A Business Model Destined to Fail

A Business Model Destined to Fail

You’ve seen the ads. “Hi, we’re OfferPad, and we want to buy your home.” 

Oops. They forgot to continue. “Hi, we’re OfferPad, and we want to buy your home for 15% less than it’s worth.”

Am I criticizing? Actually, I’m impressed. Their marketing is brilliant. It’s driving thousands of homeowners to their website each month. 

Of course, most people get their “cash offer” and laugh, or vomit. They have no interest in selling 15% below market. 

But do institutional homebuyers (known as “iBuyers”) care when you refuse to sell? Surprisingly, they’re better off! Why? 

iBuyers lose money doing what they should do well… buying and selling homes. Most businesses profit by doing more business. iBuyers lose when they do more business. 

I just heard stats showing that iBuyers typically lose 5% per deal. For every $100,000 they invest in homes, they lose $5,000. So what’s the point?   

Could it be that these firms have an ulterior motive?  They’ve been in the home flipping game for years. The real estate market is fantastic. Yet they still can’t make money. 

So is there a hidden game plan? Let’s see. But first, I’ll give you an iBuyer overview. 

The biggest players in the industry are Opendoor, Zillow, and OfferPad. Amazon and Redfin are just getting in the game. 

Opendoor has been around the longest, founded in 2014. As of April 2019, it looks like they raised $1.3 billion in equity capital, $3 billion in debt capital, and have a valuation of about $3.9 billion ($400 million less than people invested). 

Mike Delprete, a respected iBuyer analyst, published data showing that while iBuyers only have a .2% (⅕%) market share nationally, they have about a 6% share of the Phoenix metro market. In other words, about 1 in 17 Phoenix metro homes sells to an iBuyer. 

Phoenix has long been a target market to test real estate concepts before pushing them out nationally. It’s a “homogeneous” market, with consistent weather and similar looking homes. 

That makes it easier to predict market trends. So iBuyers are trying to figure out how to make money in the Phoenix area first. 

A friend with insider info about Zillow told me the firm buys only 2% (2 in 100) of the homes they make offers on. And they lose money on the 2% they buy. 

So why does Zillow pursue a business model with a 98% customer disappointment rate, losing money on the 2% of transactions that succeed?  Crazy, right? 

I suspect Zillow buys and sells homes as a loss leader to lure you in and capture your personal data. They recognize the value of identifying people thinking of selling, and then selling their info to real estate agents, mortgage companies, moving companies, etc. 

So beware when you request a purchase offer from any of these firms. Is it a sham to capture your personal info? If someday in the future your phone starts ringing, bombarding you with solicitors, you’ll know it to be true.

I’ve been in the real estate business 40+ years. There have always been small investors who hoped to make a few bucks fixing up a home, then selling it for profit. I’ve never had a problem with this because they added value, often worth paying for.

But today’s Wall Street funded iBuyers don’t add value. They are greed-driven middlemen trying to buy your home low, sell it high, and capture your personal data. 

No worries. They won’t be around long. It may be trendy, but it’s stupid to think that red is the new black, and sustained unprofitability is okay. That’s particularly true when the path to profitability is capturing your info rather than providing you with value.

When the economy burps (it always does) and when interest rates rise (they always do) iBuyers will evaporate like poof, the magic dragon. They’ll go down in history as the Edsel of real estate. 
(If you’re not familiar with the Edsel failure, check it out online). 

“The trouble with the world is the stupid are too sure and the intelligent are full of doubt.  
– Bertrand Russell

Enjoyed this post? Sign up for my blog.

sign up today

Leave a Reply