iBuying companies (like Opendoor, Redfin, or Zillow) are facing a real storm with economic headwinds. Housing real estate overall has seen a dip from all-time highs of the pandemic-fuelled growth. The housing market is grappling with the fear of recession and high-interest rates.
iBuying is a tool that enables companies like Opendoor or Zillow to use AI to buy houses from sellers and then flip them to a buyer. Seller usually goes to iBuyers when they are looking to make a quick sale.
On paper, this looks like a great opportunity. AI uses all sorts of indicators on the property and provides a price for companies (Opendoor or Zillow) to buy. The seller gets the market rate and saves on commission. The process is fast. (See the image below).
Well, not all is hunky dory. Especially with the tides turning in the real estate market. Opendoor for example bought more houses than it can sell. Right now they are trying to sell as much of their inventory as fast as humanly possible. EVEN AT A LOSS.
Zillow had a similar fallout, where Zillow offer’s (the iBuying tool of Zillow) which accounted for 61% of the company’s revenue in Q4 2021, was shut down. The reason was Zillow Offer’s was a loss-making business. The revenue was rising but it cost more than it provided.
The strategy behind the iBuying business is simple – SUPPLY AND DEMAND. iBuying requires quick turnover. All factors that I listed above – Supply, Demand, and Quick turnover are highly dependent on market and economic conditions. Look at this quote below from Wired, which states that the time a property spent on the market has increased by 30% over the last year.
While prices in Phoenix increased during the pandemic from $445,000 in August 2021 to $549,300 in August 2022, the amount of time properties spent on the market before sale rose 30 percent in the same time period, indicating that buyers were thinking harder about their purchases—a problem for iBuyers, who rely on quick sales.
Usually, iBuyer profit is in the range of 5%. If iBuyer missed the mark on buying at the right price, it is certain that the property will result in a loss. The biggest issue with iBuying is the AI model which has to predict the price of a property. When uncertainty rises iBuyers usually fail. Economic conditions need to be supportive of iBuying as well. Right now we are in the middle of turmoil.
With interest rates soaring, recession looming, a war not ending, and oil struggling – the real estate market will be fastest to lose steam in the coming months. This for sure is not a good sign for iBuying companies.
PS: We are still to see a situation where iBuying was a success. Both Zillow and Opendoor have struggled. Zillow closed its offering and Opendoor is considering similar options. Shareholders will surely make some noise.
Crazy times demand that we stay cool.
Cheers
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