The problem with home-flipping giants

• Big home-buying companies like Opendoor lightly renovate and resell properties for profit.
• These companies are akin to scalpers who buy then resell tickets for much more than they paid.

In January, when Ticketmaster started selling tickets to Taylor Swift's upcoming Eras Tour, millions of would-be concertgoers were devastated to find out that tickets sold out in a presale open only to fans with special access codes.

Disappointed Swifties had to resort to the secondhand market, where general admission for the cheapest seats, officially priced at a reasonable $49 and up, were being hawked for $243 and up on Stubhub. (At least one person splashed out $5,500 for floor seats.)

The scalpers, people or entities who resell something quickly for profit, are winning. Meanwhile, the corporate scalpers of the housing market — companies that buy and relist homes by the thousands without doing much, if any, work on them to make a profit — are struggling.

As the housing market sputters and stalls, it's becoming harder for these companies to make a profit. Their losses highlight how, when the cost to borrow money is high, firms that don't add much value get hit hard. Last week, two of the biggest remaining corporate home-flipping companies, Opendoor and Offerpad, reported dismal earnings, another sign that their business model is incredibly risky.

Opendoor, a $900 million public company based in San Francisco, and Offerpad, a $143 million public company based near Phoenix, Arizona, promised investors they could make most of their money by essentially scalping, or flipping, homes.

These firms — as well as now-defunct arms of Zillow and Redfin — dubbed themselves instant buyers, or iBuyers, because they claimed homeowners could sell their properties to them quickly and easily, without the stress of hiring a real-estate agent to list their places on the open market.

But unlike individual home flippers, who typically target derelict or outdated properties and perform extensive cosmetic and mechanical improvements to a home before relisting it for sale, iBuyers were noted for selling properties just weeks after closing on them. The companies even acknowledge that they make minimal improvements to properties over just a few weeks before relisting them. It's a volume game — and iBuyers have spent billions on tens of thousands of homes in hot pandemic housing markets like Phoenix, Las Vegas, Atlanta, Tampa, and elsewhere.

A spokesperson for Opendoor confirmed to Insider that the company typically only performs necessary repairs to make the property "clean and safe," as opposed to an extensive rehab that a smaller-scale flipper might conduct. And a spokesperson for Offerpad told Insider that the company seeks to buy, renovate, and sell each property in less than 100 days.

Trying to time the market is difficult, and betting that prices will continue to increase indefinitely is tricky for anyone. But the strategy of flipping homes en masse, which emerged when Opendoor was founded in 2014 and rose to popularity at the start of the pandemic, has not had to endure a housing-market downturn — until now.

Opendoor and Offerpad suffered big losses in 2022

Last spring, the Fed raised interest rates and the cost of taking out a mortgage climbed.

People were reluctant to sell their homes, fearing they couldn't afford their next one given the higher cost of borrowing money. Home prices started to cool slightly throughout the Midwest and more acutely in western markets like Phoenix, Las Vegas, and San Francisco.

The home flippers got hammered.

Case in point: Opendoor's 2022 earnings, announced last week. In the last quarter alone, Opendoor lost $399 million after selling more than 7,500 homes during the period. For all of 2022, the company posted a net loss of $1.4 billion — more than double the $662 million that the company lost in 2021, when it was cheap to borrow money and home prices were climbing.

Opendoor shares were down after last week's earnings, opening at $1.45 a share on Tuesday. The company's stock is down 85% from the same period last year.

Opendoor ended 2022 with nearly 13,000 homes to sell in its possession. Despite the major losses, an Opendoor spokesperson told Insider that the company does not plan to conduct a "fire sale" on that existing inventory.

Meanwhile, Offerpad, an Opendoor rival with a near-identical business model, announced a fourth-quarter net loss of $121 million in its earnings report last week. The company lost over $32,000 on each home it sold last year, the report showed. Offerpad's share price is currently down 86% from a year ago. By the end of December, Offerpad still owned 1,800 homes.

Zillow and Redfin shuttered their iBuying arms due to losses

It could be worse: Some of Opendoor's rivals didn't survive the pandemic.

Zillow and Redfin shuttered their homebuying and selling platforms to try and stanch their losses.

Zillow exited iBuying in November 2021, after determining that it was going to lose too much money on many of the homes it bought in top markets like Atlanta, Phoenix, and Houston. It lost $881 million in 2021 alone. The situation became so dire that CEO Rich Barton said that more losses from its iBuying arm, Zillow Offers, could put "the whole company at risk."

A year later, Redfin pulled the plug on RedfinNow, its home-flipping business. In a November 2022 memo to staff, CEO Glenn Kelman said that RedfinNow stood to lose as much as $26 million in 2022 "even before its overhead expenses." Despite it being a smaller loss than competitors were expecting, he said it was "still larger than we could afford to bear."

Kelman also said one "problem is that iBuying is a staggering amount of money and risk for a now-uncertain benefit. We've tied up hundreds of millions of dollars in houses that you yourself wouldn't want to own right now."

Home- and car-flipping firms add little value

As the economy teeters on the brink of recession and the Fed continues to hike rates to tame inflation, higher borrowing costs are punishing companies that don't create value.

At its core, the main business model of home-flipping firms doesn't create a ton of immediate value. Any renovations made are typically minimal, and there's an emphasis on getting a property back on the market and resold as soon as possible. Instead, these companies attempt to play the middleman between sellers and buyers during a market bull run, pocketing any immediate equity gain and fees on both transactions.

It's not just houses. Companies that quickly flip other high-value commodities like cars have also taken major hits to their market caps since the era of free and cheap money came to an abrupt end last year.

Carvana and Vroom, publicly traded firms that quickly buy and sell cars online, profited tremendously from the demand for new and used vehicles during the pandemic. In the past 18 months, though, they've seen their bottom lines and share prices crater.

Home sellers face a tough road in 2023

For iBuyers, 2023 promises to bring more pain.

The forecast for home sellers — both individuals and companies — appears gloomy in many parts of the country as mortgage interest rates hover at 6.5% and sales prices in major cities across the country continue to soften.

There is some good news for buyers, however.

It could be an opportunity to make a lower offer on a property sold by an iBuying company. Opendoor, Offerpad, and other companies that rushed to purchase homes are now discounting the asking prices of those homes to get them off their books. And any significant increase in inventory, or homes for sale, in markets from Phoenix to Vegas could send comps — the listing prices of neighboring homes — spiraling downward.

The still-softening market will keep putting iBuyers in precarious positions, as the real-estate analyst Mike Delprete wrote in a February 14 blog post. But if these companies hold off on buying homes, he added, that's not a good solution either.

"As Opendoor dramatically slows down its purchase of homes, it will lose less money, but it also loses its ability to make money," he said. "Think about it: If a coffee shop loses money on each coffee it sells, the solution is not to sell less coffee; it's figuring out a way to sell coffee profitably."