With Zillow Group (ZG 1.95%)(Z 1.95%) officially pulling the plug on iBuying, investors in other companies looking to revolutionize the home buying and selling industries are understandably worried. In this Fool Live clip, recorded on Nov. 9, Fool.com contributor Matt Frankel, CFP®, along with real estate analysts Matt Argersinger, Austin Smith, and Anthony Schiavone, discuss whether investors in the other major iBuyers should be concerned.
Matt Argersinger: I think the first thing I want to ask the panel, I'll ask if you maybe I'll start with Matt Frankel, which is before we get to Zillow, what is your overall take on iBuying the industry? Is it viable and Zillow exiting the business a bad omen for the whole industry or the business model itself? Or do you see that this industry is going to take off in that companies like Offerpad (OPAD 0.23%), Opendoor (OPEN +2.78%) should have success down the road?
Matt Frankel: It is viable. The question is, how do we make it viable? Who's going to win the race to scale it quickly? Right now iBuyers take a 5% to 7% fee on each home. They also offer things like mortgage services. But overtime, they could add things like home warranty, smart home services, energy efficiency services, insurance products, things like that, that can really add to the contribution margin. There's a lot that it could be done to increase the margins. I'm still very bullish on iBuying. I want to hear what the other guys think, but I am still all-in.
Argersinger: Austin, what do you think about iBuying? You mentioned earlier, you definitely see some promise here over time.
Austin Smith: Yeah. All-in on iBuying in the two experts, I follow most closely to balance the emotions here are Matt Frankel and Mike DelPrete. I think Mike DelPrete is an extremely talented skeptic. I always like getting his data, it tempers my enthusiasm. But I see businesses that are scaling, growing, and becoming more operationally efficient very quickly. If you look at a point-in-time snapshot, maybe the recent price appreciation did drive the majority of these efficiencies.
But the majority not all. It is very clear when you look at the operations of Offerpad and Opendoor, that they are becoming more operationally efficient quarter over quarter beyond the price appreciation, whether that's driving most of the gain or some of it is not what I'm looking for. I want to see them getting better, and they are. And to Matt's point, the adjacent services you can bolt onto these transactions are enormous and this is the largest transaction most individuals ever make in their lives. This is when they're stressed and frustrated running around doing all different services. I'm very bullish on iBuying, although I like that Mike DelPrete tempers that with his skepticism.
Argersinger: Yeah. Anthony, I don't know if you want to throw in your opinion as well on iBuying.
Anthony Schiavone: Yeah. Just to play devil's advocate here a little bit. Two concerns. I have with iBuying is first the valuation on how accurate their algorithms, especially for Zillow like without actually getting under the hood of the house. How accurate evident an estimate can you get? Two is once was a downturn in the market, how are they going to drop cash flow when you like till about 10,000 houses in the quarter. How are you going to be able to resell those at a lower valuation and expressing those houses. They're not generating the cash flow, they're kind of just assets sitting there. Those are the two concerns that I have, but it definitely has potential and any new industry, I mean, there's going to be ups and downs, question marks.
Argersinger: All good points all around. My take is going to be much more sort of qualitative in the sense that many of us on the panel have had bought and sold homes. It is still a draconian process, a costly process, time-consuming. No doubt, I think there is a real allure for a solution that can make it happen quicker where there's no fuss, it can happen, like I said, you can even get an offer from an iBuyer lightning-fast, income, you pay a fee for that, but it takes all the hassle and normal friction out of selling a home.
I think the home-buying and -selling industry is ready for that and just needs the needs to happen quicker, and you can happen with less friction. It doesn't necessarily need to happen with less cost because there are certainly some real cost involved. But I just feel like that there needs to be someone on the other side of the table that can do that quickly. The iBuyers that's essentially what they're trying to do. It's only it's still only 1% of home sales as we saw. Maybe it will take years.
But even if it gets, it takes 5% to 10% percent, that's pretty meaningful as a percentage of the sales in any given quarter. I think there's room for it. Some of the other points, it's one of the things that still needs to be figured out. It's probably really risky, operationally challenging, capital-intensive right now. But where there is a way, I think there is a profitable solution.
Smith: Look at CarMax it's the same model atomized people know that they're not getting the best price for their car, but they're getting an acceptable one, and they can sell it whenever they want, and they don't have to worry about cleaning it and plenty of for-sale sign on it and having people come by and sit in their car, we weren't going to buy it. I don't see equally capital-intensive, but in the same way, CarMax has a forecast and inventory what they'll be able to sell it for. That's a huge value to consumers that they have through their voting with their wallet and their wheels. That's a business that they appreciate using.
Frankel: One thing to add to what Matt said. The iBuyer customers are very happy with their experience. Offerpad did a study, they added 95% customer satisfaction rate. Third-party studies say that they have an 81 Net Promoter Score, which is off-the-charts good. I don't know about people who sell their home through traditional realtors. I guarantee their satisfaction rate's not 95%. I've sold I think five homes through traditional Realtors in my lifetime, and I wasn't 95% satisfied with how it went.
It's only 1% of the market now. But as it grows, you're going to see that network effect of people who tell their neighbors, oh I sold my home to Offerpad, and it was a great experience. I sold my home to Opendoor, and it was a great experience. I sold my home through ReMax, and it was terrible and things like that. You're going to see this network effect when it reaches a critical mass there. Right now, most people don't know anybody who is sold a home to an iBuyer because it's only 1% of the market. But that's not going to be the case forever.
