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Can iBuying Ever Be a Profitable Business Model?

By Matthew Frankel, CFP® – Sep 2, 2021 at 7:17AM

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An iBuying CEO gives his take on the future viability of the business.

Many real estate experts believe that iBuying -- the business of buying homes directly from homeowners and selling directly to buyers -- has massive growth potential. But no company has figured out how to do it profitably at scale just yet. In this Fool Live video clip, recorded on Aug. 23, contributor Matt Frankel, CFP, interviews Offerpad CEO Brian Bair to get his take on future profitability of the industry and his company in particular. 

Note: Offerpad has agreed to go public via a merger with special purpose acquisition company (SPAC) Supernova Partners Acquisition (SPNV).

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Matt Frankel: One of the biggest concerns I hear from analysts is, there's no way that iBuying could ever be profitable. I'm sure you've heard that before. To be honest, in the beginning, it's a tough business to make money at.

Brian Bair: Right.

Frankel: You mentioned you're the most efficient of the major iBuyers, so I wanted to expand on that before I get into my next question.

Bair: Yeah. It's a great question. This is what's really important, and this is where we think we're different than most as well. As much fluff as you put into and as much technologies you put into it, you have to buy, you have to renovate, and you have to sell the home. And you have to be really efficient at those three things. The way you acquire, the price you pay. But the renovation, what to do and what not to do with that home? What's the right renovations, and then how do you sell that home on the market so the house moves through the process quickly? The unit-level profitability per home is really important. There was some talk a year ago, and it's died out a little bit, but going, "iBuyers, they can lose money on their home because they're going to make it up at other adjacent services," and I've always rolled my eyes on that. You have to be able to buy the home right and have that level of profitability per home, then you can adjust what that looks like over time. But you got to get that right, and that's probably, what we would say, one of our biggest advantage is, just with our real estate experience to do that. Long story short, there is a path to profitability. But we're in hypergrowth right now as well, and so you really invest in growth. But also, we want to make sure that that unit-level profitability per home is there, then you add other ancillary services on top of that, and that's where it gets really exciting as you think a one-stop solution center, because then you're attacking it from all different directions and giving the consumer a much better experience.

Frankel: I'm sure you've heard the famous fix-and-flip saying, you make your money when you buy, not when you sell. When you decide how much to offer on a home, is that all technology-driven? Do you have any human involvement in that? What's the secret sauce there?

Bair: Listen. Great, glad you brought that up because this is what I really get passionate about. The thing I love about Offerpad, and that's really hard to do, is because most people in real estate, they're trained to buy low and sell high. What's the lowest I can get this house? Real estate models in the past have been looking for distressed situations to do that. There is a pass in the family, there's divorce or something going on that they feel that someone needs a quick cash offer. And that was one of the education that we had to do for the first couple of years by telling them we're not that. But what's nice about our model, we don't know the position that that our customers are in. They come to our platform, they tell us about their home, and they get an offer for it. We're putting our best path forward, and if we underpay for our home, the consumer's so smart, we're not going to buy enough homes that way. If we overpay, we are going to be holding that home way too long because we can't sell it, right? That's really where we really flex our muscles in that acquisition standpoint, and what we do is we balance technology, analytics, and AVM [automated value model] that I believe is world-class out there. But we also combine that with our people power in the market. Our AVM will get us about 90% there, but they only have that local expertise in Charlotte or name the market. Think about the AVM going, "Hey, this makes sense, this doesn't make sense." I'm a big believer in the AVMs, but they're not there yet. We have to make them smarter. So we've balanced technology with our people.

Matthew Frankel, CFP has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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