And now, Opendoor’s behavior, driven by the data it sees, portends bad news ahead. “Right now, they’re trying to sell as much inventory as possible as quickly as possible,” DelPrete said. One possibility is that, based on data seen by Opendoor, the company thinks things could get worse. “They’re reading tea leaves,” he said. “They just have better tea leaves than you and I.” Fraser has no problem with that: “We’re able to respond very effectively and very quickly to changing conditions because we have those signals in the business,” he said. Say.
But the data Opendoor has access to may only tell half the story. iBuyers accounted for a record 1.3% of all U.S. home sales in 2021, but some regions are more popular than others. “Their model is that they can only really be successful in certain parts of the market,” said Amit Seru, a professor of finance at Stanford Graduate School of Business. iBuyers operates in areas where the housing stock is relatively new and uniform, so they operate in Phoenix and Cities like Las Vegas are overrepresented, but ignore states like Missouri and parts of Texas where older houses dominate.
Fraser disputes Opendoor’s notion that it has no insight into the broader market. Its “buy box coverage,” which is offering home offers in the markets it operates in, is 65 percent. “It’s a mainstream product, not a niche product,” he said.
While prices in Phoenix have risen during the pandemic from $445,000 in August 2021 to $549,300 in August 2022, the amount of time a property spends on the market before selling has increased by 30% over the same period, suggesting that buying Homes are more serious when considering purchases – a problem with iBuyers who rely on quick sales.
Analysts predicted a weaker market in September, which has come true as Opendoor sold a large number of properties at a loss. Seru does believe that the struggles iBuyers now face are somewhat indicative of economic headwinds because of the way iBuyers work. When the time is right, they’ll win big. When the going gets tough, they struggle first.
iBuyer’s gross profit on any transaction is in the 5% range, according to Tomasz Piskorski of Columbia Business School, who is also a member of the National Bureau of Economic Research. When profits are squeezed, iBuyers are the first to exit because their business model is based on selling the homes they buy quickly for a profit. “Opendoor now knows that if they buy this home — remember, it’s discounted — they could end up stuck for months,” Piskowski said.
DelPrete compared iBuyer such as Opendoor to short-term stock traders. For decades, people bought company stock with the goal of holding the stock for many years and getting a steady return on investment. People do the same with property: move into a house, live in it for decades, then sell it as needed in exchange for an appreciation or downsizing, depositing the often sizable profit when they go. iBuyers expedited the process, closing home deals in months rather than years, and making marginally smaller profits. “It’s a fragile business model that doesn’t work well when there’s uncertainty about prices,” Piskorski said.