Competing Against “Losers” (Companies Willing & ABLE To Lose Millions Or Billions)
Ken McElroy is one of America’s most prominent real estate investors.
He runs a huge real estate fund, owns hundreds of millions worth of real estate himself, works with “Rich Dad” Robert Kiyosaki, publishes a prominent newsletter and frequently comments on real estate trends in general.
That is why I took notice when Ken recently posted this short 7-minute video called: Is This The Death of Real Estate Agents?
He was discussing iBuyers like Zillow, Opendoor and Offerpad, and pointing out the usual concerns: (1) iBuyers make below-market offers; (2) iBuyers charge higher fees; and (3) iBuyers allow for no negotiations.
Long story short: the only advantages of using an iBuyer are quicker access to cash and less effort prior to selling (no staging, repairs or showings). But sellers invariably get less for their homes.
iBUYERS LOSE $100,000 PER TRANSACTION
But – what really struck me was his discussion of the massive losses iBuyers are willing to absorb once operating expenses are accounted for (some of the iBuyers mislead investors by claiming they are making money on transactions but they are not factoring in total operating expenses).
Some of the iBuyers are losing as much as $100,000 per transaction.
iBuyers are also taking enormous risks b/c if the market turns while they are holding inventory, they could quickly lose billions.
WHY RISK SO MUCH?
iBuyers are willing to risk so much for several reasons:
- Upselling. They hope to “upsell” sellers and buyers other products that will make them money like mortgages and insurance.
- Economies of Scale. They hope to start making money on volume once they hit critical mass; some market observers think they will capture as much as 50% of the market in several years.
- Cheap Capital. This is probably the biggest factor of all and it is something most people never consider. When rates are held close to zero like they are now, capital is both extremely cheap and extraordinarily plentiful, as investors are desperate to find yield any way they can. As a result, they take enormous risks themselves, investing in “growth companies” that focus far more on revenue growth than on profitability. Hence, investors in low-rate environments are willing to accept billions in losses as long as companies have revenue growth and “a story.”
In fact, here is a list of 14 famous companies that are losing billions, e.g. Uber, Airbnb, Zillow, Snap, Casper, Blue Apron, Dropbox, etc. These companies would likely not exist in their current form if rates were even close to “normal” (in the 6% to 8% range we saw in the 1990s for example).
In any case, this topic of companies willing to lose billions is something we all have to worry about as it is happening in the mortgage realm too; many large lenders are now offering loans at losses to maintain market share; to hopefully upsell other products like insurance, deposit relationships and equity lines; and to achieve some sort of magical economies of scale at some point.
WHAT TO DO?
- Sell Expertise and Value. This is obvious and much easier on the real estate side I think, b/c there is so much data proving that iBuyers pay much less than normal buyers on average. On the mortgage front, the “losers” can perform refis with some competence, but we see their purchases blow up constantly. More importantly, many sellers will not accept offers when they are accompanied by a pre-approval letter from one of the “losers.”
- Pray for Higher Rates. Everyone seems to love low rates, as they make real estate more affordable and foster refi booms. BUT – low rates also artificially inflate the real estate market and allow large companies to compete without ever having to make money.
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