IBUING: A business model for walking on tight ropes
Opendoor and OfferPad effectively identified the home seller’s ability to line up timelines between sales and purchases. They use algorithms to provide sellers with immediate cash offers. If that’s accepted, they will repair the house and sell it on the open market. The seller can then move whenever a new home is ready to enter.
This business model is very capital-intensive, operates at low margins, has long trading times, and requires a lot of money to reach break-even. This is not usually a successful recipe.
Above all, it relies on a stable housing market, so the home is priced accurately by algorithms and can be obtained with ample margins. When the companies launched, home prices steadily rose and sales volumes had plenty of opportunity, which led to increased sales volumes.
With an innovative and technology-bearing concept, the ibuyers turned their heads.
The industry will first jump towards IBUING…
As both companies gained traction, players in the residential real estate industry saw opendoors and offer pads as threats and potential keys to becoming an elusive “one-stop shop” platform for home buyers and sellers.
The key players acted accordingly Zillow, Redfin, Realogy (now Anywhere) and Keller Williams Between 2017 and 2019, they launched their own version of IBUING, and many high-tech startups were founded with various spins of the IBUING concept.
“I feel like I don’t have any options right now,” Keller Williams CEO Gary Keller said in 2019 when his company joined Frey. “After Opendoor and Zillow become the only players in the Ibuyer space, you can’t decide on the terms and start building a brand of “they buy a house.” ”
…then to jump straight away
The IBUING model was tested after the pandemic began in March 2020, given its reliance on needle threads within a stable market. The housing market has become volatile as homeowners and buyers appear to adjust to lockdown orders, creating a massive pricing bubble.
Zillow cut its losses early by shutting down the Zillow Offer program in November 2021 due to the algorithm failing to adjust. A year later, Redfin shut down Redfin after causing a quarterly loss of $22 million.
However, Opendoor and offerpad had no choice but to continue. The pandemic bubble tallyed $5.15 billion in the first quarter of 2022, with both Offerpad reaching an all-time high of $1.37 billion, bringing a massive surge in revenue.
But it didn’t bring about a sustainable positive net profit and in fact it did the exact opposite. The companies achieved small profits in the first quarter of 2022, but Opendor suffered an astronomical loss of $928 million after just two quarters. In the fourth quarter of 2022, Offerpad recorded its highest loss at $121 million.
Scramble to stop bleeding
Opendoor and offerpad have dramatically reduced operations. In 2022, Opendoor bought a house 35,000 homes under. I bought 14,684 in 2024.
The number of houses on a contract to purchase at the end of each quarter serves as a measuring stick for your purchase activity. At the end of the first quarter of this year, Opendor has contracted for more than 1,000 homes, with an offer pad of 245. These numbers are significantly lower than the pandemic bubble peak.
To compensate for the loss in revenue, the companies are looking to aggressively cut costs. Opendoor fired 17% of its workforce in November, following 22% Reduction April 2023. Offerpad unlocked 7% of its employees in 2022, and private numbers opened 2023.
However, according to Tomasello, the bones are not very severed with flesh.
Ibuing is a term known in the real estate industry, but little is known among the general public. Furthermore, Opendoor and OfferPad are not well-known brands, so they rely on advertising and partnerships to generate leads. This means they can reduce so much ad spending
Offerpad says it is revamping its marketing strategies to get more money from the money they spend, rather than spending more money.
“We’re becoming more intentional with every marketing dollar,” Courtney, vice president of Offerpad, read in an email to Housingwire. “The goal is not to pull back, but to allocate spending wherever you see the most effective returns, whether on a digital channel or through consumers, partnerships or agent programs.”
Where will Eve Year go from here?
Variations in trade policy have undermined consumer sentiment and mortgage rates remain sustained high. The number of homes for sale has steadily increased this year, but sales coincides with last year’s historic lows.
Where does Eveyer go from here, with so many macroeconomic uncertainties hindering the already drooping housing market?
Offerpad expanded to other services that are characterized as “asset light” in the hopes of complementing its viewing operations. These include listing services, mortgages, titles and renovation projects called Renovate. This generated $5.3 million in the first quarter of this year.
Opendoor has previously provided mortgage lending and brokerage companies, but has closed these businesses as part of its cost reduction in 2022.
Both companies don’t have many options, but be careful and strategic about where to buy a home. Otherwise, businesses could be at risk if the housing market turns volatile again.
A company in this situation may try to sell or merge with another company, but there is no natural partner in such a transaction, especially given that the main players in residential real estate have already washed their hands of IBUING.
Still, their stocks are full of delisting possibilities, so the two companies were able to find value in M&A if the right circumstances presented themselves.
“Like most companies, the usual business courses opportunistically evaluate strategic opportunities that we believe will create value for our company and our shareholders,” Reid said.
