Real Estate Shows Tech Is No Holy Grail
In iBuying, just because you bet on technology, it doesn’t mean you’re a winner.
3 min
Everyone wants to be a tech company. Office-sharing, meat substitution, ride-hailing, fashion styling, fitness—they are all technology businesses, according to founders who covet the high-flying valuations the appellation can garner in the public markets.
But just having technology doesn’t automatically make an investment superior. Consider real estate’s digital home flipping: Here is a business that is undoubtedly “tech” but where the value of the technology isn’t yet clear. With iBuyer Offerpad’s merger with blank-check firm Supernova Partners expected to close early this quarter, the value of technology—or lack thereof—is something that online real-estate investors will want to consider as they place their bets in a crowded field.
So-called “pure play” iBuyers Offerpad and competitor Opendoor Technologies both describe themselves as technology companies. Opendoor says it is a “digital platform for residential real estate.” Offerpad says it is focused on “tech-enabled real estate solutions.” Both companies have a chief technology officer and some version of a data scientist, presumably there to hone the technology investments and analyze their utility.
These companies may be solving similar pain points in seamlessly digitizing real-estate transactions, but they seem to be approaching the problem in different ways—Opendoor with money and Offerpad with experience. As of its March presentation, Offerpad said it had raised less than 9% of what SoftBank-fueled Opendoor had, though it had bought and subsequently sold 38% as many homes. And whereas Offerpad is led by a former real-estate agent, Opendoor is led by someone from the real estate technology business.
Opendoor’s deep pockets have no doubt fueled its rapid growth. It is now active in 39 markets with the stated goal of entering 42 by year-end—double the number of markets Offerpad is targeting this year, despite being only one year younger. But bigger doesn’t necessarily mean better: Opendoor lost far more money last year.
According to company presentations and regulatory filings, both companies had roughly the same gross margins last year, suggesting they are equally good at pricing homes and timing the market. An analysis by scholar-in-residence at the University of Colorado Boulder Mike DelPrete shows the difference in economics lies in “indirect costs” such as technology, the sales and marketing of that technology and the salaries of the people who build it.
Mr. DelPrete’s analysis shows Opendoor sold a little more than twice as many homes as Offerpad last year, but its technology and development expenses were about eight times higher over that period. A look at regulatory filings from both companies shows that dynamic was also true at least in the two years before the pandemic, albeit at a slightly lower ratio. The takeaway: Either Opendoor’s technology isn’t all that it is cracked up to be, or its investments have yet to pay off.
Opendoor says it isn’t blindly pursuing growth for growth’s sake, but making strategic investments in pricing, technology and operations platforms as it scales. The goal, according to the company, is to build a platform capable of high volume. With the real-estate market on fire, it is certainly working that angle: Opendoor’s spent almost as much on technology and development in the first quarter as it did in all of 2019.
The business of iBuying is still nascent: Opendoor says just 1% of real-estate transactions today occur online and iBuyers claim that they are competing against the traditional agent model of buying and selling rather than one another. But the slice of the market open to iBuyers has become crowded, creating a land grab atmosphere. Especially, as the pandemic has shown a generation of tech-savvy millennials finally seem to be hitting the home-buying market, time is of the essence.
Offerpad’s SPAC deal reportedly gave the company a post-transaction value of $3 billion, well below Opendoor’s current fully diluted market value of $11 billion. When comparing the two, investors should at least consider the fact that technology is only as valuable as its competitive advantage.
Reprinted by permission of The Wall Street Journal, Copyright 2021 Dow Jones & Company. Inc. All Rights Reserved Worldwide. Original date of publication: July 4, 2021.
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Chris Dixon, a partner who led the charge, says he has a ‘very long-term horizon’
Americans now think they need at least $1.25 million for retirement, a 20% increase from a year ago, according to a survey by Northwestern Mutual
Philip Lowe’s comments come amid property industry concerns about pressures on mortgage holders and rising rents
2 min
Leaders in Australia’s property industry are calling on the RBA to hit the pause button on further interest rate rises following yesterday’s announcement to raise the cash rate to 4.1 percent.
CEO of the REINSW, Tim McKibbin, said it was time to let the 12 interest rate rises since May last year take effect.
“The REINSW would like to see the RBA hit pause and allow the 12 rate rises to date work their way through the economy. Property prices have rebounded because of supply and demand. I think that will continue with the rate rise,” said Mr McKibbin.
The Real Estate Institute of Australia today released its Housing Affordability Report for the March 2023 quarter which showed that in NSW, the proportion of family income required to meet the average loan repayments has risen to 55 percent, up from 44.5 percent a year ago.
Chief economist at Ray White, Nerida Conisbee, said while this latest increase would probably not push Australia into a recession, it had major implications for the housing market and the needs of ordinary Australians.
“As more countries head into recession, at this point, it does look like the RBA’s “narrow path” will get us through while taming inflation,” she said.
“In the meantime however, it is creating a headache for renters, buyers and new housing supply that is going to take many years to resolve.
“And every interest rate rise is extending that pain.”
In a speech to guests at Morgan Stanley’s Australia Summit released today, Governor Philip Lowe addressed the RBA board’s ‘narrow path’ approach, navigating continued economic growth while pushing inflation from its current level of 6.8 percent down to a more acceptable level of 2 to 3 percent.
“It is still possible to navigate this path and our ambition is to do so,” Mr Lowe said. “But it is a narrow path and likely to be a bumpy one, with risks on both sides.”
However, he said the alternative is persistent high inflation, which would do the national economy more damage in the longer term.
“If inflation stays high for too long, it will become ingrained in people’s expectations and high inflation will then be self-perpetuating,” he said. “As the historical experiences shows, the inevitable result of this would be even higher interest rates and, at some point, a larger increase in unemployment to get rid of the ingrained inflation.
“The Board’s priority is to do what it can to avoid this.”
While acknowledging that another rate rise would adversely affect many households, Mr Lowe said it was unavoidable if inflation was to be tamed.
“It is certainly true that if the Board had not lifted interest rates as it has done, some households would have avoided, for a short period, the financial pressures that come with higher mortgage rates,” he said.
“But this short-term gain would have been at a much higher medium-term cost. If we had not tightened monetary policy, the cost of living would be higher for longer. This would hurt all Australians and the functioning of our economy and would ultimately require even higher interest rates to bring inflation back down.
“So, as difficult as it is, the rise in interest rates is necessary to bring inflation back to target in a reasonable timeframe.”
Chris Dixon, a partner who led the charge, says he has a ‘very long-term horizon’
Americans now think they need at least $1.25 million for retirement, a 20% increase from a year ago, according to a survey by Northwestern Mutual
