With Zillow (ZG 5.30%) (Z 4.90%) bowing out of the market, there are now only three major players in the high-potential iBuying space, Redfin (RDFN 5.77%), Opendoor (OPEN 16.55%), and Offerpad (OPAD 9.49%). In this Fool Live video clip, recorded on Nov. 11, Fool.com contributors Matt Frankel and Jason Hall discuss which could be in the best position to deliver long-term outperformance.
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Matt Frankel: We are going to pivot a little bit, we're going to talk about iBuying. No, we're not accidentally playing the tape from last week again. We actually have some new information to talk about with the iBuying saga that's going on. We all know Zillow reported earnings, I think it was a couple of weeks ago now, where they announced they're pulling the plug on their iBuying business, Zillow Offers. Jason commented to me before the show that this seems just like a failure of their AI process and just total algorithmic failure to price homes. We heard earnings from Offerpad and Opendoor yesterday. I want to focus on Offerpad, but both of them showed how iBuying is not in trouble, Zillow just did a bad job.
Jason Hall: Entirely.
Frankel: Let's start with Offerpad, which is my favorite, and full disclosure, this is the one I own shares of, and I'll tell you why in a minute. But they had a great quarter, this was their first full quarter as a public company. They went public by SPAC merger, got a few $100 million to buy houses, so shouldn't surprise anyone that their volume really is ramping up.
Revenue was up 190% year-over-year, take that with a big grain of salt because this business was really slow this time in 2020. They bought 2,753 houses in the third quarter. They sold 1,673. You're not seeing that supply-demand imbalance, first of all, you saw with Zillow. Zillow bought something close to 10,000 homes and sold about 3,800. I believe it was. Big, big imbalance in buying and selling.
You're not seeing that with Offerpad. Some of the statistics they put out in their third-quarter earnings report were just really impressive. Remember, Zillow is having a tough time flipping houses in a reasonable timeframe. I think they cited the supply chain disruptions, they cited the worker shortage, things like that, If I'm not mistaken. Offerpad is not having that problem.
They have their own employees who do their renovations, so they're not seeing this -- trying to book contractors and things like that. They're not seeing big problems. They see 99% of their homes are owned for less than 180 days. They target about half of that. But that means that they are clearing virtually every house in their inventory within two quarters. Zillow is not doing that. They sold one-third of what they bought in the third quarter. That's not a great recipe for turning over your inventory.
Hall: Matt, I just want to touch on that. In this kind of business, you have to turn the inventory quickly because a lot of times, you're using leverage to acquire it, and so you're spending money. It becomes unproductive, and the longer you wait, the more it becomes stale and the harder it is to sell it at a price you want to get. They have to buy it right, they have to fix it fast, and they have to turn it over.
Frankel: Yeah, they don't want to bet on future housing prices. It certainly helped in the second quarter. Every house in America was up by 10 percent in three months. It certainly helped. But that's not what they want to do. They want to make a 5%-7% commission for buying someone's house. They want to make repairs, flip it for maybe a 1%-2% margin for a total gross margin of 9%-10%, and they're happy with that.
That's what they want to do. They don't want to bet on prices of houses. Offerpad is doing a better job of predicting home prices than anyone else. Check out the statistic from their report. They see a less than 1% variance. Since their inception in 2015, they've seen a cumulative variance of less than 1% between what they think a home is going to sell for and what it actually sells for, less than 1% variance. That's a pretty good job of predicting housing prices. I know I repeated that three times now, but it really bears repeating just given Zillow is not doing that.
Hall: They're required to do the same thing.
Frankel: Zillow took that away to a $300 million write-down in the third quarter alone because of their failure to predict what home prices are going to do. Offerpad's not growing at all costs and I'll leave it at this. This is not really earnings-related but this is my favorite thing about Offerpad. They encourage people to shop their homes on the open market.
If they're in a particular hot real estate market, Offerpad will actually front them the money to make repairs, let them list through the traditional way on the open market, and their attitude is if someone wants to overpay for your house, let them, we're not going to do it. We're going to make money on the repairs because you're using our contractors and you're paying us back at closing. We're going to make a little bit of money that way, but we're not going to overpay. Here's our offer. If it makes your process easier, go ahead and take it. But if your local market's going crazy and we can't predict real estate prices, we don't want any part of that, we'll help you sell it. I like that they're being more of a full-service shop than the rest of the iBuyers.