Deidre Woollard: This Millionacres hour we're going to talk about iBuying, because I think that you and I, Matt, [laughs] have so many opinions on iBuying, and we're getting to the part we're going to have Zillow and Redfin earnings soon. We've got Offerpad going public, and so there's just a lot happening right now. The first thing I want to mention is that Case-Shiller numbers came out today. Did you see those?
Matt Frankel: I did not.
Deidre Woollard: Numbers that Case-Shiller was up 14.6 percent, highest price in 30-plus years really. The most interesting thing I keep finding about this, is that Phoenix is the hottest market, and you think Phoenix is right now the actual hottest [laughs] market, because it's so warm there, but people keep moving.
Matt Frankel: The warm places seem to be the hottest markets right now, like Las Vegas is a particularly hot market as well. I actually heard a bigger statistic, I was reading on the National Association of Realtors website, the median sales price of existing homes is up 23.6 percent in May. That's pretty impressive and makes me want to sell my house. [laughs]417.
Deidre Woollard: I think one of the things that we're dealing with right now, and Jason Hall and I were talking about this last week. It's like, on the one hand, it's such good news for home owners, because they have equity, but the affordability problem is just so massive that it's hard to cheer it on when you know it really prevent so many people from buying.
Matt Frankel: That's definitely true. We're starting to see inventories take back up, I wouldn't say normal levels, but the reason I was on the National Association of Realtors say was, because I wanted to see the pace of home sales. In May, it was the highest it's been since the pandemic, which indicates that inventories are coming back. It's not just crazy bidding wars that are getting the prices up, it's some inventory coming back onto the market.
Deidre Woollard: It's 2.5 months, so if [laughs] a normal work is six months, I feel like for a long time it was around four months, four and a half months, which is tough but doable. It's gone up a little bit, but 2.5 months is still very low.
Matt Frankel: On the affordability thing, it's like a give-and-take when it comes with mortgages as well. I want to say it was 13 percent or so that you just mentioned the home prices are up year-over-year?
Deidre Woollard: 14.6 per Case-Shiller.
Matt Frankel: 14.6, okay. The difference in your mortgage payment with a three percent interest rate mortgage versus a four percent, is about 12 percent difference in terms of cost savings. So even though home prices are a lot higher, the actual out-of-pocket monthly cost to a homeowner isn't that much more, it's the down-payment thing that really affects the affordability issue, because 20 percent of 500,000 is a lot more than 20 percent of 400,000.
Deidre Woollard: Exactly. I think that's one of the reasons that we're also seeing all of these services pop up to allow you to be a cash buyer. The thing with iBuyers right now is, you would think that in a market like this, that maybe this would be a time that iBuyers wouldn't be buying as many homes with prices going up, and yet the weirdest thing is that the opposite is happening. Redfin came out with a report, I think it was tail end of last week, that iBuyers are getting close to the pre-pandemic levels, and the numbers that Redfin has, I don't even think they included all of the iBuyers, because aside from the biggies, Redfin itself, Zillow, Offerpad, Opendoor, there's also these other smaller ones that are now coming forward with some more things. I think it's even bigger than what Redfin reported, and it's really interesting to me that at this time, when nobody can find a house, bidding wars are crazy, people are paying a 100,000 over the last price, iBuyers are still buying up homes. How is that even happening?
Matt Frankel: iBuying does not have a giant market share nationwide yet, they're very concentrated in some of the biggest markets. Do you know what Opendoor's biggest market is right now? Phoenix [laughs].
Deidre Woollard: Of course,.
Matt Frankel: The hottest market in the country.
Deidre Woollard: Didn't they start in Phoenix?
Matt Frankel: Yes, they have about a four percent market share there. Opendoor has four percent of the market in Phoenix. There is some convenience when it comes to iBuying. You mentioned the affordability issue, and specifically we just said down payments. It could be really hard to buy a home before you sold your current home. I know I've had trouble doing that before from trying to sell a house, trying to buy a new house, you usually have to have some contingency where you can't close on the new one until you've sold your current home. So the iBuying thing takes the uncertainty out of that, it allows buyers to free up their equity right away. Because I'll tell you right now, with some of these bidding wars going on, if someone has a selling contingency in their offer they're not going to get a house. It can eliminate a selling contingency for people who have to move, which can give them a leg up, because right now it's not just the highest price that's getting the house, it's the most attractive offer, the quickest closes. I just bought a vacation home and we were in a bidding war against cash buyers, but we offered a quicker close, we offered a shorter inspection period, a couple of different things to sweeten the deal. If you have to move, let's say someone has to move from South Carolina to Phoenix, using an iBuyer to sell your house quickly, a guaranteed sale, it's a cash offer, can make your offer on a new house a whole lot more attractive, which is one big value add these days in such a quick real estate market.
Deidre Woollard: I want to talk a little bit also about the moves of iBuyers, because that's part of the story too that we're tracking is that, it used to be like every time Opendoor, or where the others went into that would go into one market at a time, they'd do a giant press release, it would be a whole to do, they'd have a marketing campaign. Now, I'm noticing 2,3,4 markets all at once. Opendoor has 39 markets now, they've just announced Reno, South Florida, Oklahoma city, Columbia, South Carolina, and Knoxville, and Chattanooga. Offerpad just announced Columbus, Ohio, Kansas City and St. Louis, and also Columbia, South Carolina. Apparently, Columbia, South Carolina is getting ready for some iBuyers.
Matt Frankel: I might just see what they offer me for my house, because that's where I am.
Deidre Woollard: I think you should.
Matt Frankel: I don't know why, because Columbia, South Carolina, I don't think it's even in the top 100 cities by size in the country. I know we're a particularly hot real estate market right now, so that might have something to do with it. Opendoor's goal is to be in a 100 markets, they don't want to be nationwide. The economics just wouldn't make sense for them to be in some more rural areas of the Midwest for example, the economics of iBuying just really wouldn't make sense. They just thought of the data to evaluate those markets as well, because as we'll discuss I'm sure as we go on, profitability is very elusive in the iBuying business [laughs] to say the least.
Deidre Woollard: That's delicately put.
Matt Frankel: The better data you have to be able to evaluate prices, the more efficient the business can theoretically become, which is why you see them concentrating on these bigger markets. It's not just for dominant market share, it's because those are the ones they have the most competency to evaluate. They don't want to be in every market, they want to be in a 100 markets, and they want a roughly four percent share of 100 markets, and that is pretty feasible when you look at their original six markets. The first six markets they launched, and Opendoor is been at this for seven years. In their first six markets, they've already achieved their four percent market share, so it's definitely possible. These aren't little markets, I mentioned Phoenix, these are places like Las Vegas, Atlanta. They have a roughly more than four percent share in those few markets actually, so a big opportunity here. If they do achieve a four percent share in the 100 markets they want to be in, that's $50 billion of annual revenue. This is not a small amount of money, and probably more, that was based on 2019 real estate figures. Now that home prices are twice what they were then, they're 20 something percent more than they were then, that's probably even more money. Their market strategy is interesting, and there's a lot of overlap. You mentioned two of them are launching in Columbia, South Carolina right now, that doesn't seem like a coincidence, that seems like a competitive strategy to try to dominate certain markets, and really go head-to-head and establish the presence in that market before your competitor can do it. If you look at the list of Opendoor's and Zillow's markets, they're almost the same [laughs]. They're not the 25 biggest markets in the world or whatever, but there is so much overlap and it's an interesting competitive strategy they use.
Deidre Woollard: I believe that part of the reason for that strategy is because of the housing stock in those markets, not as old and more homogenous. What are the things that Mike DelPrete, who covers this space, wrote about recently on his website was, what happens when these iBuyers are starting to move into Mid-western and North-eastern markets, so there you have so much older housing stock, and you also have housing stock that is just wildly different in terms of age, size, just all factors and all of these iBuyers are trying to find that ideal algorithm, so that they can make these offers quickly and have them be accurate and pencil out on the other side once they sell. I feel this is going to be a huge challenge, it's really exciting to me, because I feel this is going to be the test. I thought that last year the pandemic was going to be the test, but that was a whole different kind of test.
Matt Frankel: I think of iBuying the way I think of gas-powered cars a 100 years ago. At the time, it was pretty obvious that was the wave of the future, but 98 percent of the gas powered car manufacturers ended up going bankrupt, because it's really tough business to be profitable consistently. Like you said that it's really about perfecting the algorithm and trying to find the competitive advantage over your peers. Because if you make terrible offers as an iBuyer, you'll go bankrupt in a month, it's such a high revenue business. I mentioned Opendoor is looking for $50 billion of revenue a year, if they do $50 billion worth of bad offers, and are losing money on every house, that's a quick way to go out of business. Who do you think has the big advantages? Opendoor is the biggest, and let me give you just a couple of numbers of the three big ones that I know of: Opendoor, Zillow and Redfin. Opendoor sold 2,500 homes in the last quarter, that's pretty good size numbers. Zillow was 1,422, Redfin was a 171, so big difference, big gap between number two and number three. Do you think any of those are getting closer to the secret sauce there yet?
Deidre Woollard: I hate to say this but I still feel like Zillow is going to be the closest partly because of, the thing that real estate agents hate the most, the Zestimate. When you think about it, they've been spending years preparing for this. Not on purpose I don't think, because the Zestimate came out so long ago, but they've had to figure this out for a long time ahead of everybody else.
Matt Frankel: For a while, the zestimate was pretty inaccurate.
Deidre Woollard: Oh, yeah. [LAUGHTER]
Matt Frankel: [LAUGHTER] That's also putting it kindly, [LAUGHTER] but if for example, my house's estimate varied by $50,000 in the course of one week at one point.
Deidre Woollard: Oh my God.
Matt Frankel: Those are newer technology, [OVERLAPPING] but they have so much data that they're able to use to perfect this. Zillow has 225 million unique monthly visitors. Their site was visited 2.5 billion times, if over a 150 million homes are in their database, that's a lot of pricing data that they're getting. I think Zillow's competitive advantage is, that they're starting in certain markets to test using the Zestimate as their offer, to really automate the process. You go to Zillow site, look up the value of your home, boom, there's your Zestimate, there's your offer, that's where you can get all cash, right now. That could put traditional home sales out of business, if they perfect that. If it becomes that easy to sell your house, because right now my Zestimate is pretty good, is gone up about 25 percent in the past year. If I could sell my house for that with one-click, if I wanted to sell my house, that's a pretty tempting offer. People are going to Zillow site anyway, which is where I see them really getting the competitive edge as they grow. No one goes to Opendoor site unless they're looking to sell their house.
Deidre Woollard: True.
Matt Frankel: No one goes to Redfin right now unless they're looking to sell their house, or if they were referred by a Redfin agent. Zillow just has that traffic coming to its site anyway. There's room for more than one winner in the space, let's be very clear on that. [OVERLAPPING] This is a huge market opportunity, but I could see Zillow running away from everybody else if they get it right.
Deidre Woollard: I think that's definitely true. The traffic is just a huge advantage. I'm not quite sure it's going to be as simple as everybody turning to iBuyers. That's one of the things that I think you and I debate about, is the future of brokerages. I think I'm a little more bullish on brokerages than you are. I think you're seeing the end of- not the end of real estate agents, but you're seeing them being phased out, I think a little faster than I am.
Matt Frankel: I think in 20 years, iBuying is how we're going to buy and sell houses. Right now, the current pace of existing home sales in the U.S. is 5.8 million a year. Based on the median's existing sale price of 350,000. I never thought I'd see the day when the median existing home price was 350,000, not in a while anyway. But, based on that, that means about $2 trillion of existing home sales volume. I think that will be mostly iBuying within 20 years. I think this is the future of the way we buy houses. I think they'll perfect their algorithms, like we just said. If it's as simple as clicking on your Zestimate, and getting a cash offer on your house, and then being able to go to Opendoor and Redfin and Offerpad and etc, and getting competing offers and picking the best one. If it's that easy to get a cash offer and control the closing time frame and, free up your equity. I think that's absolutely how we're going to be buying and selling houses in 20 years. If people can figure out how to do it profitably. If they can't figure out how to do iBuying profitably, the industries could go away. [LAUGHTER]
Deidre Woollard: We'll, that's what Rich Barton said, I think it was Zillow's last earnings call, was that they weren't concerned about profitability at this point because they were more concerned about scale, so they weren't focused on the individual house. But I think what you said is interesting there because there's an opportunity that, I think some of the brokerages are starting to get into, which is that idea of aggregating the competitive offers, because in the beginning you had one iBuyer, maybe two iBuyers in the market, but now you're having 2,3,4, so there is going to be at some point here the kayak of iBuyers or something like that, where you have the different offers all laid out for you.
Matt Frankel: I think that's really where you're going to see the turning point. Is when, in 100 of the biggest real estate markets in the country, you have five different offers on your house, that are all cash iBuying offers, that are fair market values, because the Zestimate is designed to be the fair market value of your house. It's not designed to be a bargain-basement price. The iBuyers make their money in other ways. Opendoor charges a seven percent fee, Zillow's average fee is five percent, Redfin charges 5-13 percent for an iBuying transaction. They're making their money, that 5-7 percent even of a $350,000 average home is not a small margin. If they can just make that their profit margin, if they can get it to that point, that'd be pretty impressive. Scale is important, yes. These companies are trying to establish their dominance, which is where I think Rich Barton was going with that. They don't want to lose the race in other words, but at some point you're going to have to show a path to profitability because no one's found it yet. Most of them are running something like a negative 7-10 percent profit margin on these, and that's a lot of money when you're talking about houses.
Deidre Woollard: Well, but the other place they are planning to make money and everyone is trying to be the be-all, end-all platform, so a lot of them are looking at those ancillary things. They're looking at title. Offerpad just announced they're now licensed as a mortgage broker in a couple of places, Opendoor's is in loans. Obviously, Zillow and Redfin also are expanding their mortgage and title. Glenn Kelman of Redfin has absolutely said that, in his opinion, they can't expand mortgage fast enough. They are trying to keep up with the demand and trying to open more offices as fast as they can.
Matt Frankel: Yeah, there's a lot of opportunities in the home selling process, [OVERLAPPING] and a lot of what these iBuyers are trying to eliminate are these unforeseen costs of selling a house. You go to sell a house, the buyer inspects it, and then you got a punch list of $5,000 worth of items they want fixed before they move on with the sale. They eliminate those, but there are a lot of other costs involved in selling a house, and a lot of the people don't realize that, getting a mortgage has origination fee, or the title insurance is part of the closing cost that costs money. If say, Redfin or Zillow, with Zillow pretty much does offer everything right now. Opendoor is getting there too. If they can control the entire transaction from buying the house to having the borrowers find a new house, because then you get a customer doing it on both sides, pay the mortgage process, the title process, the inspection process, having Zillow home appraisals, I don't know if that exists yet, but it should.
Deidre Woollard: [LAUGHTER] It probably will,.
Matt Frankel: It probably will at some point if it doesn't already, but there's a lot of little adjacent parts. Zillow's version of U-Haul where you can rent a moving truck from them. There's a lot of little ways is my point, [OVERLAPPING] that overtime they could add these incremental revenue streams. Even if they could just breakeven on the house itself, but sell them a mortgage, sell them title insurance, sell them an appraisal, sell them an inspection. That's thousands of dollars per transaction right there.
Deidre Woollard: But I think the other thing that I'm seeing that's interesting too, Redfin does this and Compass also does which is the idea of the concierge program. If you don't like the price that the iBuyer they're just like, okay, we're going to buy it at this price. You can also opt for their Concierge's program where they, I believe in Redfin case, they take like another percentage point of commission, and they basically handle all of the improvement of the property. It's like the iBuyer process, except that you actually have the potential to gain more of the money yourself directly, If you go with that Redfin agent.
Matt Frankel: That's if you think that the offer they give you is not really market value.
Deidre Woollard: Right.
Matt Frankel: Which in today's market, that probably happens pretty often. In the hot markets, the Zestimate can't keep up with a lot of these markets. If you're in a market where home prices are rising three or four percent every week, some of these iBuyers just aren't going to keep up with that. If you say, "No, this is a really hot market, my house is worth a lot more than it appraises for, if I were to sell it on the open market." The concierge service definitely makes sense and, I think all of the iBuyers will have something like that eventually. They don't yet. [OVERLAPPING] I know Redfin does. Zillow doesn't have a tradition brokarage-. [OVERLAPPING]
Deidre Woollard: Yeah, but Redfin does because it started out as a brokerage, and that's why Compass has it because it's a brokerage, so there's more value into shifting people over.
Matt Frankel: Yeah, so I don't know if the bigger value is in Redfin specifically right now, or as a referral engine, to their brokerage business. That will be an interesting point to see because Redfin has a pretty big share of a fragmented market. Their market share is well over one percent of the entire U.S. housing market right now. I'm curious to know how much of that comes from people who started at Redfin now trying to just get a quick offer and eventually went to concierge or out.
Deidre Woollard: Well, the other thing about Redfin that makes me optimistic about it too, is that they're continuing to see their traffic grow. They crack into the big three of top real estate search sites. They've up their marketing, and a lot of markets are spending a lot more money on advertising and so I think they are in that build awareness mode. Right now it's interesting the ads from Zillow and the ads from Redfin are so similar. They didn't use to be so I'm finding that very interesting.
Matt Frankel: Talking about things moving in this Columbia, South Carolina. Redfin just came to the Colombia about a year ago I think, shortly before the pandemic. Redfin now is not here, but the brokerage services. One of the interesting things, traditional real estate agents hate Redfin.
Deidre Woollard: Oh, yeah.
Matt Frankel: They really do. Last time I gave a pitch on Redfin about a year ago, when we first started Fool Live, and the entire Q&A was filled with- [LAUGHTER] apparently we have a lot of realtors listening, because the entire Q&A was full of people who; Redfin to agents aren't as attentive, they don't add as much value, they don't the local market as well. It's more of a technology play than the actual service you're getting. It's an interesting war going on between Redfin and the traditional brokers. [laughs] They are taking share, they are a threat. They really are.
Deidre Woollard: They are absolutely a threat. They've launched a luxury service. It's got slightly different branding. I've seen a couple of signs. But the interesting thing about Redfin that I noticed when I was working in real estate brokerages and when we get a new agent and we're trading them as an agent. Those agents were so well prepared, like an agent who'd spent a year or two as an Redfin agent, was at the place of where a traditional agent would be in five years. Because they have learned so much of the system. They had to transfer over their systems and that was hard for them a little bit mentally. But overall, they would crush it in sales because they were just so used to staying busy and they would just keep moving forward.
Matt Frankel: It's an efficiency play. Redfin's big value proposition is here we are going to charge you half the commission. But our agents could do double the amount of sales. They still going to make as much money. There's a few other tech focused real estate brokerages, EXPI, eXp World Holdings. But it's a really interesting dynamic there as how efficient they are. The naysayers are probably right. They don't have quite as much personal assistance. They don't spend as much time with you, things like that. I know a lot of showings can be done remotely with Redfin agents a lot of the time, for example. But it's a more efficient business model and there's always going to be at a certain subset of the population that wants guidance and things like that and really values the personal experience of the traditional Realtor. But I got to think that the eye buying process, once they've really like ironed out the kinks, will be very appealing for the majority of Americans.
Deidre Woollard: Definitely. I want to bring up this comment from Max, he said that Zillow by law could absolutely not do loans and appraisals because the law prohibits the lender from even knowing the appraiser and you have to go through a third-party, which leads to why the housing market is so fragmented. Good point to keep in mind.
Matt Frankel: That's true. Maybe a referral network for appraisers.
Deidre Woollard: That's exactly where my brain went to. There's got to be some way [LAUGHTER].
Matt Frankel: Some way, they can make money off the appraisal process. [LAUGHTER]
Deidre Woollard: The appraisal process and the inspection process, to me, are the areas that haven't quite been "disrupted" yet. When you look at inspectors especially, I don't know about you, but when you get an inspector, isn't it usually like a very small business?
Matt Frankel: Yes, usually like one guy, who runs an inspection services, he's a licensed inspector. Like I have my inspection guy, some real estate investor. I use the same guy for every house because he does a great job. It's one person. He's got a guy in a pickup truck and he's got he's little logo on the side, but it's his business just by himself. Very fragmented business.
Deidre Woollard: I feel like that's one of those spots that is so ripe for set for someone to come along and systematize it to some extent because, if you've gotten an inspector, why do you have that inspector? Because you know that guy is good. But I would say the quality of an inspector can differ very widely. [LAUGHTER]
Matt Frankel: That's why when I found a good one, I stuck with him.
Deidre Woollard: People do, people share inspectors, and that's one of the things in real estate. Once you have a good one, everybody passes that person around and you have to wait for that person sometimes because you just want the guy who actually, and it is usually a guy, but the person who goes into the attic, goes into the basement. Really looks at all of the foundation. You can tell the difference between someone who's doing it right and someone who maybe you just don't trust.
Matt Frankel: I will tell you a true story when we had the inspection done on this house that I'm sitting in, it wasn't the same day. It was just some random home inspector we called because I didn't know this guy yet. He missed the fact, that I had an entire wall that there is no power to. There are four outlets on one whole wall that the builder never ran power to. Now if I want power to there I have tear out two different walls. Because we discovered it about a year after the fact from the home was out of warranty because it's in my kids play room, so we didn't have anything plugged in there. We'd set out the caps on them and completely missed that there's no power in the room, so it pays to have a good inspector.
Deidre Woollard: Absolutely. I want to dive into some questions because we're getting a few here. Question from Celia. It seems like, selling your home and moving to another is basically a wash where the premium you get for selling is canceled by the premium, you have to pay to buy. There's a lot of aggravation with biding wars. That is absolutely true in terms of what's happening right now. They call it housing grid lock or something like that. That's part of what's happened. That's part of why you're not seeing inventory tick up because people are seeing those prices. If they could move, they would, because they can't afford to buy in somewhere else. You're seeing a little bit of that movement happen where the impact of remote work people leaving California to go to Idaho, for example, that's one that we're seeing. Then in that case, yeah, your dollar goes farther, but even then prices in like Boise, Idaho are [LAUGHTER] going way up. That is a real concern in this market and it's one of the reasons that it seems to me in many ways to be one of the most stuck markets I've ever seen.
Matt Frankel: Well, I've seen statistics were about 25-30 percent depending on who you ask of people who wanted to sell their home over the past year delayed the sales due to the pandemic. Historically July and August are the two busiest months for homes coming on the market. There's some reason to believe we might see an uptick in inventory. But, at the same time, if you're just thinking about selling your home, you don't have to. My house has gone up, I want to say 30-40 percent since we bought it. Depending on which estimate you're looking at. I would still have to buy another inflated house if I sold it and like Celia said the only bidding wars and all the aggravation. Right now, it's a paper gain, where you're going to see this come into play as the refinancing market. We saw one giant wave of refinancing last year because interest rates were like almost nothing. They were pretty much giving mortgages away. I know I refinanced, I know our colleagues Anand Chokkavelu refinanced twice last year because rates dropped and then they drop again. Pretty much everyone I've talked to refinanced last year. That was before home prices rose by another 15 percent. Now everyone has 15 percent more equity in their home so you're going to see another wave of refinances, where people take some of that equity out, because borrowing against the value of your house is probably the cheapest way to borrow money. If you could borrow money at like three percent compared to a credit card at 18 percent, where a personal loan at seven or eight percent. Even it's a no-brainer. If you want to do some home repairs. The guy who put in my pool said he is backed up by a year-and-a-half now and the specific reason he gave, is that people have a lot more money to borrow from their homes to do projects with. If people wanted a $50,000 pool a year-ago, they might not have been able to afford it. Now, they could take that $50,000 out of their house and get on the waiting list so they are doing that. Where you're really going to see the home values come into play is the refinancing market. Mortgage volumes are going to remain elevated for some time. If home prices rise another 20 percent over the next year, it will happen all over again. But don't make the mistake to think that refinancing boom is dead just yet.
Deidre Woollard: That is a really interesting point and you bought up something else that I think is interesting there, which is that home improvement market just keeps booming partly because, everybody can get money and also everybody believes that every improvement they make is going to make them money, which isn't really the case, especially with the pool.
Matt Frankel: I'm under no delusions my pool is going to make money.
Deidre Woollard: But people do think that it almost doesn't matter what they do to their house because, they believe the prices are going to keep going up. I understand that because we've been in, what are we at, 111 months in a row of price gains. That stretches the bounds of memory from psychological standpoint is that a lot of people who own a house now don't remember a time when their house was worth less because they didn't own a house at that point. That feels risky to me.
Matt Frankel: It is and historically, home values don't decline as much as the stock market does. It's not like the ups and downs. But it does happen. Your home is not always going to go up. Most home improvements, by most I mean like 95 percent of them do not pay for themselves in terms of added equity. Remodeling.com puts out a great list every year about this.
Deidre Woollard: Their Cost versus Value Report, I love that report.
Matt Frankel: Yeah, the Cost versus Value Report and they're only two or three on there than I've ever seen over 100 percent return on equity or return on investment. They're always small things like an upgraded Garage Door is one.
Deidre Woollard: Yes, that always mystifies me, the Garage Door is apparently a good investment.
Matt Frankel: I can see that if your original Garage Door was terrible, if it felt like a baseball holes in it or something like that. Stone Veneer on the house is another one that often makes it. A new deck if your house doesn't have one, is a good way to return value. But most improvements, including things like kitchen renovations, bathroom renovations, pools, forget it, I'd be lucky to get half the [laughs] money I put in the pool. I wouldn't have put a pool even if we were planning on staying in this house for 20 years. But most improvements, they add to your equity but not as much as you're putting in. If you borrowed $50,000 to get your house to do a home improvement project, you're not going to get $50,000 of value out of it. Borrow it to do that because it's something you want to do and because you're going to use in enjoyment out of it, not because you think it's going to make you money.
Deidre Woollard: Absolutely. Let's dive into some questions. Sanjay asks, "I'm curious why Redfin's stock price isn't through the roof in this environment. What type of real estate market is ideal for Redfin?" Redfin stock price was through the roof last year. I think that certainly Redfin had a huge year last year capitalizing on the housing boom. I believe there will be another boom for Redfin stock. There's been a lot of talk certainly last year, less so this year about it being overvalued, and I think that's why we saw it tick down a little bit this year.
Matt Frankel: The ideal market for Redfin is a lot of inventory because they're are brokerage at heart.
Deidre Woollard: Yes.
Matt Frankel: Right now inventory is very low. Prices are up, but that doesn't make up for the fact that inventories, half the normal level. High prices and high inventory. I would say almost too much inventory would be ideal for Redfin, and Zillow, and Opendoor because it adds to the value of the iBuying business. If you can't sell your home quickly, it gives you a lot more of a reason to use an iBuyer. Right now if I put my house on the market today, it would be sold by tomorrow. We mentioned controlling costs earlier, but one of the other big value adds of iBuying is you could control the timeline. If I want to just accept the cash offer today and close in 10 days, I could do that with an iBuyer. I could do that right now with any real estate agent I find [laughs] Markets that are right now. If homes are sitting on the market for three and six months because of an oversupply issue, that's when the iBuying process really has value. Because if I can accept an offer tomorrow and close in two weeks if I want to, and my neighbor's house is sitting on the market for six months, that's a big reason to use an iBuyer like Redfin now or Zillow offers or Opendoor. I think that from both sides of Redfin's business, not a terrible oversupply, you don't want a flood on the market, but a slight imbalance in the supply to the other direction would be an ideal market for Redfin's business.
Deidre Woollard: I think the other thing too, and I've talked about this before, is with the iBuyers now a lot of the homes that they buy and fix are being sold to invitation homes, other single-family rental portfolios. We've talked before about the amount of money going to single-family rentals right now and these portfolios is mind boggling. I feel it's every other day I hear about some billion-dollar fund to acquire a whole bunch of single-family rentals. That is interesting to me as a long-term trend because you're watching some of these houses being recycled into rentals, and if there is a flood on the market, it won't be like what happened in the great financial crisis because that flood as it stands now would almost immediately be snapped up.
Matt Frankel: I'm glad you brought that up. I can see the single-family real estate investment trust, REITs, getting a lot bigger because of this trend. Right now, if you look at most commercial property types, hotels, apartment buildings, malls, they're about 40-50 percent owned by REITs. The penetration rate for single-family homes is less than one percent for REITs. I don't have the actual statistic in front of me, the percent of single-family homes that are rentals, but it's in the 20-30 percent range in most markets. There's a lot of room for reconsolidation in this space. I can see new REITs popping up to create single-family portfolios. What's the subzero Zillow or Opendoor from creating its own REIT and spinning it off or something like that? A natural source of buyers for the properties they acquire. I can see one of them doing that. I didn't have that idea I just came up [laughs] with that.
Deidre Woollard: All right. I just wrote a story about a startup called Arrived Homes that I've been following for a while. The thing that they're doing that I think is really interesting, and I'm not sure it's going to work, is they're turning every single single-family into a private REIT. You have a single-family home, maybe it's worth, they started to like Arkansas, Charleston, South Carolina, a couple other places. There's like 100 investors on a $200,000 or $300,000 house that has a renter in it. Each one has an individual REIT. It's an interesting concept to me. I'm still not sold on it, but that's a variant of that idea.
Matt Frankel: I like that idea. I think there's a whole lot of different directions they could take this thing. Let me see. Celia had another good question that I wanted to hit when I'm thinking about it. "Do you think iBuying will ever come to communities that have older housing stock?" I like that because he mentions specifically where the real estate is monotonous in a certain area. For example, to the Northeast railroad suburbs of the turn of the 19th -20th centuries. I think iBuyers are generally going to stick with those top 100 markets for the most part. I can see them doing a hybrid model when it comes to the older neighborhoods and more rural areas. Where you request an offer from an Opendoor and they order an appraisal and then they make you an offer, or something to that effect where they don't have great data and where every house is really different. Downtown Columbia area, most of the houses were built in the 1930s. If I look at five of those houses, I'm going to find five houses in very different condition.
Deidre Woollard: Oh yeah.
Matt Frankel: All the rental properties I've bought in Downtown Columbia were built in the '30s. I could tell you that inspections, you will be surprised to one direction or the other. You will be either really disappointed at how it turns out, or really surprised that the house that old is still in good shape. A lot of variability when it gets to the older houses. I could see them developing some hybrid iBuying model for the rural and older markets. But I think for the most part they would concentrate in the bigger areas. I read in Opendoor, the 100 markets that they mentioned they want to be in is at over 80 percent of the addressable homes they could buy. There's not that much of a reason for them to invest in the 20 percent or less of markets where they don't really have a core competency in. It's my take on that.
Deidre Woollard: The other thing too is what we just talked about is they aren't going to work in markets, I think to some extent where they don't have that single-family rental demand as a secondary option if they can't sell it to a traditional homebuyer. I think that that might be part of it too.
Matt Frankel: Fee Father has a really good question on iBuying. "As somewhere looking to sell their house soon, the advantage I see of using an agent in this market is their ability to manage a bidding war. In your opinions, how cool does the market need to be for iBuying to overcome this advantage?" That's a very good point. If you sell to an iBuyer, especially in this market, you're not going to get what you would on the open market generally. They will make you a fair but modest offer. It will not be what you're going to get, especially if your market is full of bidding wars. That's definitely one thing to consider. That's not the value that iBuying really brings to the table. Right now you can have your house zero days on the market, which is one of the things Opendoor brags about, which isn't really an advantage right now. Predictability of costs is one. Not only are you going to pay your realtor but then there's going to be a bunch of unforeseen transaction fees and repairs and whatnot. You get an all-cash offer which you might not even in a bidding war. Most buyers today still use mortgages, the vast majority. If you're in an area where there's a lot of investors, you might get some cash offers, but if you're in an area where families just want to buy a house, they're probably going to be using mortgages. You get in all-cash offer very certain timeframe and you can control the closing timeline. Opendoor let's people close in as little as three days. That's a very quick close. If you need to sell your house quickly and what the money in hand quickly, let's say you found the perfect house to buy and want to free up that capital in three days so you could put an escrow deposit in, that's an option with an iBuyers. There's a lot of value they bring to the table, but if your objective is to maximize the amount of money you get in the sale, ibuying at this stage of the game is probably not the way to go.
Deidre Woollard: Well, the other things that the iBuyers do, which we haven't really talked about yet, is they also work with the homebuilders. In some cases, you want to sell your house, but you maybe can't move into it right away because your new house hasn't been built yet. Opendoor and others work on the other end too that if you have to stay in your house for 90 days, you can do that as well. That is the other factor here too, is homebuilding. A lot of iBuyers are working with homebuilders directly to make that transition seamless. That's something else that is part of this equation as well.
Matt Frankel: Yeah, there's a lot of value. I think it's actually up to like 180 days with some of them.
Deidre Woollard: Yeah.
Matt Frankel: We'll buy your house in six months, that's what you can get on the open market. If someone's in a bidding war for your house, you could bet they want to close in a month or maybe two at the most. They want that house. There's other value, but like I said, to maximize your profit potential, you're better off listing it. At this stage, like the Deidre said, when there's the kayak of iBuyers, that might not be the case. You could probably maximize your value by getting five competing offers but we're not there yet.
Deidre Woollard: No, but that is what's going to be interesting. When you've got three or four of them in the same market and they're competing for the same house, that's when it's going to get really fun. I want to grab this question on thoughts on Compass. Because Compass IPOed recently at start of April at 20 bucks a share, it's now sitting at $13.5 a share. The brokerage I used to work at got bought by another company and then got bought by Compass. I have some opinions on Compass because I know a lot of agents that worked for Compass. Robert Reffkin, the CEO his original goal was to have a 20 percent market share in 20 markets by 2020. That didn't happen. They are getting a larger share of the luxury market, but they are really a company that has grown almost exclusively by acquisition. That's the thing that makes me a little bit nervous about Compass long term. Is that they just bought a ton of independent brokerages in top-tier markets like Los Angeles, New York, Boston, etc. They also bought a lot of technology. They bought a lot of smaller startups that deal with real estate, CRMs and things like that and they are investing a lot in engineering talent. But they really have to stitch together a whole bunch of companies in order to make Compass really stay there for the long term. The other thing is with campus it's just a real estate brokerage. I'd say that as someone who invest in Realogy, RE/MAX, and some of the others, but it is at its core, not a disruptor in my opinion. It's just a more efficient real estate brokerage.
Matt Frankel: You just gave your thoughts on Compass. I will grab another any thoughts question? Hi, any thoughts on Fundrise? Here I'm not a big fan and I'll tell you why. I'm definitely a REIT fan. Fundrise if you're not familiar they are the eREITs company. They offer private rate similar to, it works similar to a mutual fund. You put money into a pool, you have to redeem your shares directly with the company when you want to get out, things like that. I like REITs, I invest in REITs and rental properties. The biggest benefit to REITs over rental properties is that they're liquid. I can click the buy button and sell them whenever I want to. That's not the case with eREITs. Fundrise actually suspended redemptions in April, May, June of last year, you couldn't redeem your shares. If you needed your cash, you were stuck. Which during an economic crisis isn't really what you want to have happen with your investments. If I needed to sell my, say, Realty Income shares last year. I mean, I wouldn't want to sell them at a depressed valuation but I could have very easily. Things like that really turned me off about the eREIT model. If I saw my Realty Income shares, someone else on the other side buys it. If I redeem my eREIT shares, Fundrise has to buy them, which is why they suspended because they didn't want to have a run on their cash reserves. But I like the publicly traded REIT model the best of any kind. There are private REITs, there are public but non listed REITs which I guess is what Fundrise would be classified as. Then there are public listed REITs which are pretty much what we talked about. I am a big fan of the latter, and I really don't see any benefit to going the other way with them. That's my opinion on Fundrise. Great reputable company. I don't know if Deidre have any thoughts.
Deidre Woollard: I do. I like Fundrise, the fees are a little higher, but overall, I feel like Fundrise when it comes to regulation aid, they are the big easy in the space. They just announced a $300 million credit facility because they're going all-in with Goldman Sachs because they're doing massive amounts of single-family build to rent. They bought a community from D.R. Horton till end of last year. They're working with a whole bunch of the homebuilders. Their strategy overall is Sunbelt, single-family, and also multi-family. I've been a Fundrise investor for a couple of years. I also invest in REITs, of course. Is Fundrise crushing the REITs? No. Because Fundrise is really all-in on multifamily right now, it's a little less diversified I think than it used to be, but I still like Fundrise. I also participate in Realty Moguls, one of their private REITs?
Matt Frankel: Yeah, and that's fair to say. I mean, there are good play on the multi-family space right now, but several are a lot of the publicly traded REITs I follow.
Deidre Woollard: Yes.
Matt Frankel: I can't make the case for owning both. [laughs] Its where I'm at with it. I don't dislike the company, I mean, it's a good product and their fees are a little on the higher end, but they're reasonable.
Deidre Woollard: Sure.
Matt Frankel: There are companies with higher and more outrageous fees and Fundrise, I will tell you that much. Let's see. How about solar on roof from return on improvement cost perspective? Depends where you are, is the short answer. You're not going to get a 100 percent. You're just not.
Deidre Woollard: Also depends on how you finance it and what you do. Solar loans can be really complicated when you want to try and sell your house. If you have to finance it, I think be really careful with that because I've seen some deals get just messed up because of solar loans.
Matt Frankel: Or the solar leasing, that's even worse.
Deidre Woollard: Yes [laughs] that's absolutely even worse.
Matt Frankel: Usually, you know the guys that pull you aside at home depot and try to offer you solar panels, usually there's solar leasing models. I'm not a fan of solar leasing. As you're certified financial planner, you're not just your real estate guy.
Deidre Woollard: Yeah. Listen to this bad idea, you are absolutely right
Matt Frankel: Solar leasing is generally not the way to go. I would say if you're going to buy solar panels, either pay for them in cash, or finance them through some way that's not like a solar loan.
Deidre Woollard: Yes.
Matt Frankel: if you get finance them through your home equity loan, you are going to use them for a few years to essentially eliminate your electric bill and then you want to sell them as part of your house. That can be a smart economic decision because they do add value to your house, it depends. A lot of home improvements on that note, it's really interesting to mention, vary from geographic location. Take the pool for example. In most parts of the country, a pool will not add a ton of value to your house, but it adds more to my house in South Carolina where it's a 105 degrees during the summer than with your house in New Jersey. The only market that I've heard of where it adds more than a 100 percent of its costs as the Florida Keys where I used to live.
Deidre Woollard: Makes sense.
Matt Frankel: Because buyer's expected you could swim all year round and there are so few houses there that buyers just want a pool. The only pools you could put in a literally the size of this room that I'm in. Because everything is so small down there, so it doesn't cost you a time to put in and you'll get your money back for it. But there are very few markets where pool make sense. The same could be said for a lot of other modifications you can make to your house too. Like a duck is more beneficial in a place for its comfortable outdoors more of the year than somewhere where it's hot year round. Ask an experienced realtor is the best way to go.
Deidre Woollard: Yeah
Matt Frankel: Any questions you see? I see a few.
Deidre Woollard: I like this one for you. Jenny asked, "What do you think of the Simon Property Group's SPAC?"
Matt Frankel: I always get these SPAC questions.
Deidre Woollard: Yeah [laughs] I know.
Matt Frankel: I don't own it just because I paired down the number of specs that I have. It's sponsored by Simon Property Group. I love the ability they've shown to allocate capital in a responsible way. They've done a great job of buying up retailers that were distressed. The Aeropostale's acquisition a few years ago was already profitable. The Forever 21 acquisition that they made last year is already returning something like 50 percent of their original cost annually. That's a great return on investment. I'm optimistic. I think the spec space in general is very crowded right now, there are about 400 different ones looking for deals so they have a lot of competition. They bring a lot of value to the table with the connection with Simon Property Group as a ton of value for a struggling retailer that might want to go public through their spec. I think they're going to find a target that's worthwhile-
Deidre Woollard: But do you think it's absolutely going to be a retailer?
Matt Frankel: I think it's going to be some type of business they can incorporate into their mall. That doesn't necessarily mean a retailer. I think it could be a hotel operator. It could be a co-working business. It can be an entertainment operator. It can be a restaurant chain. I would not be surprised to see them take a privately held restaurant chain public through their spec at all. Because that's a big component to Simon's Property. A big selling point is you can eat at nice restaurants here that you normally wouldn't see in malls. A lot of mall operators are trying to think outside the box and then having a real association and investment in a non-retail company could be a good way to use that. Don't quote me on this, I think they raised about $300 million in their IPOs. They've a good war chest to go shopping with. But as far as stock market goes, I have cut myself off from a stock addict, so I cut myself off from [laughs] buying anymore pre-deal stocks. I own Chamath's too, IPOD and IPOF and Yellowstone acquisition Boston Omaha stock. But I prefer to invest in Boston Omaha directly. Boston Omaha and Simon are the only two publicly traded stocks sponsors that I know of. Where you can invest in the stock from the sponsored side of the equation. Because the economics really favor the sponsor. Simon is too big for it to really be a needle mover. If Simon finds the next DraftKings, which was probably the most successful stock deal of all-time. If they find something like that, it could be a needle mover. But Boston Omaha is small enough that their stock can really be a needle mover. The economics really favored the sponsor, which is why stocks are very controversial. That's the main reason. But I'm very curious to see what they buy depending on what the target is, I might buy shares. [laughs] I'm allowed to buy shares of stocks that have declared their target not pre-deal.
Deidre Woollard: [laughs] Makes sense. I've got question from Lowe on Tesla's solar panels. Tesla solar panels so freaking disappointing to me because I really thought when they were first debuted and they were showing all those renderings. I thought they were great, I thought the idea was great. The execution has been dreadful. I guess. [laughs] The best way to put it, it has not worked out.
Matt Frankel: I don't comment much on Tesla because I get threats on Reddit when I do. [laughs] I was a SolarCity investor before they merged. I was an early Tesla investor and got out too earlier, which is maybe why I'm bitter about the company. But I was a SolarCity investor and that's where their solar operation came from. Everyone always thinks of Elon Musk as a SpaceX and Tesla. SolarCity was one of his too. I like you said, not the best execution in the world. But we'll leave it at that.
Deidre Woollard: Beautiful design, but yeah.
Matt Frankel: Yeah. I don't know. Are you a Tesla investor?
Deidre Woollard: No.
Matt Frankel: Okay. We're still friends then.
Deidre Woollard: [laughs] I've got a couple of questions on BlackRock buying home partners.
Matt Frankel: I shouldn't say, but I'm not too familiar with that deal. I don't know. Have you dug into that one at all?
Deidre Woollard: I have not dug into that one.
Matt Frankel: I don't want to comment on a deal that I'm not that familiar with.
Deidre Woollard: Yeah.
Matt Frankel: I see the questions. I will definitely dig into that and we will get back to you. You could probably use that to get Deidre to convince me to come back next week [laughs] or the next after that.
Deidre Woollard: Question from Ms. Melanie in the RTP area and under 350,000 price range is absolutely a bidding war. Dozens of $30,000 over asking prices, all cash offers win. Younger buyers who don't have access to that cash, we'll have to use a service like Ribbon to become cash buyers and then get a mortgage. Really good point there about Ribbon and there's other services like that. There has been a startup boom and lots of venture capital go in to that. Which is always a fascinating thing about real estate venture capital in general, it will go to stitch together those pieces of the market where there is a need and that's definitely been one in the past couple of years.
Matt Frankel: There are ways to sweeten the deal. You can remove some contingencies if you're comfortable doing that. A lot of people have success with adding a personal note, saying, I'm not an investor, this house for me and my family and we're going to make memories there things like that.
Deidre Woollard: The NAR hates that.
Matt Frankel: That might sound silly, but people do that and it's successful.
Deidre Woollard: Yeah, but it's got all fair housing issues the National Association of Realtors they are very anti that.
Matt Frankel: Okay, well, don't take my advice on that. [laughs]
Deidre Woollard: It does work though. That's the thing it's been a problem for real estate agents to figure out whether they [OVERLAPPING] or not
Matt Frankel: Well, at level as a playing field. I'm in favor of it. I'm not saying go ahead and do it, but if I were making the rules, I would tell people to do it. With mine, we reduced the inspection period a little bit. The services like Ribbon are definitely feeling that void. They're not free.
Deidre Woollard: No.
Matt Frankel: But they are definitely filling that void. But there are ways to effectively compete against cash buyers. I mean, get a full pre-approval before you submit your offer. For example, put an what's called-
Deidre Woollard: Could you say the escalation clause?
Matt Frankel: Yes. Using escalation clause to outbid any cash offer by a little bit, which is one of the ways we got our vacation property. We offered, I think 1,000 over whatever the next confirmed offer was. We ended up getting it that way. There are ways to compete against cash buyers without having to go through the services bid. As far as bidding wars, that's just how the market is right now in certain places, there's really no advice I can give you to avoid bidding wars. [laughs]