When will Opendoor close its doors?

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When will Opendoor close its doors?

Chris Martin
Investor · Willow Spring, NC · Member since 2009 · 5k+ posts · 3k+ votes

The homebuyer/flipper company Opendoor Technologies (OPEN) is starting to look like a zombie company.

Last quarter, they produced negative gross margins (-12.6%) and lost $928 million in operations. Their market cap (number of shares times stock price) is $1.08 billion as of market close Friday.  Their balance sheet is in tatters. DOOR assets consist of $6.1B in inventory and $3.25B in liquid assets (cash, restricted cash, marketable securities) BUT $3.37B in the current portion of non-recourse asset-backed debt. Their total debt load (including convertible notes) is $8B. Details are available for investors to see via their latest 10-Q. 

Their stock price is off 95% since they made a weekly high closing price of $34.59 on 2/8/21. Yesterday, the stock closed at $1.71 per share. On November 2, they laid off 18% of their workforce, per page 33 of their 10-Q. The low OPEN market cap makes me think that new equity financing is out of the question. Their borrowing capacity (page 16) seems like it is adequate but only if they can avoid a couple quarters of losses like they have just experienced. We are in the slower, seasonally impacted, transaction impaired, phase of the market. Couple that with bloated inventory and two quarters of losses is feasible. 

The Management’s Discussion and Analysis of Financial Condition starts on page 32 of the 10-Q. Under Current Housing Environment OPEN management says several things that I consider 'red' or 'yellow' flags. OPEN management statements are 'quoted in italics', my comments are in bold:

'While we had anticipated a slowdown in the housing market from peak levels, the speed of adjustment realized earlier this year was much faster than expected and sharper than typical seasonal trends.' - really? The Fed telegraphed rate hikes well in advance, and the impending impact was well known in the industry. At least you admit you failed to see it. Mgmt, you missed. Why are you not fired?
'...we have continued to adjust down listed prices on our inventory to stay in-line with the market and drive resale clearance.'  - it appears decay in gross margins will continue into the future

'...we have recorded inventory valuation adjustments of $573 million ... during the three ... months ended September 30, 2022' - It seems this impairment will impact future quarters when the sales are realized. Perhaps $1B losses are possible in 2023Q1 and Q2
'We have also proactively reduced our acquisition pace via higher spreads embedded in our offers' - Coupled with a slowdown in the market, the question becomes if your anticipated 'higher spread' will actually materialize. My hunch is that your inventory problem will only continue for the foreseeable future and gross margins will remain distressed.   

There are more. They go on to talk about inventory management and say homes "on the market" for greater than 120 days... represented 21% of our portfolio, compared to 15% for the broader market... In other words, OPEN is underperforming the market. I'm not really surprised. I prefer to use 90-day intervals for quick turns when in hot markets because DOM is compressed. I guess 120-day is reasonable given the market is in correction. 

Upshot #1
So... I turned to my local data sets (county downloads) to see what, if anything, I can glean from the local market. My last SD (Snapshot Date) was 11/2/22. At that time OPEN owned 274 properties in WC (Wake County, NC) which includes Raleigh. Here's what is alarming: Their house inventory at SD held greater than 90 days is 60% of their WC holdings. Here's a quick look at their inventory age (dates are 2022:)

Date  Number of Properties
Before August 165
Aug 59
Sept 31
Oct 19

As OPEN says on page 35 they "significantly reduced our offer pace and subsequent closings of new home acquisitions in light of our risk management objective" and it shows in the overall Raleigh market. They are buying less, but they are still buying. Most likely, the recent closings represent contractual obligations from (potentially) many months ago. In November, OPEN bought 25 houses per public record. Sidebar: they bought two houses on 12/2, the day they laid off 18% of the workforce.

I took a quick look at some of their inventory. I couldn't automate this analysis, so I picked some properties and ran numbers by hand. That's why there are only a few semi-random picks (if I saw a street name I knew, then I picked it.) Post edit: The table is not ideal - "P Date" = Purchase Date; stamps = Tax Stamps Paid; PP = Purchase Price; NFS = Not Yet For Sale;  SPrice = Sale Price

P Date stamps PP Listed? SPrice Cut? Amt?
7/21 854 427,000 Pending 391,000 11/10 13,000 541 TEXANNA WAY Holly Springs
7/15 772 361,000 NFS 361,000 ? ? 604 SUNSET DR Fuquay
6/30 711 355,500 ForSale 321,000 11/17 6,000 1317 GREENBRANCH Raleigh
6/22 543 271,500 ForSale 247,000 10/20 6,000 5269 WINDY HILL Raleigh
5/31 727 363,500 SOLD!! 346,000 810 LAURENS WAY Knightdale
5/17 928 464,000 Pending 413,000 11/17 15,000 7228 OAK VILLAGE Fuquay
3/28 637 318,500 SOLD!! 300,000 11/30 1348 BROMPTON Garner

Buying a property for $318,500 and selling it for $300,000 is not a sustainable business model. 

Upshot #2
OPEN may be open (no pun intended) to moving inventory. By that, I mean lowering price so a real investor can buy it. This may be an opportunity going forward. Time is on the side of the buyer. For me personally, I'd be exploring this space as a potential LT investment. Please post if you see this as a potential opportunity. 

Upshot #3
OPEN may present opportunity for equities traders via PUT contracts. There were some profitable options chains last week and I am watching for trading opportunities. 

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Ryan Moyle
Real Estate Broker · Indianapolis, IN · Member since 2022 · 6 posts · 4 votes
3y

Such a great, well thought-out post Chris. I work in the Raleigh market and haven't been able to figure out how Opendoor is still hanging on, not to mention still actively buying houses. I've had 2 situations with OpenDoor recently.

1. Beginning of September, I represented a client buying a house from Opendoor in the Margots Pond subdivision of Wake Forest. Opendoor had purchased the property for 570k. The original buyers before Opendoor had only purchased it for 535k, 4-5 months beforehand. With Opendoor having a 5% fee when they buy from you, it pretty much allowed the original owner to break even. Opendoor did zero updates, if anything the house looked cleaner when they bought it vs when they listed it. They originally listed for 612k in May, my buyers closed on it for 545k in early September. It's important to note that although Opendoor was only losing money on the deal, or their investors were, they were fairly smooth to work with.

2. I made an offer on a house in Durham that Opendoor had also offered on. Needed a complete cosmetic rehab, HVAC, roof, kitchen and baths updated, flooring, paint. Seller had smoked in the house for 5-10 years as well. Completely fixed up/flipped, the house was worth maybe 315-330k. We were trying to buy at around 80% of ARV minus repairs. I believe I came in somewhere around 200-210k. Opendoor offered like 285k. It seemed like they were buying the property at ARV minus repairs, potentially just focusing on appreciation. This closed out less than 5 weeks ago, right around Halloween. I'm sure they charged the seller that 5% service fee as well.

This second situation was very surprising to me. I follow the MLS everyday in the Triangle area and am constantly looking for deals, I see the price drops on Opendoor properties every week. Most of those price drops are now below what they paid for it, some significantly below what they paid. At the time they made that offer, their stock was at an all time low. How could they logically be making that offer? I wasn't surprised we got outbid, it was just the amount we got outbid by. It reminded me of that scene in War Dogs when Jonah Hill gets outbid. There's little to no profit on the flip, especially paying out a buyer's agent commission. I would love to know what equations and criteria they use to buy their deals. Not that it affects me, but hopefully on that one they have a different exit strategy in mind.

I understand that throughout parts of 2020-2021, early 2022. You could buy deals and after 5 months they might appreciate 10% just sitting, or more. Then inventory was so low, you had buyers offering even higher amounts just so they could win the bidding wars. But that is not the current market in late 2022. Like you said that, buying a property for $318,500 and selling it for $300,000 is not a sustainable business model. It seems to me they're still doing it. The only thing you can additionally account for is that 5% service fee they charge, but they still turn around and pay a 2.4% buyer's agent commission on most of their deals. I tend to just study their situation deal by deal, but they're obviously losing money as a whole too. 

With Redfin done buying, Zillow done for now too. Opendoor just did layoffs, changed a handful of their leaderships roles. I can't see Opendoor continuing on too much longer.

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  • Ryan Moyle
    Real Estate Broker · Indianapolis, IN · Member since 2022 · 6 posts · 4 votes
    3y

    Such a great, well thought-out post Chris. I work in the Raleigh market and haven't been able to figure out how Opendoor is still hanging on, not to mention still actively buying houses. I've had 2 situations with OpenDoor recently.

    1. Beginning of September, I represented a client buying a house from Opendoor in the Margots Pond subdivision of Wake Forest. Opendoor had purchased the property for 570k. The original buyers before Opendoor had only purchased it for 535k, 4-5 months beforehand. With Opendoor having a 5% fee when they buy from you, it pretty much allowed the original owner to break even. Opendoor did zero updates, if anything the house looked cleaner when they bought it vs when they listed it. They originally listed for 612k in May, my buyers closed on it for 545k in early September. It's important to note that although Opendoor was only losing money on the deal, or their investors were, they were fairly smooth to work with.

    2. I made an offer on a house in Durham that Opendoor had also offered on. Needed a complete cosmetic rehab, HVAC, roof, kitchen and baths updated, flooring, paint. Seller had smoked in the house for 5-10 years as well. Completely fixed up/flipped, the house was worth maybe 315-330k. We were trying to buy at around 80% of ARV minus repairs. I believe I came in somewhere around 200-210k. Opendoor offered like 285k. It seemed like they were buying the property at ARV minus repairs, potentially just focusing on appreciation. This closed out less than 5 weeks ago, right around Halloween. I'm sure they charged the seller that 5% service fee as well.

    This second situation was very surprising to me. I follow the MLS everyday in the Triangle area and am constantly looking for deals, I see the price drops on Opendoor properties every week. Most of those price drops are now below what they paid for it, some significantly below what they paid. At the time they made that offer, their stock was at an all time low. How could they logically be making that offer? I wasn't surprised we got outbid, it was just the amount we got outbid by. It reminded me of that scene in War Dogs when Jonah Hill gets outbid. There's little to no profit on the flip, especially paying out a buyer's agent commission. I would love to know what equations and criteria they use to buy their deals. Not that it affects me, but hopefully on that one they have a different exit strategy in mind.

    I understand that throughout parts of 2020-2021, early 2022. You could buy deals and after 5 months they might appreciate 10% just sitting, or more. Then inventory was so low, you had buyers offering even higher amounts just so they could win the bidding wars. But that is not the current market in late 2022. Like you said that, buying a property for $318,500 and selling it for $300,000 is not a sustainable business model. It seems to me they're still doing it. The only thing you can additionally account for is that 5% service fee they charge, but they still turn around and pay a 2.4% buyer's agent commission on most of their deals. I tend to just study their situation deal by deal, but they're obviously losing money as a whole too. 

    With Redfin done buying, Zillow done for now too. Opendoor just did layoffs, changed a handful of their leaderships roles. I can't see Opendoor continuing on too much longer.

    3Reply
  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    3y
    Quote from @Chris Martin:

    The homebuyer/flipper company Opendoor Technologies (OPEN) is starting to look like a zombie company.

    Last quarter, they produced negative gross margins (-12.6%) and lost $928 million in operations. Their market cap (number of shares times stock price) is $1.08 billion as of market close Friday.  Their balance sheet is in tatters. DOOR assets consist of $6.1B in inventory and $3.25B in liquid assets (cash, restricted cash, marketable securities) BUT $3.37B in the current portion of non-recourse asset-backed debt. Their total debt load (including convertible notes) is $8B. Details are available for investors to see via their latest 10-Q. 

    Their stock price is off 95% since they made a weekly high closing price of $34.59 on 2/8/21. Yesterday, the stock closed at $1.71 per share. On November 2, they laid off 18% of their workforce, per page 33 of their 10-Q. The low OPEN market cap makes me think that new equity financing is out of the question. Their borrowing capacity (page 16) seems like it is adequate but only if they can avoid a couple quarters of losses like they have just experienced. We are in the slower, seasonally impacted, transaction impaired, phase of the market. Couple that with bloated inventory and two quarters of losses is feasible. 

    The Management’s Discussion and Analysis of Financial Condition starts on page 32 of the 10-Q. Under Current Housing Environment OPEN management says several things that I consider 'red' or 'yellow' flags. OPEN management statements are 'quoted in italics', my comments are in bold:

    'While we had anticipated a slowdown in the housing market from peak levels, the speed of adjustment realized earlier this year was much faster than expected and sharper than typical seasonal trends.'     - really? The Fed telegraphed rate hikes well in advance, and the impending impact was well known in the industry. At least you admit you failed to see it. Mgmt, you missed. Why are you not fired?
    '...we have continued to adjust down listed prices on our inventory to stay in-line with the market and drive resale clearance.'  - it appears decay in gross margins will continue into the future

    '...we have recorded inventory valuation adjustments of $573 million ... during the three ... months ended September 30, 2022' - It seems this impairment will impact future quarters when the sales are realized. Perhaps $1B losses are possible in 2023Q1 and Q2
    'We have also proactively reduced our acquisition pace via higher spreads embedded in our offers'     - Coupled with a slowdown in the market, the question becomes if your anticipated 'higher spread' will actually materialize. My hunch is that your inventory problem will only continue for the foreseeable future and gross margins will remain distressed.   

    There are more. They go on to talk about inventory management and say homes "on the market" for greater than 120 days... represented 21% of our portfolio, compared to 15% for the broader market... In other words, OPEN is underperforming the market. I'm not really surprised. I prefer to use 90-day intervals for quick turns when in hot markets because DOM is compressed. I guess 120-day is reasonable given the market is in correction. 

    Upshot #1
    So... I turned to my local data sets (county downloads) to see what, if anything, I can glean from the local market. My last SD (Snapshot Date) was 11/2/22. At that time OPEN owned 274 properties in WC (Wake County, NC) which includes Raleigh. Here's what is alarming: Their house inventory at SD held greater than 90 days is 60% of their WC holdings. Here's a quick look at their inventory age (dates are 2022:)

    Date  Number of Properties
    Before August 165
    Aug 59
    Sept 31
    Oct 19

    As OPEN says on page 35 they "significantly reduced our offer pace and subsequent closings of new home acquisitions in light of our risk management objective" and it shows in the overall Raleigh market. They are buying less, but they are still buying. Most likely, the recent closings represent contractual obligations from (potentially) many months ago. In November, OPEN bought 25 houses per public record. Sidebar: they bought two houses on 12/2, the day they laid off 18% of the workforce.

    I took a quick look at some of their inventory. I couldn't automate this analysis, so I picked some properties and ran numbers by hand. That's why there are only a few semi-random picks (if I saw a street name I knew, then I picked it.) Post edit: The table is not ideal - "P Date" = Purchase Date; stamps = Tax Stamps Paid; PP = Purchase Price; NFS = Not Yet For Sale;  SPrice = Sale Price

    P Date stamps PP Listed? SPrice Cut? Amt?
    7/21 854 427,000 Pending 391,000 11/10 13,000 541 TEXANNA WAY Holly Springs
    7/15 772 361,000 NFS 361,000 ? ? 604 SUNSET DR Fuquay
    6/30 711 355,500 ForSale 321,000 11/17 6,000 1317 GREENBRANCH Raleigh
    6/22 543 271,500 ForSale 247,000 10/20 6,000 5269 WINDY HILL Raleigh
    5/31 727 363,500 SOLD!! 346,000 810 LAURENS WAY Knightdale
    5/17 928 464,000 Pending 413,000 11/17 15,000 7228 OAK VILLAGE Fuquay
    3/28 637 318,500 SOLD!! 300,000 11/30 1348 BROMPTON Garner

    Buying a property for $318,500 and selling it for $300,000 is not a sustainable business model. 

    Upshot #2
    OPEN may be open (no pun intended) to moving inventory. By that, I mean lowering price so a real investor can buy it. This may be an opportunity going forward. Time is on the side of the buyer. For me personally, I'd be exploring this space as a potential LT investment. Please post if you see this as a potential opportunity. 

    Upshot #3
    OPEN may present opportunity for equities traders via PUT contracts. There were some profitable options chains last week and I am watching for trading opportunities. 


    U have to deduct probably 3 to 4% off those sold prices for cost of sale so its even worse for the bottom line especially at those price points.
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  • Carlos Ptriawan
    Member since 2019 · 7k+ posts · 4k+ votes
    3y

    What made you think big investment companies can't buy Opendoor, write off their debts, buy their asset 1/3 of the price, convert it to rental property for 10 years, and sell it in 2032 ??

    Same thing happened in coal mining like 10 years ago, everything seems like they're going for bankruptcy 10 years ago, but they make record profit now.

    It's just a matter of time before someone smarter and has more money than me, will buy the ruin of open door if they go for bankruptcy lol :)

    2Reply
  • Chris SeveneyBusiness Member
    Moderator
    Investor · VA · Member since 2015 · 21k+ posts · 19k+ votes
    3y

    @Chris Martin

    They continue to get crushed and have significant inventory to move which could also drag down prices in some other markets. We recently put an offer in on a home that they paid 10% more than what it was worth. We went back and forth on counters and were still far apart. We will try again in 30 days

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  • Adam SchneiderPro Member
    Lender · Raleigh, NC · Member since 2012 · 957 posts · 639 votes
    3y

    A few observations about OpenDoor. (BTW, I always appreciate the big picture view that Chris Martin provides). First, when OpenDoor presents its purchase number, that is a deceptive number because it bakes in the repair negotiations with the seller as a line item cost on the HUD. So, OpenDoor's true purchase number is less by some unknown amount than it appears when one of us looks at public records for a particular property. But...there's no way that that line item cost is enough to cover the delta between the buy-sell numbers to leave a profit. If you look at the Triangle market, and focus on Wake County, here are some numbers I found interesting: OpenDoor sold 1.5% of the inventory sold on Triangle MLS in the last 12 months. So, what % of the Actives are OpenDoor properties? Not 1.5%. They have 4.7% of the actives, 14% of the 60+ DOM actives, and 20% of the 120+ actives. This tells us that they missed the boat with their numbers, and it doesn't look like they are dumping inventory....thoughts?

    2Reply
  • Chris Martin
    OP
    Investor · Willow Spring, NC · Member since 2009 · 5k+ posts · 3k+ votes
    3y

    @Adam Schneider As your data confirm, the general consensus is that (well put) "they missed the boat with their numbers." Those are astonishing numbers: 14% of the 60+ DOM actives, and 20% of the 120+ actives. IMO any investors active in this market should start looking at OPEN inventory (see window dressing below.) I'm not buying for my partners/company, but would be interested to listen to anyone (not directed to any individual) who thinks they have some greater insight into how a person would play this market, assuming you think there is an opportunity. 

    Summary of my thoughts: 

    - unlike the past few (or more) years, the Triangle (and the US) has returned to a seasonal market that is slower at this time of year

    - overall market is against OPEN - higher rates mean lower affordability; sales velocity has decreased considerably

     - carrying costs and cost of capital for OPEN will be higher going forward

    - window dressing - the company may be motivated to get inventory off the books before year end (so put in lowball offers now and close by YE)

    - Their $830M Market Cap is problematic for raising new capital

    - who's left? Bulk retail buyers have left the market and that isn't likely to change in the next two reporting periods

    More concern - Interest payments. Here are historic payments on outstanding debt, which will certainly increase going forward:

    $68M2022Q1
    $89M2022Q2
    $115M2022Q3

    The average interest rate on their current outstanding debt is in the 3.19% to 4.13% range for Non-Recourse Asset-backed Debt. Of their $8.3B capacity, they have borrowed $5.472B or 68%. Of their Asset-backed Mezzanine Term Debt Facilities, they have $1.6 billion outstanding, non-current debt (not due within 12 months) attributed to their Term Debt Facility 2020-M1 and Term Debt Facility 2022-M1 at a massive 10% rate.

    They are heavily leveraged, not profitable, staring at much higher financing costs, and have run into a rapidly slowing housing cycle. This could be deadly.

    Here is one more local anecdotal data point to this story. In Wake County, OPEN has sold 12 properties since 11/1/2022 yielding at best a -7.3% return, but as Adam pointed out, that's not including cost of sales and any OpEX OPEN incurred.

    REIDTaxStampSale $PurchStampPurch $P Date% from Purch
    363387640320,000661330,5007/28/22-3.2%
    131911540270,000668334,0006/30/22-19.2%
    157669474237,000464232,00010/03/222.2%
    346705682341,000768384,0005/27/22-11.2%
    62377660330,000609304,5007/19/228.4%
    3543281012506,0001082504,1008/8/220.4%
    225648848424,000828414,0008/25/222.4%
    205746664332,000592296,0008/15/2212.2%
    213049678339,000858429,0009/23/22-21.0%
    337937650325,000776388,0007/1/22-16.2%
    405609768384,000909454,5006/22/22-15.5%
    414830553276,500670335,0006/28/22-17.5%
    Averages340,375367,133-7.29%-7.3%
    Totals4,084,5004,405,600-321,100-7.3%

    Times are going to be tough for Opendoor for the next two quarters at a minimum. How they handle inventory and maintain financing sources will determine their ability to continue as a going concern. 

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  • Adam SchneiderPro Member
    Lender · Raleigh, NC · Member since 2012 · 957 posts · 639 votes
    3y

    @Chris Martin -- I agree with you on your comments, for what it's worth.

    1Reply
  • Jared Prevost
    Lender · Tampa, FL · Member since 2020 · 113 posts · 119 votes
    3y

    @Chris Martin

    Love how you're digging into the 10-Q this deeply, really awesome research.

    What's interesting is that it's not only iBuyers like Open that are hurting, companies that built their business model around sourcing deals for iBuyers and hedge funds are really hurting as well.

    Mark Spain has an office on our floor and their sales folks have told us that their 'guaranteed cash offer' is an assignment to a hedge fund or iBuyer. They've basically lost their largest buyer on the wholesale side and seem to be nothing more than a discount brokerage now

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