The inception of the ‘iBuyer’ marketplace in the USA is a curious new trend. What’s an iBuyer? That’s why we are going to look under the hood at Homeward – fresh off a $105M USD financing round – to understand the BMi (business model innovation) behind the new iBuyer model in the real estate market.
What is Homeward?
Homeward is a proptech (property + technology) company in the nascent iBuyer market that is bubbling up in certain regions of the United States where a platform, such as Homeward, calculates the value of a home automatically, purchases it, and re-sells the home itself.
Homeward solves a liquidity problem for many sellers who want to buy another home, but don’t want to risk carrying two mortgages or need immediate liquidity for whatever reason, but don’t want to firesale their home (and thus get a low price).
Homeward operates in the states of Georgia, Colorado, and Texas at the moment. As the company is effectively operating as a real-estate broker/agent, it must be licensed in each individual state before it can roll out in any respective market. Their recent financing round of $105M USD ($20 M equity, $85M debt) will allow them to expand into new markets and build their agency partnership network.
How Does It Work?
It is a 6-step process:
1/ Homeowners fill in online application
2/ Homeward platform automatically calculates value, determines approval in minutes
3/ Seller can now make an all-cash offer for their next home
4/ Since Homeward has bought the sellers current property, they can lease it from Homeward for up to 6 months while they list and sell their current property
5/ When the home sells, the customer can buy the home back off Homeward at the original purchase price
6/ Homeward takes a 2-3% cut off the purchase price
As you would expect on this type of nascent market – where uncertainty is high and the value of goods is high – the devil is in the details. There are many permutations and what ifs especially since Homeward’s main strategy is agent partnerships.
The idea is that the 2-3% fee is a strong enough business model, at the core, to scale-up the service and mitigate the risks associated with the model. Like most agency real-estate models, the idea is that the seller can bundle the cost into the sale of their home and pass it on to the buyer, especially since Homeward has guaranteed the sale (see Floor Price Certainty).
There is a strong value proposition here for real estate brokers/agents as well, and that’s why there is some flexibility in the business model to ensure agents are able to leverage their model to their benefit, in line with the vision of the founder and CEO Tim Heyl, a real estate agent himself.
Homeward originates its customers through its partnerships.
This model gives the company the advantage of a B2B2C (business-to-business-to-consumer) type model, rather than a B2C (business-to-consumer) model where they need to build the customer acquisition channel and spend a lot of time and money on customer acquisition. Comparatively, you would expect Homeward to have a relatively low CAC (Customer Acquisition Cost) in the iBuyer space.
It is a large and still underserved marketplace. The effects of the pandemic have created a lot of dislocation in the real estate market, especially in the USA where it has been very regional. Having a sales channel that originates via trusted agents with deep local expertise should help ensure that Homeward can continue creating strong demand for its services without needing to continuously fill the pipeline through its own B2C channels. This is a key dimension of BMi in the iBuyer marketplace.
Main competition in the iBuyer market comes from Opendoor, Zillow, and Redfin. Zillow and Redfin are huge digital property search platforms that have repositioned themselves into the ‘Real-Estate 2.0’ marketplace of iBuyers by leveraging their sales, marketing, and data science abilities. But their models are quite different than Homeward’s model, which is centered around the agent and not simply making money between the spread between the price the iBuyers buy the home and resell it.
Since the original pain point for homeowners centers around bridge loans, many companies – including @properties (in partnership with CIBC) Compass (in partnership with Better.com) and others – have entered into the fray to help their agency customers get more efficient access to this money at better rates. This type of brokerage fintech model is distinct from iBuyers in that they streamline the process of getting a bridge loan for their clients, but don’t actually provide an end-to-end iBuyer platform themselves.
Certainly, as the model evolves – especially with the emergent uncertainty we have seen in 2020 – we will see consolidation on the startup side of the market combined with the entrance of the big players into the market themselves, either by M&A or launching their own business line. You can bet that institutional players will respond sooner rather than later if players like Homeward start eating into these very profitable business lines:
Depending on how you slice this market up, there are likely hundreds of $Billions at stake for the market winners. Homeward has built a unique iBuyer model that centers around the agent, so it will be interesting to follow their progress in the years ahead as they embark on the next wave of their growth curve.
Homeward’s business model provides a classic view into the BMi process of clever innovation. Leveraging the agency model to tap into the iBuyer marketplace gives them a unique advantage that is likely to be seen as they expand out their partnership strategy and move into new markets. In a fragile economic environment, a blended strategy between technological automation and local human expertise is a good strategic move. How well will this model work? Time will tell!
What is Business Model Innovation? Innovation using the Business Model as the main mechanism, rather than product or technological innovation. Reinventing a business model – or creating a new one – is a matter of remixing the core components of a business model and developing new value propositions, revenue streams, and cost structures.