Zillow and Opendoor ride the iBuying wave — Redfin, not so much -

Zillow and Opendoor ride the iBuying wave — Redfin, not so much

December 22, 2020

Real estate has been one of the slowest industries to adopt technology but over the past decade, a suite of tools has digitized the homebuying experience:

  • Zillow ($Z) offers an online marketplace to buy/sell your home.
  • Redfin ($RDFN) is a real estate brokerage that focuses on using technology to service clients while offering lower agent commissions.

But in 2020, it’s all about iBuying — the new model on how you buy/sell your home. On Dec. 21, Opendoor ($OPEN), the leading iBuying platform, had its stock market debut.

Digitizing the home-flipping business

Using technology, iBuying platform assesses and makes an all-cash offer to buy your property within 2 days of application — speeding up the process of home selling. iBuyers then resell your property on their platform.

Two players that dominated the US iBuying market:

  • Opendoor controls 64% of the market in 2019.
  • Zillow launched its iBuying product in 2018 and has grown to control 18% of the market in 2019.

The headaches of iBuying

In the past 2 years, iBuying has seen tremendous growth but the model has its problems:

  • Large initial capital — iBuyers platforms must take on large amounts of debt to finance home purchases.
  • Low margins — iBuying platforms receive a small fee on home purchases and looks to make a profit in reselling the property.
  • Reliant on the health of the real estate market — if the real estate market falls, iBuyers will be heavily impacted.

iBuyers earn ~11% on each transaction but the majority goes to covering transaction costs — agent commissions, closing fees and property repairs.

What’s left over (<4%), goes to paying sales & marketing, salaries and other general expenses. In the first 9 months of 2020, Opendoor lost nearly $200m.

iBuyers must rely on selling additional services for profitability — home financing solutions, escrow and insurance

For investors… Riding the iBuying wave

2020 was a good time to be in iBuying stocks…

  • Zillow’s iBuying business has grown 85% in the first 9 months of 2020 and its stock increased over 200%.
  • Social Capital Hedosophia II, the SPAC that took Opendoor public, increased 200% in the 3 months after the acquisition announcement.

With iBuying accounting for just 0.5% of the total US real estate purchases, iBuying has lots of room to grow. In some cities, iBuying has reached as high as 6.8% of home purchases.

But to become a viable long-term business, iBuyers must find a way to profitably buy/ sell properties.

More resources on Opendoor’s business…