Real Estate Disruption Landscape
A number of companies are going after the opportunity to disrupt residential real estate – Zillow, Opendoor, Redfin, Offerpad, Compass, Homeward, and Porch, to name a few. The reason is that residential real estate is 1) a massive, fragmented market with around 5.5m home transactions annually, triggering an exchange of around $2T in value, and 2) full of friction because digital offerings today are nascent. For perspective, iBuying accounts for less than 1% of all home transactions today, and tech-powered brokerages such as Redfin and Compass have less than 5% share of transaction volumes.
The unifying thread among new entrants is an attempt to bring liquidity and reduce friction in the home transaction and ultimately, the moving process. That said, the opportunity is being approached through a spectrum of strategies. In our opinion, iBuying platforms have the potential to be the most transformative. That’s because they’re solving the most difficult problem – using machines to price and purchase homes directly from consumers – along with building a platform to streamline all activities around moving to provide a one-stop digital shop to buy and sell. Given the size of the TAM, other tech-powered approaches from brokerages like Redfin and Compass and alternative home financing companies such as Homeward will continue to grow as they help improve home transaction efficiency.
Below we outline the landscape of companies addressing the residential real estate opportunity. We’ve segmented them into three categories: iBuyers, tech-powered brokerages, and alternative home financing companies.
- iBuyers – The three largest iBuyers are Opendoor, Zillow and Offerpad. Although Zillow has its legacy ad business, the company has been clear that its focus with Zillow 2.0 is buying and selling homes. iBuyers purchase and sell homes directly to consumers. They generate revenue from a service fee that sellers pay in exchange for the certainty of an all-cash offer, the time certainty of choosing a closing date, along with the convenience of not having to repair, stage, or show the house. They also earn revenue from any home price appreciation when they sell a home. In the first quarter of 2021, Opendoor held roughly 56% of iBuying purchases, followed by Zillow at 29% and Offerpad at about 15%. Today, Opendoor has been more aggressive in acquiring inventory which has benefited its share. Long-term, we see the iBuying leadership concentrating between Zillow and Opendoor. The basic question is whether Opendoor continues to pay up for homes while growing its brand. For Zillow, its future is dependent on the company’s ability to convert its top-of-the-funnel leadership today (221m unique users in the March 2021 quarter), improve the accuracy of the Zestimate, and convert browsers into sellers.
- Tech-powered brokerages – Redfin and Compass are examples of tech-powered brokerages which leverage software to transact homes faster (while Redfin has a very small iBuying arm (RedfinNow), it’s not the company’s focus). In the case of Redfin, these efficiencies are passed on to home buyers and sellers in the form of discounted agent fees. We view Redfin as the digital broker for everyone, with an average home transaction value of about $490,000 in 2020. For Compass, the goal is to equip agents with better technology to buy and sell more homes, earning them more in commissions. We view Compass as the digital broker for people with more expensive homes, with an average home transaction value of just over $1m in Q1 2021. While there is value to be captured in these approaches, fundamentally they don’t change the nature of home transactions. Agents and commissions are still front and center.
- Alternative Home Financiers – Three of the primary players in this space, all private companies, are Knock, Orchard, and Homeward. While their offerings vary slightly, they focus on a “Buy Now Sell Later” option, by which homeowners can unlock equity in their existing home to purchase a new home, and then sell their previous home after the fact (in essence, it’s a bridge loan). Many of these companies will also back buyers’ offers with their own cash, essentially turning into an all-cash offer. From a high level, these offerings help solve 1) the timing issue of buying and selling a home while avoiding double moves and overlapping mortgages, and 2) makes buyers more competitive because their offers are not contingent on securing financing or the sale of their existing home. Similar to tech-powered brokerages, while these companies are solving some paint points, we don’t see them disrupting the fundamental mechanics of home transactions like iBuyers.
- Everything in between – In between the discovery, financing, buying, and selling, is a checklist of smaller tasks and services that are part of every move. These include finding insurance, movers, and handymen for repairs and installation, as well as transferring internet/tv, and security systems providers to a new location. Porch’s business model is essentially lead generation around what are five components of a move. From a consumer standpoint, Porch removes the headache of finding these components, and from a service provider’s perspective, they give access to high-intent customers.
iBuying represents the biggest opportunity
We believe the iBuying is the category of the real estate landscape with the largest opportunity. One of the core challenges for iBuyers to solve is using machines to accurately price and purchase homes at scale. The fundamental question is whether a machine will eventually be capable of consistently appraising the value of a home better than humans. We are long-term believers in the power of AI, and see appraising home values as a wheelhouse machine learning use case. The bigger the problem, the greater the potential reward.
Bringing it together
We’ve outlined 9 companies that are tracking the real estate disruption opportunity. Long-term, the most frictionless process will be when a customer can sell, buy, finance, insure, renovate and move using the same company. In other words, bringing the disparate parts of a real estate transaction under the same roof. We believe this anchor point will be iBuyers, as they are already tackling the most difficult problem of pricing and purchasing homes at scale. Today, the three iBuyers mentioned above offer mortgage and closing services, and in the future, we expect they will bolt on or build out additional ancillary services. This is where seamless transactions and true liquidity will arrive, along with a superior consumer experience and value proposition.