Top Real Estate Disrupters: Offerpad Disrupting the Disrupter
This is the first in a series of articles chronicling notable real estate disrupters fueled by property and neighborhood data from ATTOM Data Solutions.
Zillow bought its first home in May.
The online real estate giant’s plain-vanilla purchase of a four-bedroom, three-bathroom home in Chandler, Arizona, for $410,000 is bursting with symbolism for the one-time real estate disrupter, itself now reacting to a new wave of disruption in the real estate industry.
The rapid ascent of so-called iBuyers over the past five years has forced Zillow to pivot from a core value its CEO proudly adhered to as recently as three years go.
“We sell ads, not houses,” said CEO Spencer Rascoff in the company’s Q1 2015 earnings call. But in his prepared statement for the company’s Q1 2018 earnings call, Rascoff spends seven paragraphs on how the company plans to start buying and selling houses with its version of the iBuyer business model, dubbed Instant Offers.
“We purchase the home, do all the work a seller would do, and put it back on the market in short order, in partnership with agents and brokers,” he says of the Instant Offers initiative.
Rascoff also provides an example of how the company could conceivably generate $1 billion in profit from Instant Offers.
“Given the enormity of the U.S. residential real estate market, the potential total addressable market for providing homesellers with a service such as this is significant. There are 5.5 million annual home sales at $1.8 trillion in annual sale volume,” reads the Rascoff statement. “It’s too early to estimate how many sellers might choose to sell in this way or what our typical net profit per transaction might be, but as an example, if 5 percent of sellers select this method, that is 275,000 transactions. For illustrative purposes at scale, using $250,000 as the typical home value, a $3,500 net profit per transaction would result in a nearly $1 billion profit opportunity annually.”
That $3,500 net profit may be a bit ambitious based on Zillow’s first home purchase, which is now listed for sale with an asking price of $425,000 — just $15,000 above the purchase price. A listing commission of just 3.5 percent would alone wipe out any profits, not to mention any needed renovation costs and carrying costs such as property taxes.
But it’s the bigger picture represented by the $1.8 trillion in annual home transaction volume attracting disruptive business models to real estate along with the capital funding those real estate disrupters. Total funding to real estate tech startups in 2017 was $12.6 billion in 347 deals — up 200 percent from $4.2 billion in 2016, according to RE:Tech, real estate tech research marketing agency.
This is the first in a series of articles highlighting four real estate disrupters that each represent four distinct business models threatening to bring about massive change to the traditional real estate industry: iBuyers, discount brokerages, predictive listing models, and off-MLS marketplaces. Although each real estate disrupter is targeting a different niche of the marketplace, the common theme among all four companies is the heavy use of data and technology to fuel the disruption.
Real Estate Disrupters: Defining a New Industry
While the iBuyer model may be new for Zillow this year, it’s a disruptive business model that has already proven to have some staying power thanks to pioneers like Offerpad, which started purchasing homes directly from homeowners in the Phoenix area as early as June 2015, according to Cortney Read, director of communications and outreach for the company.
“As we are defining a new industry, there are a lot of competitors coming in,” she said, noting that each of the companies under the iBuyer umbrella are offering a different flavor of products and services to the real estate marketplace. “It really only validates that consumers want this.”
The success of Offerpad has attracted venture capital, with a total of $410 million raised so far, according to Crunchbase. Its biggest round of funding was a $230 million deal in 2017, landing Offerpad as No. 3 among notable funding deals ranked by RE:Tech for the year.
While Zillow has purchased one home so far, Offerpad and fellow iBuyer pioneer Opendoor — which launched in 2013 — have purchased nearly 10,000 homes combined over the past five years, according to an ATTOM Data Solutions analysis of public record data.
The number of purchases by these two pioneering real estate disrupters has grown exponentially each year, up 112 percent in 2016 and up 133 percent in 2017, and is on pace to nearly triple in 2018, according to the ATTOM analysis.
The average purchase price for homes acquired by Opendoor and Offerpad over the past five years was $230,307, a significantly lower price point than the charter Zillow home purchase, and translating into roughly $2.3 billion in transaction volume.
It’s important to note that the $2.3 billion represents less than one-half of the transaction dollar volume that the two companies are participating in given that the iBuyer model involves reselling homes purchased within a relatively short period of time — and at a higher price point. Offerpad’s Read estimated that her company alone is involved in $130 million in real estate transactions per month, a run rate of more than $1.5 billion for the year.
“We are doing it at a large scale,” Read said, noting that after launching in Phoenix the company has expanded to eight markets.
Data-Fueled Real Estate Disrupters
The large scale Offerpad has achieved in just a few years has been fueled largely by data, according to Chief Real Estate Technology Officer Dan Mayes.
“While real estate is at the core of our history and brand, Offerpad uses data to fuel its business model,” he said. “If an organization is only in one market, they only have one market to consider when making decisions. We’re currently in eight markets — eight markets that each have their own trends. The market trends can be identified with the help of data and it’s how we stay ahead of market.”
In addition to informing market trends, data also helps inform decisions Offerpad makes at the property level, according to Mayes.
“Offerpad receives data from many sources, and most importantly knows how to use when buying and selling homes,” he said. “From deep neighborhood data that helps set a benchmark for offers, to providing property characteristics to better help us determine the needs of our buyers.”
ATTOM analyzed homes resold by Offerpad within 12 months of the original purchase date in Phoenix in 2017 and found the median price of those sales was $26,400 above the median price at purchase. That price differential was significantly higher than the potential $15,000 expected with the Zillow resale and leaves more room for a net profit, but Read said that price differential is not the company’s primary source of revenue.
“The way that we make money is that we have a fee … that varies on the home (depending on) how soon they are looking to move out of the home,” she said. “We manage all the renovations. We have our team that does that and they are very efficient to get it done and get it buyer-ready to put it back on the market.”
Read said Offerpad’s business model is disrupting the marketplace by giving control back to sellers.
“The number one thing is you’re putting the control back in the seller’s hand,” she said. “Before Offerpad there wasn’t much control they had or certainty over the process.
“A lot of people have actually lost out on their dream house … because they had a contingency of their house selling. There is not really peace of mind until the deal closes and the funds are transferred to their account,” Read explained. “With Offerpad you come to us, give us your property address, upload some pictures and within 24 hours we’ll provide you an offer. … We actually have customers that sell to us and buy Offerpad homes and they are able to do those transactions within a month.”
Mayes said the same data and analytics the company has developed to fuel its business model and customer-facing applications is also helping to fuel investment in the company.
“In addition to using data to provide a tremendous home buying and selling experience, we invest continuously in developing our proprietary technology and enhancing the millions of real estate and economic data points we collect,” he said. “These investments in data and technology help us identify potential market expansion while providing our investors and partners with the insight and the confidence to continue fuel our operations.”
Other Top Real Estate Disrupters
Please contact us if you have questions about the underlying data referenced in this article, or would like to have access to that data in the form of custom reports, API, Bulk File or DaaS.