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The iBuyer Massacre and Why Most Will Never Survive

On The Market Podcast Presented by Fundrise
40 min read
The iBuyer Massacre and Why Most Will Never Survive

Zillow, Opendoor, and other iBuyers made quite a name for themselves over the past two years. By buying up every house on the block, iBuyers quickly became the “no work, best price, all cash” alternative to selling through an agent or a wholesaler. These huge, wall-street funded businesses were buying thousands of homes in the blink of an eye, doing some quick repairs, and flipping them in record time. But even with all this activity, iBuyers were slowly hemorrhaging money, causing most of them to crash and burn within the past year.

Now, all that’s left standing is Opendoor and Offerpad, two of the most experienced iBuyers around. But will either of these giants survive until the end of 2023? With home prices starting to plummet, interest rates rising, and last year’s homeowners not looking to move, will Opendoor and Offerpad bleed out before they get another shot at this wild housing market? We brought in real estate tech strategist, Mike DelPrete, to give his opinion on the future of iBuyers.

Mike has been watching iBuyers for a while. He’s seen them creep into towns, buy up inventory, just to sell at a loss months or years later. He knows what competition looks like for real estate investors, and he doesn’t think iBuyers offer much of a threat. Mike walks through the current state of iBuyers, how they could end wholesaler and realtor careers, why most iBuyers were designed to fail, and why companies like Opendoor and Offerpad may be forced to pivot strategies very soon.

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Read the Transcript Here

Dave:
Hey, what’s going on everyone? Welcome to On the Market. I’m your host, Dave Meyer, joined by Jamil Damji today. I was going to ask how you’re doing, but now I know you’re dancing, you’re singing already.

Jamil:
I’m super good. Yeah, this is fun.

Dave:
Last time I saw you, we had a team call on Monday, you were going to Disney World. How was it?

Jamil:
It was incredible. I went to Disneyland with six 16 year olds and I survived. Actually, I have a beautiful family and I got a great kid, and well, we had a lot of fun. I got to ride some rise. I ate Turkey leg, had some Dole Whip, what could be better in life.

Dave:
Yeah, that sounds lovely and I’m glad you had a good time. Well, today we have an episode that we’ve been talking about and wanting to do for a long time, and that’s talking about iBuyers and we have one of the foremost experts I think in the world talking about real estate technology in general. Mike DelPrete, he’s not an investor, but he’s a professor of real estate technology. He knows everything about this, and we had a great conversation, but the conversation, we obviously already filmed it. We sort of go right into it. So before we go into the interview, I’d love to just quickly explain what iBuying is. You’re pretty familiar with the topic, right?

Jamil:
Sure. So what I have seen iBuying as, how it works is, it’s essentially a convenience purchase. So a company will come in and give a homeowner a convenience offer, typically a cash offer, and they’ll provide all of the ease and flexibility that that offer should provide. So cash, quick closing or flexible closing, flexible terms, lease backs, post-possessions, all of the ways that a homeowner can get maximum flexibility, and in return for that convenience, they trade value, they trade some equity.

Dave:
Yeah. And so basically as a seller, you could go on Zillow, sort of the famous one, but there are several Offerpad and Opendoor publicly traded companies. Redfin was doing this for a while. You can go on these websites and it’s like if you’ve ever seen that instant offer kind of thing, like Jamil was saying, they’re just making this convenient for you. And it’s been this sort of hot topic, especially I think in the real estate investing community over the last couple of years because in some ways, and I think people can argue this and we’ll talk about this, it does threaten or you could make an argument that it threatens real estate investors because they’re going after some of the, let’s call, the motivated sellers that real estate investors typically target.
And I’m not going to spoil it, but that’s sort the framework of why we wanted to have the conversation here with Mike and talk about iBuyers because it is a really important trend impacting the world of real estate investing. And I think he sheds a lot of light on how as an investor you should be thinking about this industry. Is there anything else you think our listeners should know before we jump into the interview?

Jamil:
I think, just take notes, because this is an incredibly intelligent conversation about where real estate has been, where it’s currently at, and where it could possibly be going. If you are the kind of person right now that’s trying to determine where should I be, how can I be more forward thinking, how can I be the next innovator? You might find the idea on this episode.

Dave:
Awesome. Well, that’s a great setup. We’re going to get into our interview with Mike DelPrete, but first we’re going to take a quick break. Mike DelPrete, welcome to On the Market. Thank you so much for joining us.

Mike:
My pleasure. Thanks for having me.

Dave:
So can you tell our audience just a little bit about the work you do related to the real estate industry?

Mike:
Yeah, sure. So if we go back in time a little bit, I worked at an internet business that owned a real estate portal, kind of like the Zillow, but it was in New Zealand, so it was the Zillow of New Zealand. And since I left there and returned back to the states, I’ve been studying, well, there’s this question in my mind, which is what are some new ways, new business models that might change how people buy and sell homes? I assume you and a lot of your listeners, people buy and sell homes, it feels antiquated. You’re like, why does it work like this? How come it doesn’t do that? Concurrently, billions of dollars have poured into the space over the past couple years, and there’s a lot of investors and companies and entrepreneurs trying to change that.
So that’s what I’ve been interested in, and all of my work stems from that. So I’m looking for businesses, business models, companies, entrepreneurs that are trying to change how people buy and sell homes. And a lot of that work just comes out as research, reports. I’m a data guy, so I try to find evidence, it’s who’s raised money or issued a press release, but what’s actually working? And then trying to connect the dots between those different data points to enlighten what the trends are, what the insights are, what’s working, what’s not working, and why.

Dave:
Awesome. You’re our kind of guy. That’s going to be a great interview. I’m looking forward to this. But before we jump into some of the recent stuff, I’m just curious, were you in real estate before working in that portal? Were you a tech person or how did this interest pique in you?

Mike:
It’s a good question, and my family asks me that all the time. What are you doing and why? After I went to college, I started a tech business. So I was a tech entrepreneur. I didn’t raise any money, but I built up a company, 40-50 people, and sold it. And that was a good exit and that gave me the freedom to explore my passions a little bit more. And some of that was moving to New Zealand and experiencing a different culture and a work environment. And that’s where I first got interested in real estate or technology in real estate. I’ve always been a tech guy. I haven’t really been into real estate. I’m not that into real estate. I don’t own any rentals. I don’t have a property portfolio. I’m not invested in any real estate stocks, but I think it’s a fantastic area that suits me because it’s huge.
There’s a huge opportunity. There’s a lot of data, just a lot of data all over the place, and it’s hard. The path forward is not clear and it wasn’t clear to me five years ago. I could look at other industries and you can chart out how you think it’ll go. Video on demand or cable television, it’s clear where this is going. But real estate, no idea, all bets are off. And I have a busy brain that doesn’t like to sit around idle and I wanted something, a hard problem to think about. And nothing to me seemed harder at the time than figuring out, okay, what’s going to happen in this space? What are we going to see going forward?

Dave:
All right, great. Well, you seem like just the person for the questions that we have. I actually first stumbled upon your research last year when I’m sure it was a very busy time for you with Zillow’s iBuyer program, famously, infamously, whatever, shut down. So we’re curious just to learn a little bit more about the state of iBuyers right now, because as real estate investors, there’s been, I don’t know, Jamil, what do we call it? Paranoia, fear, something.

Jamil:
I call it paranoia. I would call it fear. I think there’s a lot of misunderstanding about the space and I’ve looked in and dove into a little bit of Michael’s research. And again, just understanding how little of the market right now, it’s actually affecting. It’s such a overestimated fear. The real estate professionals in general don’t understand how to utilize this resource that’s available there. And so I think it’s all of it. I think it’s misunderstanding. I think it’s fear. And I also believe that if we had a better understanding of what their model was and what they were actually trying to accomplish, then we could have a better narrative about it. Because real estate agents think that they’re there to take away their jobs. It’s not the case.

Mike:
Yes and no.

Jamil:
Okay, well, let’s hear it.

Mike:
Yeah, I mean, think, so, if we go back to my question, what are some new models that may change how people buy and sell homes? iBuying is one of many. So we can talk all about iBuyers, we can talk about other stuff. But iBuyers are a clear answer to that question. They’re probably the largest, the most well-funded. And fundamentally, they represent this really radical change to the status quo. At the time when Opendoor, the biggest iBuyer first came to the scene and raised some money, there were other companies, but they were all taking the existing real estate process and just digitizing parts of it. If we can bring this online or automate that, that’s disruption, that’s real estate tech. Opendoor came to the party and they cleared the table and said, nope, there’s a totally different way from A to B.
Instead of listing your home the traditional way, we’ll go in, we’ll buy it from you almost site unseen. You could get a check in the mail by the end of the week and then we’re going to fix it up and sell it off when we’re done. That was a radical proposition at the time. So iBuyers are part of real estate tech disruption, but real estate tech disruption is not just iBuyers, there’s plenty of other companies out there. But to answer your question, I mean, there’s so much to unpack there, but just to pick one topic of what you asked and happy to talk about the business model, but I think if we talk about agents, Opendoor is the largest iBuyer, and they came out of the gate with a bit of an anti-agent message. I mean, the marketing is really clear.
It’s like the traditional process is broken, we’re going to fix it. If you’re an agent, you are the traditional process. Opendoor spends, I mean, even up until earlier this year, they spend tens of millions of dollars on TV advertising campaigns. And the messaging there is sell your home the new fashioned way. So if you follow that train of thought, the old-fashioned way is the traditional way, and that’s agents. So every real estate agent is old fashioned. So there is a bit, to be fair, there has been a bit of antagonism between iBuyers and real estate agents from the get go and continuing to today.

Dave:
So how does that work with a company like Zillow or Redfin, that those are two, I guess, previous iBuyers now that both of them have thrown in the towel. But how was that working and is that part of the problem is that they sort of had this iBuyer business that is potentially antagonistic or adversarial towards agents? At the same time I know Zillow, the vast majority of the revenue comes from agents. I don’t know exactly how Redfin’s revenue comes in, but.

Jamil:
Well, they’re a brokerage as well. And so Redfin is representing buyers hand over fist.

Mike:
Well, let’s get the easy one out of the way first, Redfin. Redfin was technically an iBuyer but just exponentially smaller than anyone else. They’re also their own brokerage. Redfin employs their own real estate agents. So Redfin can go out there, do whatever they want and say, this is what we’re doing, like it or leave it. They can just force their organization to accept this. So it wasn’t a big deal for them. So we’ll put that to the side. But Zillow, yeah. I mean, I think Zillow’s entry into iBuying and their messaging and how they pitched that to agents, it’s a master stroke in good communication. There was such little backlash from that that often gets forgotten. Because so much has happened since then, but it was really well done. And the way that Zillow got around it was they said, yeah, there’s another iBuyer out there, Opendoor, and they don’t want to use agents, but we do.
So we’re Zillow, we want to come in, we want to offer iBuying because we think that’s a pretty valuable solution for today’s homeowners. But we also, we want to work with the industry, we want to work with you, our valued partners, our valued agents, and the way we’re going to do that is we’re actually, we’re going to continue to use an agent on every single one of our transactions and we’re going to pay you a commission on it. Whereas, with Opendoor, consumers would go to Opendoor directly, they wouldn’t use an agent. It was a zero-sum game. The agents lose because Opendoor wins. Zillow was saying, Hey, we’re going to still use agents, we’ll still pay a commission.
And the way that financially transpired was almost this tax that Zillow had to pay agents for every transaction. I forget it, that it was like one and a half percent just to pay those agent commissions. So if you look at the unit economics, Zillow’s were always worse than Opendoor because Zillow continued to pay that agent tax to use agents in order to not upset their existing client base. Zillow generates a billion dollars a year in revenue from agents, they can’t afford to go out there and upset them.

Jamil:
I think in addition to that, though, there’s an important piece to the equation that having a homeowner have an advocate in the conversation. When you look at the way that, I mean, I’ve transacted with Opendoor before and it’s interesting, though, just the way the contracts read. You’ve got your first line item, which is your purchase price or their purchase price, and then all of their credits come out on the last page of the document where you’ve got their technology fee, you’ve got their market risk fee, you’ve got all the different ways that they’re going to change the settlement statement when the deal actually closes. The property then records at a much higher price than what they actually pay for the property. And it’s confusing. It’s confusing to people when they’re looking at the settlement statement.
They say, wait, hold on, you said you were going to pay me 225,000. I’m looking at my settlement statement now, it says 165. So inserting an advocate into that conversation so that the technology can be explained so that the contracts can be explained so that how everybody’s being monetized is explained and people can make an informed decision. I don’t think that’s a terrible thing to have.

Mike:
No, and I think that’s symptomatic of the psychology of this whole space. We’re talking about real estate, somebody’s single largest transaction they will likely undertake in their lifetime. And I mean, I’ve talked about this, right? This idea of loss aversion and whatnot, but fundamentally, the larger a transaction, the more conservative human beings are; the less we want to make a mistake. If I want to try a new coffee shop that opened up down the street, I’ll try it out one day, I spend $5, and if I don’t like it, what did I lose? I lost five bucks. I’ll just go to my normal place tomorrow. I want to try video streaming service. I sign up for Disney plus the first month is either free or 10 bucks. What do I get if I don’t like it? I just lost 10 bucks. Not a big deal. But with real estate, what’s the potential downside if you make a mistake? It’s huge.
Your example, it could be tens of thousands of dollars. We’re talking about video streaming services and coffee are not on Maslow’s Hierarchy of needs shelter is. So, I mean, coffee is on my hierarchy of needs, but real estate, shelter is right. We’re talking about being in the right school district at the right time. We’re talking about safety, we’re talking about being near my parents or something. It’s all wrapped up into that. And that’s why on these high value transactions, people are much more conservative and they have a specialist help them. That’s why we have financial advisors to help with financial planning and wealth management. That’s why there’s divorce lawyers. That’s why there’s M&A attorneys and investment bankers to help out with these high transaction, low frequency transactions where they can be the specialist and provide that expertise. And in real estate, that’s the real estate agent. So bring it all back. That’s why we still have agents, that’s why agents are not going away anytime soon. And that’s why it feels funny to outsource that advocacy to the for profit company you are working with.

Dave:
Yeah, it seems a little bit like a conflict of interest, I guess, when it’s all sort of vertically integrated and they don’t have that much objectivity. I would like to jump back, I guess, a foundational question here, particularly for real estate investors. Because as a group, I guess, I’ll speak for everyone and say felt like iBuyers are competition, too. They were coming in making offers on a lot of the types of distressed properties or value add opportunities that traditionally smaller investors really liked. And that sort has been a threat. But one thing I’ve always just been curious about, and Jamil hinted at this, is what is the volume even? Are they even making a dent in the national scheme of housing transactions or is this sort of overblown and they’re really just of this niche thing?

Mike:
It all comes down to perspective and the tyranny of percentages. So if we start way at the top, I think Opendoor, it’s either Opendoor or all iBuyers, but Opendoor’s market share last year was something like 1.3%. So out of all the homes that were purchased, Opendoor purchased maybe 1.3, it actually sounds too high. I think that was all iBuyers. So anyway, you’re talking like a percent, right? So you can look at that and you can say, oh a percent, that’s a rounding error. It’s totally niche, not a big deal. But then if you translate that percent into an actual number of transactions, you’re talking about 40, 50, 60, 70,000 houses. That’s 40, 50, 60, 70,000 houses. That’s 40, 50, 60, 70,000 families that are looking to move. So there’s a big deal there. And then if we go a little bit further, because that’s national. The iBuyers are not, they’re not really national.
I mean, they kind of are but they’re not, right? So they’ve issued press releases and launched in 50 markets around the country. So there is a growing national presence, but not all markets are created equal. There’s a very high concentration in these top four-ish markets. Phoenix, Atlanta, Texas, and kind of the Carolinas. So Phoenix is ground zero for iBuyers and Atlanta is very close number, well, they go back and forth. So if you look at one of those, Phoenix or Atlanta at times market share, the iBuyer market share maybe five, six, 7%, but it’s peaked above 10

Jamil:
10, yeah.

Mike:
So there’s times when those markets where they have 10% share the markets, one out of every 10 homes is going on Opendoor’s, books. So that’s a big deal. And then you can even get narrower and you can say, okay, there’s a neighborhood in Atlanta and you know what? In there that market share number is closer to 20, 30, it could be even 40%, right? The denominator’s getting pretty small at that point. And Bloomberg has done some research on that in the past. So it really all depends. If you’re a property investor in Minneapolis or Indianapolis, this is not a big deal. They’re not doing anything right. But if you’re a property investor in Phoenix or Atlanta, this is absolutely a big deal.

Jamil:
And I’ll speak to that real, real quickly because I’m in Phoenix, Arizona, and I felt Opendoor coming into the market. I’m a investor. I buy and sell houses. I wholesale traditionally. And when Opendoor came into the space, they were the Silicon Valley wholesaler. They were the wholesaler in a suit and that was what everybody got fearful of. Because they thought, wow, these guys are, they’re sophisticated, they got billions of dollars, they’re going to come in and they’re going to completely disrupt what our business model is. And was there a dent, and did it affect us in the early parts? It did, absolutely. Everybody’s volumes adjusted and we had to get more engineered with our marketing. We had to get more boots on the ground. Everybody had to pivot. If you were going to survive when you had an 800 pound gorilla in your backyard, you were going to have to do better.
You’re going to have to offer more solutions. You were going to have to offer more service, you were going to have to offer more transparency. There was going to need to be a shift in the market. And I think that what Opendoor effectively did for us in Phoenix is it made everybody better. We all had to work harder and do better in order to compete with Opendoor. I’m also going to say this, there are parts about it that I don’t think got better.
For instance, when you look at some of the product, and I’m not knocking Opendoor, I think they’re a wonderful company and I like the people involved in it, and God bless them. But when you look at the product and you see what has come down from flipping houses from the sky, I did a whole YouTube exposé on it and I looked at what does it look like when a mom and pop rehabber whose heart and soul goes into a project when they care about where are we going to put the placement of this shelf because we’re thinking about the family that’s going to live here and where they’re going to put their things and how people are actually going to live in this home.
And when you changed it from the perspective of somebody coming in and their livelihood being the business versus an algorithm deciding that they were going to buy this house and that they were allowed to spend 1% of purchase price in order to renovate it, which is the typical amount of money that they want to spend in a property, what did that project look like when it came back onto the open market? And when you look at how that affects neighborhoods that they’re investing in, I think that the ultimate result wasn’t super positive. And to me, I think that’s a piece that we all need to understand and look at is that when somebody has the choice of selling their home, you might get X dollars from Opendoor and you might get X dollars from this wholesaler or this rehabber, but what is that impact on the community when it’s done?

Mike:
It’s a really good point. It reminds me of a chat I had the other day with an agent friend of mine who was showing their buyer a bunch of homes. Some of those homes were Opendoor homes. And the feedback, again, this is one data point, but it reinforces that. The feedback from the buyer after touring that Opendoor home was, “It doesn’t have any soul.”

Jamil:
Exactly.

Mike:
Right. They don’t-

Jamil:
It’s missing the soul. Michael, you hit it.

Mike:
Yeah, they don’t stage the houses, which is fine. This is what happens when you have, like you said, an algorithm running the business. It’s very data driven and when that occurs, you don’t stage the home. All the paint colors are the same, all the rugs and carpets are the same. Everything’s the same. But that the buyer was looking, they want to live there. I want some character. I want to know what is in the soul of this home and do we connect or not? Yeah, I think that’s a tough proposition.

Dave:
Interesting. Yeah, I mean, I think that’s really helpful context too, to understand the localized concentration here. Obviously, 10% is a lot, especially if you live in those communities, you feel that, and it feels, I’m sure, pretty weird as both an investor and just a home buyer. So that’s helpful in helping everyone understand that if you’re a real estate investor, unless you’re in one of these major markets, you’re probably not competing that directly against some of these iBuyers. Which sort of brings me to my next question is are there going to be any iBuyers in the near future? Because now we’ve seen Zillow drop out, we’ve seen Redfin, which you just explained is not a huge player anyway, but one of the bigger names, at least in the industry. So I guess, Opendoor, Offerpad is still around, are those the two big ones? Because from what I read, they’re not doing great either.

Mike:
Those are the two pure play iBuyers left Opendoor and Offerpad. And Opendoor is about four times as big as Offerpad and by volume. And Offerpads always played by the beat of their own drum. I’ve done some research on this, it’s all online and free. So if you want, you can look at it. But Opendoor is founded by a bunch of Silicon Valley Tech folks. Offerpad was founded by a bunch of real estate folks. And Offerpad has had a different philosophy. It’s not pedal to the metal, let’s get as big as we can, as fast as we can. It’s a little bit more moderate and they’re willing to put more time and money into the rehab of the houses. They’re real estate people. So they get that a bit more and they have a different model. And the result of that is, I think, Offerpad, at least, is just, let’s call it, more moderate. When the market’s swinging wildly up and down, Offerpad’s not going to go up as far and it’s not going to go down as far.
So in the last quarter, Opendoor, lost a lot of money, Offerpad, lost a little bit of money. Yeah. Anyway, I don’t know what the next, I mean, the next 12 to 18 months is a free-for-all. I’m not sure what’s going to happen. Surviving it is simply a matter of how much money do you have in the bank and how much are you spending every month and do you have enough to weather this financial and real estate market storm. I think Opendoor is in the process of pivoting or evolving their model a bit. They’ve launched more asset-like products. So they’re basically Opendoor’s trying to be an iBuyer without actually buying the home. They have this exclusive marketplace and they’re going to sellers and saying, if you want to sell your home, come to us. We’ll charge you a fee, 5% fee.
And right now we’ll rebate 2% of that back to you, but we’ll charge you a fee, we’ll give you a cash offer. And remember, Opendoor only buys a percent of the homes. They don’t have to, nobody’s holding a gun to their head and forcing them to buy every home. But we’ll give you a cash offer and then we’ll advertise your home in our exclusive non-MLS marketplace. And if you’re a property investor, this is where you should start paying attention and we’re going to try to find you buyers. And that could be individuals or that can be institutional investors. And I made this point a couple days ago on a webinar, what I’ve just described sounds a lot like a real estate agent.

Jamil:
Or a wholesaler.

Dave:
Horse to mil, yeah, try to turn you into a robot.

Jamil:
Let’s be real. This is what we do is we sell equitable interest in the house, and that’s exactly what Opendoor is proposing. And rather than coming and the whole thing, oh, we actually have the money to back up what we’re going to do, we’re actually going to close. All these promises go out the window. Now all of a sudden they realize that, hold on a second, we can’t take everything down. Maybe it’s time that we just start selling equitable interest. I mean, that’s what happened, right? It was always the better model anyways, right? Because I’ll tell you what? I didn’t lose money any quarter.

Mike:
Yeah. So they’re pivoting around. I mean, will we have iBuyers in a year, two years, five years? I don’t know. I sure hope so, because if we don’t, that means a tidal wave has swept over this industry and washed away everything new. And we’re back with the 1990s again. And it feels like that shouldn’t be the case. Traditional iBuying is a great proposition for a certain segment of players. I’d like to see more options for consumers, more options for people to buy and sell homes. But it’s definitely, I’d say this, it’s funny in real estate, I think the phrase existential threat gets overused. But this is the existential threat. This is the crisis moment.

Jamil:
It’s not a nuclear disaster guys, we’re talking about houses, right?

Mike:
Well, for these companies it is, it is life or death. And that’s where we’re at now. Opendoor got punched in the face really bad in Q3. They guided to an even worse Q4 and Q1. I mean, the next six months are just going to be pretty brutal. So we have to wait and see.

Jamil:
Well, I’ve got a piece to add to that, because looking at some of the numbers that shook out. Because I was looking at your research, Michael, and again, it’s phenomenal research for anybody that hasn’t dove into what Mike DelPrete is actually doing out there, read it. Read what he’s talking about. Because when you look at the business model in itself, they haven’t accounted for operations. There’s no money to operate. They can’t pay anybody if they’re just looking at the margins that we’re looking at here, it makes no sense. So then I started to think about, well, let’s look at some of the transactions that I’ve in fact been involved in where Opendoor was either a buyer or a seller. And it was interesting because when the market was doing what it was doing, when things were getting a little heated here in Phoenix, Arizona, I’m buying and selling houses.
I’m fixing and flipping houses, I’m wholesaling houses, I’m active. I’m in a deal. And I put this nice remodel, we did a good job on the remodel. I think we over improve for the neighborhood, we put it on the market and of course, market was hot and we started getting multiple offers, but they were reasonable multiple offers, just super reasonable $5,000, $7,000 above list. It made some sense for the market and the heat. Then all of a sudden we get this one offer and it was $75,000 above list. And I thought, who the heck would do that and why? I just needed to know why. So we look and it’s Opendoor buying our fully remodeled house. And I said, if these guys want to buy this house at $75,000 above list, sell it to them. But I need to know why. And so I started looking at who owned the houses in the neighborhood, and a lot of them were Opendoor.
And so it made sense to me that would Opendoor not want to buy this house at $75,000 above list price and set a new comp so that they could add money or equity to all of the other holdings that they had there. And then is that not part of the bigger problem that we’re talking about affordability here in the United States. When you look at the practices and how these things are shaking out, when they don’t make sense, understand why? And that’s the reason I had to look at that whole offer and that whole situation, because it made no sense to me. And the only reason you would want to overpay once is if it was going to make you money 30 times behind it. So how do we make sense of that, and how does the public digest that?

Mike:
We can’t make sense of it. We don’t. I think it’s the question, what’s really interesting here, it’s not so much the question of is Opendoor doing that on purpose or not? Because I think there was some Zillow conspiracy theory about Zillow doing the same thing. It’s the fact that we have to ask ourselves the question. Are they? That’s new. We’ve never been in this position before. We’ve never had a for-profit Wall Street-backed company with billions of dollars and tens of thousands of houses operating like this in the housing market. Effectively like short sellers, because I think institutional investors are long, long term investors.
You buy some AT&T or GE stock, you hold it for 10 years, 20 years, 30 years, that’s it. But now we’ve got day traders, and you see what happens with day traders, with Game Stop and Bed Bath and Beyond and all this craziness, that didn’t exist before. That wasn’t a possibility. But now it is. So the same thing is true in real estate. Now that we have Opendoor operating effectively as a real estate day trader, what are the unintended consequences now? What are the questions we have to ask ourselves now that we didn’t have to five years ago or 10 years ago? And this is exactly one of them.

Dave:
So I’m very curious because during the run-up in prices, the recent rapid appreciation, some of them, Zillow being the notable one, but even Opendoor, they weren’t doing that well in a market that just seemed perfect for them. Absolutely perfect. You could buy something, do literally nothing, and then sell it six months later and make a killing. And they were somehow losing money off this. And to me, it seems like what is the problem? Because is it operational? Because that seems like one problem. The other one that me, Mike, just so you know, I have some training in data science and machine learning. The other part of me is how in hell can they not predict the prices of these houses a little bit better? Because, like you said at the top of the show, there’s just so much data with which you can build AVMs, an automatic valuation model. It just seems like they should be better at this. So do you have any idea why they’re struggling so much?

Mike:
Yeah, the short answer, and I don’t mean to be curt and we can expand, is just their expense base is too high. I mean, at the high points of 2022, home price appreciation is crazy. You look at the numbers of Opendoor and I mean, don’t mean to keep picking on Opendoor but any iBuyer, but the problem is Zillow was out of the game. But you look at what they bought a home for and what they sold it for, and I published this research, it was record high. The difference between what they bought it for and sold it for was like 20%.

Jamil:
And Michael, that didn’t even take into consideration the way that they manipulate those contracts, right? Because it’s not, the recorded buy price is not actually the purchase price. So it was even higher than what you were thinking.

Mike:
If there’s other costs in there or other takeouts then yeah, absolutely. And I mean, they still charge a 5% service fee, but 20%. And you’d look at that and you’d say, wow, you bought something for 300, and then I mean, literally the amount of time between when they take possession of something and then re-list it as about 10 days. So it’s unfair to say the price appreciates 20% and 10 days because there’s a closing period. There’s a lot of time in here. But even if you say two months, three months, that’s crazy home price appreciation. Now the reason that doesn’t fall to the bottom line is because it doesn’t include all of the expenses. So any expense these companies have, all their hundreds of millions of dollars, employees, technology, office rent, salary, all that stuff. It adds up. And I think that’s the fundamental challenge for profitability of these businesses.
It’s also, it’s symptomatic of the fact that it’s real estate and you need boots on the ground. I mean, you guys get this. You just can’t manage this business from your basement. You need hundreds, thousands of people in the field. They’re buying, I forget what it was, 150 houses a day at their peak. There’s so many people in trucks with ladders driving around Phoenix that you can get to fix things up. I mean, you really hit these real world situations. But just to wind it back, I mean, they’re making money. Homes are appreciating, but it’s pretty simple math, it doesn’t flow to the bottom line because there’s just a huge pot of expenses here.

Dave:
That’s crazy. Because that makes me feel like they’re not going to succeed ever. Because if they couldn’t make it work during a time when they were getting all of these market tailwinds, how are they going to make it work in the future when hopefully we get back to a housing market in the next year or two that just grows around the pace of inflation?

Mike:
Well, here’s the thing, and we might not have even talked about this today in this chat unless I brought it up, which is, again, showing the problem. But the thing is, everybody is so focused on the short-term crisis of the iBuyers that we’re all forgetting to take a step back and look at the long term view. We’re like, oh, my God, are they going to survive? Is there enough cash? They’re making so much money on home brace appreciation now everything’s tanking. Are they going to weather the next six months? But we have to remember, if we go back to pre-pandemic times before the market got crazy, the biggest question for iBuyers, and this is something I harped on time and time again, is there wasn’t a credible path to profitability. These businesses were still, they were losing money. It’s like, okay, that’s fine, but what is the path to profitability?
How will you become profitable one day? And that had not been proven yet. There were arguments to say once we get to scale, we’ll be profitable. We can grow our revenues and the expenses grow slower and ta-da, we’re another Amazon. Or we can make money by selling adjacent services, primarily mortgage, title, and escrow. So we get a bigger slice of the pie for each transaction. That was it, right? And we’re going to automate stuff and use technology to bring our expenses down. So you look at all those and I love looking at those, and the evidence wasn’t there. It was like, yeah, I see maybe a little bit on the scale thing, but it’s still too early to tell. And the other ones, I’m just, it’s not flowing through on the data yet. So if we put aside the short term, are they going to survive? I’m thinking we still have that same problem that is still the same problem. We saw what happened when they get to scale and the market goes bananas, that you lose a billion dollars. So there’s a big problem.

Jamil:
The only way they survive, Dave, is through the marketplace.

Dave:
What do you mean? Coming after you, basically.

Jamil:
100%. The only way they survive is buying my company. No, no. Really, the only way they survive is the marketplace. Because, look, if you can change the model where you don’t have to be so cash-intensive, you don’t have to take title down, you don’t have to take title to all these properties. You’re not paying commissions multiple times because, Michael just said, it’s a 10 day turn. They are doing nothing to these houses. You accomplish the exact same. In fact, the house might look better the day before they close and the day they list. Okay, so with that said, the marketplace makes sense. It makes sense, right? It’s like if you look at the car industry, how many of us have traded in a car? All three of us, I bet. We’ve all traded in a car. We all know that we were leaving money on the table.
Every one of us understood that there was a convenience situation here that we were taking advantage of. So what if that becomes the proposition, the value proposition of the consumer? Listen guys, we are becoming your marketplace, you know that we’re just going to take your car and put it on the dealer auction. That’s exactly what’s going to happen with the house, you know that we’re just going to take your house, we’re going to put it in the marketplace auction, you’re going to get what you’re going to get. We’re going to take our fee, bada-bing, bada-boom. We didn’t have to come up with any extra money, we didn’t have to raise funds, there was no cost in capital, operations completely come down. And this starts to make sense.

Mike:
I think there’s a different factor in there. You asked how many of us traded our car in, I traded my car in. I went to a dealer and I traded it in and I was done. That’s different than me going to a dealer, giving them my car. What is that called?

Jamil:
Consignment.

Mike:
Yeah, consignment. Giving them my car on consignment and then seeing what happens with it.

Jamil:
True.

Mike:
So iBuying is the first. They buy your home, done. What you’re talking about now, this marketplace, that’s consignment, and it may be great, but it’s less speedy, it’s less certain, and it’s less simple than the iBuyer proposition. So I don’t know how that’s going to pan out, but we can’t kid ourselves. It is different. It is a different proposition. And sorry, just one more thing. When I trade in my car and I give it to the dealership on consignment, the dealer’s saying, oh, actually, we’re going to sell this to our exclusive network. We’re not going to expose this to everybody. We actually have a set number of buyers.

Jamil:
I think that changes, too. I think eventually what ends up happening is it’s the network and the MLS. I think essentially what’s going to end up happening is they’re just going to become the full scale wholesale operation.

Dave:
Interesting.

Jamil:
And they’re going to change their name to Keyglee, that’s what’s up.

Dave:
Well, it’s funny, Mike, when you were describing these paths to profitability or proposals. It sounds like these companies and it makes sense, given their backing, are following almost more of a venture capital model where it’s like just go rapidly after market share, worry about profitability later. You hear about companies like Uber that was doing this, they were taking a loss. They were subsidizing rides for people just to capture market share. But Uber didn’t own the cars, they didn’t have assets, they weren’t stock holding anything in case things went wrong. And this, it doesn’t seem like, there’s so much risk just going after that market share approach before you have profitability when you’re buying literally billions or tens of billions of dollars worth of assets often leveraged. That just seems crazy. And so what you’re saying, Jamil, is more of the Silicon Valley approach to this, right? They would not touch owning the asset. They would set up a marketplace, like Uber did between drivers and rider. And they’re basically going to take the same approach to real estate.

Jamil:
Imagine if Uber had to own every car.

Dave:
They wouldn’t do it.

Jamil:
I mean, the model wouldn’t make any sense, right?

Dave:
Yeah.

Jamil:
So it’s got to evolve. It’s got to evolve. And listen, I congratulate them for the amount of bravery it took to do what they’ve accomplished. It’s incredible. It’s a great disruption to the business. I think that evolution is necessary in everything. We want to see things change; we want to see things get more efficient, we want to see things become more fluid. I can see that looking at the way that this is panned out right now, that there’s not enough money in the pie to operate. So what’s next? And you hit the nail on the head in the biggest appreciation we’ve seen in the history of housing, it couldn’t survive. So what’s next?

Dave:
Well, Mike, I’m curious. Yeah, we’ve asked you a lot about iBuyers, but is there something else coming down? Is it sounds like iBuyers are trying to evolve or is there something else you see coming down the pipe in terms of real estate tech that might be impacting the industry?

Mike:
Yeah, before we get to that, I want to come back to the marketplace thing as well. The challenge that Opendoor and any other company faces in trying to create a marketplace in real estate is that one already exists, right? It’s the MLS systems everywhere. There is a marketplace, it functions, it’s efficient. Could it be more efficient? Yes, but it does work. There is one place you can go to find all the houses for sale. There’s not one place I can go to find all apartments for rent. There’s not one place I can go to find all cars, there isn’t. And that’s why there’s not one place I can go to find all taxis available in my area. Those things don’t exist. But the challenge is in real estate that does exist, it’s the MLS system. And I get it, you bump into 10 people and you’re going to get 10 different opinions about why the MLS system is broken.
It sucks, it doesn’t work. But at the end of the day, it is a marketplace. It could be more efficient, it’s operating. But I don’t know about you guys, but I’ve bought homes, I’ve sold homes, it works. The MLS system, it does work. I can go to Zillow and have a high degree of confidence. I’m looking at all the properties for sale. So anyway, that’s the marketplace. What’s next? Well, listen, I think the crisis of the moment is home affordability. And I think that will be a new category in prop tech, real estate tech that we’re going to see created over the next six to 18 months. There’s a variety of different ways to address that from rent to own to shared equity-

Dave:
Fractional ownership.

Mike:
Fractional ownership. And I hate fractional ownership if we’re thinking about blockchain and owning like $100,000 worth of a house. But if you can can’t afford 100% of the home, maybe you can afford 70% of it. And some investors come along for the other 30% and they’re in it for the long term ride. There’s a number of different ways companies are starting to do this and I’m excited and hopeful about what the future is there because home affordability is a problem and it’d be great to get some Wall Street money funding companies to solve the problem created by Wall Street money in the real estate market. But that’s kind of where we are. So I think that’s next and I’m interested in that and I’m starting to advise some companies in that area and dig a little bit deeper because I want to be smarter in that and do what I can.
But for all the other, there’s iBuyers, there’s a classic company called Power Buyers that do cash offer and buy before you sell. There’s W2 brokerages, real estate brokers that employ their agents like Redfin, instead of the contractor model. There’s a lot of new models out there and I think there is absolutely value in that model for consumers. The idea of buying before you’re selling that sounds really cool. Why isn’t that the status quo? But the challenges in the current financial markets and real estate markets, those companies are all bleeding. They’ve yet to reach escape velocity. They’re not profitable and it’s going to be really tight. So my hope is that that category survives, and I think it will, but depends how bleak the next year is. I hope it survives. I hope the iBuyers survive and I hope we have some new models that once things start picking up again, they can keep going and keep offering new ideas into the space.

Jamil:
And I wanted to add one little defining piece to the marketplace conversation because I’m stuck there.

Mike:
We can’t get away.

Jamil:
No, but I don’t think it’s just the overall marketplace. I think it’s the cash buyer marketplace. I think the piece of the pie or the piece of the puzzle here, that Opendoor, when they say the word exclusive, what they’re trying to say is this is not going to be subject to a retail mortgage. This is not going to take the time that a regular sale would take. This is going to be a speed and convenience situation. That’s why you’re coming to the cash buyer marketplace. And this is going to be different from your multiple listing system, where you’re going to be subject to all of the nuance that regular retail sale would have.

Mike:
I meanm I can’t help it, but my mind goes to, well, okay, so-

Jamil:
Let’s start it.

Mike:
Opendoor’s going to… No, no, just who has the cash? Opendoor has the cash. So you’re going to be using their cash. So it’s not going to be on Opendoor’s balance sheet, but you’re still using their cash. There’s other companies that are doing that and they’ve announced they have to stop, their lending facilities are drying up or interest rates are becoming too high. There’s too much risk. Like, okay, Dave, I’ll give you my cash, buy your home. But my God, what happens if you work for Meta or Amazon and you just got laid off and you lose your job? It’s too risky right now. So there’s still this huge, I believe, I mean, there’s still a really huge financial risk for that company providing that at the moment.

Dave:
Yeah, it’s going to be really interesting to see what shakes out over the next couple of years. Because you look at publicly traded real estate companies and the best ones are down 30 to 40% like REITs often. Redfin is down 90%. And so these are big well-funded companies. You think, I’m sure, Mike, some of the companies you like or research startups, pre-revenue companies, it’s going to be pretty tough for them to survive. I totally agree with you. I hope they do because I do think there is need for some innovation in real estate and I think there’s so many interesting ideas out there, but none of them have been able to really make a dent yet. And so I’m with you. I hope they survive and I hope that we start to see some interesting new trends emerge as we hopefully in the next 12 to 18 months come out of this correction and into a new era for the housing market.

Jamil:
I think the next thing that we’re going to watch is the feast. There was another brilliant article that Michael wrote where he talks about predators and prey. And I think the next show is going to be a National Geographic basic show where we’re going to watch a whole bunch of companies get devoured by the companies with the money, and that’s the next six to 18 months. We’re going to watch the feast, who’s going to survive and who’s going to get eaten?

Dave:
Basically all the big companies with cash are going to roll up these smaller companies.

Mike:
Yeah. And the asterisk is, but these smaller companies are all losing money, and some of them are encumbered with debt. So it’s like, right now, I’d hate to be in Zillow’s boardroom saying, yeah, I think we should drop 500 million and acquire this business that’s losing money. Really? Can you justify that? And there’s also this question of what are you buying?
Even Opendoor, if we were to buy Opendoor, what they own, I mean, geez, they ended Q3, they own 16,000 homes. That’s pretty good. And they have technology, but these transactional things, it’s not a subscription as a service that it’s not a SaaS model. You don’t have recurring revenue. What kind of do you have there? You’ve got a brand and technology. So I think you’re right. I mean, yes, you’re right and referencing me, yes, there is going to be a feast. I do agree with that, but I’m worried about companies just zapping out of existence or fire sales rather than a smart amalgamation of existing players into something new here. Because there’s questions. Where’s the value? What am I actually buying? What can I value?

Dave:
All right, well, with that grim ending to this episode, I think we have to get out of here. Well, I guess real estate investors will probably be happy to hear that they are not facing tremendous competition from iBuyers, but it remains to be seen what sort of real estate tech we might be hearing about next. But Mike, this was tremendously helpful. You’re a wealth of knowledge. We really appreciate you being here. For anyone who wants to find out more about you or connect with you, where should they do that?

Mike:
Just go to mikedp.com. Look me up on Google, got a website, all my material is there. You can have a lot of fun reading things; mikedp.com.

Dave:
All right, great. Well, thank you, Mike. We appreciate it and hopefully we’ll have you back sometime soon when there’s some new exciting trends to talk about.

Mike:
Sounds good. Thanks for having me. A pleasure everyone. And yeah, have a good one.

Dave:
All right, that was fun. I’ve wanted Mike to come on the show forever and he did not disappoint.

Jamil:
He is a really intelligent person. I loved his perspectives and it gave me a lot of insight and obviously, he’s researched what he’s talking about. He knows intrinsically what’s going on in this business model. And when you see somebody that is so well versed in the data and the model itself, it’s really valuable to listen to them.

Dave:
Totally. I like it because he’s also not an investor, he’s not an agent, he doesn’t work for any of these companies. He approaches it from a much more academic standpoint. And I know he does consulting and private practice stuff, but he is also a professor at CU Boulder, so yeah. Yeah, it’s really cool to just hear this research-based analysis of it and it took a turn. I was not expecting. I did not. I was excited to have you on the show. I was like always am because of the Phoenix iBuyer connection. But I didn’t realize that there is a sort of idea that they’re going to go into and try and automate the wholesaling industry.

Jamil:
It’s exactly what’s happening. It’s exactly what’s happening. And I’ve been, it’s funny, I’ve been calling it for a while. I figured that this evolution was going to take place. I couldn’t see how taking properties down, doing minimal repairs to them, and then trying to get retail value for it was going to pencil out. I didn’t see this playing out well. I’ve gotten a lot of flack. I’ve been making videos about this conversation for a few years and I’ve had multiple people reach out to me and say, “Why are you taking shots?” And I’m not taking shots. I’m just literally expressing what’s obviously happening in the market and we’ve got to look at it, we’ve got to call it what it is. And we’ve got to then assume that a pivot is in place. They are going to have to evolve. What they’re doing right now isn’t going to work. And I think what Michael talks about in this episode was really important.

Dave:
My big prediction now is that the CEO of Opendoor in 2024 is going to be Jamil Damji. You are going to be tapped for that job because it seems like-

Jamil:
I would do a fantastic job of it, to be honest. I think they need to learn from the scrappiness of wholesale. They’ve got to understand this instrument that we’ve made millions of dollars on. And listen, look, I’ve been profitable through the down, and even as the market’s doing what it’s doing right now, we’re still crushing it, right? So iBuyers take notes. Equitable interest is an incredible tool. And figuring out how to monetize that is probably your parachute out of this.

Dave:
Totally. Well, first of all, you should just get a consultant gig and make a lot of money from them, but you don’t seem nervous about it. Why is that?

Jamil:
I don’t seem nervous about it because I have no reason to be. I’m looking at our balance sheets, I’m looking at what we’re accomplishing right now, and while everybody is bleeding because we don’t hold property, because we are truly just delivering the information that exists. Look, your house can trade at this price right now. It is what it is. And buyer, this is how low you can pay right now. Are you interested in purchasing? Yes. Let’s connect the dots. Let’s do the deal. And because of that, we’re still transacting. People still need shelter. He talked about Maslow’s Hierarchy of Needs. Shelter is still there and it doesn’t matter what if we’re in a recession, if we’re in a boom economy, that hierarchy of needs will always be the same. Housing is inevitable because we need somewhere to live.

Dave:
Totally. First of all, never thought Maslow’s Hierarchy of Needs would be referenced on this show, but here we are. And then, secondly, but are you nervous that they might eat into your business? They’re active in Phoenix. If they start trying to mimic wholesalers, Phoenix might be their first choice.

Jamil:
I think there’s a conversation that we have. I truly do. I think there’s going to be a point in time in the future where Opendoor and Keyglee sit down, and I think it’s going to be a good conversation because I think that they could gain so much from what we do. They really could. And if we melded the business model of what we do and the business model of what they do, and we brought those things together, I think you actually have the perfect iBuyer. So I’m not nervous about it. I’m excited for the conversation.

Dave:
Nice. All right. Well, thanks a lot for coming, man. This was a lot of fun. I really enjoyed this episode a lot.

Jamil:
Likewise.

Dave:
All right. Well, Jamil, where should people connect with you if they want to be a part of the Opendoor Keyglee mashup?

Jamil:
You guys can find me on my YouTube channel. There’s a great video that you should check out from back in the day. I posted it with Max Maxwell and I on my YouTube channel. It’s just Jamil Damji or youtube.com/jamildamji. And also follow me an IG. I make funny videos there.

Dave:
You definitely do. You can also follow me on Instagram where I’m @thedatadeli. Thank you all so much for watching. We’ll see you for next episode of On The Market.
On The Market is created by me, Dave Meyer and Kailyn Bennett. Produced by Kailyn Bennett, editing by Joel Esparza and Onyx Media, researched by Pusher Janedoll, and a big thanks to the entire BiggerPockets team. The content on the show, On The Market, are opinions only. All listeners should independently verify data points, opinions, and investment strategies.

 

Watch the Podcast Here

In This Episode We Cover

  • How 2022’s housing market almost destroyed the iBuyer industry
  • A huge threat to real estate agents and wholesalers from iBuyers
  • The massive operational expenses that destroyed businesses like Zillow Offers
  • The iBuyer’s “path to profitability” and why it’s almost impossible to achieve 
  • Why homebuyers are refusing to buy the soulless flips iBuyers offer
  • Whether or not iBuyers will be able to survive this current housing correction 
  • And So Much More!

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Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.