WeWork - not working. Is the iBuyer Buz the same?

Buying & Selling Real Estate
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WeWork - not working. Is the iBuyer Buz the same?

Lesley Resnick
Real Estate Agent · Jacksonville, FL · Member since 2015 · 1k+ posts · 1k+ votes

I have been following WeWork for while now wondering what is the big deal?  $45B valuation?  For what?  They are valued and treated like a tech, but they did not create anything new.  The sobering light of their financials has scared off investors from their IPO.  Shared space, online booking and electric doors have been around for a while.  Further, Regis has been in this business as long as I can remember.  In Jacksonville there are a number of incubators that are industry focused to collaborate and create an environment that fosters business among like organizations and leverage shared space.

The ibuyers are like the WeWork story.  Taking huge sums of VC money and blowing through it only to get more for hitting the grow at any cost model.  Since they are in this realm they receive a tech start up valuation.  They will never be able to scale like a tech or maintain the margins.  The value of a tech is that the net next unit of production goes to almost zero.  Facebook will incur an unmeasurablely small cost to add 1,000 users to its servers.  The iBuyers need a $250m in cash plus carry costs to add 1,000 houses.  There is a market for iBuyers and for some people it will be perfect. It is not going to change the world.  The majority of sellers would rather wait for thier house to sell and get market value, than take a 15% hair cut.  The iBuyers must buy below market and sell at or above market, the same as anyone else who wants to make a profit in this business.        

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Aaron K.
Specialist · Riverside, CA · Member since 2015 · 6k+ posts · 3k+ votes
7y

@Scott Wolf not speculation; I used to work for one, can't give exact details but financing costs are included in the initial service fee, it is already planned for.  @Lesley Resnick the biggest risk mitigating factor is that the fee is fluid, thus if interest rates rise so does the fee, DOM projections up higher fee.  Marketing totally depends on the company but that won't be a permanent expense in the future at least not at the level it is now.  SG&A per house is also falling due to new methods.

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  • Aaron K.
    Specialist · Riverside, CA · Member since 2015 · 6k+ posts · 3k+ votes
    7y

    @Lesley Resnick iBuyers are on a much better track and in the cities where they hit scale they can offer realtor cost parity with holding costs factored in.  The marginal cost of one more house is also quite small because unlike Wework holding time is not forever.

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  • Lesley Resnick
    OP
    Real Estate Agent · Jacksonville, FL · Member since 2015 · 1k+ posts · 1k+ votes
    7y
    Originally posted by @Aaron K.:

    @Lesley Resnick iBuyers are on a much better track and in the cities where they hit scale they can offer realtor cost parity with holding costs factored in.  The marginal cost of one more house is also quite small because unlike Wework holding time is not forever.

    I am not sure I follow your thinking.  Could you clarify what you mean?     

    On the buy side they save 6%, no agent fee.  On the sell side they save 3%, they are willing to pay an agent.   

    Their gross margin is in the 9% range plus any difference in purchase vs market.

    In Jacksonville the average DOM for August was 60 days.  Average selling price 242,000.  If you own 1,000 houses @ 242,000 = 242,000,000 or debt service of 1/2% = 2.4m a month

    If you consider: transaction costs (doc stamps, title insurance), interest on the money, taxes, insurance.  Additionally, they run a business to manage the assets and the money.  Their marketing budget is in the millions.  It is difficult to estimate their true costs per month, but I would estimate they are in the 5-7% SG&A (Selling, General and Administrative Expenses) per house.

    As long as the VC money keeps flowing they are fine.

    When the market softens. They face a lot of challenges.

    Interest rate risk - if the rates normailze one of their biggest line items could double.

    Liquidity Risk - They need a TON of money to keep things moving and banks desire to continue to lend or require greater cash reserves is a huge risk.  Their customers ability to get a mortgage. 

    DOM Risk- This number is extremely low now, It could double or triple where it is now.

    Their financial model needs to be more like home builders who scale based on orders.  The large scale spec inventory model is tough to maintain long term.  

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  • Scott WolfPro Member
    Lender · Boca Raton, FL · Member since 2014 · 1k+ posts · 959 votes
    7y
    Originally posted by @Lesley Resnick:
    Originally posted by @Aaron K.:

    @Lesley Resnick iBuyers are on a much better track and in the cities where they hit scale they can offer realtor cost parity with holding costs factored in.  The marginal cost of one more house is also quite small because unlike Wework holding time is not forever.

    I am not sure I follow your thinking.  Could you clarify what you mean?     

    On the buy side they save 6%, no agent fee.  On the sell side they save 3%, they are willing to pay an agent.   

    Their gross margin is in the 9% range plus any difference in purchase vs market.

    In Jacksonville the average DOM for August was 60 days.  Average selling price 242,000.  If you own 1,000 houses @ 242,000 = 242,000,000 or debt service of 1/2% = 2.4m a month

    If you consider: transaction costs (doc stamps, title insurance), interest on the money, taxes, insurance.  Additionally, they run a business to manage the assets and the money.  Their marketing budget is in the millions.  It is difficult to estimate their true costs per month, but I would estimate they are in the 5-7% SG&A (Selling, General and Administrative Expenses) per house.

    As long as the VC money keeps flowing they are fine.

    When the market softens. They face a lot of challenges.

    Interest rate risk - if the rates normailze one of their biggest line items could double.

    Liquidity Risk - They need a TON of money to keep things moving and banks desire to continue to lend or require greater cash reserves is a huge risk.  Their customers ability to get a mortgage. 

    DOM Risk- This number is extremely low now, It could double or triple where it is now.

    Their financial model needs to be more like home builders who scale based on orders.  The large scale spec inventory model is tough to maintain long term.  

    Without any of us having inside information to their financials, it is all speculation at this point. Yes, they do need large infusions of VC capital, but anyone needs capital to do this. I'm sure with their size, they're not paying 10% interest to a HML, but probably getting a sweet deal on capital from a large bank or lender. That being said, everyone on BP knows that this business can be very profitable, so why not at scale?

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  • Lesley Resnick
    OP
    Real Estate Agent · Jacksonville, FL · Member since 2015 · 1k+ posts · 1k+ votes
    7y
    Originally posted by @Scott Wolf:
    Originally posted by @Lesley Resnick:
    Originally posted by @Aaron K.:

    @Lesley Resnick iBuyers are on a much better track and in the cities where they hit scale they can offer realtor cost parity with holding costs factored in.  The marginal cost of one more house is also quite small because unlike Wework holding time is not forever.

    I am not sure I follow your thinking.  Could you clarify what you mean?     

    On the buy side they save 6%, no agent fee.  On the sell side they save 3%, they are willing to pay an agent.   

    Their gross margin is in the 9% range plus any difference in purchase vs market.

    In Jacksonville the average DOM for August was 60 days.  Average selling price 242,000.  If you own 1,000 houses @ 242,000 = 242,000,000 or debt service of 1/2% = 2.4m a month

    If you consider: transaction costs (doc stamps, title insurance), interest on the money, taxes, insurance.  Additionally, they run a business to manage the assets and the money.  Their marketing budget is in the millions.  It is difficult to estimate their true costs per month, but I would estimate they are in the 5-7% SG&A (Selling, General and Administrative Expenses) per house.

    As long as the VC money keeps flowing they are fine.

    When the market softens. They face a lot of challenges.

    Interest rate risk - if the rates normailze one of their biggest line items could double.

    Liquidity Risk - They need a TON of money to keep things moving and banks desire to continue to lend or require greater cash reserves is a huge risk.  Their customers ability to get a mortgage. 

    DOM Risk- This number is extremely low now, It could double or triple where it is now.

    Their financial model needs to be more like home builders who scale based on orders.  The large scale spec inventory model is tough to maintain long term.  

    Without any of us having inside information to their financials, it is all speculation at this point. Yes, they do need large infusions of VC capital, but anyone needs capital to do this. I'm sure with their size, they're not paying 10% interest to a HML, but probably getting a sweet deal on capital from a large bank or lender. That being said, everyone on BP knows that this business can be very profitable, so why not at scale?

    All good points. Until their financial are released it is speculation and good sport. I am still not sure if they are more REIT than tech and if that is the case, valuations should match. It is still unclear if they are going to be good for investors, home owners or the market in general. Will they imporve the market or further fragment it?

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  • Aaron K.
    Specialist · Riverside, CA · Member since 2015 · 6k+ posts · 3k+ votes
    7y

    @Scott Wolf not speculation; I used to work for one, can't give exact details but financing costs are included in the initial service fee, it is already planned for.  @Lesley Resnick the biggest risk mitigating factor is that the fee is fluid, thus if interest rates rise so does the fee, DOM projections up higher fee.  Marketing totally depends on the company but that won't be a permanent expense in the future at least not at the level it is now.  SG&A per house is also falling due to new methods.

    1Reply
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