Offerpad Solutions Inc (OPAD) 2022 Q2 法說會逐字稿

Good afternoon, and welcome to the Offerpad Second Quarter 2022 Earnings Call. My name is Sam and I'm your moderator today. (Operator Instructions) I'll now turn the call over to Stefanie Layton, Vice President of Investor Relations and ESG at Offerpad. Stefanie?

Thank you, and good afternoon, everyone. Welcome to Offerpad Solutions second quarter 2022 earnings call. Our Chairman and Chief Executive Officer, Brian Bair; and 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 and events could differ significantly from management's expectations. Please refer to the risks, uncertainties and other factors relating to the company's business described in our filings with the U.S. Securities and Exchange Commission. Except as required by applicable law, Offerpad does not intend to update or alter forward-looking statements 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. The reconciliations of Offerpad's non-GAAP measures to the comparable GAAP measures are available in the financial tables of the second quarter earnings release on Offerpad's website. I'll now turn the call over to Brian.

Thanks, Stefanie. Hey, everyone. Appreciate you joining us today. I'll cover some company highlights, market trends and our focus for the remainder of the year. Mike will share our second quarter 2022 financial results and our third quarter 2022 expectations. Highlights for the first half of the year include: we generated nearly $2.5 billion in revenue and $52 million of net income. We sold more homes in the first half of 2022 than we did during all of 2021. We completed more than 6,500 renovation projects with an average time line of 21 days. We maintained an average time from home acquisition to sale below 100 days, and we won 6 new markets.

We also continued to see increasing customer interest in our solutions. More people visited our website during the second quarter than ever before. Requests for an Express cash offer also hit an all-time high. The interest validates the increasing level of awareness around our services and the value we provide to customers. For our Flex listing service, transactions increased 47% quarter-over-quarter and 123% year-over-year. In the first half of the year alone, we signed more listing agreements than we did during all of 2021. We made great progress growing Flex and we expect it will be an increasingly important solution as the real estate market adjusts.

The choice between our Express cash offer and our Flex listing service not only provides customers a more individual experience based on their preferences, it also provides the company diversified revenue streams with different advantages in either a buyer or a seller's market. Our ancillary service offerings also grew in the second quarter. Offerpad Home Loans reached more customers in more states with loan volume increasing 37% over quarter one. In addition, Offerpad Home Loans has a new mobile app and consumer portal, making it easier to shop this solution. The new app will deliver a completely digital mortgage experience from starting to finish. Utilizing powerful communication and self-search tools, the apps unites borrowers, loan officers and Offerpad's real estate experts to provide a streamlined home buying experience.

Enhancing our Offerpad Home Loans product is another step towards becoming a one-stop solution for homeowners. Our 94% customer satisfaction rating in the second quarter remains a key indicator that our services continue to resonate with customers. A great example comes to Rachel (inaudible) in Arizona. Rachel bundled by buying a new home, selling their existing home and using our Offerpad Home Loans mortgage service. She posted, I highly suggest they're bundling packages. I received discounts for using their (inaudible) lender, Rachel shared. I was so nervous buying my first preexisting home. I learned so much. I will definitely use Offerpad again. This is why we do what we do because there is a way to make buying and selling a home easier.

Turning to the broader real estate market, the softening we have been expecting is here. Over the last 18 years in real estate, highest learned when markets adjust, especially this quickly, it's very important to be decisive and get proactive with owned inventory. You want to sell your current inventory quickly and replace it with new inventory underwritten for today's climate. Keep in mind, most homes we own currently and homes that are just closing today were underwritten back in March and April under completely different market conditions. For example, the home we underwrote then potentially had no other homes in the market within a mile. Now today, when the home hits the market, it has 7 to 10 comparable homes.

I'm going to talk through several dynamics we are seeing nationally and then walk through how we are proactively adjusting to the unique market conditions. Housing supply increased rapidly from a low of 1.6 months in January to more than 2.5 months supply. The Fed increased interest rates quickly and mortgage rates increased from the historic lows to over 6% at the high point. (inaudible) mortgage rate increased 75 basis points in just 4 business days. The pace of change in rates on top of the home price appreciation is added to consumer affordability challenges and has caused some buyers to wait on the sidelines for things to settle.

Metal markets are seeing the same magnitude of change. In general, the markets that have seen the greatest rate of price appreciation are being impacted the most. For example, the Midwest and Southeast, including markets in Georgia, North Carolina and Florida are currently showing active buyer demand. The Southwest moved faster with visible softening in our Phoenix, Denver, Austin and Las Vegas markets. This is a good example of how our geographic diversity mitigates risk during the transition between market cycles. The diversification we have today has been thoughtfully and intentionally established over the last 6 years, supporting the resiliency of our business.

Our team's extensive real estate experience is another strength supporting our ability to execute through different market cycles. Our regional general managers have an average of 22 years of real estate experience and our local general managers have an average of 17 years. So how do we put this expertise to use? We have a sophisticated underwriting model with various levers we can pull in different market conditions. Because the markets have been so hot for so long, we built in some cushion for each home in case the market slowed. We saw this happen, but this cushion has allowed us to price our inventory to sell after a swift acceleration of home price appreciation, without having to take a larger impairment than we are.

To adjust, we revised our overall (inaudible) by putting a cap on our purchase price in several markets, conducting real-time market-by-market reviews of our inventory. We are prioritizing acquisitions closer to each market's media price point, and we are offering our select listing service to customers with higher priced homes. We reduced the length of time available for customers to select their closing date, reducing the 90-day closing time they had in the past.

Our acquisition teams update our underwriting assumptions to account for additional risk by incorporating wider spreads, adjusting for increased active inventory on the market, increased our estimated holding times, increased our service fee and interest expense among other items. One other important adjustment we have made was our renovations. Our team has increased the amount of upgrades on certain properties to ensure our homes have the inviting look and build buyers want. When inventory increases and multiple competing homes are available to choose from, we want our home to sell first. This helps limit our exposure to extended holding times.

Limiting our exposure to extended holding times will be increasingly important during the second half of the year. The efficiency and effectiveness of our renovations can mitigate the risk by reducing extended time to cash and aged inventory. In the second quarter, our team completed over 3,500 renovation projects with an average investment of $17,000 per home. The average duration in renovation improved to 20 days in the second quarter compared to 23 days in the first quarter. The sophistication of our renovations operation is unique, and it will be an important near-term strength. As always, we are closely watching and managing inventory on over 180 days.

Because of some of the proactive measures I mentioned above, as of June 30, owned inventory over 180 days was less than 2%, well below our target of less than 10%. We know the real estate market is fluid and short-term results can fluctuate, but we believe this disruption is temporary. As one of the country's largest home buyers, we believe Offerpad will have great opportunities as the market stabilizes into what we expect will be a stronger buyer's market.

When it takes sellers weeks or months to sell their home in a traditional way with no certainty and no control, we believe more and more consumers will come to Offerpad. Looking forward, I have complete confidence that we are well equipped to deliver on our long-term goals of supporting our customers and delivering sustainable shareholder value. On that note, I'll turn the call over to Mike.

Thanks, Brian. Today, I will cover our second quarter 2022 financial results, review a few key data points and provide an outlook for the third quarter. As Brian mentioned, our Q2 results capped off a strong first half performance. Revenue in the second quarter increased 185% year-over-year to $1.1 billion, with approximately 70% of the growth driven by higher volumes from increased market penetration within our existing markets and new market expansions, and approximately 30% due to the increase in average sales price. We sold 2,888 homes in the second quarter, a 129% increase year-over-year with an average sales price of $372,000 compared to $298,000 in Q2 of the prior year.

Our acquisition of 3,792 homes in the second quarter was consistent with the typical seasonal first to second quarter increase. And as of June 30, we owned 3,551 homes across our 27 active markets. We reported second quarter gross profit of $93 million or 8.6% gross margin, net income of $11.6 million, adjusted net loss of $1 million and adjusted EBITDA of $13.7 million. Each of these amounts include a $21.2 million inventory impairment charge which I will discuss in more detail momentarily. Absent this charge, each of these metrics would have been $21 million higher, including adjusted EBITDA, which would have come in at $34.9 million.

Fully diluted earnings per share on a GAAP basis was $0.04 per share and includes a $0.04 benefit from marking to market the warrant value and an $0.08 charge from the inventory impairment. Coming back to a discussion of the inventory valuation adjustment or impairment, at the end of every period we evaluate each home at our inventory to determine if the carrying value is recoverable based on our expected sales proceeds. To the extent the net proceeds do not cover the carrying value, we record a charge for that expected loss in the current period. Quarterly charges have ranged from $63,000 to $1.8 million over the last 3 years, but generally well below 1% of total inventory.

At the end of June, when we performed this assessment, some markets such as Denver, Austin and Phoenix have experienced a slowdown in demand for residential housing as a result of the combination of the rapid rise in mortgage rates and robust home price appreciation in that market. While we have been making adjustments in the quarter to underwrite new acquisitions to incorporate wider spreads and lower sales price assumptions, the homes already in inventory were underwritten under very different market conditions. As such, we calculated the value given our current assessment with the best available information and recorded a charge of $21 million in the quarter. Over the next couple of quarters, as we sell our inventory that was acquired under previous market conditions and replace it with homes that we acquire in the current environment, we expect to return to more normalized levels of returns.

Returning to the discussion of our Q2 results, contribution margin after interest for the quarter came in at $28,500 per home or 7.6% of revenue and has been between 5% and 10% over the past 8 quarters. In periods of price appreciation like we have experienced over the past 2 years, we have been able to absorb the increased input cost of acquiring homes at higher rates through higher sales prices on the back end. In more of a buyer's market, our attribute to convenience, certainty and control are even more highly valued by prospective sellers, so we don't need to lean on the home price appreciation to increase returns.

By adjusting the variables in our underwriting process through the combination of our asset valuation models and in-market real estate teams, we remain consistent with our expectation of generating annual contribution margin after interest of 3% to 6% and to increase that margin over the longer term. From an operating cost perspective, we continue to demonstrate the ability to leverage top line growth and increase efficiencies of scale across the organization. For the quarter, sales, marketing and operating costs improved 230 basis points year-over-year to 6% of revenue, while technology and development costs improved 40 basis points year-over-year. G&A had a slight increase of 14 basis points year-over-year to 1.5% of revenue. The prior year period costs for G&A do not include the public company costs, which began in our Q3 2020 public company combination.

In addition to the financial metrics I just addressed, there are several other key data points we monitor closely to assess our performance. We have previously shared that our goal is to keep our average time to cash below 100 days. In stronger markets, that metric has dropped down into the mid-60s. And with slower conditions, we would expect to be at or slightly above that mark. In the second quarter, our time to cash was 83 days, which improved from a seasonally higher (inaudible) days that we saw in Q1. This marks our eighth consecutive quarter with time to cash below 100 days.

Another important metric is our inventory aged over 180 days. As Brian mentioned, as of June 30, we were less than 2% aged, well below our target of being under 10%. This is a strong inventory position as we enter this period of changing market conditions. With the softening of the market, we do expect our aged inventory to increase from the exceptionally low current levels. Inventory turnover will continue to be a key focus of the company in the second half of the year.

From a capital structure perspective, we continue to make positive strides. In June, we added $200 million of borrowing capacity under one of our credit facilities and extended the maturity date to June of 2024. In July, we increased the borrowing capacity of one of our mezzanine debt facilities by over $30 million and also extended the maturity to June of '24. We now have access to $1.9 billion of inventory financing capacity across 8 different facilities.

Lastly, our cash balance at June 30 was $155 million. We are proactively adjusting our operations to reflect the changing needs of our customers and our company as the real estate market shifts. Over the next couple of quarters, as we work through the process of selling inventory homes that we expect to produce lower margins due to the change in market conditions, we expect to rebuild that inventory with homes acquired at values more reflective of the current environment. With continued strong request volume and an established track record in our markets, we believe we are well positioned.

Specifically, for the third quarter, we expect to sell between 1,700 and 2,200 homes, generating revenue of between 600 and $800 million. We also expect adjusted EBITDA will reflect the variability in market conditions and will trend down in the short term between negative $20 million and negative $40 million. Our guidance ranges are a bit wider than our norm this quarter given the current market conditions. As we build out the technology, scale and expertise of Offerpad over the past 5 years, we entered this turn from a solid position.

The geographic diversification of our inventory, low level of aged inventory, differentiation of our renovations model, minimal supply chain constraints and an improved balance sheet all support our ability to manage through the transition period. Fundamentally, our investment thesis remains the same with a large addressable market, focused business model, competitive differentiation and an attractive growth profile. We are confident in our ability to adjust in the short term and to deliver long-term value to our customers and our shareholders.

I'll now turn the call back to Brian for some concluding remarks.

Thanks, Mike. Providing guidance at turning points of the real estate cycle is a difficult business. Over the first half of the year, mortgage rates have increased nearly 3% from roughly 3% to 6%. For a $430,000 home, assumed at a 20% down payment, that moves the mortgage payment from just under $1,500 to just over $2,000, a 40-plus percent increase. Moves like this over a short period of time are rare and obviously create issues for buyers from their affordability point of view. With the fast and significant move in mortgage interest rates, buyers likely pause to reassess what they can afford.

While there is still a medium-term structural shortage in housing supply in the short term, we believe markets that have enjoyed the most home price appreciation may see the most significant home price declines, though the extent of the decline will likely be market-dependent. Lowering home price expectations is prudent and underwrites the reasoning behind our impairment charge in Q2 and our Q3 guidance. We expect price adjustments to impact our earnings in the near term, but as the market shifts from a sellers to buyers market, we expect our margins will improve.

At Offerpad, we believe there is an opportunity in both seller and buyer's markets. We saw great success over the past year in the heavy sellers market. Now when it takes sellers longer to sell their home, homeowners can gain more certainty and control over the transaction that come with Offerpad. As the market settles, we expect our value proposition and strategy to produce improving margins in Q4 and volume should likely begin to return to normal levels in Q1, setting Offerpad up for a great 2023.

I'll now turn the call over to the operator to begin the question-and-answer session.

(Operator Instructions) We will now take our first question from the line of Dae Lee with JPMorgan.

I have 2. So the first one, you guys have talked about this being a short-term volatility. And I think, Brian, you just mentioned that in Q4 trends could start to improve in 1Q, and improve further from that. So what gives you the confidence that this is more short term? And are you seeing any signs of stability right now?

So it's very market specific right now. We're seeing some markets much more impacted than others. And so the short term goes into buyer demand, the affordability and buyer demand, where buyers sit on their hands for a little bit. How quick it happened was definitely different. We are starting to see that, like, for example, adjusting some of our price points that we're talking about that I just mentioned, we're starting to see buyer demand pick up a little bit. Mortgage rates have been fluctuating a little bit back and forth, which has been helpful. But one of the things that we're doing is definitely building in wider spreads right now as it's a little bit more uncertain. And so yes, it's -- we're -- depending on weeks, we're watching it very, very closely and getting very market specific.

And then second one, maybe this one is for you, Mike. I think you guys talked about there being around 3,500 homes in inventory right now. How should we think about -- or is there any way to think about that relative to the homes that you've bought in, I guess, a different environment back in March and April versus the current environment that you guys talked about on the call?

On the inventory, we've got -- you're right, we've got a little over 3,500 homes at the end of June. If you recall, we were -- Q1 seasonally is a little bit lower of an acquisition period for us. So we were building inventory throughout Q2. So there's a decent normalized stratification there. When you take a look at when we were going through some of the work that we were doing on the impairment, we assessed the entire portfolio. There were about 1,000 homes that were impacted. And most of those tended to be earlier acquisitions under the earlier greater change market conditions, if you will.

So I think it's something that you'll see us work through here over the next couple of quarters, getting those out in the normal course. And I think at the same time, as Brian mentioned, we've changed the underwriting criteria. And we've been doing that as we've gone through the months here and adapting here, but the demand really tends to slow things down at the end of June as we moved on. So that's our current outlook.

The next question comes from the line of Ryan Tomasello with KBW.

Can you provide some color on how gross margins trended through the quarter and perhaps 3Q-to-date if you have data to share, particularly within some of your larger markets, for example, I think Phoenix in particular has seen HPA decelerate by over 10% from recent peaks. And I guess, looking back at your inventory management heading into the slowdown, what lessons are you taking from that performance heading into what's likely to be an even more volatile period in the second half?

Yes, I'll take the first part of that, Ryan. Just on the gross margins, as you would expect throughout the quarter, they started to trend down. And so we had been seeing very good returns, HPA environments and frankly continued longer than I would tell you that we had even expected. As you know, we've been talking for 6, 9 months now about the market normalizing away from the higher HPA environment that we've been seeing for quite some time now. And we've been preparing for that. So we did start to see some of those margins come down through.

Again, it really is dependent market by market. Our Midwest operations that we've opened up within the past year have been a good sign of stability within the portfolio. The Southeast has been also held in there pretty well. But as you mentioned, Phoenix has seen some pretty dramatic movement as has Austin and Denver was another market that we pointed out earlier. So as we get into Q3, obviously, we've got the -- some of the charge from the impairment that we're taking this quarter, but we would expect those to come down and then bottom out and as we're able to put more accretive margin homes to work in the third and the fourth quarter to begin to balance and bring that back up again.

And I'll just add to that, Phoenix has always been a super strong market for us, and you're spot on. The home price appreciation and what you're seeing as home prices in Phoenix and how quickly it's happening from a lot of inventory hitting the market rapidly and affordability issues. So back to your question, what are we learning? Obviously, we're underwriting that market much differently. As you can see, we're slowing acquisitions temporarily in a market like Phoenix.

A market decline is actually not bad as long as we get a good feeling, and if consistent of understanding what we can do. There's opportunity there for us. Right now, it's just really volatile still. You have a lot of inventory hitting the market really quickly and prices are really inconsistent as well. And so markets like that, you want to be able to slow your acquisitions in a market like that and focus on markets that are healthy, Mike mentioned the Midwest or some of the Florida markets, there's still a decent buyer demand there and there's opportunity there.

And are you expecting additional large impairments for the third quarter? Is that seen as reasonable to model? And regarding the guidance, can you say what level of gross and contribution margins those ranges contemplate and how to think about, I guess, that cadence of bottoming and improving margins into the end of the year?

In terms of our expectation for impairments in Q3, we're not currently expecting to see that in magnitude again. If you take a look at that -- the impairment charge of $21 million this quarter and our guidance for Q3, what you end up with a) you can obviously see it's pulled back a bit. That's a result of the homes that we've impaired selling through some of those. Those will essentially come through the P&L at a breakeven type margin. There's other homes in the portfolio as we go through the evaluation that we've reduced prices on some selling prices on, but we're still going to make a profit on those. So there's no impairment associated with those, but those too come through Q3, Q4 at lower margins than the norm.

And then mixed in there are the homes that we're acquiring and turning over that we've underwritten with increased spreads. So we don't really give out forward-looking gross margin and contribution margin guidance. So I think we'll just tend to leave the EBITDA ranges that we have for Q3 and really see where we're at and looking at Q4 from there.

And Ryan, one thing I'll add there is the majority of the impairments came from like the Phoenix, the Denvers, the Austins. And we tried to get really smart there. We don't want to dump inventory. We want to make the best real estate decision we can make with that inventory. We wanted to price it where we could move that inventory quickly. But more of that -- and to your point earlier, some of those inventory -- or some of those markets have dropped 8%, 9%, 10%. So we want to take a healthy drop on those properties to move through those. So we wouldn't have -- and the whole point of that exercise is to get aggressive and move through some of the inventory now as quickly as possible with making the best real estate decision. So we wouldn't have issues in the future.

And just to clarify quickly, the impairment in the quarter related to about 1,000 homes and you're expecting about a breakeven gross margin on those homes when they sell in the third and fourth quarter?

That's correct, yes.

The next question comes from the line of Jason Weaver with Compass Point LLC.

Given your comments on us transitioning into a buyers market and also the record number of monthly average users, can you give any context around the growth in Express offer request and/or conversion rates within your existing markets sort of versus where we were last year?

Sorry, the Express? Sorry, I missed the first part of the question. Sorry, can you repeat the question?

Express offer requests and conversion rates.

Yes. What we've seen, which is not a surprise as the market has transitioned, in a lot of these markets we could buy as many homes as we want it. Right now we're just uncertain about -- we want to make sure there's more certainty in the market. So as the market slows and sellers have more issues selling their home the traditional way, more and more people are coming to Offerpad. So as we saw in second quarter, our conversion was very strong and especially towards the end of the second quarter when you start to see the market change rapidly. And we continue to see that today. As the market starts to slow for sellers, we're seeing more and more people start their experience with Offerpad first.

And second, a follow-up, can you give some more color around the 3Q guide on homes sold? How much of that is the overall macro environment versus the changes you're making to your buy box or acquisition criteria?

I'd really say it's -- a lot of it's driven by the macro environment because really what has been challenging is the speed at which we've seen the buyer demand pull back. And again, primarily due to affordability issues driven by a rapid increase in mortgage rates. And with the backdrop in some of the markets where we're seeing the greatest impact of that home price appreciation, which has been very strong in the markets that we have listed. So it's really trying to get our footing on how quickly does that buyer demand come back. We've got good strong positions, good strong homes on the market. I think you just have buyers out there that are paused and a little bit in wait and see mode right now, trying to understand where they think mortgage rates are going to go and where home prices are going to go.

Yes. And if you track mortgage rates recently, you'll see how volatile the mortgage rates were. I think yesterday, they were below 5% for the first time in a long time and they've increased way above 5% just within 24 hours. And so the normal buyer is not tracking mortgage rates every day. And so those are things, and that's where the volatility, a lot of things like that are happening. And so that's where, again, the best real estate decision is to slow down acquisitions, especially in some of the markets that are being affected more and then being able to wait for things to settle and inventory to settle a bit, and then there is a lot of opportunity moving forward in those markets. Thank you, Jason.

The next question comes from the line of Nick Jones with JMP Securities.

2, if I can. I guess, one, you talked about kind of varying dynamics by market. Are there markets that perhaps you're not in that you could potentially more aggressively or you can more aggressively enter with the dynamics or either more resilient or further ahead or you kind of have better clarity, I guess is there any change in how you're thinking about market expansion as kind of the dynamic unfolds?

It's a great question. So we're -- if you look at the tracking of affordability in markets and you look at affordability in the Midwest markets that haven't been impacted by the amount of price decreases and some of the things that you're seeing, the affordability is much stronger in those markets. But if you look at the West -- or the Westcoast market, some of the Southwest markets that we've mentioned, the affordability is really off the charts. And so as we look at expanding more markets, we're definitely having an eye on affordability because as mortgage rates reached a high in a long time and up into the high 5s or 6s and then you had the median home price reach over $400,000, it's a bad combination for buyers. And so that obviously -- that's what slowed and slowed the market so rapidly. So that is definitely something we're exploring. Affordability is becoming a very hot topic around here of us looking at new markets.

And Nick, I would add a couple of other things there, too. If you take a look at our footprint and our market expansion that we grew out this year in 2022, we were very intentional about going into California early in the year to establish ourselves in those markets. Those have been coming online. We don't have a big presence there as we're moving into it, and that's proving to work out to our benefit right now. But it has us positioned well as you move through the cycle for those to be really good markets for us moving forward.

The other market build-out, we really focused on a combination of Midwest markets and satellite markets for us. And we were doing that with an eye to risk management because we've had a lot of discussions about how the HPA environment has been very strong for a long time. It's going to slow down at some time. So satellite markets are much more efficient for us to get into to generally smaller markets that are close to some of our hub markets that we can leverage our management teams there from a cost perspective, but they're also more affordable markets. And those are really showing to be prudent moves for us during this year and during this particular cycle move.

And then, I guess, a question on acquiring homes. You have pretty large capacity. So is this kind of reflective, I guess, the 3Q guide and the commentary on the back half, is that reflective of this kind of being a little bit longer term? Or is there a scenario where you can use your capacity kind of change your algorithm a little bit or your fees to kind of just kind of buy through this pressure. I think kind of longer term, a lot of economists are expecting rates to actually pull back by 2024. So is there a scenario where you can just kind of grow through what we'll call them, kind of mispurchases to kind of make up for any impairments. I'm not sure if the question makes sense. But ultimately, can you kind of just buy faster to make up for a more challenged environment given the borrowing capacity?

No, it's a great question. And the answer to that is absolutely. And when the opportunity is there, you want to buy and how you make up to either misses or market changes and some of the inventory have now is buying better product with wider spreads, it's more consistent. And that's exactly what we're focused on right now. And so it's interesting.

I think one of the things that -- and maybe one of the biggest misunderstandings about real estate is that it goes from a sellers to buyers markets overnight, that's not. And so I think probably the question I have been asked more than anything else in the history of Offerpad is what happens in the downturn. And the answer I've always given is the downturn doesn't bother me. The downturn is actually the opportunity to be a buyer and the buyers market is a good place to be. The hardest place to be is when it transitions from a sellers to buyers market and that transition period at the very top, that's when it gets more foggy than ever before, and that's exactly where we're at in the cycle right now.

And so that's where we're watching closely. And so as soon as we see more consistency in our markets, there is a great opportunity. And I'll tell you the one thing also we're seeing is sellers are not as patient as they used to be. In a normal real estate market, sellers have been on the market in say, a balanced market, quote-unquote, 6 months of what it takes to sell their home. And that hasn't been the market over the last 2 years. And so when sellers are sitting on their home for a month or 2, they're very impatient. They don't have access to the liquidity. And so as that -- that's what Keith mentioned the opportunity there. They can come to us and close on their schedule, and that's where we get really excited. But right now, we want to be really smart and make the best real estate decisions through the cycle. And like I said, it's -- most of these -- it doesn't take long for people to find where they're at. But obviously, we're watching that closely.

The next question comes from the line of Justin Ages with Berenberg Capital Markets.

The first one, given the highlights that you gave around kind of the new products, is there any information you can give us on attach rates and kind of the ancillary services and how we should think about those products going forward?

I don't know if we've given attach rates, but what I will tell you -- a good question, Justin, is what has been nice about having our Flex product, as we have widened our buy box and right now, temporarily got a little more conservative about what we're buying as far as risk management, having our Flex product has been fantastic because instead of having to buy their home with all the uncertainty, we can have sellers use our Flex product, which they can list their home with us. And that has been a really awesome product we've had, especially over the last 60 to 90 days as more and more people are using that product. So we are seeing increased volume there, but I don't think we're talking about conversion yet, Mike, or...

No, not specifically, but what we can say is we're building up both. Obviously, Flex has been part of the product portfolio for some time now. We're just seeing consistent growth quarter-over-quarter there as we move through that. And again, that will continue to further enable some of these other ancillary products like mortgage. And again, they are similarly at a bit of a lesser level just because we're starting out more soon in that particular area. It's not material for us, but we're having more opportunities. And again, that -- our mortgage count quarter-to-quarter has been growing throughout since inception.

Yes. I think that's been -- the positive of transition is if you guys have heard me, I mentioned before, one of the challenges we have is the education of being a one-stop solution center, not just a quote-unquote i-buyer that we'll pay. And right now, we're seeing more and more opportunity and people look at this as a solution centers from our bundling service of using mortgages, using one of our solution experts to help them find their next house, which is really important right now and then being able to sell us their home cash or to use our listing service. So that's been something that's been getting more and more volume, especially lately.

And then switching gears to the renovation side, given your comments that you're adjusting the strategy to make the homes more appealing so they kind of stand out given the rising inventory, is that going to be reflected in maybe higher average cost of renovations or seeing the number of days per project kind of tick up?

Yes. So yes -- and just to highlight that, renovation right now is going to be key. I mentioned a little bit in the comments, but as there's more inventory, you want your house to be the nicest home that people want to buy. And we have the ability to know what else is on the market and how to upgrade our homes. What we saw over the last couple of years, you haven't had to put in all the bells and whistles in some of these homes because just a lack of supply. Now as people are choosing and as buyer demand picks up, we want to make sure that we can add different upgrades there.

The one thing with our -- and I think the most important to your question with our renovation teams, it shouldn't add a lot of time on that. It will add some cost, obviously, as -- for throwing in granite, we didn't before. Maybe we're throwing in more stainless appliances or doing more at the cabinets. That will add a little bit, but it shouldn't really affect our -- it will affect some, but maybe a few days of our renovation times. But one of the things that I will shop from the rooftops is the strength of our renovation. The adversity these guys have been through over the last couple of years with supply issues and everything else, they've done a phenomenal job. And so putting a little -- and with the sophistication we have there now, having them do a little bit more renovation to these homes, they're geared and ready for it.

The next question is from Mike Ng with Goldman Sachs.

I just have 2. First, could you talk a little bit about how you're thinking about inventory balances and purchases into the third quarter? Are you -- I know, Brian, you mentioned that you're slowing acquisitions in certain markets. I was just wondering how we should think about that line exiting 3Q? And then second, I was just wondering if, Mike, you could talk a little bit more about funding. Has the volatility in the real estate market changed anything as it relates to the terms of your funding facilities? Have the advance rates come down? Is there more cash that you have to commit to support any of those facilities or anything like that?

So in terms of Q3 acquisitions versus our expectations on sales, what I would tell you is I would anticipate acquisitions and sales being probably about in the same range. So we are temporarily slowing the acquisition fees a bit here as we go month to month or just week to week, pardon me, in terms of finding where we can reengage accurately in each market. So I think for Q3, you're probably going to see levels of acquisitions and sales given the demand characteristics right now to be pretty comparable. And therefore, inventory level is looking pretty similar as we exit Q3.

In terms of financing backdrop, we really haven't seen any detrimental effect or anything like that. We've got excellent relationships with our existing lender base. We've been -- we keep in constant contact with them. Ironically, the shorter duration of the facilities at 2-year facilities causes us to be back active with them on a pretty regular basis. And as we've gone through each of those renewal processes and over the past year, putting some new facilities in place, what we've seen is that we've been able to maintain terms and in certain instances improve them.

And even from the standpoint of borrowing base, requirements and things like that, and these are these kind of disruptive times when you're speeding up or slowing down a little bit. We test through some of the provisions in there. And thus far, we've been in pretty good shape and haven't really seen any detrimental effects to that. There's no cash calls or reductions or anything along those lines.

And I think just to add on that, and obviously, Mike lives in the credit facility world. But I would tell you, like I just had dinner with one of our lenders in New York not very long ago. And I think each one would tell you that they have confidence in us because we're going to make the best real estate decisions and sometimes they are hard decisions to make the best decisions for the company, for our investors but also the best real estate decisions that are out there. And so I think that our lenders have a lot of confidence that we're going to make the right decisions in moving through our inventory.

Our last question comes from the line of Jay McCanless with Wedbush.

The first one I had is when you think about the inventory that you're seeing in your markets, are this -- is the inventory at median price, below median price, what are people showing you right now? And I guess, I jumped on late, but if you could kind of frame that in the comments of what you're doing with the buy box right now.

So a couple of things there. So what we're seeing, and this is where when I mentioned the volatility, what happens in these markets are you're seeing more inventory and more importantly, you're seeing sellers that have had more equity in their homes. Some of these markets have appreciated 50%, 60% within just 2 years. So they have a lot of equity in their homes. And so different than what it was I've seen in other cycles where making a $25,000 or $30,000 price adjustment was a big deal because maybe they have $50,000 in equity in their home. It was -- some of these sellers have $203 -- $800,000 equity in their home that they (inaudible) pretty quickly. So where the inconsistency is coming from pricing as you're having sellers reduce prices. And I don't want to say chase to the bottom, but there's more inventory hitting, they want theirs to sell first, and so they're being more aggressive in the pricing.

So what we want to do is watch for that to get more consistent. The way that we underwrite now, just like we underwrote when the market was accelerated, we would write more on the top of where the comps are. So we would take some of the higher comps and justify for home price appreciation. It's exactly the opposite. Now you want to go low to mid where the market is and put inventory out, it's going to move quickly. And so what you're doing is you're watching active inventory more than you're watching pending and sold inventory. And I've said for a long time active inventory is really where is the best key metric of real estate. And so we're watching active inventory really closely and pricing it accordingly.

And then I guess for the EBITDA guidance for 3Q, I mean, I'm assuming -- and apologies if you've already addressed this, but I'm assuming you guys are pushing a little harder, wanting to take a little bit less margin on each home. Is that the reason you're thinking EBITDA is going to be negative for the quarter??

Yes. What we want to do and especially just because you missed the first of the call, some of the markets that have declined quicker than others, that in some of these markets, we reduced some of our list prices 8%, 10% to find where the buyers are. And the good part about that is, it's working. We've reduced some of the prices, and we're finding buyers at those price points. It's really important to just kind of distinct the 2 though, just trying to blow out inventory and sell whatever to get -- to get out of the inventory is much, much different than the approach that we're taking. We want to make the best real estate decision, how can we reduce the price to sell in 21 days with the information we have now. And that's what we've been doing. And we've made those adjustments. We're starting to see more activity there, which has been a positive.

We have no further questions waiting at this time. So that concludes the Offerpad second quarter 2022 earnings call. Thank you all for your participation. You may now disconnect your lines.