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Zillow’s decision to walk away from iBuying is great news for direct competitors like Offerpad and Opendoor, as well as transaction facilitators who provide “asset light” versions of iBuying including Knock, Ribbon, Flyhomes and Orchard.
But the industry needs to figure out what to call the new category of services that’s emerged to serve homebuyers who need to sell first, said Zillow co-founder and former CEO Spencer Rascoff, in a one-on-one talk with Knock CEO Sean Black at Connect Now.
Spencer Rascoff
Rascoff has a unique perspective as a backer of Offerpad who played a crucial role in helping the company go public, but who is also still a large Zillow shareholder.
Although he hasn’t been directly involved in Zillow for a couple years, Rascoff said, “I was very surprised by the Zillow decision to walk away from iBuying. I think that we’ve seen over the last couple of years that sellers love selling their homes to an institutional buyer — it’s a great product for sellers, and Zillow helped pioneer that space and help prove just how appealing it is to sellers.”
Rascoff said that, for now, everyone’s still “digesting the Zillow news,” and that investors will end up “in one of two camps.”
“Some people will say, ‘Well, Zillow couldn’t make this work. Nobody can. I’m out of this category'” Rascoff said.
But many other investors — “hopefully most,” Rascoff said — will decide “this is a great business model and has enormous consumer appeal and real estate industry appeal, and so there are just going to be a different set of winners in the space.”
The winners will be companies that solve the “time matching problem” — the need for most homebuyers to sell an existing home before they buy.
“I just think it’s too compelling a value proposition to a seller for this segment of the market to not be served,” Rascoff said. “Zillow has chosen to no longer serve this customer base. But I think it’s quite clear that there’s a large market that wants to sell their homes in this way. And that’s only going to increase.”
A growing number of companies are also helping solve the time-matching problem by acting as transaction facilitators. Instead of actually buying a home on behalf of clients, they provide “asset light” solutions to homebuyers like bridge loans or contingency-free financing that can compete with cash offers.
Rascoff says the industry needs to come up with some more user-friendly terminology to describe those solutions.
“I do think that you all need to figure out how to brand your category of products,” Rascoff said. “I think I’ve seen power buyers or something like that.”
“Thanks to Mike DelPrete, yes,” Black said of the tech entrepreneur, business advisor and Inman contributor who may have coined the phrase.
“I call them super bridge loans, which is not a great term,” Rascoff said. “You need to figure out what to call what you all do. Because it’s a really important product, and there’s a place for it, for sure. And with Zillow out of the buying space, I think [there is] even more running room for companies like yours.”
As an investor in Flyhomes, Ribbon and Tomo, Rascoff said he’s bullish on any company that “takes friction out of the transaction.”
Sean Black
Black wanted to know if Rascoff thought Zillow’s decision to pull out of the iBuying business — which was based on a conclusion that too often, it was overpaying for homes — will make it harder for iBuyers to borrow the money they need to acquire homes.
“I was in New York last week with a bunch of bankers, and we were hypothesizing, ‘What does this mean for the cost of capital of the model? Do rates have to go up?’ Because now this is obviously much more risky for anyone that is providing all of the capital.”
If the cost of capital goes up, that would suggest that iBuyers will have to charge more, or pay less, Black said — both of which aren’t great outcomes for consumers.
Rascoff agreed that iBuyers “may have to charge a higher fee in order to have more margin available,” to help them weather headwinds like higher labor costs, longer hold times or less home price appreciation.
If iBuyers have to raise fees, that not only affects the consumer value proposition, but the total addressable market.
“At a 3 percent fee, everybody’s gonna take the iBuying offer, right?” Rascoff said. If fees go up to 7 percent or 10 percent, “some people will still take it, but fewer people.”
Although iBuying is still just a tiny portion of the market, about 0.5 percent of all home sales, Rascoff said, “I believe it’s going to become 5 to 10 percent of all home sales.”
At that scale, “If you can find a way to make a couple of thousand per transaction, and iBuyer and goes from 0.5 percent of all homes to 5 or 10 percent of all homes, a lot of value can be created. And I think that Offerpad and Opendoor are well on their way to creating a lot of value.”
