Until recently, iBuying was largely a two-horse race.
Now, Offerpad’s decision to go public in a $3 billion SPAC deal has put rivals Opendoor and Zillow on notice. The deal, with a blank-check firm backed by Zillow co-founder and former CEO Spencer Rascoff, was announced last week.
Generally speaking, iBuying still represents a fraction of the U.S. housing market. The business, which emerged just a few years ago, uses algorithms to price homes and make instant offers with the aim of reselling at a slight profit. Though iBuyers took a hit during the pandemic, they jumped back in the game when the housing market roared back to life.
It’s also worth mentioning that until 2018, Zillow and Offerpad were actually partners in homebuying. The listing giant referred sellers to Offerpad until it abruptly changed course and began buying homes itself. In 2019, Zillow CEO Rich Barton said not being an iBuyer posed an “existential” threat to the company’s business.
Now, as the “Big Three” jockey for market share, each has a distinct business model that could be used to their advantage. (Brokerages Redfin, Keller Williams and Realogy are also dabbling in the space, but not at nearly the same scale.)
But tight housing inventory will be a challenge for all three companies, according to Lane Hornung, founder of zavvie, a startup that lets homeowners compare iBuyer offers.
“Sellers know they can maximize their return by exposing their property to as many buyers as possible — iBuyers and individual buyers,” he said. “That’s the gorilla in the room.”
Competitive advantage: First mover and market leader
Key challenge: Driving profits through ancillary services
Serial entrepreneur Eric Wu’s startup was the first iBuyer on the scene in 2014, nabbing $1.5 billion from investors, including SoftBank. In addition to buying homes, it recently formed a brokerage and debuted cash-backed offers to help buyers purchase homes. As the market leader, Opendoor sold 9,193 homes last year, generating $2.6 billion in annual revenue. It lost $98 million on an EBITDA basis.
“They’re the pioneers,” said Rob Hahn, an industry analyst at 7DS Associates and an Opendoor shareholder. Opendoor is known for its speed, but Hahn said the company’s new cash-backed offers represent a “huge” market opportunity.
“The market-making thing only appeals to sellers,” he said. “Now you have a cash-backed offer that lets them appeal to buyers.”
Competitive advantage: Focus on renovation means higher price appreciation
Key challenge: Gaining market share
Real estate investor Brian Bair started Offerpad in 2015 with two products: Express gives buyers an immediate offer for their house, while Flex lists the house for them on the open market (with Offerpad’s offer as a back-up). In the No. 2 spot, it sold 5,337 homes last year. In 2020, Offerpad generated $1.1 billion in revenue with $5 million in EBITDA losses.
Known for investing more in renovations, Offerpad generally sees greater returns on a per home basis. Rascoff downplayed the competition with Zillow, citing the listing giant’s massive agent advertising business. By contrast, he said Offerpad is a cross between an iBuyer and brokerage.
“I don’t view Offerpad and Zillow as direct competitors,” he said in an interview with The Real Deal. “Offerpad’s competition is 99 percent of people who sell their home the old way.”
Competitive advantage: Consumer eyeballs and history of pricing properties (Zestimate)
Key challenge: Scale and profitability
Co-founder Rich Barton returned as Zillow’s CEO in 2019 to lead the company’s pivot to iBuying. More recently, it has invested in home tour services, mortgage and title to turn the homebuying process into a “one-click nirvana.” In 2020, Zillow sold 4,281 homes and its iBuying business generated $1.7 billion in revenue in 2020, with $241.9 million in EBITDA losses.
With 2.2 billion visits to its website during the fourth quarter of 2020, Zillow has always had the web traffic to draw buyers and sellers to its site. In a research note last month, Deutsche Bank analyst Lloyd Walmsley said Zillow (and iBuying in general) hit a “watershed” moment with new, lower service fees that rival traditional agents. “Why would anyone with a more ‘commodity’ type of home use the traditional home selling process versus getting cash from Zillow?” he said.
Zavvie’s Hornung said, however, attracting people to your website doesn’t mean you will convince them to sell you their home. “I don’t think that’s a given,” he said.