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iBuyers struggle in Q3 while operating at ‘peak uncertainty’

Offerpad lost $80 million and Opendoor lost $928 million in Q3 of 2022

The cooling housing markets of Q3 2022 were not kind to iBuyers Opendoor and Offerpad. Or, as Carrie Wheeler, the CFO of Opendoor put it: “We’re operating at peak uncertainty right now, with an expectation of continued home price depreciation.”

As with the second quarter of 2022, the days leading up to the release of Opendoor’s third quarter earnings were rather newsy. While there was excitement surrounding the new Opendoor Exclusives platform for home sellers, the firm’s announcement on Wednesday that it would be cutting 550 positions, or 18% of its workforce, set the tone for Thursday’s earnings call.

Opendoor: Inventory offload struggles

Although Opendoor managed to record $3.4 billion of revenue in Q3, up 48% year over year, the iBuyer lost nearly $1 billion ($928 million), up significantly from a net loss of just $57 million in the third quarter of 2021. Opendoor executives attributed the firm’s struggles to its attempt to offload inventory purchased in early Q2 2022.

“We are focused on improving the health of our inventory by accelerating the resell of homes we made offers on during Q2,” Eric Wu, the firm’s CEO and co-founder, told investors and analysts during Opendoor’s third-quarter earnings call Thursday evening. “While this will come at the expense of margin losses in the short term, we expect it will enable us to put these losses behind us as expeditiously as possible and proceed with a fresh, lower risk and better performing book of inventory.”

According to Wu and Wheeler, at the end of the third quarter, the iBuyer had sold or was in resale contract on over 40% of the Q2 offer cohort — and they expect to be approximately 65% of the way through that inventory by the end of 2022.

As Opendoor has worked to move through its older inventory, executives said that it has reduced the time needed to do repairs and prepare a home for resale. That time frame dropped from an average of 23 days in Q1 2022 to 15 days in Q3 2022. In addition, it slowed the pace of home acquisition, buying 8,380 homes in the third quarter, 45% fewer than a year ago, while the rate of home sales was up 42% year over year, with 8,520 homes sold in Q3.

Optimism about the future

When looking ahead, executives were optimistic about their current property acquisitions.

“We feel good about the new book of inventory that we’re building into right now, and we’re pricing appropriately for the macro environment,” Wheeler said.

Wu also noted that he believes the firm’s newly announced platform, Opendoor Exclusives, will play an essential role in the future growth of Opendoor.

“Our sellers can now connect directly with our buyers to transact without the hassle and complexity of a traditional listing. This benefits both buyers and sellers alike,” Wu said. “For home buyers, they will be the first to see unique homes before they hit the market.”

According to executives, at the time of the earnings call, 20% of homes listed on the Exclusives platform were under contract within two weeks.

Offerpad: Higher revenue and higher net losses

Like Opendoor, Offerpad recorded higher revenue in Q3 2022 and a higher net loss compared to a year ago. In the third quarter of 2022, Offerpad earned $821.7 million, up from $540.3 million a year prior, and it recorded a net loss of $80.0 million, up 423% from Q3 2021. However, executives noted that the net loss included an inventory impairment charge of $27.5 million.

“Since the launch in 2015, most of the U.S. has experienced the seller’s market, but the value proposition we provide is even stronger in the buyers’ market, when sellers can go from listing to pending in days, and it’s going to take weeks or months, (so) iBuying becomes even more attractive. And if we are smart about how we underwrite homes in the market, there is an opportunity for enormous growth, but we aren’t there yet,” Brian Bair, Offerpad’s chairman and CEO, told investors on a call Wednesday evening.

“Right now, we are in between the sellers’ market and a buyers’ market, and expectations between the two parties are vastly different. This in-between phase is the most challenging period for the entire real estate market, including iBuyers.”

In navigating this market shift, Offerpad, like Opendoor, has slowed the pace at which it has acquired new inventory and increased the speed at which it is selling off existing inventory.

During Q3, the iBuyer bought 1,847 homes, down 33% from a year ago, and sold 2,280 homes, up 36% year over year. In addition, executives said that the average time from home acquisition to sale had dropped to 97 days, below the firm’s 100-day target, and only 5% of existing inventory was aged over 180 days.

“We are utilizing real-time market data, analytics and our years of real estate experience with thousands of transactions in our individual markets to do that. We are making tough decisions in uncertain times, with a commitment to aiming for the best outcome given the circumstances,” Michael Burnett, the firm’s CFO, said. “Right now, that often means accepting losses on homes that we believe may decline further in the short term, to be able to conserve or redeploy that capital more effectively. We are making these decisions on a market-by-market and home-by-home basis to optimize the outcome. At the same time, we have temporarily but significantly reduced the number of homes we are acquiring during this period of transition.”

Bair also noted that the firm has revised its “Buy Box” by applying the purchase price cap it implemented in Q2 in select markets to all markets in Q3. However, customers whose homes are above the “Buy Box,” but wish to work with Offerpad, are able to use the firm’s FLEX listing services.

“Our FLEX listing service has allowed Offerpad to continue helping customers through the current market conditions while lowering the financial risk to the company,” Bair said.

Executives said that FLEX listing and buying services had grown from 7% of volume in Q2 2020 to 29% of volume in Q3 2022.

Moving forward

In order to entice more buyers to consider an Offerpad home, the iBuyer has started testing a customizable renovation offering, called “My Way,” in its Phoenix market.

“With My Way, homeowners can select paint, flooring, countertops and appliances from a list of options that match their own personal style,” Bair said. “Update will be completed before they move in, and the cost of upgrades can be rolled into the mortgage.”

Moving forward, executives remain optimistic about Offerpad’s future, and see its geographic diversity as a key factor in ensuring its future success.

“Our presence in 28 markets across the country provides another risk mitigation opportunity. While markets like Phoenix, Denver and Las Vegas are still experiencing a rapid and significant pullback, we are starting to see signs of stabilization in some of the more affordable markets,” Bair said. “The diversification we have today has been thoughtfully and intentionally established over the last seven years, supporting the resiliency of our business. In the third quarter 2022, no market accounted for more than 10% of our revenue.”

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