First, I think it is important to understand that I am not opposed to the iBuyer idea. To. The. Contrary. I’ve been watching and preparing for – and creating – real estate marketing automation software for almost twenty years. Adapting the CarMax idea to real estate is an innovation – the seed of iBuying as a retail real estate market – but I did not pay attention to the iBuyers in Phoenix until last Spring, when Zillow donned its wax wings. I understood immediately all of the arguments I’ve been making in these LinkedIn articles, mostly because I had been making versions of them all along.
Second, it is also important to know that there is nothing iBuyer big-wigs say in public that would not get them thrown out of my car. You can’t be a true entrepreneur until you learn how to fire the client, and I cannot count the number of pie-in-the-sky “investors” I have politely driven back to their vehicles: “Great to have met you, but I’d rather turn you down than let you down.” Based on their public pronouncements, all of the iBuyer executives are crazy, and I would fire them all if they were in my car – or in my employ, for that matter.
But third, I am obliged to note that there is more to iBuying than the real estate results. Those crazy pie-in-the-sky big-wigs would rather talk about anything else – for good reason – but there really are multiple streams of income available to iBuyers: Loan fees, title fees, rehab expenditures, inspections, appraisals, blah, blah, blah. The iBuyer can refer that business out for a spiff or it can own the provider and keep the profit-center in-house. Meanwhile, iBuying’s front-end is simply lead-gen: You raised your hand, so now it’s buy-or-die time – where the ‘business model’ of all of Web 2.0 seems to be putting boiler rooms in swankier offices.
However: Everything said by a functionary of a publicly-traded company is P.R. – a lie in an impeccable suit. Zillow says it needs 1 or 2 points of loan origination fees because taking 6% of the buy side and at least 3% of the sell side does not yield one spare dollar after everything, and yet one more dip in the till will top off the tank. Which part of that is a lie? Why not all of it? So: Accordingly: All the P.R. about ancillary income is probably also bullshit.
I think the iBuying business model as it is presently constituted is broke and getting broker. The iBuyers in Phoenix seem to have lost money on 42 of the 45 deals I looked at. That’s just the real estate income (outflow), so start-up costs and staffing are not reckoned against it, nor are fees-disguised-as-sales-commissions counted as income. But that doesn’t matter much, if, like Zillow, you may be losing more than $50,000 a house.
Repeat that: Zillow may be losing more than $50,000 a house, on average, in the 15 houses I looked at.
As a reminder, or for those tuning in late, I compared 15 closed listings for each of the Phoenix iBuyers, choosing the 15 closings most recent to July 18, 2019. No listings were cherry-picked, all of them are linked from the posts documenting each iBuyer, and I did nothing to influence anything in anyone’s favor. Zillow’s result are awful even in the awful company they keep, but any 15 consecutive Zillow closings would be approximately this catastrophic.
◊◊◊ Spanking the Phoenix iBuyers: OpenDoor, OfferPad, Zillow, The Bottom Line.
In any case, I’m just going to show you the charts, because they’re horrifying enough:
Someday Thalia will use live data and the power of recycled electrons to do reliable post-mortems on every iBuyer transaction. For now, we’re using LegoNumbers™ – rationally-imputed values – to get to apples-to-apples results, looking at the averages of the 15 closings considered for each iBuyer. (You can see the spreadsheet I’m working from at this link; Make a Copy and use it to pin down your own iBuyers.)
As we’ve noted, Rehab Costs are 1/2 or 1/3 of the Markup, depending on the iBuyer.
Carrying Costs are Purchase Price plus Rehab Costs, multiplied times 2% per month, divided by 30 (to get a per diem interest cost), with that number multiplied times Days on Market plus 45 days (split across the pre-listing and Sale Pending timelines). That would be a LegoNumber™ simulating DOOP. Hire me a clerical staffer and you can have real numbers – or you can wait for Thalia. This is more than reasonable for now.
Closing Costs are imputed at 1% of the buy price, 1% of the resale price, plus an additional $2,500, as an average, in iBuyer-paid closing cost concessions on resale. Weak listings attract weak offers. Who knew?
(Both loan interest and title fees are imputed at discounts, but neither are free, and other costs – taxes, HOA fees, power, water/sewer/trash – are not discounted no matter how many accounts you have.)
The Net columns are just calculations based on those numbers: Return equals inflow minus upkeep. ROI equals Return minus the initial investment – the Purchase Price plus the Rehab Costs.
And DOOP is death, ain’t it? The carrying costs on all of these homes are huge, even the ones that sold quickly. Residential real estate has always ignored the carrying costs of inventory – socializing those costs to the seller without reminding him that time is money. iBuyers do not have the luxury of ignoring their carrying and marketing costs – which may be too steep to bear against margins that are already clearly threadbare.
Go to the spreadsheet to see all the carnage, but the summary is largely adequate: OpenDoor is awful and getting better, OfferPad is getting better faster, and Zillow is careening among all its many disasters:
Q: How do you lose $160,000 on a housing “investment”? A: Like a boss!
Take pity on poor OpenDoor and OfferPad. They might well have garnered the honors as the Greatest Fools in Phoenix real estate. But what’s pissing away sixteen grand a house when Zillow is dumping three times that much money – on average?
This is not sane. This is not start-up shake-outs. This is not Underpants Gnomes gamely fishing alternative streams of invisible income. This is Wall Street-funded foolishness unseen in the internet age – already astoundingly foolish at times.
This is newspaper news today – the iBuyers are all run by people who are perfectly inept at marketing real estate – but it won’t be news for long.
Why not? Because the better iBuyers will be doing much better very soon. And the others will be acquired or bankrupt.
Do I have your attention? In a week’s time, I have gutted the three Phoenix iBuyers. And I know a lot more than I’ve told you so far. iBuyers make a lot of mistakes. I’ll show you how to make them pay for them…