2 weeks Ago By [email protected] (Jeremy Bowman)
iBuying has been one of the most disruptive ideas to enter the real estate industry in decades. iBuying, which stands for instant buying, is home-flipping taken to its logical end, done at a large scale by corporations, rather than just a small contractor. The practice once held a lot of promise as technology has made it easier to buy and sell a home, see comparable sale prices and other useful information, and collect and analyze data to know what works and what doesn't.
The concept was embraced by virtually every real estate tech player, including Zillow and Redfin . However, it didn't work out as hoped for those two companies and they threw in the towel in 2021 and 2022. Zillow closed its iBuying business, Zillow Offers, in 2021, after finding that its algorithm for estimating home values wasn't nearly as good as it thought it was.
At the time, CEO Rich Barton said, "We've determined the unpredictability in forecasting home prices far exceeds what we anticipated." Redfin followed suit the following year, amid a sharp slowdown in the housing market. CEO Glenn Kelman underscored the high cost of capital and risk in buying homes to flip, and the Redfin Now segment lost more than $20 million in 2022.
Opendoor is still standing Not all the iBuyers have folded, as Opendoor Technologies ( OPEN 2.38% ) and Offerpad seem to have made it through the worst of the housing market. Interest rates are expected to start coming down at the Fed's next meeting in September, which will bring some much-needed relief to mortgage rates, and it's likely to unlock pent-up demand in the housing market, which should favor Opendoor.
Investors seem to be betting as much. Since Fed Chair Jerome Powell said that the "time had come" for rate cuts last Friday at the Jackson Hole symposium, Opendoor shares jumped 24% in just two sessions. Offerpad, which is much smaller than Opendoor and trades on much lower volume, also jumped by a similar amount, showing renewed enthusiasm for iBuying.
The argument for such a surge in Opendoor stock seems clear. Home-flipping is a cyclical business . It's easy to make money when home prices are rising, but much harder to do when prices are falling.
Falling home prices forced the fallout in iBuying, with Opendoor's stock crashing in 2022, but a rebound in home sales could rescue the company. Can Opendoor take advantage? While Zillow and Redfin were closing their iBuying businesses, Opendoor was also shrinking. The company issued multiple rounds of layoffs, sharply reduced its inventory of homes, and made other cost cuts in order to ride out the slow housing market.
Opendoor has made progress on the bottom line, shrinking its second-quarter adjusted earnings before interest, taxes, depreciation, and amortization ( EBITDA ) loss from $168 million in the quarter a year ago to $5 million. It's also accelerated its home purchases, which were up 78% to 4,771 homes, showing confidence in a housing market recovery after rationalizing home purchases earlier. Opendoor intends to get more aggressive with its homebuying, reducing its spreads, meaning the discount to its estimate of the home value that it offers to sellers.
The company makes money on a 5% service fee it charges sellers in addition to the margin it makes on the sale. Opendoor still expects a challenging housing market in the third quarter, calling for a contribution profit -- which is gross profit after certain additional expenses -- of $35 million, and it also sees an adjusted EBITDA loss of $60 million-$70 million in the quarter. It accepts revenue of $1.
2 billion-$1.3 billion, up 29% at the midpoint, though revenue isn't the best way to judge this company as it's easy for it to make unprofitable sales. Opendoor does expect tailwinds from falling interest rates, but it hasn't factored it into its guidance.
Is Opendoor a buy? As a stock, Opendoor looks well positioned to capitalize on lower interest rates, and investors seem prepared to bid the stock higher on favorable signs for the housing market. However, the underlying business model is still unproven, and Opendoor was only briefly EBITDA-positive in its publicly traded history, which came before home prices crashed in 2022. Additionally, there's no guarantee that home prices will rise even if mortgage rates fall.
After all, home prices are already at all-time highs, and lower rates could encourage more sellers to enter the market as it relieves the "lock-in effect" from the low rates of the pandemic. Under these circumstances, the best approach with Opendoor for those interested in the stock seems to be to open a small position for now and wait for clearer evidence that the business can capitalize on lower rates, as there's still a lot of uncertainty. If the company can make iBuying work, though, there's a lot of upside in the stock.
.
