Opendoor is an online real estate company founded in 2014 by Keith Rabois, Eric Wu, Ian Wong and JD Ross. In 2018, it raised $ 400m from Softbank Group and $ 300m from General Atlantic in 2019.

In 2014, the startup advertised itself as:

  1. “work with sellers directly to purchase home[s],”
  2. “work with local partners to rehab, maintain, and improve our portfolio of properties,”
  3. “partner with local brokers and Realtors to market, list on [the multiple listing service], and resell to retail buyers and investors”

BUY, REFURBISH, SELL

Opendoor has evolved into a digital, pure play “instant buying” (iBuying) real estate company. Seller submit their property’s details and Opendoor instantly makes an as-is cash offer. Opendoor then refurbishes the property and relists it.

Today, customers can sell their property to Opendoor, list it with Opendoor, buy from Opendoor and get financing.

1. Sell to Opendoor

  • Sellers share a video walkthrough and upload some of the property’s details
  • Opendoor makes an instant cash offer for the property “as-is”
  • Sellers can decide when to move out in order to avoid paying double rent / mortgages

2. List with Opendoor

  • Opendoor advances up to $ 10k for repairs (interest-free)
  • Sellers pay around 5% in fees for selling with Opendoor
  • Local experts assist sellers during the sale

3. Buy from Opendoor

  • Prospective buyers browse through open listings and can visit houses with tour assistants (unassisted tours are also possible in certain localities)
  • The user makes an offer and easily submits key information required to close the sale through the Opendoor app or by email
  • In certain localities, buyers can “return” their home to Opendoor under certain conditions

4. Finance with Opendoor

  • Buyers don’t have to pay for application origination, underwriting or processing fees and down payment comes in at minimum 3%
  • A mortgage consultant helps home buyers during the process
  • Buyers can now refinance their home and get approved in as little as 15 days

These features are packaged into an intuitive and easy-to-use interface. It provides the trust home buyers and sellers need while providing a quick and convenient way to deal with real estate.

DATA AND UX-DRIVEN ADVANTAGE

Opendoor is competing for homes with established real estate agents. It also fights for leadership with Zillow and Redfin. Its competitive advantage is built on data-driven models that define the price at which Opendoor should buy and sell a property.

These models are driven by:

  • 25m home level data inputs
  • 145 unique features per inspection
  • 175,000 on-site inspections

Improvements in its model’s accuracy enable Opendoor to make 63% of its offers automatically in Q1 2020 versus 41% in Q1 2018. And these improvements are possible thanks to massive amounts of data:

“We look at every single transaction that's been conducted in any of our markets since at least when transactions are recorded, which normally goes back 10 years.”

“So we have at least the last 10 years of data of all the transactions that have happened along with every single parcel that exists in these markets” Ian Wong by Kevin McAllister for Protocol

BANKING MEETS SILICON VALLEY

Opendoor is a founder-led company as Eric Wu is CEO and Ian Wong serves as CTO. Management has deep experience from TIER-1 investment and management consulting firms and leading tech companies.

Here is a closer look at Opendoor’s key people:

Eric Wu

  • Co-founder and Chief Executive Officer at Opendoor
  • Before Opendoor, founded Movity.com, a location data analytics company that was acquired by Trulia.com in 2011
  • Graduated from the University of Arizona with a bachelor of science in Economics

Ian Wong

  • Co-founder and Chief Technology Officer who leads Opendoor’s team of engineers and data scientists
  • Previously, built machine learning applications at Square and Prismatic
  • Earned degrees in Electrical Engineering and Statistics from Stanford University

Carrie Wheeler

  • Chief Financial Officer and independent board member at Opendoor
  • Previously, spent 21 years at TPG as Partner and Head of Retail and Consumer Investing and started as an analyst at Goldman Sachs
  • Earned her Bachelor of Commerce (with Honors) from Queen’s University

Megan Meyer Toolson

  • Head of Operations at Opendoor
  • Previously, spent almost 2 years at Bain Capital and over 2 years at McKinsey & Company as a Business Analyst
  • Earned her MBA from Stanford Graduate School of Business

An experienced management team and a strong product, driven by data and changing the customer experience.

SIZING THE OPPORTUNITY

The whole Opendoor story started when Peter Thiel (co-founder of Palantir and PayPal) suggested to Keith Rabois:

“[…]Peter Thiel suggested that I come up with an idea to innovate in residential real estate, It’s the largest part of the economy unaffected by the Internet. And that was definitely true then” Keith Rabois by Jordan Novet for Venture Beat

The largest part of the economy unaffected by the internet, mainly run by sales agents, here are the numbers for the National Association of Realtors (NAR):

  • There a 2m active real estate agents in the USA
  • 1.36m of those are Realtors - meaning that they have a real estate license and are members of the NAR

But what do home buyers do first?

  • Only 12% of the 22 to 29 year olds contacted a real estate agent
  • While over 20% of the +55 year olds contacted a real estate agent
  • Over 40% of 22 to 54 year olds looked first for a property online

Where did buyers found the home they purchased?

  • 62% of the 22 to 29 year olds found it online
  • While over 35% of the +55 year olds found it through a real estate agent

Property hunting is moving online, are real estate firms also making the switch?

  • According to the NAR, 46% of the Real Estate firms cited keeping up with technology as one of the biggest challenges for the next 2 years

And home buyers are better informed:

  • Buyers now have more data at hand (online pictures, listing information and history)
  • Buyers now review properties online and solicit the help of a real estate agent for the documentation and price negotiation

How could the real estate agents’ role evolve?

“In the near future, buyers will look to real estate agents as strategic experts to help make sense of all this data” by Reno Heine for Forbes

This looks very much aligned with what Opendoor proposes

  • Easily browse properties online
  • Visit a home with a tour assistant or on your own
  • Solicit the help of an agent for financing matters / documentation needs

WHY RELY ON IBUYERS?

Not everyone is optimistic about these “instant buyers”. A report by Collateral Analytics has found that iBuyers on average charge higher fees than traditional agents.

  • Driven by the need for these iBuyers to compensate for liquidity risks and carrying costs

The report ends on a more favourable tone:

“For some sellers, needing to move or requiring quick extraction of equity, this is certainly worthwhile”

Well, this is what Opendoor is targeting as their CTO explained to Protocol:

“What we've seen is that customers not only crave convenience now, […] They also really want assurance that [the process] is safe” Ian Wong by Kevin McAllister for Protocol

Another study, by Mike DelPrete, focussed on Zillow and Opendoor. It found that these iBuyers almost paid fair value for the property they bought.

“The evidence in this research study strongly suggests that iBuyers are offering close to fair market value for the homes they purchase” Mike DelPrete by Jeff Andrew for Curbed

RECESSION WATCH

As Opendoor is offering close to fair value, isn’t it taking on too much risk? What if the market collapses?

  • Home prices tend to decrease in a downturn. An unexpected downturn that was not forecasted by Opendoor’s models could have a considerable impact

    “[…] bear significant risks if prices decline. A downturn in home prices, not forecast by the iBuyer market analysts could be devastating as they ramp up their business platforms” From Collateral Analytics

Opendoor already went through a downturn:

COMPETITVE MARKET

The iBuyer market is competitive, here are some players:

  • Zillow Offers
  • RedfinNow
  • Knock
  • Entera
  • Offerpad
  • We Buy Ugly Houses
  • Houzeo

The leading players (Zillow, Redfin, Opendoor) have similar offerings. A competitive edge might be acquired through improved pricing models.

  • But in the long run, this might end in a “fees”-war between the leading players
  • Pressuring their (already low) margins

TAKE A BREATH

So… This is a lot of information. Let’s summarise:

  1. Opendoor is a pure play and fully digital iBuyer. It instantly buys and sells properties and provides financing options
  2. The real estate market is moving online as the younger demographics start looking for homes online and often find the home they purchased online
  3. Opendoor and fellow technology-first real estate challengers compete with data, machine learning models and better customer interface
  4. In order to gain customers, iBuyers often pay fair value for homes, pressuring their margins for now

FINANCIAL CHECK

Note: period is 9 months ended September 30

  • Total revenue decreased by 34% year over year to $ 2.3B in 2020 down from $ 3.5B in the previous period
  • Opendoor stopped buying homes during the pandemic
  • Sales reached $ 4.7B in 2019 (full year), up 159% from $ 1.8B in 2018
  • Sales grew 157% from $ 711m over the 2017 to 2018 period
  • Gross margins stood at 7.8% in 2020 up from 6.5% in the previous period

    “Opendoor thinks it can generate $458 million in “contribution profit” by 2023, or 4.7% of revenue. That’s still a pretty thin margin” by Chris Bryant for Bloomberg
  • Operating expenses decreased 26% to $ 301m from $ 409m
  • Net loss reached $ 119m down from a loss of $ 247m a year earlier
  • Opendoor’s current assets stood at $ 923m versus current liabilities of $ 179m
  • Opendoor got about $ 1B in cash following the SPAC merger

VALUATION CHECK

Opendoor has Gross Margins of 7% and makes around 2 to 3% per home sold. It can be compared to Vroom and Carvana’s business models of low margins and high volumes.

  • Opendoor and Carvana are providing a better customer experience, a platform consumers can trust and convenience
  • These players don’t need years of experience to become competitive as data on the auto and housing market is relatively easier to find
  • Both companies address large markets that have not been digitised yet

But are considerably pressured during downturns.

  • The housing and auto market face immense difficulties during downturns
  • Auto dealers have to limit their inventory during the recession but have enough car to sell when to economy kicks back
  • iBuyers (such as Opendoor) have to pause home buying and try to sell current inventory at minimal loss

On Valuation

Opendoor is now worth $ 12.3B on 2020 (run rate) sales of $ 5B. Despite Opendoor’s attractive story, the long-term potential and current valuation don’t make perfectly sense.

We can view Opendoor’s sales as “Gross Sales” and its Gross Profit as “Net Revenue”. Similar to Uber and other commission-based businesses.

Opendoor could generate $ 5B in sales this year and has gross margins (commission) of around 7% so it could get $ 350m in Net Revenue

  • At today’s market cap of $ 12.3B, this means that its Price To Net Revenue is at around 35
  • If sales double to $ 10B and gross margins increase to 10% this would translate into $ 1B in Net Revenue
  • At a multiple of 12, this would translate into a market cap of $ 12B

BENCHMARK'S TAKE

The Good

  • The real estate market is digitising as a new generation of buyers favour online tools
  • These buyers look for a more convenient, trustworthy and easy way to buy and sell their house
  • Opendoor’s refreshed user interface and customer experience attract customers in droves as it managed to grow sales at +150% over the 2019 to 2017 period
  • Opendoor is a founder-led company and management has as pristine track record
  • Despite the recent downturn in sales, Opendoor managed to safeguard its financial position and rebound post-COVID

The Bad

  • The iBuyers market is competitive and strongly correlated to the state of the broader economy
  • Margins are thin and competition might be based on the iBuyers’ fees in the future as the data-advantage might wear out
  • Based on Opendoor’s potential contribution margins and projected revenue, the risk / reward ratio is less attractive for now

Disclaimer

Please note that this article does not constitute investment advice in any form. This article is not a research report and is not intended to serve as the basis for any investment decision. All investments involve risk and the past performance of a security or financial product does not guarantee future returns. Investors have to conduct their own research before conducting any transaction. There is always the risk of losing parts or all of your money when you invest in securities or other financial products.