Did iBuying Fail Its First Big Market Test?

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It was just a few months ago that iBuying — the process through which companies buy homes and then renovate and sell them — looked like the future of real estate. In their most recent earnings statements, both Zillow (NASDAQ: Z) (NASDAQ: ZG) and Redfin (NASDAQ: RDFN) touted the success of their aggressive expansion into dozens of markets with more to follow.

They weren’t alone, many major real estate brands and startups either launched their own iBuying programs or entered into partnerships. One year ago, Opendoor raised $300 million on a $3.8 billion valuation.

It seemed that all that remained was for the companies to fine-tune their purchase algorithms and continue to take over new markets. But then COVID-19 happened, and suddenly all bets were off. In just a few short weeks, nearly all major iBuyers, including Zillow, Redfin, Opendoor, and Offerpad, paused their iBuying, citing the outbreak as the reason.

How fast will iBuying return?

Current indications are that iBuying is paused rather than stopped, although it’s unclear for how long. Zillow CEO Rich Barton has said that the company plans to fully restore Zillow Offers “once health concerns pass and local health orders are lifted.”

A larger concern for iBuyers with a large inventory is that when they are ready to sell again, prices may drop, hurting their bottom line. During Zillow’s last earnings call, it indicated that it had 2,707 homes in inventory. Should the company be unable to sell those homes for more than it paid, that could have a substantial impact on Zillow’s bottom line.

The concept of iBuying is just a few years old and was created during a time when both prices and sales were rising. It has never been tested by a down market. The ability to buy and sell homes at scale could prove to be an advantage in a market where prices are falling. However the uncertainty caused by the COVID-19 outbreak and the resulting changes in behavior have left a lot of questions unanswered about the traditional spring homebuying season.

Not all iBuyers are on equal footing

One thing that real estate analyst Mike DelPrete pointed out in his analysis is that while Redfin and Zillow have other avenues of income, startups that are pure iBuyers, such as Opendoor and Offerpad, don’t. While Zillow and Redfin have invested heavily in iBuying, it’s only part of their revenue streams.

However their other sources of revenue are also similarly impacted. Zillow has offered a 50% discount to its Premier Agents on their monthly bill for real estate leads. Redfin, which operates as a brokerage, announced in a letter to shareholders that it will temporarily increase the fixed amount of agent paybut also warned that furloughs and layoffs could be forthcoming. Zillow and Redfin are also working to sell the homes they have already purchased through iBuying.

Both Zillow and Redfin are publicly traded and have to answer to company shareholders. Many other iBuyer startups are funded by venture capital, such as Opendoor, which has received millions of dollars from SoftBank‘s (OTCMKTS: SFTBY) Vision Fund.

The Millionacres bottom line

At this point, there are far too many shifting economic factors in place to predict the future of iBuying. Certainly the fact that nearly all iBuyers paused activities so quickly is a sign that this business is still nascent and vulnerable to economic swings.

When it began, iBuying rolled out on a market-by-market basis starting with cities where prices were relatively low and the types of homes available were relatively standard, such as Phoenix and Las Vegas.

When iBuying returns, it may not be as simple as flipping a switch. Individual real estate markets may be impacted differently, depending on local economic factors. For each of these companies, adjusting their purchasing algorithms to a changing world may be the difference between success and failure.

Posted by Million Acres

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