In part one of this episode, host Maiclaire Bolton Smith sits down again with CoreLogic’s real estate tech solutions expert Mark Weaver to chat about how rising interest rates and a slowdown in buyer interest resulted in the once-red-hot iBuying and power buying segment being abruptly confronted with an environment designed to stress-test their business models.

Find full episodes with these guests in our podcast archive here: https://clgx.co/3zqhBZt

In this episode:

0:52 - Meet Katia, the newest team member of Core Conversations

2:06 - Mark is back to introduce himself

3:09 - How is the current market testing the iBuying model?

4:30 - What is the future of iBuying?

6:26 - What is iBuying anyways?

7:07 - Maiclaire talks about her iBuying experience

8:36 - Mark explains how iBuyers are pivoting their business models

10:45 - Katia takes a coffee break to do the numbers in the market

12:00 - What are the current opportunities for iBuyers?

13:22 - Designing a buy-box

Mark Weaver:

Yeah, so a lot of those iBuyers right now are trying to figure out how do we still do this at a profit while offering the seller a price point that makes it worth their while, back to your point.

Maiclaire Bolton Smith:

Welcome back to Core Conversations: A CoreLogic Podcast, where we tour the property market to investigate how economics, climate change, governmental policies and technology affect everyday life. I am your host, Maiclaire Bolton Smith, and I'm just as curious as you are about everything that happens in our industry. We've discussed property technology, or PropTech, in previous episodes, but we've only just skimmed the surface, and it's a good thing that we did because much has changed since we first spoke about the industry in Episode 47.

Katia Oloy:

Hi everyone, I'm new around here. I'm Katia, and I'm going to be joining Core Conversations as another voice this season. While Maiclaire is still going to be our host, I'm here to give you a look into the research that our team does for some of the more nitty-gritty subjects we discuss. I'm also really excited to bring a new segment to our episodes where I will provide a glimpse into what's happening in the greater economy so that you know what is happening in the property market.

Speaking of happenings, we want to invite you, our listeners, to reach out to us on social media, we're @CoreLogic on Facebook and LinkedIn, and @CoreLogicInc on Twitter and Instagram. However, if you want to have a conversation with us face to face, come and meet up with some of our experts, or just check out what we do. We are going to be at MBA's Servicing Solutions Conference and Expo on Feb. 21 through Feb. 24, in sunny Orlando, Florida. Not a bad place to be in mid-winter, we promise. Okay, let's hop back in with Maiclaire to continue our conversation.

MBS:

So to keep our conversation about PropTech current, we're going to pick up where we left off and talk about how the cooling housing market is disrupting the innovation that itself was meant to disrupt. So without further ado, let's jump into it. Mark, welcome back to Core Conversations.

MW:

Lovely to be here. Thank you for having me again.

MBS:

Okay. Well, you were just on this podcast at the end of last year, but I felt like there was so much more that we could talk about, it was just the tip of the iceberg. So before we jump in, can you remind our listeners about your background and your role here at CoreLogic?

MW:

Sure. So, I work in our Data Solutions team, supporting our data and analytics business, specifically how these PropTech businesses are leveraging our data, analytics and technologies to foundationally run and operate their businesses. So super exciting part of the business to work in.

MBS:

Yeah, definitely. And super exciting for our topic today. So the property industry is a human capital-intensive industry traditionally, but the last couple of years we saw the proliferation of technologies like iBuyers and power buyers, or they're called bridge financing sometimes, and I think one might say that PropTech solutions were born out of the bull market that characterized this period, but things have changed in recent months, and this is one of the most exciting things that I think you and I talked about when you were here the first time. And I want to just revisit this topic of iBuyers and power buyers because how is the current market testing the evolution of this iBuyer business model?

MW:

Well, that's exactly right. So PropTech's only been around relatively recently, within the last decade. All these business models pretty much emerged and were born in the last appreciating market cycle that we lived through.

MBS:

Sure, okay.

MW:

So back to your point, none of these business models have really withstood the test of scrutiny in a decelerating market or a downward depreciating market. So for sure right now there's a lot of focus on how these business models adapt, change — and questions about whether some of them survive as this market cycle changes, and stress tests the applicability and relevance of these business models across all market cycles, not just upward appreciating ones.

MBS:

Okay. And I want to talk about that survival topic right there because we've seen some big players in this market. I know Zillow and Redfin were pretty big in the iBuyer market and they've now closed their iBuying arms. What does this mean for other companies? You and I talked offline a lot about iBuyers because of my interest, personally, and I know you've been through some of this yourself as well. There are a lot of companies out there, what does it mean for these remaining companies to have their stocks... we've seen their stocks drop dramatically in recent months. Does it mean there's not as much competition or does it mean that they're just not going to exist anymore?

MW:

It's a great point. So on the one hand, for the iBuyers that are left it's potentially opportunistic to accumulate market share if they can figure out how their business model would adapt and supports the current market conditions. But to your point — Zillow was first, then relatively recently followed by Redfin — where they actually ceased operations, they ceased their iBuying arms. Now, you could actually argue that those guys were followers in this space anyway because they effectively were born in PropTech 1.0, which was really the rise of the portals. Redfin and Zillow got into the iBuying business because there was a lot of venture capital going into fueling their emerging competitors like Opendoor and Offerpad. So this very much, I think, is a return, to Redfin and Zillow, of their core business and their core competencies, which are areas that are very familiar to them. And to your point, the ones that are left standing are the ones that were ones that pioneered and invented iBuying as a concept.

So a subtle distinction there, but an important one because the iBuyers that remain were born as iBuyers and invented the iBuying concept, and don't really have anything else to fall back on. So they have to continue to invest and pivot and understand how they operate in this market. It was easier in a lot of ways for Redfin and Zillow to get out when the going got tough because they had other business lines and established business models to fall back on.

MBS:

Right, okay. Yeah, so whereas the other ones that they didn't have plan B, that was their business.

MW:

Yeah.

MBS:

That's really interesting.

KO:

Okay, let's take a moment to talk about what iBuying is. We learned a little bit about this in Episode 47, but to sum it up briefly, we'll use a definition from The New York Times, which said that iBuyers are essentially, "institutional house flippers, companies that use algorithms to estimate a home's value and then buy it directly from the owner for cash." Power buyers, on the other hand, are companies that bridge finances and that awkward gap between selling a home and buying another. What they do essentially amounts to a cash offer for a buyer and guarantees the sale of a home.

MBS:

Yeah, it's interesting because part of the reason you and I started talking about this is you really piqued my interest when you were first on the podcast because, I mean, I've talked a lot about buying this home that we live in now and we are looking at moving and upgrading our house, and I just can't be bothered with putting a home on the market and having to deal with all of that. So this iBuying was really appealing to me, and I had talked to some of my colleagues actually that had used an iBuyer in the last six to eight months and been really successful with it. So, this was very interesting to me when you and I first started talking about it. However, the market's very different now than it was six, eight, 12 months ago.

And what I encountered was as soon as I questioned with some of these iBuyers, the instant response I got from most of them was, "We're not buying properties in your area right now." And then I dove into a few others and tried to check all of them out, and somebody's like, "Yeah, we'll come and make you an offer." And then they wait and right before they're supposed to come, they're like, "Yeah, it's not worth our time. We wouldn't be able to give you what you paid for the house." And if you were to look at just looking at even a CoreLogic valuation of what the property is, it would be significantly higher than what we paid for it. So it was interesting to me to see the fall of the iBuying market firsthand. So yeah, I just wondered if you could comment on some of that.

MW:

So, a lot of those iBuyers right now are trying to figure out how do we still do this at a profit, while offering the seller a price point that makes it worth their while, back to your point.

MBS:

Yeah.

MW:

And in an upward-appreciating market, it's relatively easier to make money on that transaction, right?

MBS:

Sure.

MW:

It's just the natural market appreciation during the holding time is going to mitigate a lot of their risk of the holding period or the cost of carry. Now, of course, we're in a different market, we're in a decelerating market, a softening market, and potentially in a declining market in certain MSAs' geographies. So how they pivot their business models and make it workable so that they can understand, quantify and lay off their risk in the transaction.

MBS:

Sure.

MW:

While at the same time offering a price to the consumer that makes sense for them. This is the world that we're now living in, right?

MBS:

Yeah.

MW:

And on the back of that, actually, the iBuyers that are still in the market and are still operating, the types of data and analytics that, for example, that we have, that we offer the industry, it's never been more important to get the most accurate, highest-quality data sources feeding into those models because we've already seen some consolidation and entrants leaving the market.

MBS:

Okay.

MW:

The ones that survive and ultimately thrive are going to be the ones that can really, really understand and quantify the risk profile and still deliver a product to the consumer that makes sense for them.

MBS:

Yeah.

MW:

MBS:

Sure.

MW:

We're leaning in with these companies, a lot of the time, to help them understand and live in this new world, but it's tough in terms of how these business models adapt. Yeah.

KO:

MBS:

I guess the other thing is, are there still opportunities for those iBuyers that still have their doors open, that are still offering services on the open market to make themselves competitive and profitable?

MW:

Yes. The short answer to the question is yes, but it's definitely harder for them to understand, needle in the haystack, which properties they should be acquiring and at what price point than ever before. What we've also seen is their approach to risk and iBuying, and the way that they would construct what's called their buy box, was very, very much property-centric driven in terms of they'd start with the property then go outward to the market. Now what they're doing is they're turning that on its head. Now they're saying, "Which geographies and MSAs am I comfortable operating in versus not?" And then they're looking at the local market implications before they actually start to look and underwrite the property.

MBS:

Okay.

MW:

So the way that they approach iBuying has fundamentally changed from being property-centric outward to more like local MSA-specific inward to the property.

MBS:

Okay. There's a couple things I want to dive into there. But first, you used an acronym, MSA, and that is the "metropolitan statistical area." So just when we're talking about geographies, I just wanted to clarify that a little bit. But the thing I wanted to dive into is this idea of "buy box." I thought that was a really interesting concept that you mentioned. So can you talk a little bit about this? What is that? How do you define parameters of the box?

MW:

Yep, sure. So as I just mentioned, a lot of these PropTechs, whether they're in iBuying or whether they're in power buying, will set and define what's called their "buy box," which is basically, effectively, it's their investment criteria, in terms of, "We've got lots of capital to deploy, we want to deploy that capital into our buy box of this criteria because we're satisfied that that's a sustainable investment strategy for us." And as I just mentioned, buy boxes traditionally were property-centric. It was all done by understanding the property first and then the environment around the property or the market around the property. Now, in this changing market environment, buy boxes are being adapted and changed to be market-centric first, and then to underwrite or evaluate the property secondarily.

MBS:

Yeah.

MW:

Such as the nature of this current market cycle that we're going into.

KO:

That is really helpful information, and there's more to come. However, we're going to continue this conversation in part two of this episode when we pick back up next week. Talk to you then.

MBS:

Okay, and thank you for listening. I hope you've enjoyed our latest episode. Please remember to leave us a review and let us know your thoughts, and subscribe wherever you get your podcast to be notified when new episodes are released. And thanks to the team for helping bring this podcast to life: producer Jessi Devenyns, editor and sound engineer, Romie Aromin, and social media duo Sarah Buck and Makaila Brooks. Tune in next time for another Core Conversation.