Where does iBuying go from here? Waving Goodbye to Zillow Offers...
After Zillow's announcement of it's withdrawal from iBuying, a look at what got us here and where we go next
iBuying has probably been one of the most interesting trends in real estate over the past decade.
For the uninitiated, iBuying is way for people to sell their homes directly to a company which promises a quick offer (in some cases, it’s within 24 hours) to purchase their home, after they upload details of their property online. If the sellers are satisfied with the offer, the company sends a physical representative to validate if the home is in the same condition as promised earlier, if it needs any repairs, and if it needs to update it’s earlier offer. Once the details are finalized, the move out of the sellers is coordinated and the money is wired quickly (in some cases, the entire transaction completes within 1 week!).
iBuyers include companies like OpenDoor, OfferPad, Zillow Offers and RedfinNow - All of whom have focussed on this offering over the past few years. They use a combination of high quality data science and algorithms to estimate the ideal purchase price of each home and forecast the demand for the same in the next few months, and couple that with operations team of surveyors and real estate agents to execute the business on the ground.
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iBuying has primarily been happening only in the US, so this article will focus on that market alone. But keep in mind, the opportunity of iBuying can be extended to any other country as well.
How big is iBuying?
Given most of the iBuyers are publicly traded entities, we have access to high quality data about the fundamentals of the business.
About 14,000 all homes were bought in Q2/2021 were by iBuyers, which represents a little less than 1% of all homes bought in the same period in the US. In certain cities like Phoenix, Rayleigh and Atlanta, the number is around 5% (Check the table below for Q3-2019 data).
% of homes bought by an iBuyer - Courtesy NY Times
Perhaps the most interesting trend in iBuying has been the speed of growth by many of the companies. Coming out of the pandemic in Q3/2020, almost all companies have been increasing their rate of purchase of homes by almost 100% EVERY QUARTER for 4 straight quarters now (Chart below is from Mike Del Prete - One of the leading researchers around the iBuying industry)
iBuyers growing at an astounding 100% every quarter for the past few quarters
Trouble in Paradise - Zillow Exits iBuying
Mid Oct-2021, Zillow announced that it would stop buying any new homes till the end of the year. It said it had run into issue pertaining to labor shortage and supply chain, which was which forced it’s decision. This was closely followed by news that Zillow was selling 7,000 homes to institutional owners.
On 3-Nov-2021, Zillow announced that it is exiting the iBuyer business altogether. In a long LinkedIn Post, Co-Founder and CEO Rich Barton said the company had challenges in accurately forecasting future demand of homes accurately enough to make the business viable. He also added that the business has far too much volatility and requires too much investment of Zillow’s equity capital to make sense for them to continue operating the business.
Much of this isn’t surprising. Zillow’s unit economics on Offers’ business has not been impressive, in comparison to it’s competitors. In Phoenix for example, the company, on average, listed it’s homes for 6% lesser than it’s purchase price compared to OpenDoor which has been listing at 1% over it’s purchase prices.
In simpler words, Zillow sold homes for $29,000 lesser (on avg) than what it bough them for
In Q3-2021, Zillow posted a loss of $422M on it’s Offers business, which is an exceptionally high number given that it’s core business (in media and marketing) posted a revenue of $480M in the same period. By the time all of it’s current homes are sold, it is expected that Zillow would have lost close to $1B on it’s Zillow Offers program.
Where does Zillow go from here?
Zillow’s core business around media, marketing and technology is about 17 years old and is growing @ about 20% YoY on a base of about $1.5B a year. While those are impressive numbers, it is probably not the reason Co-Founder Rich Barton came back to the company as CEO. Notably, Richard has also cofounded companies like Glassdoor and Expedia and serves on the Board of Netflix.
The company has increasing been moving away from it’s classifieds business into transactions, with Offers being it’s largest bet. With Zillow pulling out of the iBuying market, it might be interesting to see if it opens it’s marketplace for other iBuyers like OpenDoor and OfferPad to list their properties.
‘Power Buying’ as a concept has seen a strong pull in the market recently as well. Companies like Knock are empowering home buyers with cash backed offers on their new home purchases, or new age solutions to buy their next home before selling their current home. It’s hard to see Zillow not going after a piece of this pie. Zillow Home Loans has been one area of interest where it has been increasingly investing more of it’s efforts, wherein it hopes to sell mortgages to buyers. It’s an easy bet that they would go deeper into the ‘Power Buying’ market.
Zillow Rental Manager has been another such area where it provides tools to small landlords to list their rentals, screen tenants, sign leases and collect rent - All in 1 product. It already owns HotPads for rental listings, and it is expected to go deeper into the rental value chain.
I was planning on writing more, especially about what Zillow’s exit means for OpenDoor as a company, but decided against it. Do you think I should? Drop a comment/reply and tell me if you would like a detailed piece on what OpenDoor is up to and what it’s next steps are likely to be!
Sources and Links
https://www.mikedp.com
https://www.nytimes.com/2020/01/16/realestate/ibuying-real-estate-what-it-is-and-where-it-is-happening.html
https://www.mikedp.com/articles/2021/7/29/ibuyers-are-back-purchase-volumes-and-prices-soar-to-record-highs
https://www.mikedp.com/articles/2021/11/3/zillow-exits-ibuying-five-key-takeaways
https://www.linkedin.com/pulse/here-what-we-told-shareholders-employees-our-decision-rich-barton/?trackingId=uMgfBs8vR7GcU2EMsknowQ%3D%3D
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