Our industry needs to better understand iBuying’s economic equation. Mike DelPrete’s query is simple: have an honest, open conversation about profitability.
This post was republished with permission from Mike DelPrete.
A casual investor might be excused for mistaking iBuying for a profitable business. Zillow’s most recent letter to shareholders states: “The average return on homes sold before interest expense was $ 21,830 per home.” Opendoor’s investor presentation highlighted the “positive unit economy” with a contribution margin of $ 11,000 per home.
Both statements are factually correct. However, the numbers shown are marked with asterisks and notes. Opendoor and Zillow emphasize iBuying’s one-size-fits-all economy that eliminates tens of millions of dollars in spending – from salaries to marketing to technology – necessary to run the business.
It’s the equivalent of a flawless conceptual version of iBuying, where transactions magically take place without employees, customers come out of nowhere, and technology is freely available to all.
When all indirect costs are included, profitability quickly turns negative for both companies.
Zillow’s average return on homes before interest is around $ 22,000 per home. After all costs are taken into account, the net loss per home is $ 72,000. Keeping track of this number reveals the true unprofitable business over time.
Both companies are unprofitable and will each lose around $ 300 million in 2020. If all expenses are included, every business will lose tens of thousands of dollars per home. Opendoor lost less money per home than Zillow in both 2019 and the first nine months of 2020.
The measure of profitability that any company highlights is Adjusted EBITDA, which is its own set of challenges. The “I” in EBITDA stands for “Interest”, which means that Zillow and Opendoor exclude their collective interest expenses from the calculation. Interest expenses are an important and necessary part of the iBuyer business model and amount to tens of millions of dollars each year.
In 2019, Opendoor’s interest expense was $ 105 million, which is not included in the only visual profitability measure. To determine the actual net loss (over $ 300 million), readers must scroll to the very last slide in Opendoors Investor Deck in the Appendix.
Switch on the light
One of Zillow’s corporate values is to turn on the lights. Quote:
“We believe that information is power, and we have made it our business to increase transparency in real estate and in our company. Our goal is to unlock information and enable our employees, customers and partners to make better decisions. “
I agree: information is power and transparency is power. This leads to better decision making. Much of my work is focused on the need for transparency.
IBuying is a new business model powered by billions of dollars in investment. The first question many people ask themselves is, “Is it profitable?” Not when necessary expenses are excluded, but the entire business model.
My question is simple: talk about profitability. Don’t be afraid of it. Don’t let readers scroll to the appendix or the supplementary financial tables and do a series of calculations to get their answer. Turn on the lights.
Mike DelPrete is a strategic advisor and global real estate technology expert, including Zavvie, an iBuyer listing aggregator. Connect with him on LinkedIn.