Over the past 18 months, Offerpad (OPAD -1.64%) has become the most profitable iBuyer in a crowded marketplace. In this video clip from "The Rank" on Motley Fool Live, recorded on March 28, Fool.com contributors Matt Frankel, Travis Hoium, and Jamie Louko discuss the real estate company's unique strategy that's made it quite attractive to home sellers and buyers as well as investors.
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Matt Frankel: It went public through a SPAC backed by Spencer Rascoff, former CEO of Zillow (ZG 5.74%). It has a pretty impressive growth trajectory and it's the most profitable iBuyer. If you're not familiar, iBuying is the practice of companies buying homes directly from sellers, and making some cosmetic repairs, and then selling them directly to buyers.
The idea is that the process of selling a home is terrible, in the U.S., for lack of a better term. It's full of consumer pain points. I've been through it three times. Having to stage your home, have showings, strangers through your house constantly. Not in the market like today's where you sell a house in two days.
But in a normal market, you have weeks of people being in and out of your house, open houses. You have to hope that they can get a mortgage once you get a buyer. It allows you to control the timetable. It's a hassle-free way to sell a home. The idea is buyers are willing to take a slightly lower price on their home in normal markets in exchange for getting rid of all these pain points.
Offerpad's process is unique in a couple of ways. One, not only will they just make an offer to buy your home, this is called Offerpad FLEX, they encourage customers to list their home on the open market with a cash offer from Offerpad in their back pocket by partnering with one of Offerpad's realtors. If you're in a market where homes are selling for $50,000 over asking, Offerpad says go for it. Let someone else overpay for your house. We'll provide you an agent, things like that, no hard feelings.
They also offer mortgage services, title services. They are profitable. They were GAAP profitable, meaning they had positive net income for the full year 2021 from an iBuyer, people didn't think that was possible. Opendoor (OPEN 10.30%) certainly didn't do it. But it's the most profitable iBuyer on a unit economics basis by a significant margin.
They have over an 8% gross margin, which when you're talking about real estate transactions, is a lot in terms of buying a home and flipping it quickly. They have a lot of cash that they got through their SPAC IPO. They've scaled up. They did over $2 billion dollars in home sales in 2021. They're expecting about double that in 2022, expanding into a bunch of new markets, including California this year, which they just did.
I'm a big fan of Offerpad. I had their CEO, Brian Bair on a show not that long ago, I think right after they went public. A really impressive company and I like that they're prioritizing efficiency. Because like I said, companies that cared about profitability before the recent market downturn, I think are at a very underappreciated advantage. I think that iBuying, there's only going to be one or two winners, I think. I think Offerpad has a great chance.
Travis Hoium: I wanted to ask you about, if I remember looking back at these, one of the differences with Offerpad was that, do they do more fixing up or upgrades than their competitors? Zillow was weird because they tried to be a market-maker so they tried to compress margins as much as they could. It seems like the advantage of Opendoor and Offerpad was they're like, we need to make money on these transactions and if we're not going to make money, we're not going to do it. They were a little bit more open about that, which I like. But it seemed like Offerpad's margins were a step higher in part because they were doing more of these upgrades. It looked like they would do whole kitchens and it wasn't just a flip.
Frankel: I'm glad you mentioned that, because even with that Offerpad FLEX if you get a cash offer you list it with an agent. Offerpad will front their customers the money to make repairs at their discretion and just get paid back at closing. They make money in that way too. But they're definitely more repair-oriented. They have some of their own in-house repair teams so they don't deal with third-party contractors as much as some of their rivals, which also helps their timetable maintain quickness. Jamie, any thoughts?
Jamie Louko: I have questions about the iBuying space. I do believe in the mentality that home buying sucks and I don't look forward to it one day. It would be awesome if I could go to a place and buy a house online. Maybe not my first house. But that being said, investing in these iBuying companies has been something I've been looking at from afar.
But when we're looking at Opendoor versus Offerpad, Offerpad, at least financially, looks a lot stronger to me. I love the profitability out of an iBuyer. That's something you don't really see. The margins are stronger. I just ran them pretty quickly. Offerpad has 10% gross margins. That's not good, but it's much better than Opendoor's 8.5%. When we're talking about billions of dollars, that really adds up. I like the margins, I like the profitability. If I had to invest in an iBuying company, Offerpad would probably be the top company I'd look at.
Hoium: Or part of the basket at least.
Louko: Or part of a basket.
Frankel: We'll close after this. iBuying has about a 1% share of the U.S. housing market. If that can scale, say, 4 or 5%, that will be a major win. I mean, both Offerpad and Opendoor can both 10x if they can get 4 or 5% of the U.S. housing market between them.
Hoium: You alluded to it, but I think it's worth pointing out that the housing market has been hot. That should not be a good place for these iBuying businesses. They want a normal market where you have to sit through two months of your home being on the market, maybe somebody's over asking. This market where you put a sign and have 40 people at your front door the next day is not helpful for an iBuyer. The fact that they're profitable, in this market, I think is encouraging.
Frankel: If I put this house I'm sitting in for sale at a reasonable price, it would sell tomorrow, and that's not what the iBuyers, they don't want it, they want a market where there's just enough consumer pain points in the process to make it more appealing.