Is online direct home selling going to disrupt the Australian Real Estate Industry?
There is a new group of startup companies using data analytics and operational efficiency to potentially disrupt the traditional real estate agent. They are sometimes referred to as iBuyers (instant buyers) and their business model is online direct home selling.
In this model a company purchases a home directly from a homeowner, improves it and lists it on the market as fast as they can. In short, it’s tech-enabled house flipping!
The iBuyer gains from the difference between their buy price and sell price and reduces risk by taking a fee from the owner of the property for buying their property off them in a manner that is quick, easy, stress free and avoids all the things they hate about dealing with real estate agents.
The leading company in this market worldwide is a company called Opendoor Labs, but there are a number operating worldwide including, Knock, Offerpad, Redfin Now (a division of low cost agency Redfin), and Nested. And before you say that won’t work in Australia… there is already an iBuyer operating here called Sellable.
So why would a seller use a company like Opendoor, knowing that Opendoor are going to immediately re-sell their property for a profit. The answer is because they solve a key problem that sellers hate about using traditional real estate agents, which is “uncertainty”. Using the traditional approach, a seller faces:
1. Uncertainty about how much they will sell their property for and an agent can’t tell them,
2. Uncertainty about know how long it will take to sell, or settle, or even if it will settle at all, and an agent can’t tell them, and
3. Uncertainty about the best way to sell their house. Should they go to auction, tender list with a price or without.
Using Opendoor, a seller knows how much they will get, they can choose when they move out of the house, they don’t have to worry about fixing it up, having it ready for inspections, and they completely avoid the uncertainty of whether they should sell first before buying a new property to live in. And people are willing to pay to remove all of that uncertainty.
So, let’s review some of the numbers that surround Opendoor’s success to date.
As of mid-December 2017 Opendoor, had served 10,757 customers (sellers and buyers) since it began in 2014. Between Nov 2016 and Dec 2017 in it’s 2 main markets in Phoenix and Dallas it grew over 150% and has captured nearly 3% of all home sales in these markets. To put it in perspective if Opendoor captured just 1% of the national US market it would have revenue of more than $1billion.
Opendoor has raised over $350 million (US) from a range of very high-profile investors including Khosla Ventures, the CEO of Yelp Jeremy Stoppelman, a number of former PayPal alumni (known as the PayPal Mafia), and YouTube co-founder Jawed Karim.
According to Mike Delprete a real estate technology strategist who completed an in depth analysis on the model, Opendoor is averaging a 7.4% gross margin in 2017, up form 5.4% in 2016. With an average buy price of $203,000 and a gross margin of $15,000. It takes Opendoor just 13 days to do a partial renovation and get the house back on the market, a key figure in avoiding expensive holding costs.
Opendoor also charge a risk fee to the seller based on how risky the purchase is. As their data analytics improves, they can become more competitive with their risk fee which currently averages 6.7% of the offer price. They market to sellers that using a service like Opendoor not only removes the uncertainty but actually saves the seller money as demonstrated in the following info graphic on their service.
Another significant improvement to the Opendoor service over traditional agents is that buyers can view properties to purchase 24 hours a day, 7 days a week with an app that unlocks doors to properties. Additionally, home buyers are provided a 30-day guarantee on their purchase that stipulates that Opendoor will buy back the home if they don’t like it after they move in.
Like any new disruptive service, the iBuyer model will have its challenges. These include:
- An undifferentiated product. At its core, all iBuyers offer the same basic product to consumers: certainty and simplicity. There may be price competition or various technologies to support the process, but those advantages lie in the margins. The typical consumer for this service only cares about one thing: instantly selling their house.
- Resource intensive. The iBuyer model is expensive, and not just because it’s buying houses. To be successful, iBuyers need a lot of boots on the ground in each market they operate. These businesses are people intensive which results in making consistent service at scale difficult.
- No repeat customers. This is true for the whole real estate industry, but it doesn’t change the fact that without repeat business the cost of attracting new customers is expensive. There are no economies of scale around attracting and retaining a loyal clientele. Most importantly, this levels the playing field and reduces the barriers to entry for competitors.
Sellable which is an Australian version of Opendoor, works on a very similar model. Founded by tech entrepreneur Justus Hammer, Sellable raised $5.5 million last year with LJ Hooker Corporation and Ray White owning 14 and 15% respectively. The business is much smaller than Opendoor and still working out the nuances of the Australian market but have solved one of the biggest issues with this model in Australia which is overcoming the costs associated with stamp duty.
In an industry that has had little change in the last 30 years, there is no doubt the iBuyer business model will increase its share of the nearly $100 billion of revenue generated by selling residential property across USA, UK, Australia and New Zealand every year. However, whether the iBuyer model is to real estate what UBER was to the taxi industry is yet to be seen.