iBuying Industry | Opendoor vs Zillow

iBuying Industry Overview

Residential real estate is one of the few markets that remains relatively untouched by digital transformation, and by far the biggest. In 2020, the existing home sale market is estimated to have reached $1.6tn. Despite the large market size, information and key players remain highly fragmented and decentralized, with millions of realtors and brokers, and thousands of MLS’s. Furthermore, the buyer / seller experience is highly complex and time consuming. This creates an environment ripe for disruption.

One rapidly growing sub-industry trying to tackle these issues is the ibuying industry. Through ibuying, sellers can sell their houses via digital platforms to buyers such as Opendoor, Zillow, or Redfin in all cash deals. The ibuyers then inspect the house, do touch up / restoration work, and sell the house through their digital platforms to the next homeowner. This business model tackles multiple problems with the traditional home selling and buying process:

1.       Convenience: Sellers going through the traditional process face hassles and inconveniences related to preparing listings, negotiating offers, hosting open houses, and more. iBuyers allow you to bypass these steps by getting an offer with minimal disruptions to sellers’ daily living.

2.       Speed: The traditional home selling process between finding a realtor to actually closing on a sale can take 110+ days. However, if a seller uses a company like Opendoor, he/she can get an offer as quickly as in 3 days.

3.       Certainty of Closing: One of the most common reasons for failed transactions is the buyer not being able to obtain a mortgage. iBuyers address this issue by providing cash offers.

4.       Costs: In traditional sale processes, sellers will often have to do minor repairs, clean, and prep the house to make it look appealing to buyers. Additionally, they will likely have to pay a real estate agent various fees to bring their house to market. These costs can quickly add up and sellers may walk away with less cash than they initially expected. With ibuyers, sellers know upfront what the offer price is and how much in fees are charged, leaving little room for unexpected costs.  

All of these advantages presented by ibuyers is beginning to catch consumer attention. In Q4 2017, ibuyers made up 0.2% of buyers. 2 years later in Q4 2019, ibuyers made up 0.7% of buyers. However, the COVID-19 pandemic at the beginning of 2021 caused ibuyer market share to shrink to 0.1%. We view this as a shot term decline and expect rapid recovery as well as continued market share gain by ibuyers moving forward.

Thesis

·       Large and underpenetrated TAM: (detailed above)

·       Clear value proposition: (detailed above)

·       Strong secular industry tailwinds: Profitability growth of the ibuying industry is closely tied to price increases in the real estate market. Market research shows that as inventory of existing single-family homes supply continues to face constraints, housing prices are likely to continue to experience 2-5% increase yoy in the future. Additionally, millennials will be aging into “house buying age” over the course of the next 5-10 years. This influx of demand mixed with supply limitations will continue to drive house prices up for the near-medium term. Additionally, studies show that millennials are more likely to resort to digital channels to find real estate, thus expanding the ibuying industry’s addressable customer base.

·       Growth opportunity with adjacent services: As the industry matures, players will be able to add adjacent services related to home buying and selling. Already, companies have started to add title and escrow products, with high levels of attach rate achieved. Additional services such as mortgage and home warranties could be additional sources of growth in the future.  

·       Economies of local scale: Residential real estate is a highly local business. As companies increase their market share in individual cities, they will be able to obtain more favorable rates from suppliers such as brokers. Additionally, the more inventory a player controls in a certain market, the more pricing power they will have at point of sale.

Considerations

·       Natural limitation on adoption: Although the industry saw accelerating growth pre-pandemic, it is unclear exactly what portion of sellers will adopt ibuying. Trying to expand outside of a “sweetspot” demographic may eventually lead to increasing customer acquisition costs and erode margins. However, given the massive market size, even 5% penetration would represent significant upside for current players.

·       Cyclical business: The industry is highly susceptible to economic cycles. In 2020, industry leader Opendoor saw revenue decline by ~45%. In Q2 2020, ibuying market share fell by 84%. Although a part of this dramatic decline was due to lock down orders, economic cycles that don’t impact transaction volumes but do impact interest rates and price of houses would still negatively impact the industry. If interest rates rise and/or house prices fall, then the industry will experience margin pressure as the delta between inventory purchase price and sale price may decrease. 

·       Competition: Although the industry is still relatively young, multiple players have popped up over the last three years. Zillow is the market incumbent who added an ibuying business in 2018. Today, the market leader is Opendoor with ~2/3 market share. Smaller competitors include Offerpad and Redfin. As the industry grows, it is possible that other adjacent players may also enter the market.

·       Smaller cities are less attractive: iBuyers are already present in major MSAs today. As companies expand to less populated geographies, they may not be able to achieve the same geographic density they have seen in current geographies due to lower population count and lower housing turnover. This could make it difficult to achieve profitable scale.

·       Cash flow drag: For growing businesses, having enough inventory is critical. It is also incredibly cash draining. As the business continues to grow, buying inventory will continue to be a drag on free cash flow.

Opendoor

Opendoor is the market leader in the ibuying industry, with ~64% market share in 2019, ~3x bigger than the next closest competitor Zillow. Up until COVID-19, the company saw >150% yoy growth. Today, the company trades at ~1.0x NTM revenue. Opendoor has a few advantages over other industry competitors:

·       First mover advantage: As the first major player in the ibuyer industry, Opendoor has the greatest market share, and is ahead on product development and services attach rate.

·       Better economies of scale: Given its greater market share in many local markets, it is likely that they’ve been able to achieve better unit economics, at least in the near term.

Zillow

Zillow is the second largest player in the ibuying industry with ~22% market share in 2019. Zillow originally started off as an online provider of home value estimates and earned revenue through online advertising. Its core asset is a database of ~135m home prices across the US. Since 2018, the company has expanded into ibuying, lending, and other services. As an industry “incumbent”, Zillow’s ibuying business stands to benefit from many differentiating factors:

·       Stronger partner ecosystem: Zillow already has partnerships with real estate agencies, MLS’s, and other industry players. This is a meaningful advantage over competitors because Zillow can leverage this network to provide better services to sellers. Even if a seller does not take the cash offer from Zillow, they can directly connect seller with a local real estate agent who is already in Zillow’s IMT network. This provides a more seamless experience for sellers and gives Zillow management over more transactions. For example, Zillow can take advantage of it’s “gatekeeper” position by charging real estate agencies fees for referring sellers from their ibuying platform. Because of Zillow’s pre-existing network, they can monetize a seller in ways that other competitors cannot. Similarly, on the buying side, Zillow can provide one of the largest arrays of choices to home buyers because they list houses from partner real estate agents and newly constructed developments as well. This network provides the most value to home buyers and gives Zillow’s house inventory access to more buyers.

·       Stronger brand recognition: Zillow is a brand with wide consumer recognition. This means that Zillow.com is one of the first websites a seller or buyer visits at the start of their transaction journey. This gives Zillow the widest seller / buyer funnel and gives them “first shot on goal” to drive conversion. Other competitors may only be the second or third search and therefore possibly have fewer and lower quality views. With stronger brand and IMT customer funnel, Zillow may be able to have lower seller / buyer acquisition costs. Consumers may just find it easier and more convenient to get loans, buy houses, and shop for house prices all in the same ecosystem, possibly driving higher attach rate of additional services for Zillow than competitors.    

·       Data advantage: Providing house value estimates has been Zillow’s bread and butter for many years longer than other competitors. As such, it is possible that the company may have a data advantage in being able to triangulate the right price to offer sellers and buyers. This may be able to give them an edge in their pricing strategy, driving a better margin profile than competitors.

Conclusion

Although Opendoor may have been the market leader historically, COVID-19 decimated market penetration for the industry. Moving forward, we think Zillow’s existing partner ecosystem, brand recognition, and historical database puts it in a strong position to possibly overtake Opendoor and become the market leader.