There are only two pure-play iBuyers on the public market: Opendoor (OPEN 2.11%) and Offerpad (OPAD 2.10%). Both went public within the past few years as part of the SPAC boom, and while there are some differences in the exact services and methods, both have generally the same business model. They buy homes directly from sellers, make minor repairs, and aim to resell the homes at a modest profit.

Of the two, Opendoor is by far the largest. Opendoor purchased 14,135 homes in the second quarter, compared with 3,792 for Offerpad. Opendoor also announced an exclusive partnership with Zillow (Z 0.78%) (ZG 0.71%) to generate iBuying leads, so it's probable that it will remain the larger of the two for the foreseeable future.

However, what Offerpad lacks in size, it makes up for in efficiency. Despite its smaller scale, Offerpad has been the more profitable of the two. It was GAAP profitable for the full year of 2021 as well as for the entire first half of 2022. While I wouldn't call Opendoor's profitability bad, it has operated at a modest loss in most recent quarters. In the second quarter, Opendoor lost $54 million compared with an $11.6 million profit for Offerpad.

Both stocks have been beaten down in 2022. Opendoor and Offerpad are down by 68% and 74% so far in 2022, respectively.

Why have these stocks fallen so much?

To be fair, there are some legitimate concerns about the iBuying business as the market slows. Volume is the most obvious – if there aren't homes coming to the market, it makes it difficult for these companies to continue to scale.

A less-obvious concern is holding cost. Generally, iBuyers aim to hold homes on their balance sheet for less than 100 days on average. They want to buy, make repairs, and sell as quickly as possible. Holding too long not only creates a massive interest expense (iBuyers finance a large portion of their home purchases with debt), but it also creates real estate pricing exposure. Think of it this way – if the average home price declines by 10% while an iBuyer owns it, it makes it very difficult to flip the house in a profitable manner. This is rather unlikely, but we're seeing small declines in selling prices in many markets, and it's worth keeping an eye on.

This could be iBuying's time to shine

While there are some legitimate risk factors, it's also important to realize that the ultra-hot real estate market of 2021 was not the ideal environment for iBuyers.

Think of some of the key advantages for a homeowner who sells their property to an iBuyer:

  • They don't have to wait for an uncertain amount of time for their home to sell. Well, for most of 2021 and early 2022, homes were flying off the market in just days, or even hours, in most of the United States.
  • They get to control the closing timeline. In the hot real estate market, buyers were so desperate for homes that they'd agree to virtually any timeline the seller wanted.
  • They don't have to make cosmetic repairs before selling. Well, in the hot market, buyers generally didn't care about a home needing a fresh coat of paint.

In simple terms, most of the competitive advantages of the iBuying business were significantly impacted by the hot real estate market. As the market cools and buyers find it tougher to sell homes in a timely manner on the open market, it could make iBuyers a far more appealing option as quick transactions and desperate buyers become a thing of the past.

It's also worth noting that this is a massive market opportunity, and that if they can both gain market share, the iBuyers don't need the real estate market to heat up. In a typical year, about 2 million existing homes change hands in the United States. Based on second quarter volume, the iBuyers have about 3% of it.

The bottom line is that while there are some good reasons to be cautious, there's also a solid case to be made that a slower real estate market could actually be a positive catalyst for iBuying adoption. In full disclosure, I own shares of Offerpad because I'm generally a fan of profitability-focused businesses, but there's a lot to like about both companies -- especially at the current beaten-down valuations, and the recently announced Zillow partnership definitely makes Opendoor more attractive. If Opendoor and Offerpad can continue to scale their businesses in a profitable manner, there's massive long-term potential here.