After Zillow Z, -2.12% ZG, -3.43% shocked investors by announcing that it would leave the business of buying and selling homes altogether — just weeks after the company initially indicated it was simply pausing its home-flipping efforts — myriad questions emerged.
A central one has been whether the problems Zillow encountered were unique to its approach to the so-called “iBuying” business model, or inherent to the model itself. One of Zillow’s biggest home-buying competitors says it all came down to execution.
“When you actually execute, this is a really, really strong model all the way, across the board,” Offerpad OPAD, +0.26% CEO Brian Bair told MarketWatch. “And if you don’t execute, it’s like any business — it just doesn’t work.”
For Offerpad and its largest competitor, Opendoor OPEN, -6.77%, Zillow’s exit from the tech-powered home-flipping business serves as both an opportunity and a cautionary tale. MarketWatch spoke with Bair to get his perspective on where the iBuying model is headed now in a Zillow-less environment and how a cooling housing market will affect the industry. The following interview was edited for clarity and length.
MarketWatch: How does your model at Offerpad differ from what Zillow Offers was doing?
Brian Bair: First and foremost, you know, we were founded on real estate DNA. My background has been heavily in real estate and real-estate operations. So we took the approach of we wanted to get some of the best real-estate minds and then team that up with some of the most powerful technology in real estate.
The reason we did that is, this is a very logistically heavy model. What we want to do is to buy, renovate and sell a home in 100 days. That is the model. To do that, the way you acquire, the way you’re renovating, and the way you sell all impacts that.
There’s been a lot of talk about [automated-valuation models (AVMs)] and pricing lately. Where we’ve always been different is, we’ll have our algorithms or AVMs get us about 90% there, but that other 10% we’re going to combine that with our people power in our markets. These are people that have bought hundreds or thousands of homes in those markets. They have local expertise in those markets. So we’ll combine that technology with our people, and we feel like that that’s one of the things that is definitely different.
The second part of that is renovations. We internalize a lot of our renovations in most of our markets. In Phoenix, it’s almost all internalized, which means they are employees of Offerpad. What that allows us to do is have more flexibility in controlling the renovation process.
[Our competitors] are looking just at [collecting] a service fee [for buying and selling]. Our renovation model and real-estate DNA allows us to not just take money from the service fee, but to add value to that home [by renovating it] so we can price that home and try to maximize the value of that home.
The other thing that makes us different is we’re a full solution center. We got called an iBuyer along the way somewhere. If a consumer doesn’t like our cash offer, they have the choice of working with one of our local agents in that market to put their house on the market to see if they can maximize the price of that home. If they can, great; if they can’t, well, we’ll keep our cash offer as a backup position for 60 days.
MW: With all of that in mind, how does Offerpad work to appropriately price the offers it makes? It seems like that was part of the problem for Zillow.
Bair: Let me tell you, the easiest thing to do is to buy homes. If you pay somebody enough money, they’re going to sell you their home. And then it’s going to generate a bunch of buzz from doing that. The hardest thing to do is to buy, renovate and sell in 100 days, and make this a profitable asset when you sell it. There’s been this narrative of how this is a chase to see who can buy the most homes the fastest. That’s just not sustainable. This is different than other technology businesses that people have seen before.
We have algorithms and analytics — we pull a lot of the same public data. It’ll get us about 90% there. But let’s say we’re down in Houston. Well, we’ll have an acquisition specialist that’s there — that lives in Houston and goes into our office in Houston. They’re our Houston expert, and they’ll know street by street details. So the algorithm will get about 90% there, and they’ll take a few minutes determining if that algorithm is right before we send out the offer.
“‘If you pay somebody enough money, they’re going to sell you their home.’”
Home price appreciation is hard to judge, but we’ve been, I think, consistently around 99% accurate with what we think a home is going to sell for and what it does sell for.
MW: You touched on this before, but I wanted to revisit what you said about internalizing your renovations. How do you work to map your renovation costs and keep them down?
Bair: That has been something that we have been hyper-focused on from the beginning. Some of the negative pushback we got in the beginning was, “Isn’t this more expensive, internalizing some of these people? Can you scale as fast as others because you’re internalizing it?”
When you have more control of the renovations, then you can control costs, you can control quality and you can control timing. Those are all really key things. When you’re hiring a third-party contractor, you hire them and don’t really control a lot of the process. If you get tripped up there, it’s just as important as getting tripped up on the pricing side of it.
Our model played favorably into the pandemic. Having internalized renovation has played to our favor here with the labor shortages and some of the things that are going on. These employees get paychecks every two weeks, so our turnover has been much, much lower than you’re seeing in other industries. And so that’s also really helped with our execution.
MW: Now that Zillow is exiting the iBuying business, what does that mean for Offerpad and the rest of your competitors? What’s next for this sector?
Bair: I think there’s actually more opportunity for us now. There were three companies buying at that volume, and now there’s two. I find it funny as I’m sitting here thinking about when Zillow got into iBuying, people were asking, “Brian, what are you going to do because Zillow was entering iBuying?” Now that they’re out, people are asking, “What are you going to do now that Zillow is out of it?” The overall take is the opportunity is just massive. Consumers absolutely love this product. It’s not a product we’re trying to convince consumers to want.
The services that we provide are only going to grow. But you have to execute. This is all about fundamentals and execution. It’s a very specialized real-estate model, and you have to do it right. I’ve always been really bullish on our channel and where we’re going to take it. It’s doable. We’re going to continue to grow responsibly and continue to get market share. It’s a shock that they got out of this as quickly as they did, but I also think there’s more opportunity, and you’re going to see this growing in the future.
MW: Do you expect other companies to try to fill the void that Zillow is leaving behind? Not just companies already experimenting with iBuying, but new entrants to the market?
Bair: I expect more people jumping in this space. Since we started this 6.5 years ago we’ve seen all different kinds of tweaks to our models over time. People fundamentally know that’s what the consumer wants. They know what works, and they see the opportunity. But they also appreciate how hard it is to execute. I’m not expecting a major player to come in. You’re going to see some regional ones like we’ve seen over the last little bit. But there is a lot of opportunity for us right now, and in others in the space.
“‘The home-price appreciation has been a really difficult environment for us.’”
MW: I would imagine now for anyone to enter iBuying in a major way — especially for another publicly traded company — they would need to overcome the hurdle of the doubt some investors might have because of what Zillow experienced.
Bair: That’s going to be the hard thing. Like the questions you have for me right now — imagine trying to go, “Hey, I have a new business idea. Let’s go get into iBuying.” Where you will get tripped up in this business that you have to buy, renovate and sell in 100 days. If you’re holding homes for six months or a year, that doesn’t work. In this model, you’ve just got to execute really well.
Real estate is changing, and it’s going to continue to change. It’s just too way too cumbersome. It puts too much burden on the consumer and is completely different than any other industry that they’re working with right now.
MW: The market appears to be at a turning point when it comes to home-price appreciation, and many economists believe that home-price growth will slow as interest rates rise and more people hit affordability ceilings. The iBuying model did survive a pandemic, which was a major test. Is this the next test for the iBuying model, and how will slowing price growth affect your business?
Bair: The home-price appreciation has been a really difficult environment for us to operate in for various reasons. Anything you buy is going to perform — you will get a lot of buyers that want that house. What’s difficult about home price appreciation — if you look at it from an iBuyer — is people can put their house on the market for a weekend, and they can sell their home in a weekend. Why would someone need to come to an iBuyer?
The thing that I have been probably the proudest of is that — even though there was more certainty for a consumer who was selling the traditional way than there ever had been over the last six months or eight months — they still were coming to us.
What I’ve been seeing is a tipping point for iBuying. When we launch in markets, even if we’re the first iBuyer in that market, people are familiar with what we’re doing. They understand it. Four or five years ago, I’d have to educate them for six months about what we were doing. So I think it’s actually a really exciting time.
MW: In other words, even if the housing market is slowing, that’s when your customer acquisition might become easier?
Bair: That’s exactly right. The market is always going to do something. You’re going to have six months or a year of home price appreciation, and then you’re going to have [a situation] where the sky is falling, interest rates are going up and people think the market’s going to decline. Each market is different; each cycle is different.
What you want to do is be ahead of all of that, and that’s why having boots on the ground is really important. A question I get asked a lot is, ‘What happens in a downturn?’ The consumer is going to have more trouble selling their home the traditional way, and they’re going to come more and more in our direction. I think we all knew it couldn’t go on like this forever.
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