The world of iBuying has grown significantly in recent years. In Q1 of 2021, the country’s top iBuying companies bought around 15,000 homes, almost double from the previous quarter and 5,000 more than the previous record. iBuying is when a company uses an algorithm to price a home, making an offer to the seller in cash within minutes and closing in a matter of days. Sellers may sell their homes below market price, but they do so because of the speed and reliability that comes with the iBuying process. In turn, tech companies renovate the home and flip it for a profit. This process was pioneered by Opendoor and several other companies have followed suit, including MLS giants like Zillow and Redfin. However, even with large institutional backing, there are uncertainties in buying and selling a home using automated technology because of the sub-par returns to date.
Zillow created its iBuying platform, Zillow Offers, in December 2019. Just two years later, it is officially shutting down the operation. For Q3 2020, Zillow Offers generated $186 million in revenue from iBuying. For Q3 2021, that revenue increased to $1.17 billion, but the company also incurred a loss of $422 million even with the tailwinds of a robust housing market. These steep losses caused the company to end its iBuying efforts and lay off 25% of its staff. Zillow blamed its struggles on supply chain issues due to materials and labor shortages. While Zillow may be out of the iBuying picture, the business model continues to expand.
Are these iBuyers, backed by institutional capital, pushing up home prices for the average American? Recently, The Real Deal published an article about the warning signs of Zillow’s buying practices and how frustrated home buyers were being outbid by Zillow. From Zillow’s data, iBuying accounted for 1% of all home purchases in the United States in Q2 2021. However, the caveat is that the iBuying companies are focused in certain regions with the most growth in valuations – so in hot housing markets such as Atlanta or Phoenix where iBuying accounted for over 5% sales, home valuations would be more impacted.
It is yet to be determined if iBuying is a viable business model or not. In Q2 of 2021, Opendoor was the most active iBuyer in America and posted its first profit. However, the profits were slim and in the following quarter, the company took a loss. Many technology companies need scale to become profitable; however, with home prices continuing to reach all-time highs, one would think that iBuying could be very profitable across the board. Opendoor’s success can be attributed to its accurate algorithm while Zillow’s struggles were primarily due to its faulty algorithm that often led to overpaying for homes. One of the major issues with flipping homes at scale is that unless companies focus on master-planned communities, every home is unique and will have its own issues. It is difficult to develop algorithms that can predict all of the factors that go into a renovation because each situation is different. Although iBuying presents a benefit to the sellers in terms of a guaranteed quick closing, it might not be a profitable business model. In order to achieve a successful iBuying program, everything from the construction materials needed to the cost of each renovation must be perfectly calculated. This will only happen if iBuying companies bring more of these processes in-house. Recently Opendoor acquired online mortgage brokerage RedDoor. The acquisition will streamline the sales process and create synergies within the company. For companies like Zillow that have failed to build a sustainable iBuying platform, they can grow their operations to encompass more functions of the home buying process by acquiring mortgage brokerage firms, title companies, and homeowner platforms like Porch.com, simplifying moving, insurance, and home improvements. Companies such as Opendoor that have had some success with iBuying might be able to make iBuying a viable business if they continue to refine their technology.
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