Large home buying companies like Opendoor lightly renovate properties and then resell them for a profit. These companies are similar to scalpers who buy tickets and then resell them for much more than they paid. Some of these companies, also known as iBuyers, have closed down, while others have struggled in the recession.
When Ticketmaster began selling tickets to Taylor Swift's upcoming Erasu tour in January, millions of concertgoers were shocked to learn that the pre-sale, which was only open to fans with a special access code, had sold out.
Disappointed Swifties have had to turn to the secondhand market, where general admission tickets for the cheapest seats, with official prices starting at a reasonable $49, are being sold for as much as $243 on Stubhub (at least one person shelled out $5,500 for floor seats).
Scalpers — individuals or groups who quickly resell something for a profit — are winning. Meanwhile, corporate scalpers in the housing market — companies who buy thousands of homes with little to no effort and then relist them for a profit — are struggling.
As the housing market stagnates and stalls, it’s getting harder for these companies to turn a profit. Their losses highlight how high borrowing costs hit companies that don’t add much value hard. Last week, the two remaining big home flipping companies, Opendoor and Offerpad, reported dismal earnings, another sign that their business models are extremely risky.
Opendoor, a $900 million public company based in San Francisco, and Offerpad, a $143 million public company based near Phoenix, Arizona, promised investors they would make most of their profits by essentially flipping homes, or flipping them.
These companies, and the now-disbanded divisions of Zillow and Redfin, called themselves instant buyers, or iBuyers, because they claimed homeowners could sell their properties to them quickly and easily, without the stress of hiring a real estate agent and listing the property on the open market.
But unlike private home flippers, who typically target neglected or outdated properties and make extensive cosmetic and mechanical renovations before putting them back on the market, iBuyers have been notorious for selling properties just weeks after the transaction closes. The company has even admitted to making minimal renovations in the weeks before putting a property back on the market. It's a volume game, and iBuyers have spent billions of dollars on tens of thousands of homes in cities like Phoenix, Las Vegas, Atlanta and Tampa, where housing markets have boomed during the pandemic.
An Opendoor spokesperson confirmed to Insider that the company only makes necessary repairs to make properties “clean and safe,” as opposed to the major renovations that smaller real estate companies typically undertake. An Offerpad spokesperson also told Insider that the company aims to buy, renovate and sell each property within 100 days.
Timing the market is hard, and it's hard for anyone to bet that prices will keep rising indefinitely, but the strategy of mass home flipping that was born when Opendoor was founded in 2014 and grew in popularity at the onset of the pandemic hasn't had to withstand a housing market downturn until now.
Opendoor and Offerpad set to suffer big losses in 2022
Last spring, the Fed raised interest rates, making mortgage borrowing more expensive.
People were reluctant to sell their homes for fear they wouldn't be able to afford their next home due to high borrowing costs. Home prices began to fall slightly across the Midwest and fell more sharply in Western markets such as Phoenix, Las Vegas and San Francisco.
Home flippers were hit hard.
One example is Opendoor's 2022 earnings, released last week. The company lost $399 million in the last quarter alone after selling more than 7,500 homes during the period. For all of 2022, the company posted a net loss of $1.4 billion. That's more than double the $662 million the company lost in 2021, when borrowing rates were low and home prices were rising.
Opendoor's shares fell after the company's earnings report last week and opened at $1.45 per share on Tuesday. The company's shares are down 85% from the same time last year.
Opendoor had about 13,000 homes available for sale as it finished 2022. Despite the big losses, an Opendoor spokesperson told Insider that the company has no plans to “dump” any of its existing inventory.
Meanwhile, rival Offerpad, which has a similar business model to Opendoor, reported a fourth-quarter net loss of $121 million in its earnings report last week. The company lost $32,800 per home sold last quarter, according to the earnings report, but for the full year, Offerpad made a profit of $9,300 per home. Offerpad's shares are now down 86% year over year. Offerpad still had 1,800 homes in its inventory at the end of December.
Zillow and Redfin shut down their iBuying divisions due to losses
The situation could be even worse: Some of Opendoor's rivals did not survive the pandemic.
Zillow and Redfin have shut down their home-buying platforms to stem losses.
Zillow exited iBuying in November 2021 after determining it was taking big losses on many of the homes it purchased in major markets like Atlanta, Phoenix and Houston. The company lost $881 million in 2021 alone. The situation got so serious that CEO Rich Barton said further losses on its iBuying division, Zillow Offers, could “put the entire company at risk.”
A year later, Redfin discontinued its home-flip business, RedfinNow.In a November memo to employees, CEO Glenn Kelman said RedfinNow could lose as much as $26 million “before overhead” in 2022. That was smaller than what competitors were expecting to lose, “but still more than we can afford,” he said.
“One of the problems is that iBuying involves huge amounts of money and risk, with the rewards currently uncertain,” Kelman said. “We've put hundreds of millions of dollars into homes that you probably don't want to own right now.”
Home and car resellers add very little value
With the economy on the brink of recession and the Fed continuing to raise interest rates to tame inflation, rising borrowing costs are hurting companies that don't create value.
In essence, the primary business model of home flipping companies is not to create significant value immediately. Typically, minimal renovations are made and the focus is on getting the property back on the market and reselling it as quickly as possible. Instead, these companies act as middlemen between buyers and sellers during market bull runs, looking to pocket immediate equity gains and commissions on both sides of the transaction.
It's not just homes: Companies that flip other high-value goods, like cars, on short notice have also seen their market capitalizations take a big hit since the era of free and cheap capital came to an abrupt end last year.
Carvana and Bloom, publicly traded companies that quickly buy and sell cars online, benefited hugely from demand for new and used cars during the pandemic, but their profits and stock prices have plummeted over the past 18 months.
Home sellers face tough times in 2023
For iBuyers, 2023 will bring more pain.
The outlook for home sellers – both individuals and businesses – is bleak in many parts of the country, with mortgage rates hovering at 6.5% and sales prices continuing to fall in major cities across the country.
But there's good news for buyers.
This could be an opportunity for iBuying companies to make low offers on properties for sale. Opendoor, Offerpad and other companies that have rushed to buy homes are now slashing the asking prices of these homes in an effort to get them off their books. And any significant increase in inventory or homes for sale in markets from Phoenix to Las Vegas could drive up the asking prices of nearby homes. Downward spiral.
A still-softening market will continue to put iBuyers in a precarious position, as real estate analyst Mike DelPrete wrote in a blog post on Feb. 14. But it's not a good solution if these companies are going to hold off on buying homes, he added.
“If Opendoor were to experience a significant slowdown in home buying, it would reduce its losses, but it would also eliminate its ability to make a profit,” he said. “Think about it: If a coffee shop loses money on every cup of coffee it sells, the solution isn't to sell less coffee, but to find a way to sell coffee profitably.”
Correction: March 2, 2023 — An earlier version of this story misstated how much Offerpad made on homes in 2022. Offerpad made a profit of $9,300 per home in 2022 and lost $32,800 per home in the fourth quarter of 2022.