If OpenDoor goes big time, will it wipe out the little guy?

Question

Startup Pays Cash to Buy Homes, Flip Them: OpenDoor’s approach appeals to sellers who need to move quickly

Michael Hayworth · Answer

First, if you're not a WSJ subscriber, you can google some words in the intro, such as

"When Luke Dalien and his family needed to quickly sell their Phoenix-area house, they didn’t turn to a real-estate broker."

When you click on an article in a Google search, you'll get the whole thing.

As to OpenDoor itself....it's an obvious next step. The way of the world is consolidation and globalization. But I'm not too concerned yet, because they have a lot of challenges to overcome:

1. Competition. There is significant competition for houses in good markets. So most people will end up getting bids from more than one "We Buy Houses" company. Either they end up overpaying, or they get to buy a limited selection. It's convenient to be able to get a bid for your car at CarMax, but most people use that as a floor to negotiate with others.

2. Construction crews and quality control. We have a tremendous shortage of skilled construction workers in the U.S. Largely, that's because we tell anyone with a brain they need to go to college - even if they end up $100K in debt for a liberal arts degree (philosophy/polisci for me....employers were beating down my door, man!) and working at Starbucks. The building trades gets the American kids who were considered too dumb to go to college, or Mexicans - and Trump wants to deport most of them. There just aren't enough good people to go around. And all the good renovation crews have plenty of work. So OpenDoor will eventually struggle to hire. Either they pay more than they'd like to get a good GC like my company, or they take whoever will work for the rates they pay, like Five Brothers did in the PPC field. If they pay more, margins suffer. If they hire cheap crews, quality suffers and OpenDoor houses get a bad reputation.

3. Permits. Let's be honest...in most of the country, investors don't pull permits for most of the work they do. But cities want their revenue. I had an inspector pull up on a jobsite last week and require me to pull a permit for replacing one sheet of drywall. Gotta pay the man. But that adds costs and extends timelines. it means every time you raise one of those 5'5" high showerheads or move an electrical outlet, you gotta use a licensed trade instead of having a capable handyman do it. THAT really increases costs. OpenDoor is gonna be a big, juicy target. They'll have to pull permits on everything in most jurisdictions. There again, more costs.

Overall, I think they can succeed, but it's not nearly as much of a slam dunk as they probably told the VCs.

Jay Hinrichs · Answer

Logan Allec I don't see it razor thin margins.. and in texas tax's will eat your lunch if you have to hold for any period of time. Not to mention foundation issues etc in that market.

I can see them taking on a city like Memphis though.. 80 million could probably control much of the turn key stock and give that type of market a run for the money...

200 homes in 2 years frankly is not very much.. I do that am I one little guy in Orygun and my ROI is better.. so not sure how they can fund a big machine and make a profit.

Alberto Camacho · Answer

They are not the first to enter the DFW market. I'm sure they wont be the last. Wipe out the little guy? not likely.

Jay Hinrichs · Answer

@Alex Craig I just mentioned Memphis because I knew you smart dudes would chime in LOL.... I just don't see it at the price point in the article and the profit points.

Its much like when I was buying foreclosure in Orygun.. we had tight margins and you can spin a LOT of dollars to make very little money and we were doing it for ourselves not for VC guys or investors.

Alex Craig · Answer

@Jay Hinrichs I think Memphis is way to complicated for this model. While some really smart guy created a program to evaluate these homes, most sites like Zillow dramatically miss on values, neighborhood evaluation and schools.

I agree with @Michael Hayworth in that home owners will see what Open Door will pay and then will shop what others will pay. "We Buy Houses" signs are everywhere and there are a lot of hungry wholesalers who do mass mailings and also have their signs on every corner in areas that are most likely to buy into this model. I see Open Door as a very sophisticated wholesaler. I also seem them acquiring homes that contractors will fix up, but they will lack the basic market knowledge of areas and their homes will sit for a while and certainly buy in the wrong areas where these homes will get vandalized. There are a lot of smart people who go into developing these sites and programs, but these same smart people are not smarter then the most basic Real Estate manager or Property Manager who live and operate in the market. Several hedge funds bought and then sold quickly after they bought these large portfolio's of homes. Smart people work there, but not smart enough to know they can't put together a cookie cutter model across the board for every market and expect to succeed or think the people they have hired within the market have any other interest but their own.

Alex Craig · Answer

I don't see how this model works. If I understand correctly, you have a very motivated homeowner who is willing to take a quick offer which is obviously a low ball offer. Then Open Door goes into the home, fixes it up and puts it back on the market. Basically the have to get a huge discount, right? How is Open Door any different then a wholesaler with "We Buy Houses" sign? Then when Open Door acquires these homes, they are responsible for getting the home fixed up within a certain price point, which means they will be working with contractors who work on lower margins, but typically are the ones that can manage their budgets or time. I assume Open Door will leverage more business into better pricing, but the contractors will certainly pull off a Open Door job to work other jobs that are more profitable. From reading about Open Door, it seems like they think the rehab process can be carved out easily into a process that is easy to manage. Good luck, I know people in the market who have been doing this for years that still struggle with the rehab portion of their business.

Account Closed · Answer

looks like they are only in Dallas and Phoenix area Did you try pricing a home?

Julie Marquez · Answer

Who are the other big guys that compete with OpenDoor?

Troy Gravett · Answer

They're operating like a huge hedge fund buying at thin margins. They're also charging 8-9% in fees to the sellers. That's where they're making their money. Even if they break even on the flip, they collect $20k in fees on a $250k house.

If you're a potential seller, what would make you chose them if you can buy from the local guy without those fees?

Roberto Pineda · Answer

Like everyone else is saying...their business model isn't any different than any other wholesaler/rehabber out there, including the We Buy Ugly Houses franchises. How would Open Door wipe out the little guy when no one else has been able to do it with the same model?

And in DFW, we've already had large hedge funds make their way into the market and pay 80 cents on the dollar...little guys are still around.

Unless you think the fact that they are a 'start up' makes them special in some way? A new angle of some kind?

If OpenDoor goes big time, will it wipe out the little guy?

If OpenDoor goes big time, will it wipe out the little guy?

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