And right now, Opendoor’s behavior, driven by the data it sees, is predicting bad tidings. “Right now, they’re trying to sell as much of their inventory as humanly possible,” says DelPrete. One possible story is that based on the data Opendoor is seeing, the company believes things could get worse. “They’re reading the tea leaves,” he says. “They just have better tea leaves than you and me.” Fraser doesn’t dispute that: “We can react very efficiently and quickly to changing circumstances thanks to the signals we have in our business,” he says.
But the data Opendoor has access to may only tell half the story. iBuyers accounted for 1.3 percent of all US home sales in 2021, a record high, but some regions are more popular than others. “Their model is such that they can only be truly successful in certain parts of the market,” said Amit Seru, a professor of finance at the Stanford Graduate School of Business. iBuyers operate in areas where the housing stock is relatively new and uniform, so they are overrepresented in cities like Phoenix and Las Vegas, but ignore states like Missouri and parts of Texas, where older homes dominate.
Fraser disputes the idea that Opendoor lacks insight into the broader market. Its buy-box coverage, where it makes offers on homes in markets in which it operates, stands at 65 percent. “This is a mainstream product, not a niche product,” he says.
While prices in Phoenix rose from $445,000 in August 2021 to $549,300 in August 2022 during the pandemic, the amount of time real estate spent on the market before sale increased by 30 percent over the same period, indicating buyers were thinking harder about their property. purchases – a problem for iBuyers, who rely on quick sales.
Analysts predicted a weakness in the market in September, which has materialized as Opendoor sold large numbers of properties at a loss. Seru thinks the struggles iBuyers are now facing somehow point to economic headwinds, because of the way iBuyers operate. When times are right, they win big. And when the going gets tough, they’re one of the first to have a hard time.
According to Tomasz Piskorski of Columbia Business School, who is also a member of the National Bureau of Economic Research, an iBuyer’s gross profit on every transaction is around 5 percent. When that margin comes under pressure, iBuyers are among the first to drop out because their business model is focused on quickly selling the homes they buy for a profit. “Opendoor now knows that if they buy this house — and remember, it comes at a discount — they could end up being stuck with it for many months,” Piskorski says.
DelPrete makes an analogy between iBuyers like Opendoor and short-term stock traders. For decades, people bought stock in a company with the goal of holding onto them for years and earning a stable return on their investment. People did the same thing with real estate: move into a house, live in it for decades, then sell it to trade or downsize as needed, while saving the often significant profits. iBuyers have accelerated that process by flipping homes in months instead of years and realizing tighter margins. “It’s a fragile business model that doesn’t work well when there’s uncertainty in prices,” Piskorski said.
