The launch of Opendoor in 2015 has seemingly caused every company in the real estate industry to adjust its strategy to account for Opendoor and its fellow “iBuyers.”
Short for “instant buyer,” iBuyers purchase homes from motivated sellers at a “fair market price” determined by an algorithm. The price is intentionally below market so the iBuyer can clean, renovate, and flip that house on the open market for a tidy profit. Home sellers get the convenience of an all-cash offer that closes in a matter of days so they can take tap the equity in their current house to buy their next one.
Offerpad, Knock, and a bevy of other iBuyer startups have followed Opendoor’s lead into the space, and established players like Zillow and Keller Williams have started their own iBuyer programs, with the latter’s founder saying he didn’t want to but felt forced to do it.
But there’s one company that’s been noticeably slower to jump in—Redfin.
While listings competitor Zillow has expanded its Zillow Offers program to 10 markets since April 2018 and plans to double that number by the end of the year, Redfin Now—the company’s iBuyer program—has taken a cautious approach to expansion, having just entered its fifth market (Austin) earlier this month.
“We’re approaching this business in a sustainable way,” said Quinn Hawkins, Head of Redfin Now. “You can buy a ton of homes if you’re willing to pay just a little bit too much for them. We know running the business that there’s holding costs and risks.”
Redfin again signaled that it’s taking a different strategy with iBuying last week when it announced a partnership with competitor Opendoor in Atlanta and Phoenix, two markets where every major iBuyer operates except Redfin. Under the agreement, Redfin users looking to sell their home will see Opendoor as an option for selling, in addition to listing their home on Redfin. Redfin will earn a referral fee.
Hawkins says the partnership is about fulfilling the company’s mission of providing transparency to its customers so they can make the best decision for themselves, even if it’s not something Redfin offers. It also allows Redfin to get a piece of the iBuying action without investing millions into homes in markets where they’d be a relatively late arrival. For Opendoor, the company gets to leverage a better known brand to attract customers, not to mention its user base; Redfin drew 27 million average monthly visitors to its site and mobile app in 2018.
While a partnership with a competitor during a race to expand a new home selling concept might be viewed as a curious move, there’s no shortage of reasons the company might want to take things slow. The iBuyer concept is still proving itself, and it’s never been tested by a recession, which economists say is increasingly likely to occur sometime in the next two years.
Flipping houses—which is essentially what iBuying amounts to—requires a lot of money up front to purchase the homes. For the duration that iBuyers own the home, they have to pay to renovate and clean the house, and they have to pay any homeowner’s association dues and property taxes. When they sell the house, they might have to pay a commission to the buyer’s real estate agent. This all eats into what iBuyers gain on flipping the house, which is the difference between what they bought it for and what they sell it for on the open market.
What does this mean for their bottom line? In Zillow’s case, it means a razor thin profit margin of just 0.6 percent per home flip, according to the company’s first quarter earnings report. Given the thin margins, there may not be a reason to rush into a risky business that requires a ton of money up front and almost no profit.
Hawkins believes Redfin’s competitors are taking a similar approach to Uber and Lyft. They’re trying to expand to as many markets as quickly as possible, and then bank on a large market share making the economics work. But Hawkins doesn’t think the first-mover advantage is as potent as in other businesses because buying and selling a home is something people do every 5 to 7 years at most.
So if someone used Opendoor to sell their house today, they might tell friends and family about the experience, but they likely won’t return to the company for another home sale until years later, when iBuying—and the home purchase process in general—might look completely different than it does today. But when Uber beat Lyft to a market, its customers downloaded an app and subsequently used it two or three times a week, meaning they definitely secured a repeat customer by making it to the city first. It’s at best unclear if iBuyers can do the same.
There’s also a potential advantage to Redfin taking a slow approach to expansion in that the early entrants like Opendoor and Zillow end up educating home sellers about what iBuying is for it. While iBuying has provoked more than its fair share of headlines, most people still don’t know what it is or that it’s even an option. In Phoenix, which became an early test kitchen for iBuyers after Opendoor launched there, iBuyer transactions only account for around 5 percent of all home sales.
And eventually, it’s likely that every major market in the United States will have multiple iBuyers, and home sellers will shop around for the highest offer. At that point, iBuyers are just competing on who can offer the most money for a house. That will require the companies to find operational efficiencies so that they can keep their costs down so they can offer more for the house. Will being first or early to a market help an iBuyer in this future battle?
Zillow and Redfin also have different motives for getting into iBuying than Opendoor and Offerpad, which have a business model setup predominantly around buying and flipping houses. Zillow and Redfin have ancillary businesses that flipping houses can complement, such as selling listings ads, originating mortgages, and selling title insurance. If a customer flips a house to Redfin, the company can refer them to its listings, offer financing through its mortgage division, and so on.
Both Zillow and Redfin have acknowledged they’re striving to be a complete solution for people looking to buy or sell a house, from the moment they decide they decide to sell their current house to when they move into their new one. But does the iBuyer piece of it need to be in place as soon as possible for it to work?
With Redfin and Zillow taking wildly divergent approaches to expansion, we’ll soon find out.