Is iBuying a Viable Long-Term Strategy for Opendoor, Offerpad, and Redfin?

With Zillow group (NASDAQ: ZG)(NASDAQ: Z) iBuying officially pull the plug, investors in other companies that want to revolutionize the property buying and selling industry are understandably concerned. In this Fool Live clip, recorded on November 9th, contributor Matt Frankel, CFP®, along with real estate analysts Matt Argersinger, Austin Smith and Anthony Schiavone discuss whether investors in the other big iBuyers should be concerned.

Matt Argersinger: I think the first thing I want to do is ask the jury if I might start with Matt Frankel, which is before we get to Zillow. Is Zillow’s exit a bad omen for the entire industry or the business model itself? Or do you see that this industry is like in companies Offer block (NYSE: ON), Open door (NASDAQ: OPEN) should success be on the road?

Matt Frankel: It’s viable. The question is how do we make it viable? Who will win the race to climb it fast? Right now iBuyers charge a 5 to 7% fee for each home. They also offer things like mortgage services. But overtime they could add things like home warranty, smart home services, energy efficiency services, insurance products, etc. that can really add to the profit margin. There is a lot that could be done to increase margins. I am still very optimistic about iBuying. I want to hear what the other guys think, but I’m still all in.

Argersinger: Austin, what do you think of iBuying? You mentioned earlier that you are definitely seeing some promises here over time.

Austin Smith: Yes. All-in at iBuying with the two experts I’m following most closely to even out the emotions here are Matt Frankel and Mike DelPrete. I think Mike DelPrete is an extremely talented skeptic. I always like to receive his data, that dampens my enthusiasm. But I see companies that scale very quickly, grow and increase their operational efficiency. If you look at a snapshot of a point in time, the recent price hike may have caused most of these efficiency gains.

But the majority not all. If you look at the operations of Offerpad and Opendoor, it is very clear that they are becoming more operationally efficient quarter by quarter beyond the price hike. I want them to get better and they are. And to Matt’s point, the ancillary services that you can hook up to these transactions are enormous, and this is the largest transaction most people will ever make in their lives. This is when they are stressed out and frustrated to do all of the different services. I’m very optimistic about iBuying, although I like that Mike DelPrete tempered that with his skepticism.

Argersinger: Yes. Anthony, I don’t know if you would like to share your opinion on iBuying as well.

Anthony Schiavone: Yes. Just to play the devil’s advocate a bit here. Two concerns. At iBuying, I initially assessed how exactly their algorithms were currently being liked by Zillow, without really going under the hood. How exactly can you get an estimate? Two was once a downturn in the market how will they lower cash flow when you have about 10,000 homes in the quarter. How can you resell these homes at a lower value and express these homes? They don’t generate the cash flow, they are just assets that sit there. Those are the two concerns I have, but it definitely has potential and every new industry, I mean, there will be ups and downs, question marks.

Argersinger: All the best all around. My attitude will be much more qualitative in the sense that many of us in the panel have bought and sold houses. It is still a draconian process, an expensive process, time consuming. Without a doubt, I think there is a real appeal to a solution that can make it faster where there is no fuss, it can happen like I said, you can even get an offer from an iBuyer in a flash, income, you pay a Fee for this, but it takes all the hassle and normal frictions out of selling a home.

I think the real estate buying and selling industry is prepared for this and just needs to happen faster and with less friction. It doesn’t necessarily have to be done at a lower cost, as there is sure to be some real cost involved. But I just feel like someone has to be on the other side of the table who can do it quickly. That is essentially what the iBuyers are trying to do. It’s just that it’s still only 1% of home sales as we’ve seen. Maybe it will take years.

But even if it takes 5 to 10 percent, that’s pretty telling as a percentage of sales in a given quarter. I think there is room for it. Some of the other points are one of the things that have yet to be clarified. It is likely very risky, operationally challenging, and capital intensive right now. But where there is a way I think there is a profitable solution.

Blacksmith: Watch CarMax it’s the same model that atomized people know they’re not getting the best price for their car, but they are getting an acceptable one and they can sell it whenever they want and they don’t have to worry about cleaning and it there were lots of sales signs on it and people came by and sat in their car, we didn’t want to buy it. I don’t see capital intensive right away, but in the same way CarMax has a forecast and an inventory of what they can sell it for. This is tremendous value for consumers through their coordination with their wallets and their bikes. This is a business they like to take advantage of.

Frankel: What Matt said has to be added. IBuyer customers are very satisfied with their experience. Offerpad conducted a study that added a 95% customer satisfaction rate. Third party studies say they have a Net Promoter Score of 81 which is good off the charts. I don’t know of any people who sell their home through traditional brokers. I guarantee your satisfaction rate is not 95%. I’ve sold five houses through traditional brokers in my life, I believe, and I wasn’t 95% happy with the way it went.

It is now only 1% of the market. But as it grows you will see the network effect of people telling their neighbors, oh, I sold my house to Offerpad and it was a great experience. I sold my house to Opendoor and it was a great experience. I sold my house through ReMax and it was awful and things like that. You will see this network effect when it reaches a critical mass there. Right now, most people don’t know anyone who has sold a home to an iBuyer because it is only 1% of the market. But it won’t stay that way forever.

This article represents the opinion of the author who may disagree with the “official” referral position of a premium advisory service from the Motley Fool. We are colorful! Questioning an investment thesis – even one of our own – helps us all reflect critically about investing and make decisions that will help us get smarter, happier, and richer.