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iBuyer’s Zillow, OpenDoor, and Offerpad have $2B worth of real estate, what happens if the housing market collapses?

Joshua Fraser Mar 24th, 2020 / Data Insights, Real Estate, Investing

On March 18, Inman reported that two mega iBuyers Opendoor and Zillow are suspending purchasing homes for an unknown amount of time. If you aren’t familiar with iBuying, it is quite simple. The iBuyer (Zillow or Opendoor) purchases the home from the owner and then it turns around and sells it to another buyer. This removes the friction from selling a home and allows the seller to liquidate almost immediately without the headache of traditionally listing their property. Read more here.

While we predict that this will dramatically change the industry over the next decade, we may be on the brink of a recession and COVID-19 (aka the coronavirus) has decimated the global economy.

COVID-19 is said to have originated in China in December of 2019. Housing sales fell almost 35-40% in February and are expected to be down in March. Mike Delprete shared this, “The following chart shows property transactions in China during the early stages of the outbreak. Transactions dropped significantly -- nearly 100 percent -- during a number of weeks during the crisis, and are now growing again (but still down over 50 percent from last year).”

The United States entered a bear market as of February, 2020 and is actively ordering multiple states including NY, CA, PA, and WA to “shelter in place” and self-isolate. This means no open-houses, no showings, and essentially a complete halt for a majority of realtors. Hence why iBuyers have suspended all purchasing. 

You’d think this would be a positive for iBuyers but we are uncertain for the following reasons.  

Estated researched how many homes Opendoor, Zillow, Offerpad, and Knock currently own and here’s what was discovered:

Company Homes Owned
OpenDoor 4,727
Zillow 2,268
OfferPad 974
Knock 138

We used Estated’s valuation model to review the portfolio value for each iBuyer.

Company Homes owned Current value Lowest value Highest value
OpenDoor 4,727 $1,223,031,000 $1,090,519,530 $1,355,542,470
Zillow 2,268 $751,087,000 $668,530,080 $833,643,920
OfferPad 974 $240,734,000 $213,333,630 $268,134,370
Knock 138 $48,384,000 $42,265,650 $54,502,350

The iBuyer revenue model is based on the service fee and price appreciation from the market and renovations performed by the owner. You can find it in another Mike DelPrete presentation on Inman

What happens when a home drops by 10%? What if this is the worst recession ever recorded and the market halts and drops by 20%? (we are exaggerating but what if?)

Company Homes owned Current value Potential Loss If Homes Prices Drop 10% Potential Loss If Homes Prices Drop 20%
OpenDoor 4,727 $1,223,031,000 $122,303,100 $244,606,200
Zillow 2,268 $751,087,000 $75,108,700 $150,217,400
OfferPad 974 $240,734,000 $24,073,400 $48,146,800
Knock 138 $48,384,000 $4,838,400 $9,676,800

Opendoor has $1.5B in funding but can they survive or even thrive sitting on $1.2B worth of property for 90 days? With a potential halt of the real estate market, will prices drop and cause these companies to take a large loss? What do you think is going to happen in the next 60 days?

Zillow has invested over $1B into the iBuying craze over the last 12 months. February 21, 2020, their stock was at an all-time high of $65 a share! Today, it has been decimated and is currently trading at below $30! Yikes, how will that earnings call go...

At the end of the day, we have tremendous hope and faith that these companies will thrive and transform the residential real estate industry for the better but in times of uncertainty, anything can happen.