Q3 2022 Offerpad Solutions Inc Earnings Call
Good evening. Thank you for attending today's off a pad third quarter 2022 earnings call. My name is Megan and I'll be your moderator for today's call.
I will now turn the call over to Stefanie Layton Vice President of.
Investor Relations and ESG it off a pad.
Stephanie.
Thank you and good afternoon, everyone. Welcome to offer test solutions third quarter 2022 earnings call, our chairman and Chief Executive Officer, Brian Bahr, and our Chief Financial Officer, Mike Burnett are here with me today during the call today management will make forward looking statements as defined in the private Securities Litigation Reform Act of 1995.
Forward looking statements are inherently uncertain.
Thats could differ significantly from management's expectations. Please refer to the risks uncertainties and other factors relating to the company's fitness described in our filings with the U S Securities and Exchange Commission.
Except as required by applicable law, all prepared does not intend to update or alter our forward looking statement, whether as a result of new information future events or otherwise.
On today's call management will refer to certain non-GAAP financial measures. These metrics exclude certain items discussed in our earnings release under the heading non-GAAP financial measures.
Reconciliations of non-GAAP measures to the comparable GAAP measures are available on the financial tables of the third quarter earnings release on <unk> website, I will now turn the call over to Brian .
Thanks, Stephanie.
Hey, everyone I appreciate you joining us today.
I'll cover some company highlights market trends operational updates and our focus for the remainder of the year.
Mike will share our third quarter 2022 financial results and our fourth quarter expectations.
In the third quarter, we maintained an average time from home acquisition to sell below 100 days.
Inventory, aged over 180 days at 5% or 150 homes.
Earned a 93% customer satisfaction rating and grew our listing and higher closings by 100% year over year.
Given the macro and real estate market conditions in the third quarter. These accomplishments really speak to the flexibility of our model and the value our products offer to homeowners in the second quarter, we shared that the SaaS and the real estate market was here.
Since then the economy.
<unk> sentiment and the real estate market have changed significantly.
And increasingly hawkish fed persistent inflation.
Substantial increases in mortgage rates and further escalation of global conflict have put the financial and credit markets on edge.
<unk> residential consumers and a temporary state of shock.
Since we launched in 2015 most of the U S has experienced a seller's market.
But the value proposition, we provide is even stronger in a buyer's market with sellers can go from listing the Pennington days and it stood it takes weeks or months I buying becomes even more attractive.
And if we are smart about how we underwrite homes in the market there is an opportunity for enormous growth.
But we arent there yet right now we are in between a sellers market than a buyer's market and expectations between the two parties are vastly different.
Sellers are holding on to the idea of their home is still worth what it was six months ago and buyers aren't willing to engage at those prices.
In between Phase is the most challenging period for the entire real estate market, including <unk> buyers.
I'd like to discuss today, how we have planned for and are navigating this time.
<unk> core strategy of providing a comprehensive suite of real estate solutions is more important than ever right now.
Because of our diverse product offerings include our asset light listing service offer pilots continue to provide customers more certainty and control.
In addition, we are continuously innovating to create new products that can help mitigate many of the challenges homeowners are facing.
For example, in addition to increasing the scope of renovations on certain properties to position our homes yourself first with competing inventory is present, we are also offering customizable renovation services.
We recently started testing a new service called my way in our Phoenix market with my way homeowners can select paint flooring countertops and appliances from a list of options that match their own personal style.
Updates will be completed before they move in and the cost of upgrades can be relevant to the mortgage.
Rest of the efficiency of our renovations team is a key differentiator and an important asset as we grow.
This offering aligns perfectly with our mission to provide customers with a more convenient and streamlined homeownership experience.
On the operation side, we continue to adjust as the market evolves.
Specifically, we updated our underwriting to account for increased risk extended holding times and depreciating prices in fact, the difference between homes underwritten in the first half of the year compared to the second half is so distinct that I can tell the data. They hold was underwritten just by looking at our closing summary sheet in the third quarter.
We also revised our buy box by applying the purchase price cap, we implemented in select markets during the second quarter to our markets.
Instead of turning away customers with homes outside new parameters, we have been offering our listing service leaning into our flex listing service has allowed our prepared to continue helping customers through the current market conditions, while lowering the financial risk to the company.
Customers working with one of our local licensed agents can receive free show ready services, including landscaping and cleaning services. In addition to our home improvement advance.
Also customers continued to save by bundling, our wholesale home purchase and offer pad mortgage our flex lifting advisory services growth from 7% of our transaction volume in the second quarter of 2020% to 29% of our transaction volume in the third quarter of 2022.
With gross margin profile of 31% year to date, we expect our listing service will continue to be an important product supporting our long term gross margin target the.
The ability to use our renovations department as a risk mitigation tool and differentiator along with the ability to grow our asset light listing service provides offer pad the flexibility to navigate through changing market conditions.
Our presence in 28 markets across the country provides another risk mitigation opportunity.
While markets like Phoenix, Denver, and Las Vegas are still experienced a rapid and significant pullback we are starting to see signs of stabilization in some of the more affordable markets by related are local experts, we are strategically deploying our capital into locations with more stability and better line of sight, while maintaining a more conservative.
Acquisition approach in markets with higher volatility.
The diversification we have today has been thoughtfully and intentionally established over the last seven years supporting the resiliency of our business.
To provide some historical context in 2016, we were operating in only four markets at that time, our largest market accounted for 84% of our revenue.
In the third quarter 2022, no market accounted for more than 10% of our revenue.
This highlights the clear benefit and risk mitigation that comes from strategic market diversification.
Lastly, we continued to demonstrate a conservative and disciplined approach to managing our expenses like many others. We recently made an adjustment to the size of our internal team to reflect the current state of the market when conditions change offer patent apps, we have made some difficult but responsible decisions over the last quarter.
And we will continue to adjust as the market evolves given the current macroeconomic environment, we do expect volatility in the real estate market will likely extend beyond the duration of historical market transition periods.
Revolutionized the two trillion dollar industry isn't easy, especially in times like today, yet the simplified services, we have introduced to the consumer over the past seven years confirms that there is a better way the value of <unk> brand and the future potential value. We can add by encompassing more services are reasons, why we expect more and more.
They come to offer pads first.
We are more than just deny buyer, we are a real estate partner using technology and deep real estate expertise to serve our customers.
We believe technology enabled solutions that simplify the home ownership experience will define the future of real estate the.
The <unk> industry is in its early days with only two major players.
The upside potential is tremendous as it becomes harder for homeowners to sell and the pain points for the traditional model. We service more sellers will be looking for an easier solution.
Being one of the country's largest home buyers and what we expect will soon be a strong buyer's market could significantly amplify our opportunity to grow.
As a real estate solution center with cash offers listing services mortgage and a leading renovation team I believe offer patent is well positioned to excel.
Note I will turn the call over to Mike.
Thanks, Brian .
Despite some of the most challenging conditions and residential real estate, we continue the disciplined execution of our business strategy the.
The dramatic drop in demand for housing driven by affordability issues, resulting from the significant rapid rise in interest rates and elevated home prices was further extended in the third quarter.
Given the expected continuation of these conditions, we are keenly focused on selling our existing inventory that was acquired in the first half of the year before the disruption in the housing market at the best available price.
We are utilizing real time market data analytics, and our years of real estate experience with thousands of transactions in our individual markets to do that.
We are making tough decisions in uncertain times with a commitment to aiming for the best outcome given the circumstances.
Right now that often means accepting losses on homes that we believe may decline further in the short term to be able to conserve or redeploy that capital more effectively.
We are making these decisions on a market by market and home by home basis to optimize the outcome.
At the same time, we are temporarily but significantly reduced the number of homes. We are acquiring during this period of transition.
At times of considerable market dislocation, we narrow our buy box to limit the homes that we are reevaluating and adjust the input variables in our underwriting model to be more conservative.
This results in us acquiring fewer homes, but acquiring homes that we feel will generate the underwritten return in this market.
Though the sample size is small at this point in time, we are seeing positive tangible results from the homes that were acquired after the change in mortgage rates that are sold in September and October .
We believe this process of selling through inventory acquired in the first half of the year should essentially be completed by the end of the first quarter with a proportion of sales from older inventory decreasing from Q3 and Q4 into Q1.
This would position us well to capitalize on our strategy for profitable growth in what is expected to be a buyer's market.
We continue to expect an annual contribution margin after interest of 3% to 6% once the market stabilizes and to increase that margin over the longer term.
Turning now to our Q3 results in the third quarter, we generated $822 million of revenue exceeding the top end of our Q3 guidance range and a 52% increase year over year.
This increase was supported by the sale of 2280 homes, reflecting a 36% year over year increase in average sales price of $357000 compared to 321000 in the third quarter of 2021.
We reported third quarter gross profit of $2 2 million net loss of $80 million and adjusted EBITDA of negative $64 $3 million. Each of these amounts includes a $27 5 million inventory impairment charge.
Absent this charge each of these metrics would have been $27 $5 million higher including adjusted EBITDA, which would have been a negative $36 8 million.
Yeah.
Our time to cash increased to 97 days in the third quarter from 83 days in the second quarter. This marks the ninth consecutive quarter with time to cash below our 100 day target.
However, we do expect to be above this target during periods of slower market conditions.
From a cost management standpoint, we are taking a responsible approach to appropriately sized our operations given the current environment, but also balancing that with our expectation of this slowdown in transactional activity being temporary for us.
As a result, we reduced our operating expenses by 14% in the third quarter compared to the second quarter of 2022.
This reflects reductions in head count and sales and marketing in addition to an overall emphasis on cost reduction.
Lastly, with a continued focus on risk management and cost efficiency. We ended the quarter with a cash balance at September 30 of $197 million.
Looking forward in the fourth quarter, we expect to sell between 1425, and 1850 homes generating revenue of between $500 million and $650 million.
We also expect adjusted EBITDA to be between negative $40 million and negative $60 million, reflecting the continued near term variability in market conditions.
During Q4, we expect the initial sequential improvement in adjusted EBITDA to begin by Q1 of 2023 homes that were acquired in the second half of this year would likely make up the majority of homes sold in the quarter and would therefore be expected to further generate sequentially higher margins and ROI.
While many things in the macro environment are uncertain, we do know that the current state is temporary and that the real estate market will settle right. Now we are positioning the company to capitalize on the next wave of opportunities.
Is the first time buyer with proven profitability, a holistic solution center approach and a highly efficient and value additive reservations offering offer Pat has the structure and strategy to deliver long term value to both customers and shareholders.
Our platform products and operations have continuously improved over the years, allowing us to navigate through the current dislocation within established mature and stable Foundation.
We are focused on executing through the immediate challenges, while emphasizing and expanding the products in our portfolio to improve the balance of higher margin capital light offerings and reigniting growth further into 2023.
I'll now turn the call over to the operator to begin the question and answer session.
Thank you.
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We will pause here briefly as questions are registered.
Yeah.
Our first question comes from the line of day K Lee with Jpmorgan Chase your.
Your line is now open.
Great. Thanks for taking my questions I have two on the first one you talked about.
Stability in some markets that you operate in.
Hello, how are you seeing in those markets subscribing that.
How long do you think it will pay for other markets too.
The CEO similar behavior.
And then secondly.
How far along are you in funding the homes acquired before the market conditions deteriorated.
It seems like you guys are expecting about the mix of homes sold to shift more toward a funeral home <unk>.
<unk> is not right and on the homes that remain on your thoughts what are the what are some of the reasons those are taking longer to sell.
Yes, Hey, James it's Brian .
As far as the market conditions that we're seeing.
Specifically a lot of it has to do with the affordability, we're seeing that primarily in the Midwest markets.
Indianapolis Fort Wayne Columbus, Ohio, those markets, where you're going.
Have the home price appreciation as you saw some of the other markets.
So I think affordability is a lot driving that you still have less than a month to month, a half supply of homes in those markets as well.
So that's that's where we're seeing as far as.
When we're going to see the other markets kind of settle in a little bit I think it's going to be pretty volatile till the end of the year.
Especially in places like Phoenix, and Denver, and some of the really high.
Home price appreciation markets that we saw.
Due to affordability I think youre going to see an increased seasonality.
But obviously, we're watching that closely but there is.
There is there is there are spots in other markets that we're seeing a lot of it has to do with the median home price and affordability.
We're focused on.
Hey, Dave It's Mike.
In terms of your second question there on the homes in inventory.
Tell you is generally speaking I think we will continue to sell through those in the fourth quarter in Q1 that is our expectation.
We are anticipating that based on what we're seeing in the market and our current pacing that by the end of the first quarter, we should be.
Predominantly through that older inventory anything you know call it acquired pre up through July .
This year, so that's driving some of the negative results and the guidance for Q4, because more of the homes that we sell and there will be from that vintage as we move into Q1, I think you start to see that weighting shift.
Some of the newer homes, but we will still need to be working through that at that point in time, but based on what we can see right now thats our expectation, yes, one other thing I'll just add to that is remember what's what's in real estate a lot of this there are a lot of the data is trailing and so what will happen is on the underwritten side for example.
If we underwrite a hole in the seller chose to close 45 or 60 days from when we underwrote that home originally.
And then you'll get that house put it through renovation get it on the market. So thats, where that I mentioned this in my in my remarks before but when we underwrote that home is the most important part of what were seeing the stuff that we are.
Our underwriting at the current market conditions.
Those properties are starting to see it's early but we're starting to see good science and how those homes are performing it's the it's that more of that legacy that theyre, rather another complete different market conditions that were working through right now.
Just a quick follow up.
With that.
<unk> is going to be the peak quarter of your I guess, whether on the roofing homes being sold in Covid.
<unk> if I can.
Because I think you're seeing a smaller number of those homes getting sold.
Yes that is the expectation is that the majority of those will come through in the fourth quarter.
Thank you.
Our next question comes from Ryan Tomasello with Stifel.
Your line is now open.
Thank you for taking the questions.
Yes.
First question on <unk>.
The.
Considering the decline in book value this quarter and presumably.
The pressure that well because it <unk>.
We ended the year can.
Can you talk about your conversations with your financing partners, how you feel about financial covenants.
And overall I guess, how youre thinking about protecting the capital will be to maintain.
The financing capacity required to scale. This business beyond this market correction that one that we're going to grow.
Yeah, Hey, Ryan it's Mike.
Without a doubt now these periods or when you need to be in regular communication with your financial partners into your banks and we do that regularly.
We've got a great team and the finance and Treasury group over here, we've got good relationships and built up a very good.
Working group on the debt capital side of the equation so.
We're in close contact with them, we are proactive in our communications with them and try to give them good visibility because they are critical to our collective success. So we are in compliance with our covenants. It is something that we look at all of the terms and conditions there to make sure that we're.
Abiding by those and in line with those we ended the quarter with just short of $200 million and cash the other thing to consider too is that as we go through now.
And the end of the year and into the first quarter.
Our inventory and debt balances will be coming down as we talked about in our prepared remarks with slowing intentionally temporarily slowing the pace of buying and so those outstanding amounts come down part and parcel to that as well so.
Again, something very critical in terms of partnerships with them, but.
We've had these relationships in some instances for the past four years we've added.
To them as we've gone along and they've been good supporters of the company.
Thanks for all the color, Mike and then on the guidance for <unk> can you provide some color around what.
Gross and contribution margins, you're baking into that forecast.
And then beyond that how we should think about phasing in a recovery as you work through this inventory into 2023 and then on the on the Opex side, you alluded to some of these some workforce reductions there.
If you could maybe frame the amount of costs that you just picked out of the system and how we should be thinking about run rate opex falling.
Those efficiencies however, you prefer to define Opex I think you mentioned.
About a 14% reduction.
For over quarter.
Right.
Yeah, Okay, a lot there so come back to me if I skip over anything but first on.
Our contribution margin.
We don't specifically guide to that but but bear in mind that our contribution margin calculation is really aimed at.
Taking into account the total cost of ownership of a particular home and so in that calculation, we're aggregating the cost.
Come and go even if it's not in a particular period so.
That being said.
We believe that Q4 is probably going to be the.
The bottom.
Trough of contribution margin with Q1, and then coming back.
In terms of recovery.
On the just in terms of the recovery on your question on that.
Tough to say I mean, we run all sorts of different scenarios under different ones under different conditions.
Conditions and ideally.
As we said earlier, if we can get moved through the legacy inventory and then get ourselves in a position where we can begin to to rebuild back where we're comfortable.
At points in buying in 2023, that's the objective the timeframe for doing that.
It is really just tough to call at this point.
In terms of the reduction in force we did.
Go through a process that.
Resulted in reducing our workforce by about 7%.
We had earlier in the year and that was in September we.
We had earlier in the year put measures in place, where we're pausing hiring.
Tightening the belt on the cost structure and so we're actually from from our peak employment over the summer time were actually down about 12% from that peak due to just hiring pauses and natural attrition in the business and we will continue.
With that through the end of the year here so.
I would expect about a $2 million benefit for that this year and then you can annualize that.
That's about a quarter's worth in 2022 for next year.
Hey, Brian one thing I will just add to that is coming back to the third quarter again, what was unique about the third quarter as I said this last time is that the.
The market cycle kind of changing I think was a surprise it was the speed and so what we saw in the third quarter, that's where you're going to see in the fourth quarter us moving through it more and more of these homes is that there was a pause as buyers who thought they were qualified for a certain amount mortgage rates increased and so there was a shock there there was basically kind of a log jam in the system.
Are buyers and their ability to move and what was affordable wasn't affordable. So there was kind of a state of shock that happened there.
We're starting to like I mentioned, we're starting to see that settle a little bit.
And we're looking at our homes weekly and moving through this and so we've been.
We've been moving through inventory.
At.
<unk>.
At a pace that feels so slow, but obviously in these conditions.
Im actually happy with what the team and what we've been doing of moving through the inventory right now.
Thank you.
Our next question comes from Nick Jones with JMP your.
Your line is now open.
Great. Thank you for taking the questions.
You mentioned earlier on the call kind of.
Expectations of the volatility will last longer than a typical transition. How are you kind of are you able to kind of box out in and kind of what you know how long that might be or how youre thinking about it do we kind of need to see where peak rates go and then do spread starting to tighten and then that's when there'll be more kind of confidence and affordability for.
Homebuyers can you just kind of put a finer point on that and then I'll follow up thanks.
Yeah no. It's so what's happened is when we talk about volatility obviously, that's a really loose term what volatility is it's.
Really the sales price on the on the selling end of it Thats really volatile because you know we can buy under any kind of market conditions, where the market's going up where the market's going down and depending on how fast going down what we look for is consistency in that so for example, the certain market. Our search segment of home if it's going down in other downturns I've been involved before its going down to two five.
Sent a month, we can we can build that in.
This has been unique and when I say at a height of volatility is because were 2007 2010. It was the opposite problem. Then it was people had no equity in their home and so people were trying to squeeze out of what they could to debate to pay off their mortgage and move through what we are seeing it today as people have so much equity.
In their home.
250 to $300 of equity in it.
Home and so what's happened is youre seeing really inconsistent pricing out there from sellers and so that's what we're watching really closely and especially the high HBA markets.
We're watching closely so.
I think with with what we're what we're seeing and what we're seeing and like I mentioned some of the Midwest markets. Overall, obviously affordability is key.
Expected to be volatility as far as pricing and as far as the amount of equity that sellers have and just kind of where that gets a little bit more consistent and people start moving through inventory a little bit buyer shock kind of what I call it as getting getting more consistent on that and so.
I'm anticipating the the first part of next year, we'll start seeing.
Depending on what happens with the fed and what and what their but I think we can start seeing more consistency at least in what we're underwriting which is more which is the most important.
Factor that we're looking forward to get is just the consistency.
Got it that's helpful. And then Mike could you kind of touch on how you feel about the cash position I know you spoke to some cost cuts.
Freezing hiring it sounds like there's about $8 million benefit next year, we should look for how do you feel about kind of the cash position.
Kind of heading into next year.
To the extent that the macro environment stays challenge, maybe a bit longer.
Yeah, Nick it's.
Yes.
We ended the quarter in a good position there, but obviously as we work through some of these.
Losses in the next quarter, that's something that we just have to manage closely but I will tell you.
It's absolutely been a hallmark of the company for the past six years, we've always been very cost conscious we've been very efficient in how we run the organization we run very lean.
And we will continue to do that so it's obviously something that is high on our radar will continue to monitor and <unk>.
Managed the business appropriately.
Nick the one thing that I'll also add just just to that.
Right now what we're hyper focused on obviously, our current inventory, but also more of our asset light products Flex for example, AD and working with our.
<unk> partnerships and not just our disposition homes, but but being able to buy in.
Buying some of those homes from us as well so as we as we continue to make it through again, what I'll say the <unk>.
Volatility, we also being smart on the way that we're approaching it from the asset light side of it as well.
And as I mentioned, I think even last call being a solution center. It is not just to provide more solutions for the consumer but it also gives us levers during times of volatility that we can we can focus on different products that week that we can.
Highlighted rollout to the consumers.
Thank you.
Our next question comes from Justin Ages with Baring Bank.
Your line is now open.
Hi, Thanks for taking the question.
First on the renovations I do think it's a key differentiator I think you've disclosed about 22000 average cost of reservations, which is up.
From where it's historically been has that been an impediment to getting home sold that even though you have to put in a little more money to make them more attractive.
Making that how does those cost more.
Yeah, no. It's actually it's actually just just the opposite to what we're doing is we're when we're underwriting any new inventory, we have we're being more definitely more conscious about how we're how we're underwriting it for the renovations needed for that home, but once we own that home, we're intentionally increasing the amount of renovations thats needed us.
On the supply the supply and demand.
And in normal times, what you want is you want to you can make money through your service fee and by maximizing the price of your home through renovation.
In times like this what you wanted to do is you want to make sure that your home sales before the other homes until we've been able to use our renovation teams to add different upgrades at granite.
And appliances and different things that are going to make our home is unique in the markets to make sure our homes are prepared to sell first.
And a good product so we're intentionally doing that.
With the with the ability of our of our renovation. It's some of those things are not are they are leading to a little bit longer renovation times, but it's fair amount, it's very much worth it because it's reducing the time on the market. So but right now that's been our focus and to your point earlier beliefs.
We've mentioned this for the last six years since when Theres a market transition the importance of renovation.
Of everything that we that we just mentioned being able to control the renovations your costs or efficiency your timing.
And that that is going to be really important just again from the supply and demand we want our homes to sell first.
Alright Thats helpful. Thank you and then along those lines with the introduction of my way has the response been good I think you said that you introduced it in October and has it been well received enough that you're also considering expanding to other markets outside of Phoenix. Thank you.
Yes, so I would say, it's really early right now there is two things what I'd like to pay by way the timing of my we've been working on this product for a while the timing is key because now it's a buyer's market and it's really a buyer's product. So as we renovate and offer Pat home, we're choosing before at the housewares the markets what were going to renovate but <unk>.
So theres just a personal preference of what someone wants to have in their house and so we're able to do that through my way.
That's the first phase phases, just offer pad product, but the next phase of that will be the secondary pace of that as we use it outside of offer pad products. So a buyer that our flex teams are representing will be able to go in there and customize the house if they want.
And in a non out kind of a non offer Pat home and so I am very very bullish on where we're going with the responses. It's one of just an early indicator of customers' favorite product that we have they love the ability to to to choose the finishes on house like you would in a new home so they really like that.
But we are we are hyper focused on rolling that out.
In our other markets.
It's early but by my plan is to get that rolled out very very quickly as it is going to be great timing for for buyers and there are a lot of our other markets.
Thank you.
Our next question comes from the line of Brett Knoblauch with Cantor Fitzgerald.
Your line is now open.
Hi, guys. Thanks for taking the time.
I guess my question is.
Rates have continued to go up by call. It 100 basis points in the September .
If anything the pace of home price declines should theoretically accelerate I guess, what gives you confidence that the homes you are purchasing now.
Prices have yet to fully adjust to call. It normal levels won't see the same issues. You are currently facing with the older vintage of homes that you guys had its pretty July .
Yes, I agree overall with the overall take that we're obviously extremely focused on that.
And it's very market specific of what we're doing so.
The markets that are that are the most volatile that we're expecting more depreciating prices and we're being extremely careful in those markets and you're going to see it with the volume that we buy in those markets places like Phoenix and Denver.
Vegas those markets, we are expecting still a good decline in those markets. So we're underwriting those.
With a decelerate or per month and at a very wide margins, but in areas like the Midwest like I mentioned before the <unk> and some of the markets up their campuses that youre not seeing the nearly the.
The impact on that Youre seeing some of these other markets.
We're getting we're buying more homes in those markets and so even places like Charlotte and Raleigh are areas and so.
How do we prevent that one is remember we're underwriting under new conditions that we did with some of our what we did with our older inventory so were underwriting with with with whats more wider margins more assumptions.
Especially with purchase price and knowing that that home in a lot of these markets is not going to be worth when it is when we underwrite that so like I said the early signs of those markets are performing well the other thing that we're doing in the markets that just quiet.
Quite bluntly that we're we're not wanting to buy a lot of inventory and we're having we're pushing more and more people to use our flex where we'll help them market their home for them will even add upgrades and renovation to their home.
But and have them have.
<unk> worked with them on selling the home in the open market, but that's not anything that we're going to that we're going to buy it just because of the uncertainty in the market I think the other thing I'll just add this is just more for the areas, specifically and what youre seeing in most markets.
The country.
The outlying areas are the are the areas that are getting hit the hardest and so youre seeing much higher higher depreciation those are home prices decline more of that.
Places at 30 to 45 minutes outside the main metros. So those are and then.
So we're very sense about buy in any market anything there and then also anything next to new homebuilders, they're very aggressive on what theyre doing with their pricing and that so we're just being very selective of what we are buying right now and pushing more people to the flex product right now.
And or buying it and moving it to a single family rental company.
Alright that makes sense and then maybe just a comment another call. It 27 5 million inventory impairment.
Should we expect that to moderate or how should we think about that going forward.
So thats always.
A tough one from a prediction standpoint, what.
What we do.
At the end of each quarter as go through our existing inventory and we have a very thorough process that we involve.
Our local folks all the way down to each of the marketplaces, we run that back up through our.
Our regional operations head to our Chief Real estate officer, and so it's it's a thorough process that considers.
The markets the homes the neighborhood specifically.
And we mark them to market basically at that point in time.
The inventory balance is expected to be below where we're at now so between that and the markdowns that we take I would tell you sitting here today.
I would expect lesser.
Lesser of an impact as we go along and hopefully we start to see the the market settle out a little bit but.
Candidly, it's impossible to predict at this point.
Thank you.
Our next question comes from Jay Mccanless with Wedbush. Your line is now open.
Hey, good afternoon. Thanks for taking my questions I guess, the first one I had.
Assuming all else equal with rates I guess, what what is the difference between the top end versus the bottom end of the home sales guidance you have out there for the fourth quarter. What are some factors that would keep you from getting to the top.
I think first and foremost, it's really just going to be where.
The demand characteristics are in each of the markets and Thats really been the <unk>.
Root cause of from an affordability standpoint that slowed down.
The demand prospects the other thing that.
That.
We have in our sights too is that fourth quarter from a seasonality standpoint.
<unk> is usually the most pronounced and so how typical seasonality comes into play in an environment like this.
I'd say there is some uncertainty there and so that's why we've put a little bit of a wider range similar to what we did last quarter to try to account for some of that variability Jay.
Okay.
I guess one other one just.
Oh go ahead, Brian .
Yes, I was just going to say one of the things that we're seeing right now.
And some of the most volatile markets as you are not the nice to moves are not happening right now for somebody who wants to upgrade their home or their kitchen or that's just not happening. The majority of the transactions are coming from people who need to move lifestyle for whatever reason and so that.
Transactions that and that's led to the volatility as well right. So.
The transaction volume is the big question Mark that we're seeing in.
Just to Mike's point, so of course, we're watching that closely.
Is it because that leads to the buyer demand if anything that we buy so we want to make sure that anything that we acquire we're able to sell it.
And buy renovate and sell it within 100 days in and then also if not push it into flex.
Mhm.
And then.
Assuming that mortgage rates stabilize.
You put any type of expansion plans on hold right now or are you still looking to possibly enter new markets at some point.
Yes, we still we have been on pace. The past couple of years of adding about 7% to eight new markets I would say right now we still have that in our sights next years, but we're going to we're going to escalate by year, it really needs to be something that is geared more towards.
<unk> the second half of the year.
And then secondly, we would again probably have more of a bias towards in our model. We can open up larger hub markets and then we can also open up more satellite type markets and so right now given the circumstances I would say our position is.
We'll push out see how the first half of the year looks and then have a little bit more of a bias to some of the satellite or adjacent markets first.
Yeah.
Yes.
Thank you.
The question and answer session has concluded I will now turn the call over to Bryan Blair Chairman and C O.
For closing remarks.
The thing I'm most proud of is that over the last seven years, we've created momentum ensuring real estate will never be the same.
We are being realistic about the world around us, but I believe even more strongly today in our mission and our people I am excited to be part of the solution that can revolutionize a two trillion dollar industry.
You all for joining us today.
That concludes the offer pad third quarter 2022 earnings call.
You for your participation you may now disconnect your line.
Okay.
Excuse me team.
Okay.