Most of the publicly traded iBuying companies are losing money right now as business gets up to speed. As the true pure play in iBuying, Opendoor (NASDAQ: OPEN), which went public earlier this year via a special purpose acquisition company (SPAC), is perhaps facing the biggest risk.
The company recently hit its 100,000th transaction and is currently operating at a pace that could enable it to meet its 2023 revenue run rate target by the end of 2021.
In the second quarter of 2021, Opendoor purchased 8,494 homes, up 136% compared to the previous quarter. That's far more than Zillow, which bought 3,805 homes in Q2 2021. On the selling side, which was up 41%, Opendoor parted with 3,481 homes, pushing the company's revenue up to $1.2 billion.
Opendoor ended Q2 2021 with 39 markets open (and has since added two more, bringing its total to 41 markets); 7,971 homes in inventory (representing $2.7 billion in value); and a contract to buy 8,158 homes (adding another $3 billion in value). Further, Opendoor's gross profit of $159 million was up 64% over Q1, and its net loss of $144 million was a nice improvement from Q1's $270 million loss.
Building the perfect bundle
The word "bundle" keeps coming up when we talk about the future of real estate. Zillow's 360 service is one take on the bundle approach, and Opendoor is working to create a single service to sell a home easily. For instance, the company now offers self-service home assessments via mobile phone.
Opendoor is also growing its home loans business and Opendoor-Backed Offers, which allow homeowners to make a cash offer on their next property. On the earnings call, CEO Eric Wu said that in some markets, as many as 50% of sellers use the buying service to purchase their new home.
Opendoor is forecasting revenue between $1.8 and $1.9 billion. The hot homebuying market essentially allowed Opendoor to accelerate its business plan and focus on scaling the business beyond simply opening up new markets.
Are iBuyers paying too much?
This hot real estate market, combined with very low inventory, has meant a lot of competition among iBuyers. Paying more for homes makes some sense, especially when they can quickly be resold, but there could be a risk if the market were to shift suddenly.
Industry-watcher Mike DelPrete recently published an update to his 2019 research on what iBuyers are paying compared to an automated valuation model (AVM). His analysis shows that as of Q2 2021, Opendoor was paying a median of 107.7% of the AVM.
Anecdotally, we've heard both buyers and investors sharing stories of receiving extraordinary offers from iBuyers. Some of this is just a consequence of high demand. But if Opendoor's vision of future demand is too rosy, the company could be left with homes it can't turn a profit on. For now, Opendoor is receiving strong price appreciation on the homes it sells -- as much as 9.2% in May 2021, according to DelPrete's research.
The Millionacres bottom line
At this point, iBuying still represents a very small piece of the total real estate market. There's no winner in this space yet, and there's plenty of market share to be taken. The race to create a single platform for real estate has some strong contenders.
However, unlike Zillow or Redfin, Opendoor doesn't have another revenue engine to rely on. Because of this, the market hasn't been particularly kind to Opendoor in its first two quarters, but this quarter's positive results could change that.