Opendoor and iBuying: What Investors Need to Know

There's a new trend among real estate technology companies called iBuying, which refers to the practice of buying homes directly from sellers and then selling them directly to buyers, hopefully for a profit. Big real estate players like Zillow (Z -1.10%) (ZG -1.10%) and Redfin (RDFN -2.81%) are rapidly growing their iBuying operations.

However, Opendoor Technologies (OPEN -3.72%) is the biggest company that is almost exclusively focused on iBuying. In this Fool Live video clip, recorded on April 12, Fool.com contributor Matt Frankel, CFP, and Industry Focus host Jason Moser discuss Opendoor and the potential of iBuying. 

Jason Moser: What about Opendoor? Is that one you've looked into at all?

Matt Frankel: Yes I have. I know Opendoor very well. Let me break this down a little bit.

Moser: OK.

Frankel: There's a new type of real estate business called iBuying. Zillow and Redfin are both during this to some degree. This is where say Zillow would make you a cash offer directly for your house, buy it from you, do some cosmetic repairs, fix it up a little bit, and then sell it to a home buyer at a profit, essentially cutting out the middleman. You just sell your home directly to Zillow, you don't have to worry about staging it, closing it, or doing open houses. Just figuring out a closing date is what I meant to say. It's a great value proposition in a lot of ways. You're not going to get as high of a price as you probably would on the open market, but it makes your move a lot more convenient so that's iBuying. No one has been able to figure out how to do this at a profit yet at a big scale. I think Zillow loses something to the effect of $1,000 to $2,000 a home on iBuying, including all their transaction costs and stuff like that. But with Zillow and Redfin, they have other businesses that are paying the bills. Zillow has obviously its giant real estate platform. I know people who use Zillow as a verb, it's that popular.

Moser: Oh, yeah.

Frankel: "I'm going to do some Zillowing today," things like that. Redfin has their brokerage business which is wildly successful so far. Opendoor is all-in on iBuying. That's what they do. They make cash offers for houses and essentially try to do a large-scale fix-and-flip operation. They're not like gut-renovating the houses, but they are doing cosmetic repairs trying to sell them at a profit. If they can successfully figure out how to make money off each house they're doing, say like $3,000 or $4,000, which isn't a giant profit margin when you're selling a house. If they could figure out how to make a few thousand dollars per house and continue to scale their business like they have, that stock could be a home run. That's a big if. Note, I'm not skeptical about their ability to scale. They've proven that there is demand for this. They've already become like the big player in this, but it's a matter of being able to do this profitably at scale, which is really remains to be seen. Real estate is something like, I want to say there's I think $6 trillion market right now in terms of volume of homes. There were 6 million homes, sorry, I misquoted. There were 6 million homes bought and sold in a recent year. If they can get a small percentage of that and make a few thousand dollars per home, it's a pretty big market.

Moser: There is nothing wrong with that.

Frankel: Opendoor that was one of the Chamath [Palihapitiya]'s SPACs. That was IPOB, if you're keeping score, it could be a home run. The market really received that one well. He got a great value at it. The stock shot up, I want to say it's about $20 a share right now and maybe a little bit more. Opendoor could be a home run. It could, if they can't figure out how to do it profitably or to the market's satisfaction then it could go the other way. But I'm a fan of the business that's on my watch list. If you were going to sell your house, where do you think of doing an iBuying sale?

Moser: Maybe. To me, it probably depends on the market, I guess, just because a place like Northern Virginia, for example, where the real estate market is so hot, seemingly all the time, you're typically going to get multiple offers.

Frankel: That's a big point of concern.

Moser: Most all of them are all going to be well over your ask. I've always seen iBuying as wonderful on the convenience side and possibly it makes sense financially, but depending on the market, you may get more by just going the traditional route. I would even think it would help to negotiate with your real estate and say, "Listen, man, this 6% thing ain't going to fly,"  because they get a ton of money for doing not a whole lot. In some cases, not all cases, I don't mean to offend.

Frankel: You're right, you're right.

Moser: Some real estate agents, like our real estate agent here, I will say we've used the same real estate agent since we moved up here in 2010, and we've made a few transactions. They've been great because they're just so high-touch. I don't know that all real estate agents are that way, but I would feel like if I'm paying that commission, I expect that high-touch level of service.

Frankel: Just one comment, then I want to finish with a SPAC question, if we could.

Moser: Yeah.

Frankel: The iBuying thing doesn't make sense in a sellers market, like you just said.

Moser: Yeah.

Frankel: Northern Virginia seems to always be popular. Right now, we're in the market for a vacation home in Florida. The reason we haven't bought one yet is because everything that goes on the market goes under contract before we could even physically get in the car and go take a look at it.

Moser: Oh, yeah.

Frankel: Within a day. In a market like that, it doesn't make sense. If you're in a normal market like mine, where it would probably take me a month to sell my house, the advantage to doing an iBuying sale is that it allows you to control the timeline.

Moser: Exactly.

Frankel: I could get an offer, move in two weeks, and have cash in my account through an iBuying. In a market like that, it makes sense. In a crazy real estate market like right now, not so much.