Lance Glinn:

Welcome into another episode of the Inside the ICE House Podcast. Today's guest is Peter Knag. He is the CFO of NYSE listed Offerpad. Peter, thanks so much for joining us inside the Ice House. Happy to have you here.

Peter Knag:

My pleasure, Lance. It's a pleasure to be here back at the New York Stock Exchange.

Lance Glinn:

So I want to start for listeners who may not be as familiar with Offerpad, because I know leading up to the conversation before I started doing my research, I wasn't as familiar with Offerpad as I am as we start this conversation. But when you think about how to describe the company, not just in a sort of one-line definition, but the full experience, how Offerpad really helps a customer, how do you explain the role the company plays in today's real estate ecosystem?

Peter Knag:

Sure. So we are on a journey and we're going to disrupt the way people sell homes in North America, at least for starters in North America. This is the vision of our founder and our current chairman and CEO, Brian Bair. And we're, I would say, probably, who knows, a third of the way there. Right now, most people who sell their home go through a traditional list and there's nothing wrong with that process. It's been the process that's been in place for many, many decades, but there are ways to improve it, especially in this day and age with technology and data and all the information that we have compared to what we had 50 years ago.

So what we are looking to deliver to the customer, which is a person selling their home, and we're starting with homes that are easy to comp and easy to price and very similar. So not a bespoke home in New York City or San Francisco or a fancy home in Miami, but think of the Sunbelt cities and Ohio and lots of areas of the country where there's many homes that are very similar and so really aren't that difficult, especially with the use of data and intelligence as opposed to a local market feel to price.

And so our goal is to get to a place where less than one percent of those homeowners across the 25 or so markets that we're in sell their home in a very easy manner through a marketplace instead of going through a two, three month process and they just sell to us in a marketplace and we price it based on a market, not that far off from an exchange. And again, so we're starting with homes that are more similar because, like a Carvana model, sometimes it's easy for people to understand what we do or what our goal is by calling it a Carvana for homes. And that's really what we do.

You have a $300,000, $400,000, $500,000 home in Alpharetta, Georgia or in Plano, Texas, or in the suburbs of San Antonio or in Nevada and Las Vegas, you can just come to us and sell the home for really the same price that you're going to get if you go through a longer process. And so that's what we deliver. That's why this is something that we know that the market will go after once we have time to break through and get people to understand what it really is.

Lance Glinn:

And so obviously from your role as CFO, you're looking at a lot of the different financial aspects of the, I guess, real estate market. I actually, full disclosure, recently purchased a home, so I'm sort of just getting out of the whole real estate market, the whole real estate cycle. Obviously a big deal for me, big moment for every American or everyone in the world who buys their first home and is able to move from... I moved from apartment to home, but so on and so forth. And I'm sure a lot of the things you're looking at, whether it be acquisition pricing, you're looking at market timing, you're looking at renovation costs, so on and so forth. What are some of the key economic levers that you pay attention to the most that help you dictate how Offerpad should position themselves in the current market?

Peter Knag:

Sure. Interest rates are really important, but we are creating a business that can be successful in any real estate environment. But interest rates are important because lower interest rates stimulate the real estate market, the residential real estate market. And anytime, right now over the past couple years, it's been high threes, low four million transactions per year in the United States. But going back historically, it's been 50% higher than that. And so anytime that we're in an environment where there's more transactions, that's good for us and we're going to have more volume. Our model, so that's probably the biggest factor and economic policy and how that ties into it. Legislation is important and there's some things going on around that as well that we think are going to be neutral or even potentially positive for us.

But the most important point is that we're not tied to... Some people look at this business because it's a real estate business and we will always be spiky and lumpy like most real estate businesses, but we're about to get to a point where the spikes are just going to be higher profitability versus a little bit lower profitability as opposed to getting into a position where we're cashflow negative.

Lance Glinn:

And being cashflow positive, that's obviously a big milestone to hit and something that every company wants to achieve. And you, I would think, want or you don't want it to be a fluctuation between positive and negative. You want to reach cashflow positivity and then have it be sustained.

Peter Knag:

Sure. Yeah. And that's what we will do.

Lance Glinn:

What is the process to, again, not just becoming cashflow positive, but to then have that sustained positivity in the years to come?

Peter Knag:

So more products. And this has always been the vision far before I've been here for two years. For the 10 years since the business was founded, the vision is to grow and vertically integrate across lots of products and buying somebody's home is just the foundation that allows you to do that.

What's next and what's even more exciting is growing into more products. So we already have launched over the last... We've been primarily a one product company for most of our lifetime. It's not exactly as simple as that, but primarily. And we have a second product now that we're very focused on. We have a new leadership team member, Rich Ford, who's a longtime investment banker turned entrepreneur and joined the company earlier this year is leading our cash offer marketplace. And so that's where instead of Offerpad buying the home, renovating it and being the Carvana for homes, other investors, including single family SFRs, single family rental companies or small family offices use our platform, which is an opportunity to get in and buy homes that you can't buy in the MLS.

These are people that are the first thing they do in these markets is come and see if they can simply sell to us in a few days as opposed to going through that process. And so this big investor base of small investors, medium-sized investors, large investors is now using our platform. This has evolved over a number of years, but we've doubled and tripled down on our focus. And so that's product two and it increases our conversion. We have, as I mentioned earlier, very high volume of people of home sellers coming to us very early on, but only a small percentage of them actually some of them are just testing and there's no skin off their back to put in their information. It takes five minutes and maybe they're not serious, maybe they are.

So we don't catch everybody, but our web is getting bigger. And now we have other buyers that we can assign to that maybe offer a different price point. And so that's a second product and that makes it easier for us to get to profitability because now we're transacting on more transactions because we're not just doing the one offer and if they don't take it, they're gone. There's a second step. If they say no, they go into the next room. And there's another something else that they may be interested in if they weren't interested in the first product.

And then we have a third now. We develop a relationship with these customers, with these home sellers. And we have a really great sales force that we've taken back. We partially moved offshore, but realized that there's fabulous talent in Tempe, Arizona right on top of ASU, an important college campus with a lot of graduates coming out and a lot of people working for work and a lot of talented people at good price points. So we have a really great sales team. And when these home sellers say, "You know what? I still think if I just go put a sign in my front yard, I'm going to get more. You haven't disrupted me yet because this is how everyone does it. They put a sign in their yard." So then we can go do that.

And we already have their attention and we have some hooks and some things that make it even more attractive. Sometimes we offer them a free move and some things that other real estate agents aren't going to do so we make it more likely that they're not going to go down the street or just hire their friend who's an agent or something like that. So our third product actually is the traditional list that we're working to disrupt.

Right now we're very friendly with, and we will be for the long term for the duration, with brokerages and partner with them. So agents work with us in two ways. One, sometimes we get customers top of funnel through marketing, which we have significant marketing spend. And sometimes it's through agents and not through our marketing spend and they're working with somebody selling their home and they come to us and say, "Do you want..." And we will buy their home and pay their commission. It's very attractive and easy for an agent because they actually don't do that much work if all of a sudden we just buy it.

But on the flip side for customers who come to us not through agents, but through our marketing channels, which is primarily targeted marketing on Facebook and Twitter or X, we work to set up a transaction through them as well. So the reason we're going to get profitable and profitable very quickly is because we don't have one product, now we have three. And as we expand our product set, we'll transact with all of these, not all of them, but many of them, if not most of them, are going to transact and we're right there in the middle of it. It's not that big of a step to figure out how to participate in the transaction and meet them where we are.

And I'll say one more thing before I pause on your question. We also have a fourth product and we're really working longer term to monetize our cost centers. We're a construction company, too. We have a national renovation business that renovates the homes for our cash offer, our first product. And we've also offered that now for the last three years or so. And we're at about 30 million in revenue separate from all these other businesses where we've taken the same team, that new bathroom, new kitchen, carpet, paint. Some homes it's just carpet, paint, some homes it's everything. And it's very successful. Business Now will do that for investors, whether it's a BlackRock-backed SFR or a small family office-led fix and flip or they hire us now to come in and refresh their rental properties. And so that's a fourth product that's going really well and is run by a guy named Bobby Triplett, who's a very talented leader in our business and based out of Tampa, Florida.

Lance Glinn:

What I'll say is from having just experienced the home buyer's journey, no matter how new or old the home you buy is, you'll always want something renovated. That is a fact. No matter what or no matter how the previous owners left the home, what they did, you'll always want to change something a little bit. So the renovation aspect of it certainly makes a lot of sense.

Peter Knag:

We agree and a lot of these homes are purchased by couples, not always couples. There's always one person in that couple that really cares about the kitchen or really cares about the bathroom. And of course that's something that won't go away whether you're in the old model or the new model. And that's front and center for us for sure.

Lance Glinn:

Yeah, ways a market for that certainly. And so you talked in that last answer about a lot of innovation on this path to profitability. While we are going to speak more to it, I do want to hit on that innovation point just for a minute because obviously as CFO, you oversee and look so closely at a lot of capital spending and capital allocation. How do you determine whether you want to pursue that long-term investment versus maintain financial discipline in what you do? Because I would think you need to sort of find a balance. You don't want to just pour everything into long-term or pour everything into growth and innovation. You want to not necessarily be 50/50 with it, but find a balance where you're comfortable putting stuff in innovation while also maintaining the cash that you have.

Peter Knag:

Yeah, we have to do that. That's an important question for any company. It's especially important I feel like for Offerpad because our resources, we have a larger competitor who has a billion dollars in cash on their balance sheet. We don't have a billion dollars in cash on our balance sheet. And so we don't have the luxury. We have to look really hard at capital allocation. So I feel very comfortable that we are doing, if we had a billion in cash on our balance sheet, maybe we'd be a little bit looser and spending a little bit more, but not multiples of what we're doing.

We're doing everything. We have a very talented lean team at this point, the people who have stayed with the company and the people that are new to the company. We have a new culture that is much more data-driven that's evolved. We came from a heritage of real estate experts and local knowledge experts, but we've gotten to a place now where we have a very heavy... And our CEO Brian is very AI forward far more than I am and the culture is too, and it's actually pushed me. I can be a little bit of an old dog and I'm not the first person to learn every trick there is within AI, but I'm using it all day every day in part because the culture is pushing me. I can't even give myself credit for how much I'm doing it, but because there's other people in the company.

And so what we've done is we've shifted the way that we've balanced that is in an environment where it's very important for me as a CFO to conserve resources and get to cashflow positive and raise money in a non-dilutive fashion, non-dilutive manner, which means that we're going to do it at a higher price point than we're at right now and reward our existing investors as opposed to rewarding future investors. The way that we've done that is by shifting the culture and our focus across our processes. We have two new products that are being developed in-house, HENRY and SCOUT, that span across the lifecycle of our funnel, and from the top of the funnel, moving to these more products. But we've just done it in a very lean environment.

We have a chief risk officer by the name of Jai Singh, who is a very talented guy and a PhD and he's developing one of these platforms. And I mentioned earlier, we got out of offshoring and came back, but part of bringing back our operations to our startup environment, we still have ping pong tables and all that. It's a fun place to be and an exciting place to work at. The people that work there don't want to leave, but what we've done is we've shifted to more automation and we've been around 10 years and we've learned from our mistakes and we don't have a 100 person team out inspecting the homes that we're doing. We have some hybrid where we're outsourcing it and it's video-based and when the information comes back, it goes through an algorithm and there's not. And so we've moved very significantly away from having large teams of people looking at stuff to having an automated ingestion and analysis that goes into our pricing engine.

Lance Glinn:

And I think I want to shift to the consumer side for a second because obviously as technology evolves, which we've been talking about so do consumer desires and consumer demands and consumer expectations. Most importantly, how have you seen the desires around buying and selling homes changing? How is Offerpad specifically on this path to profitability adapting alongside what consumers now want?

Peter Knag:

Yeah, I don't know that consumers want anything different, but it's become harder to buy a home right now and there's the whole lockup effect and it's maybe not a great thing that the average price of a home buyer is very, very high depending on what type of home and what price point it gets up into the 50s. And that's not the American dream. The American dream is they're buying in your 20s.

Lance Glinn:

I feel that. As a recent home buyer, I feel that.

Peter Knag:

And we're not going to disrupt that. That's a market cycle and it has to do with everything that everybody knows, interest rates and the home price appreciation that very significantly increased after five years ago. And so what we can do and we are doing is making home buying a marketplace not any different than buying some Microsoft stock. A little different than that, but much, much closer to that than where we have been. And so when we simplify the market and we reduce friction in the market, the number of transactions will come up and that will help some of the issues around pricing being too high. It'll unlock inventory that maybe isn't on the market for some reasons.

Lance Glinn:

So for the last couple questions, let's first look to the short term because you mentioned could come over the next year, could come over the next two years. And I know you might say the path to profitability, obviously that's something that's been a central theme of our conversation, but what are the most important priorities or initiatives over these next one to two years that you believe will help shape Offerpad's trajectory for the next five to 10?

Peter Knag:

Yeah. We want to get back to brand advertising, which we're not doing because we're saving money. And that's really important because we want to have the shift that I've alluded to.

Vertical integration is super important. The more products, we are at four products. It's super important also that we stay focused. And so we're not rushing to get into additional lines of business, but there are some very obvious areas where we have to be and should be. We drive a lot of revenue to title companies. We should start our own title company and we will do that and we'll do it in the right way. We have some very good title partners, First American and Stewart, and we're going to do it in a way that's beneficial to all of us. But it will be a step where we're participating at a higher percentage in the benefit of title policies that are roughly title and escrow is 2,000 when the home is purchased and 2,000 when the home is sold. And if we can capture half of that and still share some of it with the entity that's writing the policy, that's really huge for us from a valuation perspective.

There's other things like mortgage and even other areas within our renovation business that I'm hesitant to say publicly at this point, so I guess I won't, but we are looking hard at vertical integration either through acquisition or growing into it. Right now with our resources, it's probably more growing into it or JV and just participating more broadly within the ecosystem.

And then longer term, much longer term, there's things like doing renovation on a B2C basis, which is more complicated dealing with a homeowner versus dealing with a business, an institution with lots of homes. But that's some of the focus points without revealing all of everything we have up our sleeve over the mid to long term.

Lance Glinn:

Yeah, absolutely. And so again, a large theme of our conversation has been this path of profitability, reaching that goal, and then not only reaching the goal, but then sustaining it in the years to come.

Peter Knag:

For sure.

Lance Glinn:

Once that goal is reached, what does Offerpad's next chapter look like?

Peter Knag:

So when you say that, I think what are we going to be in five years? The most important thing about five years is we're in an environment where we're a much higher percentage, and I know I've said this already, but I'm going to repeat it because it's so important. That's the biggest theme when you think about value. If there are people listening that are potential investors or investors, when you think about our market cap and our value, what's most important, yes, profitability and all that. What's most important for this business is volume. And we're going to add products, we're going to vertically integrate, we're going to get in title and we're going to be profitable and we're going to be even more profitable because we have five products. But what really transitions this business from market cap below a billion to a market cap well above into the billions is volume and that's going to come.

It doesn't even really require us penetrating all of the United States, which we might do eventually, or maybe we won't. Maybe we're never going to be in New York City because it's too different and complicated. But once we get to a place where the reason that I'm focused on profitability, not just because I'm the numbers guy, but once we get to a place where we have profitability, the mechanics within the business, within the operation to double and triple and scale become so much easier. We spend more marketing dollars, we get more top of funnel. We have the same conversion and we spend more on brand marketing and we eventually break through first across the cities that we are in across mostly the Southern United States where there's lots of similar homes at these price points. And people begin to just accept this is how you buy, just like they buy tide from Target now instead of driving down... This will happen in just a matter of time.

Lance Glinn:

Peter Knag, CFO of NYSE listed Offerpad. Peter, thank you so much for joining us Inside the ICE House.

Peter Knag:

Thank you so much.

Speaker 3:

That's our conversation for this week. Remember to rate, review and subscribe wherever you listen and follow us on X at ICE House Podcast. From the New York Stock Exchange, we'll talk to you again next week Inside the ICE House.

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