Fincredible MacroTalk November 17: iBuying
Comments on iBuying from company earnings calls $ZG $Z $RDFN $OPEN $LEN $OPAD $COMP $VGR.
iBuying has gotten a lot of attention in the past month due to Zillow’s decision to shutter its iBuying division.
For those unaware, iBuyers are companies that work directly with home sellers to provide instant (or very quick) cash offers. Some companies have a completely automated process that provides instant cash offers, while others rely on both technology and human involvement to make quick cash offers.
Zillow’s decision has left investors with many questions regarding iBuying. In this post, we’ve used quotes from recent earnings calls to highlight the benefits, risks, and other relevant factors about iBuying. Quotes are sourced from Fincredible.
Benefits For Sellers
The most glaring benefit that iBuyers provide to customers is liquidity. The speed and ease of iBuying relative to the traditional model is probably the biggest value to users.
“One of the benefits of the iBuying platform is the advantages of a cash offer, with no showings and a control over the timing of the transaction, become more apparent in a cooler market where the traditional model can take 90-plus days to sell a home.”
Brian Bair, Chairman, CEO
“The iBuyer and single-family for rent participants are providing additional liquidity to the marketplace. The iBuyers are providing liquidity while becoming an essential convenience provider as the coordination of the closing of a new home is being complicated by supply chain disruptions. The convenience factor is becoming a real value proposition in and of itself.”
Stuart A. Miller, Executive Chairman
Risks and Challenges for iBuyers
iBuyers face several risks. Companies have to deal with forecasting errors, operations and logistics issues, volatility of earnings, and more. Prudency is key for iBuyers, since bad decisions can snowball really quickly and leave them with serious losses.
I mean, we we could solve our forecasting problems in most markets, for sure, and we can solve our operations problems. But what we can't solve is what the model is going to tell us about how much capital we need to raise, deploy and risk in the future in order to achieve a scale that we think is necessary to offer a fair price to customers for their homes in a competitive way.”
Richard Barton, CEO
“Up until about a week ago, I would've tell you there has been a pendulum change in what we've seen in the iBuying, more and more people starting their journey, coming to an iBuyer. And so I think the news that came out was shocking to a lot of people. But what I keep saying -- and I've tried to shout this from the rooftop for years -- is it comes down to execution and operations and logistics, as this is as much as a logistics business as it is a real estate technology company. And so, like any business, the execution is going to be key.”
Brian Bair, Chairman, CEO
“If you have to buy houses every day of the week in every type of market condition, you are just force feeding yourself potentially toxic assets. And so being able to be selective and offering customers a choice is important because we're a fiduciary to those customers and we have to do what's right for the customer. But that choice is also important to us because when we are in markets where it doesn't make sense to buy homes, we can just shift the people in RedfinNow to the brokerage so that we can list more of them.”
Glenn Kelman, CEO
Put simply, our observed error rate has been far more volatile than we ever expected possible and makes us look far more like a leveraged housing trader than the market maker we set out to be. We could blame this outsized volatility on exogenous black swan events, tweak our models based on what we've learned and press on. But based on our experience to date, it would be naïve to assume unpredictable price forecasting and disruption events will not happen in the future.”
Richard Barton, CEO
iBuying Strategy
Recently, Opendoor and Redfin talked about the importance of being flexible and adapting to all market conditions. Working as brokers and market makers is at the core of what these companies do, not flipping houses.
“Important is that our model really works in up markets. It's going to work in flat markets. It's going to work in down markets. We've talked about this before, but we are a market maker. We'd like to find that, that means we provide liquidity to customers, we're pricing certainty and we're taking a spread. We're getting paid for that.”
Carrie A. Wheeler
“The sustainability of this business has gotten so much attention this week, you may wonder if Redfin hopes to compete as an iBuyer depend on being smarter, luckier, grittier or just more cautious.
The answer is that Redfin isn't an iBuyer company at all. It's part of what we do, but it's not who we are. The way we define ourselves is that the company that offers homeowners the most complete set of options for selling one home and moving to another where iBuying is one of those options. We could never pitch customers on the convenience of a cash offer without highlighting that a brokered sale, especially at a fee as low as 1% puts more money in their pocket. Having this choice is as important for Redfin and to our customers, iBuyers that live or die on whether a homeowner chooses just 1 option, the cash offer, can thrive only when market conditions favor iBuyer. Redfin can be more flexible. When home prices are uncertain or when it becomes costly to borrow the money for buying houses, Redfin can buy fewer houses and list more. That flexibility is more important than scale.”
Glenn Kelman, CEO
Human Involvement
Despite the goal of some iBuyers to completely automate the sale process, the complexity and size of real estate transactions usually require the need for agents to make sure everything is functioning smoothly.
“Agents continue to play a critical role in the purchase and sale of residential real estate. Notwithstanding various agentless models like iBuying, they represent a very small piece of the market. And in approximately 90% of all residential transactions, an agent is involved as real estate transactions are complex, and agents help to facilitate the successful completion of the transaction.”
Richard J. Lampen, COO
“We use software to help us guide our offer specialists on their bids for RedfinNow homes, but there are 2 layers of human governance on our offers. So that means that we're not as fast as generating an offer, but we're more careful. I think other iBuyers sometimes had the owner of the home use an iPhone to do a video inspection of the property where someone in the home office was trying to see through the screen, what was going on. We sent out a license inspector. So that's a second bite at the apple to make sure that we're paying the right price, that we're getting good value for our money. So we have just aired on the side of caution because you have to, in a balance sheet business, the idea that a berserk machine learning algorithm could get us into a pickle is one that all the iBuyers have worried about, and we've just tried to figure out the right balance between scale and caution and Redfin is probably at the far end of caution.”
Glenn Kelman, CEO
Scale
While a lot has been made of iBuyers, they still represent a very small percentage of the real estate market. With time, the relevance will probably grow, but it’s unlikely that a majority of real estate transactions will be through iBuyers.
“iBuying isn't going away. I think we've argued that it's not going to be 20% of the market. I just was on Inman stage the industry conference saying that I think it's somewhere between 1% and 10% of the market. But I've never said it's going to be 0 either.”
Glenn Kelman, CEO
“In terms of iBuyer, putting it into context, there are 6 million transactions last year and I believe around 15,000 of them were iBuyer. And I believe this year is expected to be around 17,000. And so I think the actual impact on our industry hasn't been felt as much by our agents. When I think about what concerns me in terms of competition, I think about anything that an agent says is hurting their ability to do their business, serve their clients, or someone that makes them want to leave Compass and go somewhere else, right? And so we are not hearing from our 21,000 agents that they're losing business in any meaningful way from iBuyer.Now in terms of them moving up in the spectrum of value of the home, I think there are a couple of challenges with that. One is it's more capital-intensive and on top of an already very capital-intensive business. Two is as you move up price point, that type of clientele is more accustomed to using an adviser and paying for advisory services. And then lastly, the homes are more differentiated. And it becomes harder to algorithmically say what the value of a home should be. But with that, I'll pass it on to Kristen to walk through Compass Anywhere.”
Robert L. Reffkin, CEO
Compass Inc Q1 2021 Earnings Call
“A final factor in this wind-down decision is that to date, we have been able to serve only a limited number of customers. We've been able to convert only about 10% of the serious sellers who ask for a Zillow Offer, and we have tended to disappoint the roughly 90% who didn't sell to us. Given our hard-earned position at the top of the seller funnel with 220 million-plus average monthly unique users and the popularity of this estimate, there are better, broader, less risky, more brand-aligned ways of enabling all of our customers who want to move.”
Richard Barton, CEO
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