Wednesday, September 21, 2022 / by Bryan Baylon
The last couple of months have been a torrid time for the iBuyers. Having been on a buying spree during the second quarter, they found themselves with far too much inventory at the start of the third quarter. A large percentage of these homes were purchased at prices that are in excess of their current market value.
So far as we know, they have not cancelled contracts, but have allowed them to complete. However their buying has been cut back dramatically now as they focus on selling what they have instead of buying too many more. Most of those sales are going to be at a loss. For Opendoor, 77% of the homes sold in Maricopa and Pinal counties during August were sold for a loss and only 23% made at least some gross margin. The average gross margin was -6.2% during August and it has dropped further during the first 2 weeks of September.
Opendoor has clearly decided to use price-cuts to sell their excess stock of homes as quickly as possible, and they have used them very aggressively. For homes that Opendoor has sold since August 1, the average reduction between initial list price and final list price is 13.1%. A few homes have seen their list prices drop by more than 20%. In addition to low list prices, they have agreed to some large concessions to buyers of up to 5.6%. though the average concession is a tad below 1%. Until last week they were offering a $3500 bonus to the buyer's broker too, though this disappeared on September 15. They have also accepted quite a few low-ball bids well below their already low list prices. This is what distressed sales look like in 2022.
The effort has worked to the extent that Opendoor unit sales have increased sharply from only 21 during the first week of August to almost 100 in each of the last 3 weeks. However they still have a lot of inventory left. Somewhere between 1,550 and 1,600 active listings as of last night. This is enough to last approximately 4 months, which takes us to the end of the year at their current sales rate.
The average price per sq. ft. for homes under $800,000 sold by Opendoor has declined from $256.14 in May to $229.07 in September. This is a much larger decline than for the market excluding Opendoor. Homes sold by regular sellers (i.e. not iBuyers) declined from $268.98 to $256.08. So Opendoor's price has dropped by well over 10% while the rest of the market dropped by just under 5%.
OfferPad has not attempted to sell off excess inventory at low prices on the MLS. They have dropped prices for a few listings, but nowhere near the size and frequency of cuts that Opendoor has implemented. However they have sold a batch of 19 homes in bulk to an institutional investor. This incurred a gross margin loss of 6.3%. But maintaining their list prices has meant OfferPad's sales are few and far between. Only 39 homes were sold by OfferPad in August - their lowest monthly total since April 2018. This also means their inventory is stuck at around 400 active listings. This is rather a lot if you are only selling 39 a month - 10 month's worth in fact.
Making this iBuyer business work is difficult in a down cycle. Even harder when you are a public company with all the SEC complications this brings. At times like this, being a spectator is probably preferable to being a participant. However if you are actively looking to buy a home, I think there are some real bargains to be found, especially among the Opendoor listings.
Market insights provided by The Cromford Report.