iBuyers - November 2022 Newsletter

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Real Estate

This was initially published in my November 2022 newsletter

It is no secret that the high demand for housing over the past couple of years was due in part to institutional investors, including iBuyers.

iBuyers are companies such as OfferPad and OpenDoor, which offer to buy your house with the intent of reselling it at a higher price. These companies bank on high volumes and rising real estate prices in order to make their profits, as their margins are very small (5% or so). Pretty much, iBuyers were planning on doing to the real estate market what Expedia and others have done to the travel market, but it has not worked out that way.

Zillow was the first major iBuyer to exit the business. In November of 2021, the real estate company famous for its Zestimate announced it would lay off 25% of its workforce and shut down Zillow Offers, the iBuyer arm of the business.  In Zillow's CEO's words: “We’ve determined the unpredictability in forecasting home prices far exceeds what we anticipated and continuing to scale Zillow Offers would result in too much earnings and balance-sheet volatility.” Oh, the irony. Remember this the next time you look at a Zestimate. Zillow was buying way too many houses for way too much money because they knew very little about the local markets they were trying to take over.  

OpenDoor is another company that was very active buying and selling during the pandemic, but it initially tended to underpay consumers. In fact, as part of a settlement deal, it was ordered by the FTC last month to pay a $62,000,000 penalty for "using misleading and deceptive information".  According to the FTC's complaint, while OpenDoor claimed it would net sellers more money, "in reality, most people who sold to Opendoor made thousands of dollars less than they would have by selling their homes using the traditional process." The settlement agreement also prohibits Opendoor from making deceptive, false, or unsubstantiated claims to consumers.  You can find the FTC news release here. If you have sold your house through OpenDoor you may be entitled to some compensation but the FTC has not clarified how the $62,000,000 would be disbursed yet. OpenDoor is currently also dealing with another issue: it failed to notice the downward trend in time and kept buying houses. Its inventory has increased and since it uses financing to purchase houses that are all declining in value, its ability to meet its loan obligations is becoming more questionable. It is not surprising its stock has lost 90% of its value since last November, and it will be interesting to follow its next moves. 

Last week, real estate Brokerage Redfin announced it was shutting down its ibuying business (RedFinNow), joining Zillow’s white flag retreat from a year ago and laying off 13% of its workforce. As the market continues to deaccelerate, there will be fewer iBuyers looking to purchase properties as they scurry back into the shadows from which they crept out.

One concern I have is the following: what happens when all these iBuyers decide to unload and sell off the properties they have been accumulating? While they may be exiting the real estate buying business, these companies still own thousands of homes they need to unload. The Great Sell Off is what would come next, which would exacerbate the trends we're seeing now, further destabilizing the market, increasing the available inventory and further depressing home prices.

In the meantime, if you receive an offer from one of the remaining iBuyers don't hesitate to reach out to me for a second opinion. As - unlike these companies - I am attuned to the local real estate market trends, I would be happy to tell you if you should take their offer or list your house on the open market.