Startup Pays Cash to Buy Homes, Flip Them
wsj.com
wsj.com
The combination of high leverage and complete property ownership seems incredibly risky to me. If the country-wide housing market turns sour, not only is the company left with swiftly depreciating assets on their balance sheet as real estate values drop and people stop buying homes, but they are also left paying (probably 1-2%) interest on houses that they "bought" with these loans for $300k, but that are now worth $200k.
But the overall concept of increasing liquidity in the market by cutting out the broker and his/her available hours, "automating" the valuation and bid process, using low short-term interest rates to flip houses, and pricing for volume and quick turnover is pretty cool. The key is sticking to "commodity" housing (cheap-mid range) and timing the market correctly.
Perhaps they're hedging their exposure with property derivatives.
You can hedge against mortgage defaults, but it's not really the same thing.
As for housing risk, we spend a lot of time on this. A few points:
- Real Estate is very momentum driven and pretty slow. Markets don't crash in a day, like stocks. The fastest price changes in 2008 were around 3% per month for non-distressed homes in Phoenix (liquidity drops, but doesn't disappear). Our model includes "insurance" that goes up and down as market conditions change, and we believe it is pretty effective.
- Diversification by city matters a lot. Phoenix plunged in the recession. Dallas was flat. As we enter more cities, our inventory risk declines.
- The risk of another housing collapse (versus decline) is small. Debt to income ratios are sane, banks remain very cautious to lend, and there is a massive buy-to-rent industry now, led by Blackstone, that came about during the recession and quickly buys homes whenever they cross a price threshold to return rental yield.
If you're a technical person in SF and want to come by the office to learn more about our models and modeling pipelines (pricing, risk, days on market, etc) shoot me an email: jd@opendoor.com
This would be the key sticking point - sure you could theoretically try to unload houses and close your positions at the first whiff of a downturn, but it seems to me that liquidity would dry up much quicker now than in 2008 (30% decrease in existing home sale volume from 2006-2007, bottoming out at ~50% decrease in 2010, so pretty drastic) given how much tighter the market is, as you describe yourself.
You can also bet that Blackstone, who is effectively providing your business a baseline risk free rate of return right now, would immediately close their rent-to-buy fund if they saw any downturn in the existing house rental market, which is ultimately powered by consumer income strength. So if we don't see a meaningful increase in income, the tightness of housing liquidity would be my main concern in quickly offloading highly leveraged positions.
My medium-term outlook is that we will see the verticalization of existing urban cores - SF, downtown LA, NY, Miami, Chicago, Cincinnati, etc. We had a great boom of prosperity WWII that allowed for an unsustainable amount of suburbanization. We are now entering an era of cost-cutting, scale, and efficiency: suburbs will lose population due to their relatively high maintenance costs - roads, grids, plumbing, delivery, transportation. I'm not sure if diversification is the right strategy.
A good analogy may be CarMax, who shifted their mix in the recession towards distressed cars and ultimately kept revenue/profits reasonably consistent. Of note: This was at the same time car companies like GM and Ford were seriously at risk of bankruptcy.
A home in a non-distressed market losing nearly a third of its value in a year is "pretty slow"? That's a scary use of the term in itself.
I'm hoping to see alternatives to the "I-saw-the-house-flipping-infomercial-at-2AM-and-want-a-piece" crowd.
What is the case is that finding cash buyers often requires some informal connections. My metro has a fair amount of flipping going on, but it's hard to point to the marketplace where all this occurs. There's the foreclosure trawlers, the agents who knows a guy who just sold his latest project and is looking for the next one, the guys from the billboard who are looking for total wrecks, ... It's daunting.
The biggest difference is price. Those companies offer 65 to 80 cents on the dollar for homes. We offer full market value, and take fees that are comparable to a traditional transaction when you consider the full cost of selling. (Our total fees are generally 8 to 10%)
The article has many key inaccuracies that the reporter refused to correct, mostly around profit. If we made $20k per home, we'd give most of that back to sellers through higher offers and lower fees. And the data science team would panic, since their key metric is accuracy.
Thanks for your response. I am not knocking on you or the product because it is a lucrative market (if done right). So, you are taking the risk on the houses? Do you guys rent out the house? What happens if it doesn't sell?
If they don't sell, we lower the price until they do. Homes are hard assets, and always have a price. In many cases, we lose money.
In the United States, buyers don't directly pay the realtor commission. The seller generally pays ~6%, but sometimes that's negotiated down. This commission is split between the buyer's agent and the seller's agent, with their brokerage typically taking a percentage. But a buyer wants to use an agent because their perception is that they're not paying for it, and most buyers aren't well versed with the house transaction process, which is complex.
You could certainly make the case that a transaction without agents would mean either more profit for the seller, or a lower house price for the buyer, but I think it will take many years until that is the norm. There are a huge number of laws built around real estate transactions, and the NAR is a major major lobbying entity.
This is gross. We just put our London place on the market, and the total commission we will be paying (to a normal high street agent) is 1%
NAR's stated purpose is to protect the commissions of the real estate agents. In some ways it's nice that they're so forthcoming about that, versus other lobbying orgs.
The buying experience is a key part of that. If you're in Phoenix (or Dallas soon), check out our homes anytime. It's fun.