UPDATED January 28, 2022, 4:09 p.m.: Despite Zillow’s iBuying fiasco, other companies are still pursuing the strategy, each with its own approach. For investing platform Roofstock, that means focusing on buying single-family homes with tenants in place — an unconventional approach.
The Oakland-based startup, which has been quietly buying and fixing up properties for the past year and a half, is ramping up its purchasing with that model.
Founded in 2015, Roofstock uses artificial intelligence to help investors buy and sell properties. The company has raised $153 million over five funding rounds and was valued at $600 million in its Series D in June 2021, led by SVB Capital. JLL, Expanding Capital and Owl Capital participated.
JLL acquired a minority stake in a deal with the company early last year. A company spokesperson did not reply to an inquiry about whether Roofstock is profitable, which means it probably isn’t.
Rather than purchasing vacant homes, as is common among iBuyers, Roofstock buys discounted homes being rented to tenants, who can remain at least until their lease is up. Most iBuyers don’t want to bother with tenants, whose presence prevents renovations.
But Roofstock’s strategy, said CEO and co-founder Gary Beasley, generates cash flow and allows the firm to wait out market downturns before selling.
“Every day we hold these homes, we make money. Every day a traditional iBuyer holds those homes, it costs them money,” Beasley said. “We don’t have to turn out capital as quickly, and since we have such good insights into what investors are looking for, this really is in service of creating marketplace liquidity and putting products on the shelf that they want.”
Zillow also thought it had good insights into flip homes’ potential profitability, but eventually realized that its algorithm was inaccurate and it was losing money by the truckload. The company decided two months ago to sell its homes and to stop buying.
The occupied homes that Roofstock purchases don’t usually require up-front investment for repairs, Beasley added. If a tenant decides not to renew a lease that expires during Roofstock’s holding period, Roofstock will remarket the home as rent-ready or have a new tenant move in.
Roofstock got into buying occupied homes after an institutional investor approached, looking to sell a 150-property portfolio quickly. Roofstock purchased the units in cash and sold the homes over the next year through its marketplace.
“Some of the clients who were coming to us wanted faster liquidity or more certainty than a full marketing process would bring,” Beasley said.
It plans to expand to new markets with help from its asset management software partner, Stessa. The goal is to more than double the sale of homes through its iBuyer program this year. Beasley declined to disclose numerical targets or the markets involved in the program.
Though Roofstock hasn’t been iBuying as long as major players Opendoor and Offerpad, Beasley said the company is confident in its data, which include detail on sellers and projected resale prices. It also has buy boxes — a list of conditions that makes a home investment-worthy — for buyers on its platform.
Roofstock does automated underwriting of each property and has an analyst review and refine the estimates before an offer is made. Afterwards, Roofstock makes an offer but doesn’t fork over any nonrefundable money until the property is physically inspected and it receives a hard bid from a contractor so it knows what repairs would cost.
Zillow’s algorithm was said to work better in markets with cookie-cutter homes, whose values could be more accurately estimated from basic details such as square footage and the number of bedrooms. But in markets with a diversity of homes in varying states of repair, Zillow’s figures could deviate widely from reality.
“If you’re trying to go too fast and you rely simply on an algorithm, you could end up making a lot of mistakes and missing some physical characteristics of homes that need to be approved,” Beasley said.
Ahead of the expansion, the company is keeping an eye on rising interest rates, which it expects will slow price appreciation. The company has decreased its margin expectations as a result.