Last November, Zillow Group (Z -2.27%) (ZG -2.02%), the largest online real estate platform, abruptly announced its plan to exit iBuying. Its nearly four-year run in the business resulted in a roughly $1 billion loss for the company.
Now it seems the largest iBuyer in the industry, Opendoor (OPEN -4.97%), may not be far behind. A recent report from YipitData shared the company incurred losses on 42% of the homes sold in August 2022. Is this a sign that Opendoor and the iBuying business model are doomed? Let's take a look and see.
What's going on
On September 19, 2022, Bloomberg published an article sharing that Opendoor could see as much as $175 million in losses in the third quarter of 2022. Rising interest rates have dramatically cooled home buyer demand and, in turn, caused housing prices to retreat.
In Los Angeles, 55% of the homes Opendoor sold in August and 76% in Phoenix were unprofitable. Opendoor has stated they plan to make good on their current contracts, even if that means they are paying more for the home than what they can sell it for. The losses it is incurring are likely only beginning.
Today's losses put the company on the same trajectory as Zillow before its full retreat from the iBuying business. Zillow was able to recover somewhat and redirect its efforts into its other services. But Opendoor doesn't have that luxury. Its entire business is backed by iBuying. Since the release of the report, Opendoor's stock has fallen 19% and has been down 83% over the last year.
Is iBuying doomed?
iBuying is a fairly new concept in home buying and selling. Short for instant buying, this model allows buyers to receive instant cash offers on their homes, eliminating the hassle of listing and the expense of working with a realtor. The company makes minor repairs and improvements, then relists the property at a higher price point, making a spread in between.
The idea behind iBuying is intriguing, but the profitability at scale or longevity has yet to be seen.
Offerpad (OPAD -5.88%) has gained the title of being the most consistently profitable iBuying company. In 2021, it produced a net profit of $6.5 million and was the only profitable iBuying company in the second quarter of 2022. Redfin (RDFN -2.62%) and Opendoor both suffered net losses in Q2 2022 of $3 million and $54 million, respectively.
At the end of Q2 2022, Opendoor had roughly 17,000 homes on its balance sheet. It wouldn't take long for the company to unload that inventory, given that in Q2 2022, it sold over 10,000 homes. However, that leaves the company with no inventory, major losses, and no clear path for pivoting.
I haven't been shy about sharing my skepticism around iBuying. The model was only sporadically profitable during one of the hottest and fastest growing periods in home price history. Now it's being put to the test, and there's a chance it doesn't come out of it. However, I don't necessarily think iBuying is doomed.
Offerpad, which doesn't seem to be suffering the same losses as its peers, could survive this challenging period, though it definitely has a bumpy road ahead. Investors looking for value buys, given today's volatility, may want to look toward other real estate stocks or fintech companies with a more proven and stable business model.