iBuyers Making Moves

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

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.
Screen+Shot+2021-03-09+at+2.37.34+PM.png

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.
Screen+Shot+2021-03-09+at+2.38.53+PM.png

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.
Screen+Shot+2021-03-09+at+2.37.48+PM.png

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.

a47b88ec-b733-b7d9-ef2e-88da80da64a6.png


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.

d0985b4b-02c2-637a-ba9e-3b42060c3c41.png


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.

be532004-d733-83f5-1932-10b58becbb93.png


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

6bf445a9-e18e-7414-a6cf-1dee6bfca0c2.png


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

0c6a240c-cebe-48d3-6ec7-1913b880f86e.png


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.

4d970a25-b3f4-b2a2-13fc-8a98d6d9372f.png


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).

5157b5e4-61f2-e696-7fab-162065932719.png


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.
d1-wJDeE141uwdvs-M41z4dsyMxAeFnx2a0DC2s0chNUllMbXPb4HHxTcJfNcprxHUy9YaddvyoewweEYigXCzvA7fH_pNd-pL1UyCvT9LF2qZcjGENLw9Cy99iEJqmopFvIKGKQo8Rs76UKwA3MMCw8z0pVyQ=s0-d-e1-ft

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.
NnXBV4RoCNpbF74jv0_I7BC2xR83MCxvFU7BEzFajmGrnVyRF1ClB6T0iPNNN_6CxoDcxPyWjxcpPvu4ZFctFsjIQdqcQn601QgLdnnfwS0QIiavfGhjz1N7EJQNK8T3nOuNWOMHAEf-8TVRQT7USnIn4wvyaA=s0-d-e1-ft

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.
cIs1OqX1dmK70zz5hnUw4YvqRIX4z1EktYCf8Io7AbiEVaJ7dqWwnIxN91rgBVu5uGP3Dx0G9vAHbK3LB2J7tJ_AuLvoF5fZ-_AI0mNfQZ6hCEnZ8PPaDucRozjhIy7x217AnyFpms1pNI3lqFcRQa1ilYfUGA=s0-d-e1-ft

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.
EpbJ84u_5ORkvQ1iAZwHq0Lw8JgNZ_B2Z1MbXH-CF0wyO3bvPjqgQRfX-vFfKjriAoW9x3MmGSXAqku7LsJz-HXxVLRqGjD_vUSGZpzgknw6dKrGSdLC7hCCREiBkLHi5J47KT9B9kjWo1obb0bEVKzqMUK9ag=s0-d-e1-ft

The decline will certainly have a material impact on iBuyer gross profit margins, which have reached record highs during 2021.
uAhRnoIFI-qoJD6ip9-p02Tl1VyzyQjltbdB01cJJMnFC8lxn6kWgi0ppfhH992DVBkolOSUGvcVLCmIKA3fxBi97u9HdWJiqO9VkzY2UgjtEv0OjfyOQFMw2vSpt_dtFB7ogy3v8cLOFXQhLekRFUiKIgrZ_A=s0-d-e1-ft

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).
T4kWIo-l-cZ5lCCxJ3XvNxstOEApM1KGsCisirBG-7HwsZu4w2E4jl9DrjqRK0DUSeahtYzyW3yyWrKYkhj_ZLo_cjRooYypQPk63bK7CG0Kkt-LftcCx-Z5srf_JWutL0a1RgrRRuD3a73Zjf9feJZdmRwtMQ=s0-d-e1-ft

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.

d1-wJDeE141uwdvs-M41z4dsyMxAeFnx2a0DC2s0chNUllMbXPb4HHxTcJfNcprxHUy9YaddvyoewweEYigXCzvA7fH_pNd-pL1UyCvT9LF2qZcjGENLw9Cy99iEJqmopFvIKGKQo8Rs76UKwA3MMCw8z0pVyQ=s0-d-e1-ft

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.

NnXBV4RoCNpbF74jv0_I7BC2xR83MCxvFU7BEzFajmGrnVyRF1ClB6T0iPNNN_6CxoDcxPyWjxcpPvu4ZFctFsjIQdqcQn601QgLdnnfwS0QIiavfGhjz1N7EJQNK8T3nOuNWOMHAEf-8TVRQT7USnIn4wvyaA=s0-d-e1-ft

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.

cIs1OqX1dmK70zz5hnUw4YvqRIX4z1EktYCf8Io7AbiEVaJ7dqWwnIxN91rgBVu5uGP3Dx0G9vAHbK3LB2J7tJ_AuLvoF5fZ-_AI0mNfQZ6hCEnZ8PPaDucRozjhIy7x217AnyFpms1pNI3lqFcRQa1ilYfUGA=s0-d-e1-ft

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.

EpbJ84u_5ORkvQ1iAZwHq0Lw8JgNZ_B2Z1MbXH-CF0wyO3bvPjqgQRfX-vFfKjriAoW9x3MmGSXAqku7LsJz-HXxVLRqGjD_vUSGZpzgknw6dKrGSdLC7hCCREiBkLHi5J47KT9B9kjWo1obb0bEVKzqMUK9ag=s0-d-e1-ft

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

uAhRnoIFI-qoJD6ip9-p02Tl1VyzyQjltbdB01cJJMnFC8lxn6kWgi0ppfhH992DVBkolOSUGvcVLCmIKA3fxBi97u9HdWJiqO9VkzY2UgjtEv0OjfyOQFMw2vSpt_dtFB7ogy3v8cLOFXQhLekRFUiKIgrZ_A=s0-d-e1-ft

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).

T4kWIo-l-cZ5lCCxJ3XvNxstOEApM1KGsCisirBG-7HwsZu4w2E4jl9DrjqRK0DUSeahtYzyW3yyWrKYkhj_ZLo_cjRooYypQPk63bK7CG0Kkt-LftcCx-Z5srf_JWutL0a1RgrRRuD3a73Zjf9feJZdmRwtMQ=s0-d-e1-ft

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.
 

David Goldsmith

All Powerful Moderator
Staff member

Are ibuyers manipulating the housing market?​

As housing prices skyrocket to record highs, some observers point to the tech-driven ibuying process as a contributor to housing market madness.
In a recent viral TikTok video, real estate agent Sean Gotcher said that a billion-dollar real estate company, with a website that “everybody” visits, is harnessing user data to figure out where it can profitably buy houses.
Gotcher said that this company — heavily alluding to Zillow — might then, hypothetically, buy 30 homes for $300,000 each but purchase its 31st home for $340,000. Gotcher said this creates “a new comp,” which gives appraisers a reference point for the value of a home in the area.
In theory, the value of comparable homes in the area would rise to $340,000. Said company would then be able to sell those 30 homes at that higher price, netting a $1.2 million profit, according to Gotcher.

How ibuying works

Sign up for the daily Marketplace newsletter to make sense of the most important business and economic news.

Tech-enabled companies like Zillow have the capability to quickly snap up houses via ibuying, which has gained traction in recent years.
Homeowners disclose information about their property to an ibuyer, which prompts an algorithm to estimate the value of the home, generating an offer in 24 hours or less.
What you’re paying for is the convenience. Homeowners pay these ibuyers a fee that’s usually higher than your standard real-estate company bill and are typically unable to negotiate the offers they receive.
Ibuyers cost home sellers about 13% to 15% of the home’s sale price, while an agent costs 5% to 7%, according to a 2019 research report from the real estate data firm Collateral Analytics.


Zillow is among the industry’s biggest ibuyers, but so are Opendoor, Offerpad and Redfin.
The practice is clustered in some of the country’s biggest markets, like Phoenix; Charlotte, North Carolina; and Atlanta, said Mike DelPrete, a scholar-in-residence at the Leeds School of Business at the University of Colorado Boulder.

A “hot scramble” to buy

According to Zillow, ibuyers constituted 1% of U.S. home purchases in the second quarter of 2021.
That share is just too small to exert an effect on the vast majority of the American housing market, according to Anthony Orlando, a real estate professor at California State Polytechnic University, Pomona.
“And if it’s possible that it’s happening in some neighborhoods, we don’t have any concrete evidence of it,” he added.
Plus, if the strategy discussed in the Gotcher video were accurate, you would expect to see housing prices increase in a lot of the markets where ibuyers operate. But prices are rising everywhere, DelPrete pointed out.
Prices have reached record highs for four straight months, jumping 19.7% year over year in July.
DelPrete said that ibuyers are paying above-market prices and they’re able to resell those homes for more than in the past. He found that the median price appreciation for ibuyer transactions in 2021 is 8.1% — up from 4.7% in 2020. However, he’s said, there’s no conspiracy to push prices up. But they don’t need a conspiracy.
People are willing to pay more because “there’s a hot scramble” to buy in certain markets, DelPrete noted, saying that’s why Zestimates, Zillow’s term for its property-value gauge, are not “the be-all, end-all value of a home.”
“It simply has to do with supply and demand,” he explained.
Zillow responded to the assertions in the video, telling Yahoo Finance: “We pay market value for every home we purchase.”
Redfin CEO Glenn Kelman also responded to the video on Twitter, stating that the company would “never intentionally underpay or overpay for a home.” But he said there is a “conspiracy” among ibuyers. “It’s to pay lower commissions to the brokers representing the buyers of the homes we sell, by about [0.6%] so far,” he tweeted.
The practice of ibuying has also raised concerns about companies’ listing practices. DelPrete said the video does a good job of “illustrating there’s two sides to every coin” and “the potential downside to having a for-profit corporation involved as a middleman.”
He pointed out that Opendoor purchased hundreds of homes late last year but withheld listings for new homes between early November and early December.
“They decided to kind of warehouse them,” he said. “If they warehoused them, then they would be able to sell them for more money a little bit later on and also have those sales hit in its first quarter as a publicly listed company.” (Opendoor went public on Dec. 21.)
DelPrete said the withholding came at a time when people were trying to find homes, with few available.

A supply crisis

Amid this ibuying hubbub, Orlando said the real, underlying problem with our housing market is a lack of supply. The U.S. is short about 6.8 million units, according to a June report from the National Association of Realtors.
“There are so few alternatives out there that people are willing to pay high prices. It’s easy to blame [ibuyers],” Orlando said. “But they’re just capitalizing on a problem that we, as a society, created by not providing enough housing units.”
The COVID-19 crisis — which enabled many people to work remotely — spurred throngs of Americans to move out to the suburbs.
Ibuyers, Orlando explained, are “jumping into these markets because they see prices appreciating. Right now, they’re not causing the appreciation.”
Orlando said another problem lurking, and the reason the video gained traction and caused so much worry, is that it highlighted how tech companies are collecting personal information from their users.
At one point in the video, Gotcher says: “They just know what ZIP code is looking at what ZIP code and how much those people can afford.”
Whether or not the market is being manipulated, Orlando said, these firms still have plenty of data on their users.
“As technology becomes more sophisticated, companies in all industries will come up with increasingly clever ways to use our data in ways that don’t always help us,” he said.
 

David Goldsmith

All Powerful Moderator
Staff member
Beat me to it by 25 minutes? (But I'm merging into the iBuyer thread)

As I have said many times you either need a rapidly rising market or big margins to flip houses.

Has The Housing Bubble Peaked: Zillow Pauses Robo-Flipping Due To "Snags"
In recent weeks we had heard several anecdotal reports that Zillow's electronic house flipping service was underperforming, buying houses at overinflated prices and then flipping them for a loss (even when factoring in fees and commissions).

It appears there has been some truth to that, because according to Bloomberg, Zillow, which acquired more than 3,800 homes in the second quarter, "will stop pursuing new home purchases as it works through a backlog of properties already in its pipeline."
Zillow Group Inc. is taking a break from buying U.S. homes after the online real estate giant’s pivot into tech-powered house-flipping hit a snag.
While Zillow is best known for publishing real estate listings online and calculating estimated home values – called Zestimates – that let users keep track of how their home is worth (with the traffic on the company’s apps and websites serving as the main source of profits in Zillow’s online marketing business), more recently it has been buying and selling thousands of U.S. homes. In 2018, the company launched Zillow Offers, joining a small group of tech-enabled home-flippers such as OpenDoor, known as iBuyers. In the new business, Zillow invites homeowners to request an offer on their house and uses algorithms to generate a price. If an owner accepts, Zillow buys the property, makes light repairs and puts it back on the market.
While the service was firing on all cylinders in the aftermath of the Covid crisis when home prices tumbled only to shoot back up to all time highs, rising at a record 20% Y/Y pace, in recent months it has found flipping to be far more challenging as the pace of flips has slowed drastically in a housing market where most of the first time buyers now find themselves priced out.

However, instead of admitting that we may be nearing (or have already passed) the peak of yet another housing bubble, Zillow has instead blamed "operational capacity" and being short staffed to meet the pace of transactions.

While the iBuying process is powered by algorithms - which as the anecdotes above suggest may way above fair value - as well aslarge pools of capital, it’s also reliant on humans. Before Zillow signs a contract to buy a house, it sends an inspector to make sure the property doesn’t need costly repairs. After it buys a property, contractors replace carpets and repaint interiors.
So joining the vast majority of US corporations which blame lack of workers on reduced output (it could, say, hike wages to quickly offset its staffing challenges), Zillow has blamed the lack of workers to perform the menial home-flipping tasks.
“Given unexpected high demand, Zillow Offers has hit its capacity for buying homes for the remainder of the year,” an employee who works in the company’s home-buying operation in two states wrote in an email to a business partner that was viewed by Bloomberg.
Staffing shortages have reportedly been exacerbated by Zillow’s willingness to let customers set a closing date months into the future, meaning it could agree to buy a house in August and begin renovating it in November.
“We are beyond operational capacity in our Zillow Offers business and are not taking on additional contracts to purchase homes at this time,” a spokesperson for Zillow said in an email. “We continue to process the purchase of homes from sellers who are already under contract, as quickly as possible.”

None of this of course would be an issue if Zillow merely hiked wages, a step that would immediately fill all the vacant positions and resolve its "stated challenges" overnight at a tiny hit to profit margins. The fact that it has not done so suggests that the cause has nothing to do with the stated reason for the flipping pause. Instead, the most likely reason why Zillow is pulling back from robo-flipping is that the housing market is starting to crack and this particular segment is no longer profitable.
In any case, according to Bloomberg, pausing new acquisitions will allow the company to work through its backlog, the narrative goes. Yet while both Zillow and Opendoor briefly stopped buying homes in the early days of the pandemic, the companies ultimately benefited from the housing boom that started when early economic lockdowns lifted, it still took Zillow several months to resume purchasing homes at its pre-pandemic pace.
Curiously, while Zillow is putting roboflipping on hold, Opendoor has no such "worker shortage" issues despite having a similar business model.
“Opendoor is open for business and continues to serve its customers with a simple, certain, fast and trusted home move,” a spokesman for the company said in an email.
It may be open, but one wonders for how long: Zillow has said it plans to refer potential customers to traditional real estate agents (and, by extension, its competitors). It would not be doing this if it was handing over not just market share but also potentially generous profit margins.
As such, the real question is whether Zillow's move may the first sign that the US housing market has finally peaked and - with rates expected to keep rising for the foreseeable future along with inflation - it's all downhill from here.
18,29442
 

Noah Rosenblatt

Talking Manhattan on UrbanDigs.com
Staff member
Beat me to it by 25 minutes? (But I'm merging into the iBuyer thread)

Has The Housing Bubble Peaked: Zillow Pauses Robo-Flipping Due To "Snags"
In recent weeks we had heard several anecdotal reports that Zillow's electronic house flipping service was underperforming, buying houses at overinflated prices and then flipping them for a loss (even when factoring in fees and commissions).

It appears there has been some truth to that, because according to Bloomberg, Zillow, which acquired more than 3,800 homes in the second quarter, "will stop pursuing new home purchases as it works through a backlog of properties already in its pipeline."

While Zillow is best known for publishing real estate listings online and calculating estimated home values – called Zestimates – that let users keep track of how their home is worth (with the traffic on the company’s apps and websites serving as the main source of profits in Zillow’s online marketing business), more recently it has been buying and selling thousands of U.S. homes. In 2018, the company launched Zillow Offers, joining a small group of tech-enabled home-flippers such as OpenDoor, known as iBuyers. In the new business, Zillow invites homeowners to request an offer on their house and uses algorithms to generate a price. If an owner accepts, Zillow buys the property, makes light repairs and puts it back on the market.
While the service was firing on all cylinders in the aftermath of the Covid crisis when home prices tumbled only to shoot back up to all time highs, rising at a record 20% Y/Y pace, in recent months it has found flipping to be far more challenging as the pace of flips has slowed drastically in a housing market where most of the first time buyers now find themselves priced out.

However, instead of admitting that we may be nearing (or have already passed) the peak of yet another housing bubble, Zillow has instead blamed "operational capacity" and being short staffed to meet the pace of transactions.

While the iBuying process is powered by algorithms - which as the anecdotes above suggest may way above fair value - as well aslarge pools of capital, it’s also reliant on humans. Before Zillow signs a contract to buy a house, it sends an inspector to make sure the property doesn’t need costly repairs. After it buys a property, contractors replace carpets and repaint interiors.
So joining the vast majority of US corporations which blame lack of workers on reduced output (it could, say, hike wages to quickly offset its staffing challenges), Zillow has blamed the lack of workers to perform the menial home-flipping tasks.

Staffing shortages have reportedly been exacerbated by Zillow’s willingness to let customers set a closing date months into the future, meaning it could agree to buy a house in August and begin renovating it in November.


None of this of course would be an issue if Zillow merely hiked wages, a step that would immediately fill all the vacant positions and resolve its "stated challenges" overnight at a tiny hit to profit margins. The fact that it has not done so suggests that the cause has nothing to do with the stated reason for the flipping pause. Instead, the most likely reason why Zillow is pulling back from robo-flipping is that the housing market is starting to crack and this particular segment is no longer profitable.
In any case, according to Bloomberg, pausing new acquisitions will allow the company to work through its backlog, the narrative goes. Yet while both Zillow and Opendoor briefly stopped buying homes in the early days of the pandemic, the companies ultimately benefited from the housing boom that started when early economic lockdowns lifted, it still took Zillow several months to resume purchasing homes at its pre-pandemic pace.
Curiously, while Zillow is putting roboflipping on hold, Opendoor has no such "worker shortage" issues despite having a similar business model.
“Opendoor is open for business and continues to serve its customers with a simple, certain, fast and trusted home move,” a spokesman for the company said in an email.
It may be open, but one wonders for how long: Zillow has said it plans to refer potential customers to traditional real estate agents (and, by extension, its competitors). It would not be doing this if it was handing over not just market share but also potentially generous profit margins.
As such, the real question is whether Zillow's move may the first sign that the US housing market has finally peaked and - with rates expected to keep rising for the foreseeable future along with inflation - it's all downhill from here.
18,29442
:)
 

David Goldsmith

All Powerful Moderator
Staff member
I've been saying for some time I don't see the long term plan. Unless you have large margins (my various groups target number has always been 70% of market) or a rapidly rising market I don't see how you succeed.

Zillow Quits Home-Flipping Business, Cites Inability to Forecast Prices​

Termination of ‘iBuying’ comes after company said it was halting new home purchases for rest of 2021​

Real-estate firm Zillow Group Inc. ZG -11.52% is exiting from the home-flipping business, saying Tuesday that its algorithmic+ model to buy and sell homes rapidly doesn’t work as planned.

The firm’s termination of its tech-enabled home-flipping business, known as “iBuying,” follows Zillow’s announcement about two weeks ago that it was halting all new home purchases for the rest of the year. At the time, Zillow pointed to labor and supply shortages for its inability to renovate and flip houses fast enough.

In a statement Tuesday, Chief Executive Rich Barton said Zillow had failed to predict the pace of home-price appreciation accurately, marking an end to a venture the company once said could generate $20 billion a year. Instead, the company said it now plans to cut 25% of its workforce.

“We’ve determined the unpredictability in forecasting home prices far exceeds what we anticipated and continuing to scale Zillow Offers would result in too much earnings and balance-sheet volatility,” Mr. Barton said.

Zillow and other tech-powered house flippers, known as iBuyers, purchase homes, renovate them and then try to sell them quickly, making money on transaction fees and home-price appreciation. Zillow used an algorithm to make home price estimates, called the “Zestimate,” and determine what it would pay home sellers.

Ultralow mortgage-interest rates and a need for more space to work from home have driven robust home-buying demand in the past year and a half. Prices have climbed sharply in almost every corner of the U.S.

“It feels like this would be a hard time to lose money buying and selling houses,” said Benjamin Keys, professor of real estate at the Wharton School of the University of Pennsylvania. “This is a time frame where prices have gone up in a lot of places, dramatically.”

In recent months, sky-high prices have forced out some buyers, and the market has showed signs of cooling off, as many economists expected. The median existing-home sales price rose 13.3% in September from a year earlier—still unusually robust, though down from 23.6% year-over-year price growth in May, according to the National Association of Realtors.

Even this gradual tapering in price growth flummoxed Zillow’s algorithm, leading the company to pull the plug on the venture.

Zillow’s class C share price was down 10% on Tuesday, falling before the company announced after the market closed that it would end home flipping. Shares continued to slide in after-hours trading.
 
Last edited:

David Goldsmith

All Powerful Moderator
Staff member
This is the best part:
"Zillow’s stumble also raises questions about its core product, which is built around its value estimates. Aaron Edelheit, who began buying houses in the wake of the Great Recession, tweeted his thanks to Zillow for paying “such an extremely high price” for one of his properties this summer. “It appeared they were panic buying,” Mr. Edelheit, who is leaving the real estate market to focus on cannabis, told The New York Times’s DealBook newsletter. “I didn’t get it. I should have shorted the stock.”

Zillow, facing big losses, quits flipping houses and will lay off a quarter of its staff.​


Zillow, the real estate website known for estimating house values, said on Tuesday that it would exit the business of rapidly buying and selling houses amid heavy losses and that it planned to let go about nearly 25 percent of its employees.
The announcement was a major strategic retreat and a black eye for Richard Barton, Zillow’s chief executive, who founded the company 16 years ago and has long talked about transitioning Zillow’s popular website into a marketplace. Last year, Mr. Barton predicted Zillow Offers, which made instant offers on homes in a practice known as iBuying, could generate $20 billion a year.
On Tuesday, Zillow, which said it has 8,000 employees, said the division had been the source of huge losses and had made the company’s overall bottom line unpredictable. Zillow Offers lost more than $420 million in the three months ending in September, roughly the same amount that the company had earned in total during the prior 12 months.

“We’ve determined the unpredictability in forecasting home prices far exceeds what we anticipated,” Mr. Barton said in a statement accompanying its quarterly financials.

Mr. Barton, speaking on a conference call with analysts on Tuesday afternoon, said the decision had “weighed heavily” on him. “We could blame the current losses on exogenous market events,” Mr. Barton said. “But it would be naïve to predict that unpredictable events won’t happen in the future.”
In all the company lost nearly $330 million in the third quarter, which was far worse than Wall Street analysts had predicted. The company made a $40 million profit in the same period a year ago.

Shares of Zillow have fallen more than 50 percent from a high of nearly $200 in February, when it was still a darling of investors as the housing market heated up. The stock dropped 11.5 percent on Tuesday to about $85.50 before it released its financials, and a further 7.5 percent in after-hours trading. (Even so, Zillow’s shares are worth double what they were at the beginning of the pandemic.)

Three years ago, the company announced plans to employ its pricing estimates to buy and sell houses. Now, Zillow is sitting on thousands of houses worth less than what the company paid for them. Last month, Zillow announced it would temporarily stop buying new homes. At the time, it blamed a lack of workers to fix up and sell the houses it had bought. But on Tuesday, Mr. Barton said using its algorithm to buy and sell houses had not produced predictable profits. It is now looking to offload its remaining 7,000 houses.

It appears the company underestimated the risk of holding houses in between transactions, which was a departure from the low-risk, high-margin ad business. And it tried to quickly ramp up its home-flipping business to 5,000 transactions a month, which Mr. Barton set as a goal, in a housing market that was already low on inventory and was starting to cool off.
Zillow’s stumble also raises questions about its core product, which is built around its value estimates. Aaron Edelheit, who began buying houses in the wake of the Great Recession, tweeted his thanks to Zillow for paying “such an extremely high price” for one of his properties this summer. “It appeared they were panic buying,” Mr. Edelheit, who is leaving the real estate market to focus on cannabis, told The New York Times’s DealBook newsletter. “I didn’t get it. I should have shorted the stock.”
 

David Goldsmith

All Powerful Moderator
Staff member
I'm willing to bet that they set goals as to how many buys they had to make and someone(s) got paid to hit those numbers. So they overpaid just like everyone else buying these same houses over the last year because that's what it took to do the kind of deal volume they "needed."

As I've said for a while, everyone is going to take the offers they made which were too high and almost no one was going to take the offers they made which were too low, so there's no "averaging out" of gains and losses. And it looks like there were people buying houses solely to flip to Zillow because they figured out what they were overpaying on (perhaps some of them even had some inside info about that?)

What happened at Zillow? “Drinking your own Kool-Aid,” for one​

Zillow tries to move past iBuying fiasco while investors, public balk at pricing issues​

The red lights were flashing all summer long — if you knew where to look.
Homebuyers took to Twitter to complain that Zillow’s much-vaunted estimates were wildly out of sync with market prices. Sellers were just as eager to crow about how much the Seattle-based company agreed to pay over asking prices. It was a big problem for a company that had bet its financial future on a computer algorithm to let it quickly buy and sell homes at a profit.



Two months later, @DrSCubed chimed in:



And in September, it was the turn of @YourComicMuse:



Last month, @philparkbot related another personal tale:


That tweet went up on Halloween. Zillow shut down the homebuying business two days later and its shares lost a fifth of their value today alone.

It’s by no means unusual that dissatisfied consumers turn to social media, in many cases banding together to bring about change on a practical or political level. And it’s not hard to push conspiracy theories that include Zillow plotting to artificially send home prices higher for its own purposes. Yet iBuying hardly has a national platform big enough to accomplish that goal. What stands out is that so many people had been pointing out for so many months that it didn’t have a handle on pricing — and yet the company held fast.
The end, when it came, took less than a month. On Oct. 18, the company said it would “pause” Zillow Offers, which it had acquired almost 10,000 homes in the third quarter alone. Then, on Monday, Zillow said it wanted to unload about 7,000 homes, seeking almost $2.8 billion. A day later came the final blow: It scrapped the business entirely and said a quarter of its staff would lose their jobs.

The official reason: It was just too hard to forecast home prices three to six months in advance.
“Put simply, our observed error rate has been far more volatile than we ever expected possible, and makes us look far more like a leveraged housing trader than the market-maker we set out to be,” CEO Rich Barton said on an earnings call on Tuesday.
The heart of Zillow’s mistake was a controversial, though well relied-upon method for forecasting prices known as the Zestimate, an automated property valuation tool. The company says Zestimate’s median margin for error nationally is 1.9 percent for listed homes and 6.9 percent for those that aren’t listed. Properties that receive a Zillow Offer are by definition off-market as they have not yet been publicly listed.

Zillow insists that the Zestimate is “a starting point.” Spokesman Viet Shelton said in an email that the company remains “confident” in its accuracy and that “we continue to improve it every day.”
Consumers disagree.


Relying solely on one’s own valuation tools is a red flag, said Ralph McLaughlin, chief economist at real estate data and analytics company Kukun.

“It’s kind of like drinking your own Kool-Aid,” he said. “You do want to keep that process at arm’s length and it doesn’t seem like Zillow did that.”
The end of Zillow Offers was a bitter pill for Barton, who founded the company in 2005 with Spencer Rascoff and Lloyd Frink. Barton stepped down as CEO after five years until stepping down in 2010. He returned to the C-suite in February of 2019 after serving as executive chairman, replacing his co-founder in the top role and quickly began a pivot into iBuying, the
catchy handle for algorithmically driven instant-homebuying.
At the time, the move made sense. Zillow said it was getting requests for an offer every five minutes. By as soon as 2022 at the earliest or at least by 2024, it would be buying 5,000 homes a month and the unit would be reaping $20 billion of revenue a year. With Barton at the helm, investors and analysts lauded the wager.

“I have a certain penchant for and attraction to big swings,” Barton said.
And competitors were already a step ahead. A few months after he was installed as CEO, Barton told The Information that OpenDoor represented an “existential threat.” He likened the shift to the decision by Netflix, where he was a board member, to produce its own content — freeing the company from drilling its own oil wells.
“If it works and we don’t do it, we get displaced as the marketplace,” he said.
It didn’t. Zillow recorded a $304 million writedown on its almost 10,000 homes in the third quarter after “unintentionally purchasing homes at higher prices than our current estimates of future selling prices.” It expects to write down another $265 million in the fourth quarter on top of $230 million to close the unit.

Instead of the billions of dollars Zillow expected to earn, it ended up losing $328 million in the third quarter alone. It’s still in contract to buy another 8,000 homes. And Zillow bulls took a bath: the stock lost more than half its value since peaking in February — during one of the nation’s biggest surge in home prices. As the shares plummeted today, about 62 million changed hands — more than 15 times the daily average volume.
Some investors were undeterred. Cathie Wood’s Ark Investment Management, which holds a 5.5 percent stake in Zillow, bought 288,813 shares through her flagship exchange-traded fund on Wednesday, according to Bloomberg. Ark didn’t respond to a request for comment. Other major Zillow holders, including Vanguard which owns 6.6 percent stake, JPMorgan Chase which owns 5.8 percent stake, and Baillie Gifford with a 4.6 percent stake, declined to comment.

While analyst Jason Helfstein at Oppenheimer didn’t cut his “perform” rating for Zillow, he said in a note on Wednesday that management must “focus on the next iteration of agent products,” something that will take a while. “The majority of Zillow’s revenue is now tied to the real estate cycle, and therefore should not trade at a secular growth multiple,” he wrote.
What’s next for Zillow? A return to the status quo. The company will “focus on the broader problem — helping people move,” Barton said on yesterday’s call.
If there are winners, it’s those who profited from Zillow’s mistakes.
 

David Goldsmith

All Powerful Moderator
Staff member

Pretium Partners picks up 2,000 Zillow homes to kick off iBuying wind-down​

NYC-based investment firm plans to rent houses​

The great sell-off has started for Zillow as 2,000 of its homes are changing hands to an investment firm.
New York City-based Pretium Partners has agreed to buy thousands of homes from Zillow, according to the Wall Street Journal. It’s not clear how much Pretium paid for the homes, but Zillow reportedly received market price on them.

The homes are located in 20 different markets in the United States. The deal reportedly expands inventory for Pretium’s single-family rental business that was already 70,000 homes strong.

For Zillow, it’s the beginning of what could be a lengthy process to end its three-year-old iBuying business. After citing a backlog of 7,000 homes and halting new purchases last month, the company announced it is dissolving its failing iBuying business and laying off a quarter of its staff.
Zillow owns 9,800 homes it needs to sell in the wind-down, the Journal reports, in addition to 8,200 it was in contract to buy. The company anticipates losing between 5 and 7 percent on the sale of its tens of thousands of homes.
Pretium is not the only company eyeing Zillow’s inventory for single-family rentals. American Homes 4 Rent, a Calabasas-based REIT, is also in the early stages of talks with Zillow.

Dallas-based Invitation Homes has also been involved in talks over home purchases, the Wall Street Journal previously reported.
The single-family rental market is a hot one, as investors are seeing an average expected risk-adjusted return on built-to-rent investments of 8 percent, according to Green Street. Through the end of July, asking rents on single-family homes had risen nearly 13 percent year-to-date, its highest increase in five years.

Pretium was recently in the news for the wrong reasons, in the crosshairs of a House select subcommittee for allegedly forcing out renters during the CDC’s eviction moratorium.
you navigate through the website.
 

David Goldsmith

All Powerful Moderator
Staff member

cp7ieAWRD3xvRs9afvw38r5jmjkqkXDpIFX_G51cTnMUhfiq90VcNwT_EjhoNNKdEsk-TUF-kQK5HsHwiHfFfiZ-A1U_6scGo_jEcaXoV7gM8d7o2X0VhasUOpjewR5rJWD2ZJHLWbaRrWIKksz_EtUECUZuKghuCGk=s0-d-e1-ft
More from Mike Delprete

iBuyer Market Share Rockets to New High​


Before Zillow's meltdown, national iBuyer market share surged to another all-time high, blowing past all previous records by a wide margin. In Q3 2021, iBuyers accounted for 1.6 percent of all homes purchased in the U.S. That's around 28,000 homes, nearly double the 15,000 homes purchased by iBuyers in Q2.
XDJA8Aa-LdjHtLRSX1LjLEI5RsyYtLM5yPwo9H6HvyOFbDe4YswcrV3-67uiRRoMmXLWjHSF8fNM5YF_2MfxjYc2f5uqb6jD6ExrcoyKl-f1Hl_rgAt3SAT139ffnUm5bpfTt0k4D33Pclv88H7K8H264UJagQ=s0-d-e1-ft

The situation will certainly change with Zillow exiting the market and seasonality kicking in during Q4 2021. But for the time being, iBuyers have never been bigger, and Opendoor is now left as the undisputed category leader.

Also noteworthy: iBuyer Market share in Phoenix, the largest iBuyer market, peaked to a new high of 10.8 percent. This is the first time iBuyers have exceeded 10 percent market share in a major market -- a significant, if temporary, achievement.
N_fkgFB61pJkPEAYne3Etx9PSj_8BSlIvnAY3u1BsQar82nE5uAX0iKbaRxHsypvHtSkHyC8KcLDD_8kP82vHJuGFaAAWpNFXp7W1N_1Tz9eN6lvbGfAezpzYiG396UdNHxYbfFUI8LdMHHIG173U01fHzqLrQ=s0-d-e1-ft

Opendoor's Earnings: Painfully Normal​


Both Opendoor and Zillow scaled their iBuying operations tremendously in Q3, but while Zillow's business spectacularly imploded, Opendoor demonstrated critical economies of scale. As it grows, its net loss per home is improving.
NFZ1RtJTR9fix6vjGUJGHsLPbMeDQ5R-mYFONan_F_lXcJIDNJnrnJIeZVHvVatpLx9PNVRcr04pbdHkTAlZ_a75fh7GAqfkzbNIEOs1lBZrcA-OnM1egIEhjzuO46JB1ACTydI3yO_GSfc2eyLOgmBzMhRdVw=s0-d-e1-ft

These charts show net profit/loss based on simple math: total net profit/loss for the business divided by the number of houses sold (excluding stock-based compensation expense). The result is a benchmark of business model efficiency.

While Opendoor and Offerpad improved their net profit/loss in 2021 (benefiting from record home price appreciation), Zillow's just got worse (and that's excluding the $304M inventory writedown) -- another reason Zillow Offers just wasn't working out.
XZ5R4kg79PSK8gpJ52SW_j_tCmlbHosc0lNusy-mjpraeZPre7PnWsvyBLxuTazgRf5G9zdia4DGZR-d6PyNmBojJjr0EaW7Iz-YPR3_mLctMCt6DmNWDZzcULCH2OQq-Tmlk5e0-i3O2GDbqzH_PX5jJ-Fvcg=s0-d-e1-ft

As it scales, Opendoor's revenue (and gross profits) are increasing faster than fixed and variable costs. That's a positive sign, and something critically important to Opendoor's growth and profitability narrative.

 

David Goldsmith

All Powerful Moderator
Staff member
And here come the lawsuits.
Zestimate: These two Zillow iBuying lawsuits won’t be the last

Burned shareholders allege company misled investors, delayed disclosing adversity​

Zillow is facing two class-action suits for allegedly misleading investors and failing to inform them in a timely manner about the struggles of its iBuying business.
More lawsuits may be forthcoming as Zillow does damage control in the wake of closing Zillow Offers, through which it used a proprietary algorithm to buy and sell thousands of homes. The company shuttered its iBuying business in early November just after apparently pausing it. It laid off a quarter of its staff as it canceled Zillow Offers, citing the unreliability of its model for forecasting home prices.


“Put simply, our observed error rate has been far more volatile than we ever expected possible, and makes us look far more like a leveraged housing trader than the market maker we set out to be,” Zillow CEO Rich Barton said at the time.
It’s not clear that its real-time pricing was accurate either, as accusations flew that Zillow was overpaying for homes.

The federal lawsuits, filed Nov. 16 and Nov. 19 in Seattle, are similar, and both seek class-action status on behalf of shareholders who acquired the stock between Feb. 10 and Nov. 2.

Both lawsuits accuse the company of drumming up positive sentiment about its iBuying activities with “materially false and/or misleading statements” in the months before it closed the operation, and of failing to disclose “material adverse facts” surrounding them.

The suits name co-founder and CEO Richard Barton, CFO Allen Parker and COO Jeremy Wacksman as defendants alongside the company.
“We are aware of the lawsuit filed yesterday and are currently reviewing it. As a general practice, we do not discuss pending litigation,” a Zillow spokesperson said by email.

Zillow’s stock price has fallen by nearly 50% since late October, when it first revealed the challenges within its iBuying business. It is common for shareholders to seek redress after a public company’s stock falls steeply in value.
Zillow’s board of directors made the decision to “wind down” Zillow Offers “in light of home pricing unpredictability, capacity constraints and other operational challenges faced by Zillow Offers that were exacerbated by an unprecedented housing market, a global pandemic and a difficult labor and supply chain environment,” the company said in a third-quarter filing.

Attorneys representing the lead plaintiffs for the two lawsuits, Dibakar Barua and Steven Silverberg, could not be reached for comment.
Earlier this month, New York City-based Pretium Partners inked a deal for 2,000 of the nearly 10,000 homes Zillow acquired through its iBuying activities for an undisclosed price.
Zillow has said it will sell the rest to all types of buyers, from individuals to institutional investors.
 

David Goldsmith

All Powerful Moderator
Staff member
"He never predicted how difficult it is to renovate a home and close it and put it back for sale," Corcoran said, referring to Zillow's CEO. "So he really bit off a lot more than he envisioned."
 
Top