Life, for most of us, seems to be on pause. This means that homebuying, one of the most expensive and painstaking purchases in most people’s lives, is also on pause as our cities grapple with responding to the coronavirus outbreak. The lack of activity will obviously hurt the country’s brokers and agents, but many of them have low overhead and will likely weather the storm. On the other hand, for owners sitting on property that they are trying to sell, this pause represents a lot more than just an opportunity cost.
This is the plight of the iBuyers. A number of tech companies have waded into the single-family housing game, using algorithms to create cash offers on properties and providing a way for sellers to forego the risk and inconvenience of listing a house and closing a sale. iBuyers rely on their rapid pace of offering and selling to turn a profit and tend to operate in metro areas throughout the west and southeast, markets that have lots of relatively new housing stock and high market uniformity.
For iBuyers, a pause in home sales means more than just loss of income. A near stoppage of sales could leave these owners with an enormous amount of inventory sitting fallow, accruing maintenance fees and tax bills. So, how much risk does this pose? How much do iBuyers stand to lose? First, it’s important to understand how much inventory the iBuyers have been stuck sitting on in the first place. Property data company Estated did some research on how many homes Opendoor, Zillow, Offerpad, and Knock, four of the biggest iBuyers, currently own. At present, the companies own 8,107 homes, divided between Opendoor leading with 4,727; Zillow with 2,268; Offerpad with 974; and Knock with 138.
With those figures in mind, we used Estated’s valuation model to review the portfolio value for each iBuyer. Across all four companies, the iBuyers control over two and a quarter billion dollars of housing. Opendoor and Zillow own by far the most, with over $1.2 billion and $751 million, respectively. Going by the generally accepted rule that deferred maintenance costs about 1 percent of the home’s value annually, a six month shutdown could cost iBuyers over $11 million. They will likely be able to weather this loss. Zillow alone has invested over $1 billion into the iBuying craze over the last twelve months. And, even though their stock has been decimated, trading at under half of what it was at the end of February, the growth investors that funded them will likely understand a temporary setback in revenue (and an even further deferment of profit). Opendoor has $1.5 billion in funding but might be on even shakier ground seeing as how it is sitting on around $1.2 billion worth of property amidst a pandemic with no clear end in sight.
iBuyers rely on income from the services fees collected at the time of purchase, as well as the price spread between buying and selling each property. Unlike the big single-family REITs, which can still collect rent checks for the time being, renting out inventory is not part of the model. So, what would happen if we see a drop in property value? Zillow predicts only a 2-3% drop in pricing through 2020, which would mean a loss of almost $70 million in expected revenue.
But that might be a low (Z)estimate. Some see a drop in the property market by 10%. Across the four companies, this would represent a value drop of over $226 million. This would not be a catastrophic loss for these well funded companies, but it would bring into question the validity of the business model. Investors questioned Zillow’s move into iBuying, since they already had a well-established advertising platform. This might add fuel to the agreement that iBuying is too risky and too hard to scale to be worth the focus of a tech company already poised for growth.
But the sun might be peaking out from behind the clouds. Zillow expects the market to reach a transaction trough by the end of spring at 50-60 percent of pre-virus levels, and a subsequent recovery by the third quarter of next year. Some of the iBuyers like Opendoor and Offerpad are already getting back to their transactions, both buying and selling. Perhaps the best solution for these companies, in the absence of a strong selling market, is to continue buying. By doing so, they would be setting themselves up to realize the biggest potential gains once markets recover. On the other hand, it would put them in an even more compromised position if the virus flares up again, and the country goes back on lockdown.
This might be an event that will benefit the biggest and best-funded of the iBuyers. According to Josh Fraser, CEO of Estated, “The large iBuyers like Opendoor and Zillow will survive if not thrive. They both will have to make hard decisions and necessary changes but ultimately will have an advantage when the market picks back up.” For the smaller companies out there, continuing acquisitions in a time of crisis may not be possible. This could hint at one of the truths of the iBuying model: this is an inherently volume-oriented business where economies of scale, and purchasing power, determines who wins and who loses.