Opendoor & Offerpad; What's Their Angle?

154 Replies

I haven't seen anything in the forums less than a year old about this, but here on phoenix I hear a commercial for Offerpad/Opendoor perhaps 4-5 times a day. Always kinda figured they must lowball quick cash offers and wholetail them. But finally I came across an REO they bought for 272,500 and have listed for 294,900. A decent spread assuming no work needs to be done and they can avoid any closing costs. A friend of mine has their house listed at 260k and decided to give them a try; they offered 230 site unseen and no pictures. She hasn't tried what they'd offer with pictures included.

I'd like people's opinions on their strategy of what seems like spray and pray. A year ago people on this site were predicting they'd fizzle out, but they haven't. Do you see them as a major factor in REI? Is their strategy something you'd replicate?

I can only speak confidentially of OpenDoor as I've done a lot of research on them and know someone who works there, although I'm assuming all of their business models work similarly. (OpenDoor, OfferPad, Knock, etc)

Keep in mind that their offers usually have fees backed out of them. They are operating on a high volume, low margin business model...one that works very well in an appreciating market. They have a lot of in house support to help cut down on selling costs...ideally they want buyers to come directly to them rather than using an agent. I've heard that they are partnering with Zillow to get their inventory built into the search function.

We'll see what happens when the market turns...word is is that they have enough cash on hand to weather a multi year downturn.

From the recent data I've read, the market share of these companies has peaked and not grown for a while now. They target "mass-appeal" properties between $200-300k and that kind of inventory is getting harder to come by, at least in Phoenix.

My understanding is they have the financial backing of Berkshire Hathaway, so basically billions. 

They operate in 3 markets, Phoenix, Dallas, and ??

The offer I received on my house from Opendoor was over the Zestimate if that means anything. I was just curious, not looking to sell right now, but thought the offer was fair or high. My wife and I have enjoyed looking at the open houses they have throughout the Dallas area. They are open from 6am - 9pm with an access code sent to your phone. Really easy process to view homes with no expectation from a realtor.

The fees to sell to them are around 9-11% if I recall correctly. They are very upfront about the fees and can close on a certain date if that is helpful to you. I think it is a game changer in the real estate industry. 

I am personally looking forward to all selling fees dropping because of technological advances and flat MLS listing fees. The days of 6% commissions are numbered.

I have submitted several houses in the Dallas area to Opendoor to see what they would offer. Most of them came back saying they could not make an offer. They have fairly narrow buying criteria - they want newer, cookie-cutter houses that are in neighborhoods that are fairly homogeneous (I'm sure their pricing model works much better there).

The ones they did offer on came in somewhat under market, but more than a normal investor would pay. As someone else mentioned, they are in the high volume, low margin business. They have a good niche and I think will be successful, but they will by no means replace the mom and pop investor, at least until their pricing algorithms get much more sophisticated.

I know this is an old forum but seems they are still up and running.  I think buyers and sellers should be aware of their business model.  If the home isn’t listed then you don’t know what the market value is, so how do you know your home isn’t worth?  They are basically taking advantage of desperate and/or uneducated buyers and sellers, they don’t understand that their homes are being wholesaled at an institutional level.

Originally posted by @Tim Trushaw :

I know this is an old forum but seems they are still up and running.  I think buyers and sellers should be aware of their business model.  If the home isn’t listed then you don’t know what the market value is, so how do you know your home isn’t worth?  They are basically taking advantage of desperate and/or uneducated buyers and sellers, they don’t understand that their homes are being wholesaled at an institutional level.

To some sellers, there are more important things than money. (time and convenience) Don't assume that everyone has the same motivations/desires when selling a home - Opendoor is buying a lot of houses so obviously people are finding their service valuable. 

Just to follow up on my previous post, Opendoor has really picked it up in Phoenix. They bought 245 homes this February as opposed to only 65 last year. This represents 2.6% of the Phoenix market, compared to only 0,8% last year. Not a staggering number but they are definitely showing improvement. 

In my last post, I noted that their market share had plateaued because the supply of homes in their price range was diminishing rapidly. It looks like they've responded because their average purchase price increased YoY from $205k to $245k. 

Anecdotally, I've seen a TON of Opendoor listings lately, especially showing buyers around areas of the far West Valley like Surprise.  

Although their market share has increased quite a bit, nothing says that they are running a profitable and sustainable business model. Only time and a change in market conditions will make that apparent. 

They are in Las Vegas and Henderson now as well.  My experience with them on the buyer side is over worded contracts but pretty smooth transaction and listed slightly above recent comps which is typical for our market. On the sellers side..............I wouldn't recommend it. 

Here is how it works:

Over the past 7 years the Vegas Valley has seen enormous growth in the housing market and home values. Many people have no idea what their home is worth. Some homeowners even rely on outdated autovaluations like Zillow's Zestimates for home values. Then opendoor or similar company gets in touch with a homewoner (because they are spend an insane amount of money on marketing to reach sellers that are not in tune with the market). FOR EXAMPLE: The homeowner maybe bought their home in 2011 for $200k for the sake of round numbers. Now lets fast forward to 2018 and the home is now worth $400k. The seller looks on websites like Zillow and sees there home is worth $380k. This seller is already underselling themselves by $20k, but wait it gets worse. Then opendoor comes along and says we think your home is worth $370k to $380k BUT we will buy it right now from you without you having to market the home or do any showings etc for $375k but we are going to charge you a fee up to 12% (in our example this would equate to $45,000). Then on top of that they charge a 7% Commission (that would equate to additional $26,250). Then opendoor would clean the home, maybe paint it, maybe put new carpet if you are lucky then resell your home for $400k in a week or two. Below I have compared 2 examples of selling traditionally with a Realtor at 6% commisions (which it may be less as it is negotiable) vs selling with opendoor or similar service.

Comparing Opendoor to a Traditional Sale with a Realtor

$400,000 Home via Opendoor

Home Value: $400,000
Sales Price: $375,000
Charge 12%: $45,000
Commissions 7%: $26,250
Total Costs via Opendoor: $71,250
Net Proceeds to Owner: $303,750

$400,000 Home via a Realtor

Home Value: $400,000
Sales Price: $400,000
Traditional Closing Costs 3%: $12,000
Commissions 6%: $24,000
Total Costs via a Realtor: $36,000
Net Proceeds to Owner: $364,000

In this Example Selling with a Realtor will save you $60,250!!!

Most homeowners I know could use an extra $60,000+ in their pocket! It is my firm belief that homeowners do not know how drastically their bottomline is affected by selling with these unethical companies.

BEFORE YOU SELL WITH ANY COMPANY ASK THEM "HOW MUCH MONEY WILL I WALK AWAY WITH?"AND THEN COMPARE THAT TO A TRADITIONAL REALTOR SALE.

I confronted them on a public post of Opendoor on Facebook, you can see for yourself how it went below
(after my question about them charging 19% they stopped responding):
HERE IS THE ORIGINAL POST

The way I look at these companies in the most simple form is similar to “Private Selling” your car or “Trading In” to a dealership. Everyone knows that private selling would net you more for the sale. Some people prefer to do the work involved to get more. Others prefer to just do a simple trade in for the fast and convenience of not having to keep their car clean and show it to others.

Opendoor is interesting.   They are essentially the "We Buy Your Home for Cash" model, but using more sophisticated data driven analytics.  These analytics will materially change the residential sales model in the upcoming 10 years.  It was predicted that at least 25% agents will disappear from the scene.  Plus appraisals and mortgage brokering will change.  Back to Opendoor.  Their model works under certain conditions:  Homogenous market, certain segment of the market, appreciating market.  A final note:  Zestimates (Zillow) does the market a huge disfavor by under and overflating properties.  In my market, I'd sell all my small rental properties at Zillow pricing.  Interesting that Opendoor is gaining a few enemies, such as some of the postings on this site.

There is a room for everybody and every business model in real estate.But from here to say that Opendoor will change the industry,  is like saying that tomorrow the sun will rise from the west.

@Robert Adams do you know if  that is also how OpenDoor operates...with the 12% Charge and the 7% commission?    It makes sense as I went through about 20 of their deals in Vegas and was shocked to see the delta between the OpenDoor purchase price and their listing price was very small....as low as 2%.   However given they make their money on the 19% in fees it makes sense.    

We tried competing in this space, but with $400M in funding behind them it is very difficult to match their marketing might.

Originally posted by @John Perry :

@Robert Adams do you know if  that is also how OpenDoor operates...with the 12% Charge and the 7% commission?    It makes sense as I went through about 20 of their deals in Vegas and was shocked to see the delta between the OpenDoor purchase price and their listing price was very small....as low as 2%.   However given they make their money on the 19% in fees it makes sense.    

We tried competing in this space, but with $400M in funding behind them it is very difficult to match their marketing might.

 Where do you see the 12% charge?

https://www.opendoor.com/w/pricing

OpenDoors charges vary, but still a major ripoff for a sellers bottom line..  They will nickel and dime a seller to death for repairs even after charging a ridiculous 10-12% (or more) amount of fees..  Their offers look competitive initially but quickly turn ugly when all the fees and fine print is disclosed..  Hopefully a cooling market will put them under, but the backing they have by Lennar (and whoever else is behind this debacle of an idea) is gonna keep them around for awhile, unfortunately..

They use old and low comps to justify their "fair" offers. The open door agent represents the buyer NOT the seller. They are NOT looking out for the seller. Sellers that don't look at the hidden details lose out big time. 

I've studied Open Door Model, looked at a few of their recent purchased and offers,  the math would NOT make sense for any Private Joe Blow realtor/investor, the profit margins would be way too small to cover for any overhead and Operations.

Yet, even with a volume based model, I don't see how they are profiting enough to cover for their staff,  surveyors, inspectors, their own so called Home consultants, etc, oh and of-course still find a way to pay back some percentage to their funds/ angel investors? They are making offers of 90-92%% of the value of the home minus their 10-12% carrying cost fee and some 7-10% repair cost.. even at that final number does anyone here think you could sustain and grow that business model if you where to try and make these type of offers?,,  The examples I studied had them at 10-13K actual dollar Net profit per property minus staff cost.

With these numbers, anyone at bigger pockets care to dive in and explain how this is a profitable and sustainable business model? did their angel/institutional investors get sold on something that may not turn out to be what is seemed? The more properties they buy the more staff they have to hire.

I've submitted my house to Opendoor as a seller.  Their offer came back right at what my realtor was suggesting I list the house at.  The Opendoor offer was 372k, at closing I have to cut them a check for 9.5% of that 372k, roughly 35k.  That leaves me with 337 in my pocket.  There are no additional fees, commissions, nothing.  I'm not sure where you guys are all getting your numbers from.  

I understand why a realtor wouldn't like their services, they are basically the Carvana of housing.  My sister sells cars and hates Carvana, my friend, who also happens to be my realtor (he's also an appraiser), is not crazy about Opendoor either.  That said he was very surprised at the offer they've made.  I'm going to have him go over the contract to make sure I'm not missing anything (and yes, I'll gladly pay him for his time), but so far it appears to be very fair and very legitimate.

Regarding inspections and repairs, there is a kick out clause in the contract, that if I'm not in agreement on the requested repairs I can back out of the deal with no obligations.

-John

@David Staples, I've been waiting for that response.....  this website came up in a google search of opendoor reviews, so I read through and felt I should respond with my experience.  My guess is the offers are localized and may vary from town to town and offer to offer, this is just my experience.

Thanks for the compliments on my well written detail.  I'm actually an IT guy, so writing is not my strong suit.

-John

@John McCool, ok, i need some clarity, "Regarding inspections and repairs, there is a kick out clause in the contract, that if I'm not in agreement on the requested repairs I can back out of the deal with no obligations"

so are you saying that their offer of 372k - the 9.5% which gets you 337 in your pocket does not yet include their potential deductions for post inspection results? 

thanks for helping us understand.

-Mike

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