“We sell ads, not houses,” said CEO Spencer Rascoff in the company’s Q1 2015 earnings call. But in his prepared statement for the company’s Q1 2018 earnings call, Rascoff spends seven paragraphs on how the company plans to start buying and selling houses with its version of the iBuyer business model, dubbed Instant Offers. “We purchase the home, do all the work a seller would do, and put it back on the market in short order, in partnership with agents and brokers,” he says of the Instant Offers initiative. Rascoff also provides an example of how the company could conceivably generate $1 billion in profit from Instant Offers. “Given the enormity of the U.S. residential real estate market, the potential total addressable market for providing homesellers with a service such as this is significant. There are 5.5 million annual home sales at $1.8 trillion in annual sale volume,” reads the Rascoff statement. “It’s too early to estimate how many sellers might choose to sell in this way or what our typical net profit per transaction might be, but as an example, if 5 percent of sellers select this method, that is 275,000 transactions. For illustrative purposes at scale, using $250,000 as the typical home value, a $3,500 net profit per transaction would result in a nearly $1 billion profit opportunity annually.” That $3,500 net profit may be a bit ambitious based on Zillow’s first home purchase, which is now listed for sale with an asking price of $425,000 — just $15,000 above the purchase price. A listing commission of just 3.5 percent would alone wipe out any profits, not to mention any needed renovation costs and carrying costs such as property taxes. But it’s the bigger picture represented by the $1.8 trillion in annual home transaction volume attracting disruptive business models to real estate along with the capital funding those real estate disrupters. Total funding to real estate tech startups in 2017 was $12.6 billion in 347 deals — up 200 percent from $4.2 billion in 2016, according to RE:Tech, real estate tech research marketing agency.
estate industry: iBuyers, discount brokerages, predictive listing models, and off-MLS marketplaces. Although each real estate disrupter is targeting a different niche of the marketplace, the common theme among all four companies is the heavy use of data and technology to fuel the disruption.
Real Estate Disrupters: Defining a New Industry
While the iBuyer model may be new for Zillow this year, it’s a disruptive business model that has already proven to have some staying power thanks to pioneers like Offerpad, which started purchasing homes directly from homeowners in the Phoenix area as early as June 2015, according to Cortney Read, director of communications and outreach for the company.
“As we are defining a new industry, there are a lot of competitors coming in,” she said, noting that each of the companies under the iBuyer umbrella are offering a different flavor of products and services to the real estate marketplace. “It really only validates that consumers want this.” The success of Offerpad has attracted venture capital, with a total of $410 million raised so far, according to Crunchbase. Its biggest round of funding was a $230 million deal in 2017, landing Offerpad as No. 3 among notable funding deals ranked by RE:Tech for the year. While Zillow has purchased one home so far, Offerpad and fellow iBuyer pioneer Opendoor — which launched in 2013 — have purchased nearly 10,000 homes combined over the past five years, according to an ATTOM Data Solutions analysis of public record data.
This is the first in a series of articles highlighting four real estate disrupters that each represent four distinct business models threatening to bring about massive change to the traditional real
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