home-selling fees from iBuying, it has been forced to make cuts. The suspended activity also leaves Opendoor with a number of homes that the firm may have to sell for a loss, or spend money to maintain before sales resume, according to The Information.

Other SoftBank-backed companies that have made major layoffs or furloughs during the pandemic include residential brokerage Compass and hotel startup Oyo
 

David Goldsmith

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Staff member

Return of the iBuyers: Opendoor gets back to buying
SoftBank-backed firm laid off one-third of staff in March

Opendoor is back in businesses and ready for remote sales.

The SoftBank-backed iBuyer, which suspended home purchases in March, said it will resume operations in Phoenix this week. To do so, the company will now do virtual tours. And it’s rolled out a new service called Home Reserve, where it will buy homes on behalf of customers who want to sell their old home first.

Opendoor is one of several so-called iBuyers that purchase homes, make light repairs and then re-sell the homes at a markup (usually alongside a suite of services). The group, which also includes Zillow, Redfin and Offerpad, stopped buying homes in March when governors across the country enacted stay-at-home policies to help flatten the curve. Although Zillow stopped buying homes, it continued to sell homes in its portfolio.

With several states slowly re-opening, including New York, iBuyers are poised to start transacting again. But there’s considerable risk particularly if they purchase homes and are unable to sell them.

“The value proposition we provide to customers is to help them move with certainty and convenience,” Opendoor’s CEO, Eric Wu, told Bloomberg. “We should be willing to take on some of that exposure and we should price homes appropriately due to that risk.”

Opendoor purchased around 19,000 homes in 2019 and owned around 3,800 in March. Founded in 2014, the company has raised $1.3 billion to date from investors including SoftBank and Invitation Homes, the single-family rental giant. In April, during the height of the pandemic, Opendoor laid off about 600 workers – 35 percent of its staff.

Wu said renting out some of its inventory is “always an option,” albeit not one he’s actively pursuing “at this moment.”
 

John Walkup

Talking Manhattan on UrbanDigs.com
I am very curious how they are pricing in the current 'viroconomy' into their offers. I would imagine they have increased their wiggle room, which means sellers are eager to hit lower bids. As a trader, it was always preferable to buy on the bid, but spooky when it happens right away!
 

David Goldsmith

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Staff member
Given how thinly the market is trading I have no idea how they are trading. I remember talking to an investor I knew who was bragging about how well they were doing on a pool of loans they had bought from the Resolution Trust. He said "we've already worked through half the loans and we're making a decent profit."

I told him "It's not the first half - the easy half - that you have to worry about. It the second half - the "problem" half - which is going to break you." Of course they ended up losing money (not much) on the whole package.

The problem here is if they make a few points on a bunch of the houses but get stuck with a few the big losers could overwhelm the small winners.
 

David Goldsmith

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Staff member
Personally, I think the market is still headed for a big correction and being a flipper is way too risky. I have too many memories of guys making good money flipping on the way up, doing larger and larger deals, and then losing it all back - and more - when the market turned.


Zillow CEO on coronavirus crisis: “We have passed peak fear”
iBuying generated $770M in revenue before buying stopped in mid-March

Zillow’s losses ballooned to $163.3 million during the first quarter despite record revenue from its now-halted iBuying business.

That’s a 142 percent uptick in losses from $67.5 million a year ago. Overall, the Seattle-based listings giant said revenue during the quarter rose 148 percent year over year to $1.1 billion.

The company’s iBuying division generated a record $770 million in revenue before Zillow suspended home purchases in late March. Until that point, Zillow had purchased 1,479 homes during the first three months of the year. Overall, it sold 2,394 properties, ending the quarter with 1,791 homes.

Zillow ended the quarter with $2.6 billion of cash and investments, the highest balance in company history. Premier Agent ad revenue rose 11 percent.

In a letter to shareholders, CEO Rich Barton said the company is “actively planning” to resume Zillow Offers, “likely within the next few weeks,” depending on health and safety concerns and local housing market demand.

During an earnings call Thursday, he said buyer demand is returning across the country. “We have passed peak fear,” he said. “Lights that were red two months ago are moving through yellow and beginning to flash green.”0

“We are now seeing buyer demand return in markets across the country,” he said. Zillow, along with many of its competitors, suspended its home-purc0hasing program in March because of public health concerns and stay-at-home orders in many states. The company continued to sell homes, though; as of March 19, it owned 1,860 homes.
0
As the coronavirus pandemic began shutting down many parts of the U.S. economy in March, Zillow canceled its revenue guidance and slashed expenses by 25 percent. It froze hiring, suspended marketing and cut discretionary spending.

Though the listings giant expects to take a hit on revenue from discounts it offered on Premier Agent, Zillow projected second-quarter revenue would be flat at between $577 million to $620 million.
Barton predicted a “great reshuffling” in the way people buy and sell homes. The forced adoption of tools like virtual touring and digital paperwork were long overdue, he said.
The pandemic could also be a catalyst for people to change their homes. “Right now I’m in my bedroom because I have three kids on Zoom school all over the house and I don’t have an office,” he said. “My dad had an office when I was growing up. I never saw the need. Well, I see the need now.”
 

David Goldsmith

All Powerful Moderator
Staff member
If iBuyers come back, I'm willing to bet you see lawsuits from purchasers because they came in and slapped a coat of paint on which made the property appear to be in good condition, and then then sold without disclosing defects (which they may or may not known of) which "anyone who lived there would have figured out."
 

John Walkup

Talking Manhattan on UrbanDigs.com
That's a good point, but it seems like a minor hurdle overall. iBuyers are just getting started and having this crazy situation early in the game will only make them stronger as now they have a *much* better idea of tail risk and can structure/price more appropriately. I have no idea what the buyer game will look like in the future, only that there's too much money on the table to not take a shot at it.
 

David Goldsmith

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Staff member

Zillow relaunches iBuying program
Company has resumed iBuying program in Phoenix, Tucson, Raleigh and Charlotte

Zillow is relaunching its instant homebuying program, making it the latest iBuyer to resume operations.
The listings portal — which in recent years made a big bet on homebuying — announced Monday that it is resuming its Zillow Offers program in Phoenix, Tucson, Charlotte and Raleigh. Zillow had paused home purchases in all 24 of its markets on March 23 due to the coronavirus pandemic, but it expects to restart the program in additional markets soon. The company had continued selling homes through Zillow Offers via virtual tours and other technology throughout the pandemic.

Zillow contracted Dr. Regina Benjamin, who served as the country’s surgeon general under former President Barack Obama, as its health advisor. All homes owned by the company will now follow a “Clean, Protect, Distance” protocol, which requires an extra cleaning regimen and limited in-person tours (follow distancing protocols).

The company’s instant-homebuying division generated a record $770 million in revenue in the first quarter of the year. Until it paused the program in late March, Zillow had purchased 1,479 homes, sold 2,394, and ended the quarter with 1,791 properties.

“These past two months have confirmed our belief that real estate is resilient,” Zillow President Jeremy Wacksman said in a statement. “In fact, we’ve seen that people – despite these uncertain times – still want to move. Zillow Offers gives them a safe, seamless way to do so, whether selling or buying.”
 

David Goldsmith

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Staff member
Homebuying startup Knock pivots to lending
Knock to offer mortgage and bridge loans, refer consumers to real estate agents

Knock, a home-buying startup, is switching to bridge loans and working with agents, rather than directly with consumers.
The company, which offers a platform for consumers who want to buy and sell homes at the same time, will now offer mortgage, bridge-loan and concierge services, Inman reported. The program, Knock Home Swap, will include a mortgage without contingencies, which Knock’s CEO Sean Black said would have competitive rates.

Knock, which raised $400 million in a funding round last year, will also stop marketing homes directly to consumers. Instead it will refer prospective homebuyers to an agent network, but does not anticipate charging agents a referral fee.

For the down payment, the startup will offer an interest-free bridge loan. The company will charge a 1.25 percent fee on the home. Knock also has an integrated title company and a network of contractors to streamline the process of preparing a home for sale.

Knock was initially modeled as an ibuyer, acquiring homes for cash and selling them to consumers. Now, the company will still buy homes if they do not sell within six months, but Black said nearly all homes listed with Knock sell within 90 days.
 

David Goldsmith

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Realtor.com wades into iBuying at last
Sellers can use Realtor.com to request an offer

Even as rivals rushed into iBuying, Realtor.com resisted the home-buying craze. Until now.
The listings portal said Thursday that it is launching a seller’s marketplace, where sellers can request offers from Opendoor, EasyKnock, HomeGo and WeBuyHouses.com instead of listing directly on the open market.
While Realtor.com, which is owned by Rupert Murdoch’s News Corp., won’t be buying and selling homes itself, it aims to be a “one-stop shop” for sellers, David Master, director of product management, said in a statement.

In a new deal with Opendoor, sellers who visit Realtor.com can accept offers and complete all-digital transactions, Inman reported. The partnership with Realtor.com is Opendoor’s second, following a deal with Redfin last year. Prospective sellers can use Redfin’s site to request offers from Opendoor or list with a Redfin agent.

Until now, Realtor.com has avoided home-buying, even as its chief rival, Zillow, has invested heavily in the sector.
In March, all of the major iBuyers – Zillow, Opendoor, Redfin, Realogy and Offerpad – suspended home-buying due to uncertainty around coronavirus. They have since resumed, and generally predict that sellers will appreciate the certainty around an instant, all-cash offer during the pandemic.
 

David Goldsmith

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iBuyer Opendoor eyes $5B IPO via blank-check firm
SoftBank-backed company last valued at $3.8B

Instant-homebuying startup Opendoor may be jumping on the SPAC bandwagon.
The venture-backed company is in advanced talks to go public through a merger with Social Capital Hedosophia Holdings Corp. II, reported Bloomberg. The deal would value Opendoor at $5 billion, and is set to be announced in the next few weeks.

Founded in 2013, Opendoor buys homes online for cash and aims to sell them for a profit after making modest repairs. The San Francisco-based company, led by CEO Eric Wu, competes with Zillow, Redfin and Offerpad in the fast-growing but somewhat unproven space.

iBuyers’ market share more than doubled in 2019, according to industry analyst Mike Del Prete. About $8.7 billion worth of homes were purchased by iBuyers in 2019.

To date, Opendoor has raised $1.3 billion from investors, including SoftBank, General Atlantic, Khosla Ventures, NEA and Norwest Venture Partners. It was most recently valued at $3.8 billion after raising $300 million in March 2019.
Along with other iBuyers, Opendoor suspended home-buying during the pandemic and in April was forced to lay off 35 percent of its staff. The company resumed buying homes in May.

Social Capital II is a partnership between venture capitalist Palihapitiya and investor Ian Osborne. Last year, their first blank-check company merged with Richard Branson’s Virgin Galactic.
Blank-check companies have made a comeback this year as a hedge against the volatile market.

Porch.com, a home-services startup, plans to go public in a $523 million deal with a SPAC, or special-purpose acquisition company. Airbnb had preliminary talks with Bill Ackman’s $4 billion SPAC before filing confidentially for an IPO. “I wouldn’t use the word rebuff,” the billionaire investor later told Bloomberg TV.
 

David Goldsmith

All Powerful Moderator
Staff member
If they couldn't make a killing when they were (just about) the only buyer in the market (height of pandemic) then odds are they aren't going to.
Opendoor is ready to go public. Is its balance sheet?
iBuying startup's losses soared 41% in 2019

Five months ago, iBuying startup Opendoor was in survival mode: It paused home buying, laid off 35 percent of its staff and raced to sell $1 billion worth of homes on its books.
Now, the company is going public through a $4.8 billion deal with Chamath Palihapitiya’s blank-check company. Invoking past investments in Bitcoin, Amazon, Tesla and Virgin Galactic, Palihapitiya, the founder and CEO of Social Capital, called Opendoor his next “10x idea.” But by merging with a special purpose acquisition company, or SPAC, Opendoor is avoiding much of the scrutiny of a traditional IPO, where potential investors get a peek under the financial hood via a company’s prospectus.

Still, during a Sept. 15 investor presentation that coincided with news of its SPAC deal, Opendoor disclosed a pattern of losses that was prevalent even before Covid struck. In 2019, the company lost $339 million, up 41 percent year-over-year from $240 million. Revenues last year hit $4.7 billion – this year, projected revenue is $2.5 billion, a drop of over $2 billion.

As for home sales, Opendoor expects a slight uptick in activity this year, projecting 19,732 home sales in 2020 compared to last year’s 18,799.
Given that it has lower revenues, bigger losses and only a slight increase in home sales, many in the real estate industry and startup communities are asking: How is Opendoor valued at $1 billion more than it was last year?

“Opendoor needs to raise more capital — it’s losing money,” industry analyst Mike DelPrete said this week. Since 2014, Opendoor has raised $1.5 billion from investors, including SoftBank, General Atlantic, New Enterprise Associates, Lennr and real estate-focused VC Fifth Wall Ventures. It hit a valuation of $3.7 billion in March 2019 when it raised a $300 million round led by General Atlantic.

This spring, DelPrete compared Opendoor’s suspension of iBuying to an airliner losing both engineers mid-flight.
“With no revenue — Opendoor’s engines — the company will glide until it either manages to once again generate revenue, or runs out of money,” he said at the time.

In a May report, DelPrete noted that Opendoor’s home purchases “dropped off a cliff” during the first quarter. Its February acquisitions were down 20 percent year-over-year and March purchases were down 47 percent year-over-year.

By reducing its exposure, Opendoor had fewer homes on the books during the pandemic. But observers said it begged the question if the company was running out of cash.
“If what they’re doing is offering liquidity in a market, they should have been crushing it,” said Kevin Clark, an adjunct professor at NYU’s Schack Institute of Real Estate.

The top iBuyers accounted for 0.5 percent of the U.S. housing market last year, generating roughly $8 billion in sales, according to DelPrete. Opendoor controlled 64 percent of the iBuying market, followed by Zillow with 18 percent (Other established brands such as Coldwell Banker, Realogy and Keller Williams have also entered the fray). Zillow, which is publicly traded, disclosed losses of $312 million on iBuying last year. Still, Zillow’s CEO Rich Barton said in October that not betting on iBuying would be an “existential threat” to the company.

Last July, Opendoor co-founder and CEO Eric Wu said he saw iBuying as a “winner-take-most” market.
“The classic example is Amazon,” he told Inman. “Though it’s hard to imagine that they get to a winner-take-all position given how many e-commerce competitors exist, Amazon certainly has and will capture the vast majority of value in the ecosystem.”

During the Sept. 15 investor presentation, Opendoor said its contribution margin — or profit per home — is $5,000 after interest payments. In Phoenix, its most established market, that rises to $8,000 per home. WU claimed Opendoor is 12 times more efficient at selling a home than a traditional agent and has been able to reduce its per-home expenses by 50 percent.

The deal with Palihapitiya’s Social Capital Hedosophia Holdings II will give Opendoor a $1 billion capital infusion and the firm will have $2.4 billion in available debt, CFO Carrie Wheeler said during the investor presentation.
Proceeds from the deal include $414 million in cash and $600 million through a PIPE, or private investment in public equity, the companies said, with Palihapitiya investing $100 million personally.

“Before the end of 2021 they’ll be back in a really solid place to where they were and growing again,” he told the Financial Times. During an appearance on CNBC, he said if Opendoor uses its current playbook to capture 4 percent of the U.S. housing market, it will be able to generate $50 billion in revenue.

Palihapitiya has good reason to hope that’s the case. He and Ian Osborn, co-founder of Social Capital, are receiving $82.8 million worth of founder shares in Opendoor, as per the FT.
“I just don’t understand why all of a sudden it’s OK for banks to make money,” he said, of receiving shares, “but it’s not OK for other people to make money.”

Schack’s Clark said Opendoor’s first-mover advantage – if there was one to be had – should have been clear by now.
“If you look at the rest of the iBuying market, no one has cracked the code,” he said. “No one has figured out if there’s a way to make money doing this. My guess is that there probably isn’t.”
 

David Goldsmith

All Powerful Moderator
Staff member
House flipping is really easy if your goal is to lose money just so you can say you are doing deals.
Can iBuying go the distance?
It’s the biggest bet in residential in years with everyone from Zillow to Opendoor seeking dominance. But the numbers are still shaky.

When George Schneider decided to sell his home this spring, Opendoor made him an offer he couldn’t refuse.
Schneider had paid $76,750 for his three-bedroom stucco house in the Phoenix suburbs a decade earlier. Opendoor, the iBuying startup backed by SoftBank and Lennar, was willing to pay him $225,000, all-cash.

The deal closed in August. After a paint job and minor repairs, Opendoor turned around and sold the property for $265,000, making $40,000 before expenses. But $40,000 doesn’t go too far when you’ve got to pay broker fees, taxes, interest and holding costs.
iBuying, the catchy handle for algorithmically driven instant-homebuying, is one of the biggest wagers seen in the residential real estate industry over the past five years. Established giants like Zillow have dumped hundreds of millions of dollars into developing their platforms, while startups like Opendoor and Offerpad have relied on venture capital firepower to compete. Last year, iBuyers purchased $8.1 billion worth of homes — so far just 0.5 percent of the U.S. housing market but twice the volume of the year prior. Since 2015, the number of players in the space has gone from two to two dozen. The goal is a lofty one: to institutionalize the U.S. single-family home business, one of the world’s largest and most fragmented marketplaces.

Sellers get speed and the certainty of an immediate offer, benefits for which many give up the premium they could have got from the standard selling process. But for iBuyers, the financial burden is tremendous, and the path to profitability deeply uncertain. Last year, Zillow lost more than $300 million on iBuying. Opendoor, which is set to go public in a $4.8 billion merger with a blank-check company, has lost nearly $1 billion since it launched in 2013.
In 2019, Glenn Kelman, CEO of online brokerage Redfin, which had dipped its toes into iBuying, called the business a “race to the bottom.” And increased competition could make profitability even more unlikely.

“When those guys [iBuyers] start competing and making offers,” said Gilles Duranton, a real estate professor at the University of Pennsylvania’s Wharton School, “the seller is going to sell to the iBuyer with the best offer, to whoever is making the biggest mistake on price.”
From eBay to Amazon
Homes are traditionally valued using “comps,” or an analysis of how much similar homes in the same area traded for. Comps, iBuyers argue, fail to take into account the unique characteristics of each property. iBuying uses algorithms to generate what they claim are far more accurate assessments of value by analyzing hundreds of different data points — everything from whether a home has granite or Formica countertops to the size of a home’s outdoor space.

The iBuyer will then make an offer for the home based on this value and collect fees of between 6 and 10 percent. The aim is to make minimal necessary repairs and quickly sell the home at a profit.

“Agents who dismiss the iBuyers as ‘flippers,’ I think they’re doing that at their own peril,” said Lane Hornung, founder of zavvie, a Denver-based startup that aggregates different iBuyer offers for sellers.

Brendan Wallace, a managing partner of real-estate focused Fifth Wall Ventures and an investor in Opendoor, described the current U.S. residential landscape as the “largest peer-to-peer market on earth.”
“It’s a gigantic eBay for homes, the most expensive asset most consumers ever purchased,” Wallace said in May. “And as a result, the information, the transparency, the speed of transactions are all suboptimal.” A company like Opendoor, Wallace said, “can capture data, provide transparency around the sale. So you just have a higher level of quality, a higher level of experience.” iBuyers can also standardize other aspects of the homebuying process that are currently cumbersome and opaque, such as title insurance.

But others feel iBuying can be detrimental to consumers. “What ends up happening is, sellers sell for less than they could have gotten, and buyers pay above market rate,” said Shaival Shah, co-founder and CEO of Ribbon, a startup that helps buyers make all-cash offers.
Some said the model is viable when home prices are rising, but given its razor-thin margins, will be tested if the market turns.
“Suppose they buy at a 3.6 percent discount and sell at a 1 percent premium,” said Tomasz Piskorski, a professor of real estate at Columbia Business School. “If housing prices drop by 5 percent, it erodes their ability to make money.”

Nima Wedlake, an investor at Thomvest Ventures, which has backed startups such as SoFi, Ladder and Lending Club, said he considered investing in several iBuyers but was deterred by their constant need for capital.
“We didn’t fully grok the model,” he said.
Mayday in March
By late March, with Covid at its height in the U.S., all of the major iBuyers suspended activities, citing massive uncertainty around pricing and fearing a housing bust. But that meant suspending a key (and, for Opendoor, only) source of revenue.


“The effect is akin to an airline losing both engines while in flight,” industry analyst Mike DelPrete wrote at the time. The pain was acute, and the repercussions swift. Within weeks, Zillow slashed expenses by 25 percent, Redfin furloughed 41 percent of agents, and Opendoor laid off 600 employees, or 35 percent of its workforce.


In retrospect, the freeze worked to iBuyers’ advantage, allowing them to avoid racking up too much inventory while nonessential businesses, including brokerages, were closed and home showings impossible. Between February and July, Opendoor reduced its inventory to $172 million worth of homes, down from over $1 billion, according to its financial statements.

Then the housing market rebounded with surprising ferocity. By May, Redfin said demand was up 17 percent compared to pre-Covid levels. July home sales surged 24.7 percent month-over-month, the largest gain since 1968, according to the National Association of Realtors.
Last month, Opendoor announced that it was going public through a merger with a blank-check company run by noted investor Chamath Palihapitiya.
“This is my next big 10x idea,” Palihapitiya, who took Virgin Galactic public in April and has invested in firms like Slack and Yammer, tweeted at the time. Opendoor declined to comment for this story, citing a quiet period before going public.

Trojan horse
iBuyers have taken pains to emphasize that they are not here to replace residential agents.
“Last year, we paid tens of millions of dollars in agent commissions,” Opendoor notes on its website. Zillow, too, has stressed that agents remain central to the homebuying process.
But last month, Zillow said it would start employing salaried agents, who would represent Zillow in its home purchases. In those transactions, Zillow Homes will be the broker of record, the company said. Atlanta, Phoenix and Tucson are first on deck with plans to expand to other cities later next year.

The move incensed agents, who spent nearly $1 billion last year advertising on Zillow.
“I’ve heard agents today saying, ‘Well, why am I buying leads from my competitor?’” said Hoby Hanna, president of Howard Hanna Real estate, a family-owned firm with $22.5 billion in sales last year according to research firm Real Trends.
Zillow tried to set the record straight. “Let me address one thing right off the bat,” Errol Samuelson, the company’s chief industry development officer, said in a video message at the time of the announcement. “We are not recruiting agents from other brokerages.”

But Wall Street liked what it saw. On the day of the announcement, Zillow’s stock price hit a record $100 per share. (It was at $105 per share as of press time.) And several analysts raised the company’s price target, suggesting they think the company’s value will go up. “The move should help Zillow improve unit economics,” Deutsche Bank’s Lloyd Walmsley wrote in a Sept. 23 note. He did not think the pivot would hurt Zillow’s lucrative Premier Agent business.
“In order to operate such a business at scale, it will be essential to drive as many costs out of the process as possible,” said Yousuf Hafuda, an analyst at Morningstar.

The full-court press on iBuying plays to what Rich Barton, who took back the CEO reins from Spencer Rascoff at Zillow last year, sees as essential to his company’s long-term prospects.
iBuying was “an existential threat because if it works and we don’t do it, we get displaced as the marketplace, theoretically,” he told the tech news website the Information last October.
Zillow’s cash cow had historically been agent advertising, but Barton said home purchases had “a mindbogglingly larger TAM [total addressable market]—$1.8 trillion of secondary market transactions happen a year in the U.S. of homes.”

That figure, however, may not be wholly relevant. In order to buy homes sight-unseen, iBuyers have strict criteria for homes they will purchase. In general, they look for cookie-cutter homes in good condition priced between $200,000 around $600,000. According to Columbia Business School’s Piskorski, the TAM for iBuyers is something like $300 billion — meaning the major players are fighting over a much smaller pot than advertised.
Piskorski also pointed to holding costs as a significant risk. “Owning an empty home is costly,” he said. Zillow declined to comment for this story.

As the two dominant players, Zillow and Opendoor are racing to add ancillary services to boost revenue, including mortgage, title and escrow services.
In a Sept. 15 investor presentation, Opendoor itemized the contribution margin, on a per-home basis, for a menu of services, including title ($1,750), home loans ($5,000) and listing your old home with an Opendoor agent ($3,750). Eventually, it plans to launch services related to home warranties, remodeling, insurance and moving, which could bring in another $7,500 per home.

DelPrete was skeptical the additions would be a silver bullet. “That’s a whopping 60 percent revenue increase from what they’re currently getting,” he said on a recent webinar. “If it was easy, it would be done already.”
And the financial strains are immense. In 2019, Opendoor lost $339 million, up 41 percent year-over-year from $240 million, it revealed during its presentation. Revenues last year hit $4.7 billion — this year, projected revenue is $2.5 billion, a drop of over $2 billion.
DelPrete noted that Opendoor had recently lowered its iBuying fee to 6 percent of the home price.

“If Zillow wants to compete, they’re going to have to lower their fees,” he said. “It’s almost like a game of chicken, profitability chicken. … Opendoor is going for it.”
 

David Goldsmith

All Powerful Moderator
Staff member
Zillow cuts 80 jobs from iBuying biz
Company is losing an average of $6,960 per instant-homebuying deal

Zillow has cut 80 jobs from its home buying and selling business, despite its big bet on the burgeoning sector.
The real estate giant doesn’t disclose how many of its 5,300 employees work for Zillow Offers. But a spokesperson told GeekWire the cuts would allow the company to invest in iBuying by “realigning our resources and staffing levels.”

iBuying has been one of the biggest trends in residential real estate in the past five years, but skeptics question whether the business model pencils out. For Zillow, cutting iBuying overhead could be a path to profitability.

Opendoor, the market leader that is going public in a $4.8 billion deal with a blank-check company, has lost nearly $1 billion since it launched in 2013.
Zillow lost more than $300 million on iBuying last year. On average, it lost around $6,960 per home during the second quarter, according to the company’s financials.
Last month, it launched an in-house brokerage and said it would employ salaried agents in order to cut down on iBuying expenses. Previously, Zillow paid broker fees on both sides of the transaction. Now, it will just pay fees when selling the home.
 

David Goldsmith

All Powerful Moderator
Staff member
Knock hires ex-Lyft, Uber exec as first CFO
Startup pivoted from homebuying to lending in 2020

Knock, a startup that helps people buy new homes before selling their old ones, has tapped a former Lyft and Uber executive as its new CFO.
The company said Michelle DeBella will report directly to Knock’s co-founder and CEO Sean Black, who previously co-founded Trulia. Her focus will be on driving “profitable growth” for Knock’s Home Swap program, which pre-funds mortgages to give homeowners more flexibility when buying and selling a home.

DeBella was most recently a vice president of finance transformation and governance at Lyft.
Before that, she was global head of internal audit at Uber.
At both companies, she helped scale the finance departments ahead of their IPOs, Knock said. She previously spent 17 years at Ernst & Young and nearly a decade at Hewlett Packard.

Based in New York, Knock has raised more than $600 million in debt and equity since 2015. Investors include RRE ventures, Foundry Group, Redpoint, Greycroft, Corazon Capital, Correlation Ventures, Great Oaks Venture Capital and FJ Labs.
In a statement, Black said DeBella was joining Knock at a “critical inflection point” in the company’s trajectory.

Until last year, Knock’s main offering was a trade-in program, where it purchased homes on behalf of consumers while helping them sell and list their old house. Once the home sold, the seller paid back Knock.
Citing friction in that model, Knock rolled out its new Home Swap program in July 2020. Knock also offers sellers interest-free bridge loans, for up to $25,000, to fix up their old homes before listing them for sale. If a home fails to sell in six months, Knock offers a backup offer.

Knock’s Home Swap is available in 15 markets, including Arizona, Colorado and Texas. It recently expanded to South Florida. Knock plans to expand to 21 markets by mid-2021 and 75 markets by 2023.

 

John Walkup

Talking Manhattan on UrbanDigs.com
Do you think iBuyers will go the way of exchanges, in which the optimal number is 1, or the way of the agent, where there's a pea for every pod?
 

David Goldsmith

All Powerful Moderator
Staff member
It's hard to tell when AFAIK not a single one is making money, just looking for market share. Also this is happening in what's been an up market where they operate; so if they are losing money flipping while the market is going up.....
Did you see how fast a number of them pulled the plug when COVID first hit? What happens in a sustained slowly downward market? Do they just stop transacting for a few years?
 

John Walkup

Talking Manhattan on UrbanDigs.com
Good point. I think the covid pause was more of a knee jerk reaction to crazy conditions. But you're right, in a downward market, I would expect their bids to drop if not disappear entirely. Then when markret rebounds they're back at full capacity. Not a bad play - in for the rewards, out for the risks - but hard to build consumer confidence in that sort of set up.
 
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