Will Opendoor permanently disrupt the real estate industry?

Question

Now that Opendoor is a public company we are seeing more information about their business strategy and overall financial metrics. The company flipped roughly 18k homes in 2019 and pretty much broke even doing so. The company is currently valued at $13 billion and is expected to take over the real estate industry and be worth hundreds of billions in the future. I'm skeptical of their overall business plan and believe that they are going to have a challenging time improving their margins and becoming profitable. From what I understand they offer slightly below ARV less repairs less a 5% service fee. How can you make a profit with that model? Curious to hear your thoughts?

Michael C. · Answer

Open door lost a bunch of money on a house in my neighborhood.  Ended up selling for less than they purchased it for. Can’t win them all I guess.

I think Redfin is more of a market disruptor, 1% list fee. Sales Agents are salaried too. When we sold with them they gave us a whole report on pricing and comps, professional 3D tour and everything. Vs a traditional local friendly agent we talked to first who gave us a guesstimate listing price without showing us any data and wanted the standard commission.

5-6% in my mind is a dead old model, I won’t pay that when better companies can do it cheaper and better.
Not sure why people hate car dealers for making a few bucks but love paying there agents thousands of dollars.

William Jenkins · Answer

Account Closed - Real estate is inherently an inefficient market and I don't see that ever going away.  I could certainly see some efficiencies coming into the industry (blockchain title, etc.), but the overall business of buying, selling, and brokering is and will always be a people/personalty/deal making business.  I don't see brokers, investors, or developers going away anytime soon.

Every example you mentioned is a commodity type business.  Real estate is not a commodity and never will be.

Greg Weik · Answer

Account Closed you are 100% correct. Zillow is also buying houses everywhere and flipping them - they seem to be shooting for only a very nominal upside and instead of a bit hit, they are going for volume.  Absolutely brilliant.

Listing agents beware!

Everything in business today is based on efficiency and scalability.  If you don't truly adopt those concepts, expect to be gone.

Bryan Frost · Answer

Totally agree. If Opendoor is worth 13B then I should be able to sell my flipping business for somewhere around $10m-$20m. Lol.

William Jenkins · Answer

Account Closed - I am a broker, but I do relatively few residential deals.  I really don't have that much skin in the game when it comes to changes in the industry.

As stated above, Opendoor has basically broken even since inception and this has been in one of the BEST real estate markets of all time.  You could have literally bought anything in the last few years and sold it for more just a few months later.  What happens when the market slows down or god forbid goes breakeven/negative?  They are picking up pennies in front of a steamroller and it will flop in my opinion.  Same for Zillow.

A property isn't a stock with a real time quote.  There isn't an exact market value that they can use to write a discounted offer on, close, and then just "relist it" for a profit.  If the 5% spread stated above is true, then I worry even more for them.  That could be a rounding error on a valuation.

Russell Brazil · Answer

Im more profitable than Open Door. I guess I should be worth $20 billion

Jonathan Greene · Answer

Talking about Opendoor now is like asking if the original Xbox is still good. Time has passed on them and their valuation is ludicrous. I see a huge flop coming on them and all of the other offshoot models.

Enrico Angella · Answer

@Bryan Frost very interesting question.

I’m very skeptical about Opendoor long term profitability and business model. If they can barely break even in such a favorable market, how can they survive a housing market downturn?

Sometimes institutional investors and Wall Street love disruptive companies, even though they seem to lack a solid business model or just a way to make real money, like Uber, WeWork and so on.

Justin Thorpe · Answer

@Bryan Frost

I think they will use that valuation to buy or build a real business.

Thomas Tarry · Answer

@Bryan Frost On Monday night I read a white paper about Opendoor by an Investment firm.  Completely independent with no bias.  Bottom line:  Opendoor does not offer a significant benefit and the author doubted the companies long term prospects.

Will Opendoor permanently disrupt the real estate industry?

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