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Online Real Estate Got Too Hot to Handle

Real estate 2.0 is still just knocking on disruption’s door.

For an industry that has historically relied upon a paper-intensive, time-consuming process of buying and selling homes, the past few years have brought a lot of progress. We can now see the value of a house in one click, tour it virtually with a few clicks or sell it with a few more. The promise is evident in the flood of companies coming to the public markets that tackle automated home flipping, like

Opendoor

and Offerpad, or seek to improve the fragmented brokerage model, like Compass.

Zillow

Chief Executive

Rich Barton

has said he and his co-founders realized people weren’t ready to buy and sell homes electronically on demand back in 2005. But 14 years later, with a human agent still at the center of most real-estate transactions, Zillow bet that a growing population of consumers were finally ready to embrace big change with iBuying.

Last year, the rise of remote work made Zillow and fellow real estate technology companies look smart. Investors started to believe that the pandemic was just the impetus the industry needed to transform on a large scale. In an 11-month span from mid-March 2020, Zillow shares soared nearly 700%—more than 2.5 times the rise of

Zoom Video Communications

over that period.

But now, as vaccination rates tick up and workers filter back into offices, investors are starting to waver. Zillow shares have shed 43% of their value in less than three months, while Opendoor shares have fallen more than 50% from their highs this year. Compass, which went public in April, is now valued at less than it was after its last private round in 2019.

An analysis this month by Mike DelPrete, scholar-in-residence on real estate technology at the University of Colorado Boulder, showed that Zillow logged three consecutive quarters of net profit, stemming from its legacy Premier Agent business. The segment would have benefited from the pandemic-driven interest in home buying and selling—with or without iBuying technology.

There is growth in iBuying, but it is slow and expensive in the early innings. Zillow’s Mr. Barton has noted the importance of fair pricing for consumers to scale the business. The strong unit economics that Zillow posted on homes in the first quarter “are not what our goal is,” he said on the company’s quarterly conference call, suggesting take rates going forward will decline. Zillow’s iBuying business lost money overall in the first quarter. And the company now expects adjusted losses before earnings, tax, depreciation and amortization for the segment to deepen sequentially by more than 50% in the second quarter.

Opendoor’s results on Tuesday showed a similar dynamic. The company said revenue grew 200% in the first quarter versus the fourth quarter, but that it lost money even on an adjusted Ebitda basis. Even with 41% expected sequential revenue growth at the midpoint of its guidance for the second quarter, Opendoor said it still may not break even. The company has been focused on rapid market expansion with plans to enter nine new markets in the second quarter, reaching 42 markets by the end of the year.

More than a decade and a half has passed since Zillow started evangelizing a future of live, digitized markets for home sales. But today, just 1% of U.S. real-estate transactions are conducted online, according to Opendoor. The pandemic teased a vision of total transformation in online real estate. As the mirage fades, broader disruption isn’t as close as it once seemed.

Write to Laura Forman at laura.forman@wsj.com

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