Redfin, Opendoor, Zillow and the Great iBuyer Game

A few weeks ago, Zillow put its first home under contract as a seller in Phoenix, consummating its entry into the “iBuyer” space. Zillow joins a fleet of competitors—including Opendoor, Offerpad, Knock and Redfin Now—that let home sellers close in days instead of months by directly buying homes at a (mostly) fair price and flipping them back on the market.

There are now multiple iBuyers operating in Phoenix, including Opendoor, Offerpad and Zillow. In a previous analysis, I noted some of the reasons why certain markets appeal to iBuyers: homogenous inventory and high transaction volume to maximize the accuracy of the automated valuation models (AVMs) that generate the offers, warm weather to minimize climate-related rehab surprises, and low taxes to reduce transfer and holding costs.

The corollary to this observation: we should expect to see direct competition between iBuyers sooner than the vast scale of the residential real estate market would have you believe,  centered around cities like Atlanta, Las Vegas, Dallas and Orlando. These cities are the first fronts in a war to own a new paradigm in buying and selling homes that could represent multiple points of U.S. residential transaction volume over the coming years—Opendoor alone will buy $2.5B of homes this year.

So: how’s it going to go down? Will Opendoor’s first mover advantage carry the day, will Offerpad’s operational chops lead to victory, or will Zillow and Redfin deploy their tremendous reach to pull ahead? In this post, I’ll propose a framework by which we can assess the competitive positioning of a given iBuyer, and apply it to the major players to predict which are best situated to win in markets where they cohabitate.

Premise #1: In the eyes of the customer, iBuyers differentiate primarily on net proceeds

It’s an interesting paradox of the iBuyer experience that the sheer speed of the transaction limits the degree of interaction the iBuyer has with the customer, particularly on the seller side.

There are certainly ways for these businesses to differentiate on product-level experience from the seller’s point of view—a smoother flow to generate an offer, friendlier appraisals, a trade-in experience like the one offered by Knock, or features like a rent-back option for sellers who don’t want to move right away. But these features feel relatively simple to replicate. None seems significant enough, relative to the psychological scale of selling a home, to create a customer experience moat unto itself.

As iBuyer product offerings mature, I believe home sellers will treat them the same way they view airlines, choosing between offers largely on the basis of the net dollars they’ll receive. In the world of traditional agents who spend months serving a client, it’s plausible to differentiate on personal or institutional “brand.” But given that the iBuyer experience is fast, impersonal and predictable by design, it’s hard to imagine brand loyalty playing a deciding role relative to thousands of dollars at stake—so long as the iBuyer has a baseline reputation as a fair counterparty, not like a “We Buy Ugly Houses” franchise.

In other words, returning to the airline analogy, iBuyers will need to invest in brand to the extent they earn a spot in the United / American / Delta tier. Beyond that, I believe brand will play a negligible role in convincing a customer to choose one iBuyer over another. Without meaningful brand or product-level differentiators, the richest offer will win.

Premise #2: Net proceeds are governed by cost, and the key controllable input into cost is inventory liquidity

If you accept the first premise, the iBuyer with the lowest marginal cost per transaction will be able to make higher offers for homes, win the price war and capture more share.

For a look at the unit economics of the iBuyer model, take a look at my previous post. Some costs—like closing costs and taxes—are significant, but since they’re generally the same for each iBuyer (with some exceptions, which I’ll touch on later), we can net these non-controllable costs out of our head-to-head comparison.

The competitive drivers of cost for the iBuyer business model can be encompassed in a single concept: inventory liquidity. The speed with which an iBuyer can buy, rehab and sell a home drives the majority of controllable cost associated with the model, including:

• Holding costs: taxes, maintenance, HOA and insurance are proportional to holding time
• Financing costs: less holding time means capital can be recycled to buy more homes, lowering the cost of capital per transaction
• Market risk: rapid turnover reduces the risk of riding the elevator to the bottom in a downturn, minimizing the need to charge a risk premium

There are other ways iBuyers can compete on cost, like developing a more accurate AVM to reduce pricing risk, or building enough scale to buy bulk materials and rehab homes for less money. Over a longer time horizon, iBuyers that offer a complete solution to buyers and sellers with owned-and-operated closing services—mortgage, title, etc—can reduce their cost relative to competitors.

But beyond being the largest input into controllable cost, inventory liquidity is the best way to generate a competitive moat. The iBuyer that builds an initial liquidity advantage can charge less, which creates more seller demand, which generates listing inventory that draws buyers, which reduces holding time and improves liquidity—a virtuous cycle more durable than operational efficiencies of scale.

Premise #3: Inventory liquidity is a function of flip operations and customer acquisition

Once an iBuyer has purchased a home from a seller, two factors inform how fast they can turn it around: flip operations and finding buyers.

By flip operations, I mean everything that happens between closing on the purchase and re-listing the home for sale: the rehab process, staging and listing on the MLS, maintaining the home, and any additional prep, like installing smart locks and security cameras to support 24/7 open houses. Using data to identify high ROI improvements for a given market, building an in-house team of contractors and handymen, and limiting the need for rehab in the first place by filtering for quality inventory are levers that iBuyers can pull to minimize flip time.

But the main source of variance in turnover is customer acquisition. Traditional agents usually find buyers by sharing listings with the local MLS, where the listings are discoverable by other agents and flow through to websites like Redfin and Zillow.

Tech-enabled disruptors can employ a wider variety of offline and online tools to increase conversion at every step of the buyer funnel. On the product front, several offline features could make listings more appealing to buyers, like making it easier to tour homes (24/7 open house or Matterport scans), offering a “certified home” guarantee, or even providing buyers with financing by underwriting their mortgage. But only two iBuyers have a proprietary presence at the top of the funnel—Redfin and Zillow, which have the power to highlight listings directly to tens of millions of unique visitors.

Implications for the iBuyer competitive landscape

If you believe that inventory liquidity is the key to lower costs, which is key to relative share gain, assessing each iBuyer’s strengths and weaknesses in flip ops and customer acquisition can help us predict the winner in markets where iBuyers compete head-to-head.

Opendoor wins on ops, loses on online acquisition (and so do Offerpad, Knock, etc)

Opendoor is the first mover and OG iBuyer. Given their scale and experience, I believe their edge exists in on-the-ground operations, with benefits both on the flip and in buyer acquisition. Opendoor’s jobs page shows that they hire an extensive team of coordinators, project managers and field technicians to manage their flips, and they’ve pioneered features like 24/7 open houses and a satisfaction guarantee to make their homes more appealing to buyers. They’re also launching a mortgage business, giving buyers a 1% discount on closing if they purchase an Opendoor home.

Where Opendoor falls short is proprietary channels of online acquisition. Without a best-in-class search experience like Redfin or Zillow, Opendoor will need to double down on paid acquisition channels for finding sellers and source a greater proportion of buyers through the MLS—which means paying a full buyer agent commission.

Offerpad and Knock haven’t been around for as long as Opendoor, but they share the same strengths and weaknesses in a directional sense. In particular, Offerpad is staffed by veterans of Invitation Homes, which holds a gigantic portfolio of single family rental properties, and that experience will likely accelerate their operational prowess. But none of these companies have a robust online presence that organically draws customers to their home inventory.

Zillow wins on online acquisition, loses on ops

Zillow’s advantage is clear: online reach. Boasting over a hundred million unique visitors across its flagship home search websites and apps, in theory, Zillow has an overwhelming advantage at targeting likely sellers with a pitch for Instant Offers based on their browsing activity, and finding buyers for owned inventory online.

But Zillow has no experience as an operations business. They’re starting by leveraging their network of Premier Agents to manage both sides of the transaction—buying homes from sellers and listing them on the market. Both agents get a commission, so this is expensive talent, even if Zillow cuts a deal to reduce the commission and nets some of the commission payment back in Premier Agent fees.

Over the long-term, Zillow will be also gated from competing on cost by its legacy business. The real opportunity for all iBuyer platforms is building enough liquidity to lower prices to parity with agent commissions (5-6% of transaction value). But this is also the moment that Zillow may run into steep resistance from its existing customer base—the real estate agents who will be supplanted by this new model. If Zillow wants to compete on price it will eventually undercut agents, and crossing the chasm from a high-margin marketplace business to a low-margin, high-volume operations business will tax even the toughest executives and shareholders.

Redfin balances ops and customer acquisition

Disclaimer: I’m a former Redfin employee, current shareholder and long on the business. With that said, I believe Redfin is best positioned to create a liquid iBuyer marketplace. With 25 million monthly uniques and brokerage operations in more than 80 markets, Redfin has an advantage in both online and offline acquisition.

Redfin can use agents to acquire sellers by pitching Redfin Now alongside its existing listing product. Unlike Zillow, Redfin’s investments in end-to-end efficiency have resulted in a agent-listed product so affordable (1% commission) that Redfin Now won’t cannibalize it—Redfin agents and Redfin Now are natural complements. To move owned inventory fast, Redfin can highlight listings to users, and use existing vertical infrastructure (Redfin Mortgage) to create an attractive end-to-end experience for buyers. Redfin listings already sell faster than homes represented by traditional agents in most markets.

Redfin’s biggest weakness relative to Opendoor and Offerpad is its lack of experience in rehab and flip operations. But given Redfin’s experience scaling a thousands-strong team of employee agents around the country, I believe they can remedy this disadvantage fast—and they’re already starting.

Conclusion

It’s worth noting that the iBuyer business model has gained traction even given a nationwide seller’s market, where the guarantee of a fast and certain sale is less valuable because most homes are under contract in weeks anyway. As the market turns, the iBuyer value prop will attract a wider audience of home-sellers.

Balanced against the opportunity of a growing market is the unanswered question of the iBuyer model’s resilience to macro risk. In the end, perhaps the biggest advantage of inventory liquidity is reducing the chance that an iBuyer blows up during a major market correction.

The battle for iBuyer market share will play out over a time horizon of years, but I believe that early and aggressive execution against flip operations and customer acquisition will kindle success in the great iBuyer game. Ultimately, a small liquidity advantage may well compound into a marketplace that makes the experience of selling and buying houses as seamless as the way we transact in everything else—and the owner of that marketplace will play a deciding role in the future of residential real estate.