So-called iBuying companies continue to rack up major losses, with the two largest companies in the industry, Opendoor and Zillow, losing a combined $607 million from their business of buying up homes and selling them in 2020.
That’s according to the latest research from the real estate technology industry strategist Mike DelPrete, who revealed that the losses translate to a deficit of about $40,000 on each home Opendoor and Zillow sold in the last year.
Opendoor and Zillow lost a combined $650 million in the previous year as well, DelPrete said.
The analyst said that the COVID-19 pandemic and the resulting growth of the U.S. residential real estate market has proved to be a real test for iBuying companies. The iBuying business model sees companies such as Opendoor and Zillow give people a way to sell their homes quickly. Homeonwers can request an instant offer on their home and then sell it to the iBuyer immediately if they decide to accept it. The iBuyer will then renovate the home if necessary, and then try to sell it on at a profit.
The problem with the iBuying business is that its instant offers usually come slightly below the market value of the home – that being the price homeowners must pay for a quick sale.
In its early days the model worked well, but with COVID-19 creating such a hot housing market the instant offers they make are no longer appealing to most sellers. Home sales have been booming, and it’s possible to sell a home very quickly, often above list price, on the open market. As such, few buyers are willing to lose money on the sale of their home just to obtain that cash a few days faster.
DelPrete says it’s noteworthy that Opendoor and Zillow both sold far fewer homes last year than they did in 2019.
Part of the problem, DelPrete said, is that most iBuyers temporarily paused their buying activity in March when the pandemic first emerged in the U.S. However, they resumed their purchasing activity in the summer when it became clear the coronavirus wasn’t going to cause a slowdown in the housing market.
DelPrete said that he believes the sales slump is only a temporary setback. He noted that Opendoor seriously ramped up its inventory of homes in late 2020 and said that should lead to much greater sales in the first quarter of this year.
In the meantime, Opendoor has responded to the situation by expanding its business model to include escrow, title and other services. Most recently, the company announced that it would further back its pre-approved customers by making an all cash offer on the home they’re interested in, so they can bid for it free of any financing, appraisal or home sale contingencies. Should the client fail to win approval for a mortgage later, Opendoor will go ahead and buy the home for cash anyway.
Opendoor has tried other tactics too, notably reducing both its own brokerage commissions and also the buyer agent commissions it offers.
The reduced fees do at least benefit consumers, and may just be enough to make iBuyers enticing again. DelPrete notes that both Opendoor and Zillow are now paying very close to market value for the homes they buy. In addition, sellers may be able to save on money when they choose to use the iBuyer’s additional services together, essentially letting it complete the entire transaction for them.
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