HomeReal Estate NewsCommercialWhy Opendoor is going big in iBuying market as Zillow drops out

Why Opendoor is going big in iBuying market as Zillow drops out

The iBuying (instant buying) industry has become a crowded, competitive one of late—in fact it’s become competitive enough that real estate marketplace company Zillow recently announced it was stepping off the field altogether, The Wall Street Journal reports. Zillow’s departure left a vacuum in the iBuying market that companies are more than happy to fill—despite the investment risks that come with entering this arena.

Opendoor now owns a majority of the iBuying market, which could be a massive boon for the company or a major flop. Current numbers point to the former as Opendoor’s sending shares increased 15% not long after the company released its third-quarter financial results. Keep reading to see why companies like Opendoor remain confident in the iBuying market while real estate giant Zillow opted to quit while it was ahead.

What is an iBuyer?

An iBuyer is a company that purchases homes in cash. The company will look at how much other homes in area cost to create a listing or offer on a property. Once an iBuyer purchases a home, it will usually renovate the property so it can resell it at a higher price, commonly known as “flipping”. IBuyers often list their property on a multiple listing service (MLS), hire a third-party real estate agent to sell it or employ an in-house real estate agent.

Selling to an iBuyer is an attractive option to people who either need to sell their home quickly, want to buy and sell a home simultaneously or want to buy and sell at the same time to maximize profits and need bridge financing.

With the final option, an iBuyer fronts the homeowner the money to buy a new house. If the offer is accepted and the person moves in, they then lease the house from the iBuyer and list their old home with a traditional real estate agent. If the seller’s initial home isn’t sold within a certain period of time, the iBuyer will purchase it at a pre-agreed price. This gives the seller the money they need to end the lease with the iBuyer and get a traditional mortgage for their new house.

How has Opendoor succeeded at iBuying?

Opendoor announced it nearly doubled its revenue during the third quarter of 2021, The Wall Street Journal reports. The iBuyer was profitable, when adjusted earnings prior to interest, taxes, depreciation and amortization are considered. Opendoor proved to be more successful than Zillow from a financial standpoint, despite purchasing more homes. The company bought a little more than 15,000 homes last quarter—a 79% increase from the quarter before and 57% more than Zillow purchased.

Additionally, the companies operated on different forecasts. Zillow predicted that further write-downs would lead to bigger losses for the iBuying portion of its business. Opendoor meanwhile forecasted that its losses would be minimal if the company was to lose money on purchasing homes at all.

So, what’s the secret to Opendoor’s iBuying success? It’s possible the company is better at the practice than Zillow was. Meanwhile the smaller Offerpad recently said it also made money on an adjusted Ebitda basis last quarter, according to The Wall Street Journal.

Why did Zillow get out of the iBuying market?

Unfortunately for Zillow, its iBuying division could not match the success it’s had in other parts of the real estate industry. The company recently announced it made a deal to sell approximately 2,000 houses from its house-flipping program. New York-based investment firm Pretium Partners acquired the Zillow homes that are in 20 U.S. markets, according to The Wall Street Journal. The company plans to rent out the properties.

The digital real estate company also plans to sell about 9,800 more homes that it owns and another 8,200 that it was getting ready to acquire. Zillow opted to shut down this part of the business because it had trouble predicting home prices and it was losing too much money. The iBuying venture will likely cost the company more than $500 million, and lead to a quarter of its staff being laid off.

“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,” Zillow Chief Executive Rich Barton said in a statement.

Is iBuying a good investment?

Despite Opendoor and Offerpad’s success, many still believe the risk associated with iBuying is currently not worth the reward. Opendoor had more than 17,000 homes on its balance sheet worth approximately $6.3 billion. That would be a lot to have on hand in a booming market, but it’s even more jarring in a market that’s beginning to trend downward.

There’s still success to be had in the iBuying market, however. It comes down to a company strategy. Offerpad is aiming for slower growth and opted to flip less houses but flip the ones it has really well. It puts more work into fewer properties but can put them back on the market in less time. Opendoor on the other hand has its sights set on rapid expansion as it wants to diversify its markets and gain a leg up in the industry. The iBuyer is currently in twice as many markets as Offerpad (44 versus 21).

IBuyers are also of the belief that opportunities for financial success come from add-on services like mortgage origination and title and escrow, which will grow over time rather than the home flip transaction. There’s also value in operating out of the same locations for extended periods of time. IBuyers can leverage their algorithms and on-the-ground contacts based on a given market’s characteristics.

A good strategy and location are not always enough to endure the risk that comes with entering a new market, however. This is especially true of iBuying, which is already connected to the risky proposition that is the overall housing market.

“We have been willing to take a really big swing on this, but not a bet-the-company swing,” Barton said.

Invitation Homes offers an alternative to iBuying

For those who find the iBuying/house flipping model to risky, there’s always the “old fashioned” model of purchasing a property and renting it out like Invitation Homes does. The company, which leases high-quality, updated homes, has found a lot of financial success with its model. Invitation Homes recently announced that its operating partnership, Invitation Homes Operating Partnership LP has priced a public offering of $600 million aggregate principal amount of 2.3% Senior Notes due 2028 and $400 million aggregate principal amount of 2.700% Senior Notes due 2034.

Meanwhile, Invitation Homes continues to see so much demand for housing, it’s been able to increase its rents almost 11% during the third quarter of 2021, Bloomberg reports. Invitation Homes, which is the largest U.S. rental homeowner, raised rents by 8% on renewals and 18% on leasing homes to new tenants. The company has seen rents rise fastest in the southwest—30% on new leases in Las Vegas and 29% in Phoenix.

“It’s a little bit crazy,” Invitation Homes Chief Executive Officer Dallas Tanner said on a recent conference call with investors. “There just isn’t enough quality housing available right now.”

Where Invitation Homes’ properties are located is part of the reason for the company’s success. The properties are usually more centrally located than those that other traditional landlords own. The convenient location often leads to tenants staying put—Invitation Homes saw a record-low turnover rate last quarter, which helped keep its expenses down. The company’s year-over-year total revenues increased 11% to $510 million while its property operating and maintenance costs increased just 3.6%.

“We are pleased to announce another strong quarter of operating and financial results,” Tanner said in a statement. “Fundamentals remain as supportive as ever, and we believe our ability to identify and capture accretive growth opportunities that complement our portfolio of well-located, high-quality homes is second to none. As a result of these attributes and our execution, including our premier resident experience from our best-in-class teams, we have once again raised our full year guidance.”

“It’s not just its current performance that makes (Invitation Homes) a great REIT to build a portfolio around,” The Motely Fool wrote. “Single-family home rental properties have become a preferred rental unit for many Americans as people look for more space and seclusion in the wake of the pandemic. The majority of Invitation Homes’ portfolio is in the Sun Belt region of the United States, an area experiencing explosive growth and record-high demand.”

What’s the future of iBuying?

Pure-play iBuyers like Offerpad have decided they are more than willing to ride the ups and downs that come with being in this market. The company’s Chief Executive, Brian Bair announced he was happy to see Opendoor achieved a less than 1% variance between its aggregate estimated and actual sales prices since its 2015 launch through the first half of 2021, The Wall Street Journal reports. When asked how Opendoor will handle home price fluctuations going forward better than Zillow did, Chief Financial Officer Carrie Wheeler said the company’s model can succeed in up, flat and down markets and added that Opendoor is, “Very good at this.”

Whether Wheeler’s forecast that Opendoor can succeed regardless of how the housing market is doing remains to be seen. The company only managed $35 million in adjusted Ebitda even though it generated approximately $2.3 billion in revenue during the third quarter. Meanwhile, its public offering filing revealed that it had not recorded a full year of profits, dating back to 2017 at least. Wall Street has forecasted its adjusted Ebitda margin will reach just 1%—in 2025.

At least for now, iBuyers are holding out hope that more people will go online to shop for homes, but who knows when that will be given that 99% of home transactions in the U.S. still happen offline. Time will tell if the demand for iBuying will ever catch up to Opendoor’s appetite for it.

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