Idk but maybe this? "But OpenDoor is unique in that it owns all the homes it lists for sale, countering the prevailing trend in Silicon Valley of solely running a marketplace that matches buyers and sellers. As a result, OpenDoor’s strategy is steeped with risk, potentially backfiring if the economy tailspins."
I'm not sure of the difference on the buying side, but their selling side seem to be quite different than the normal approach https://www.opendoor.com/homes
Yea, basically this seems to be those "WE BUY HOMES FAST WITH CASH!!!" signs you see jammed all over gas stations and highway medians, except with a responsive web design and javascript.
What is the case is that finding cash buyers often requires some informal connections. My metro has a fair amount of flipping going on, but it's hard to point to the marketplace where all this occurs. There's the foreclosure trawlers, the agents who knows a guy who just sold his latest project and is looking for the next one, the guys from the billboard who are looking for total wrecks, ... It's daunting.
The biggest difference is price. Those companies offer 65 to 80 cents on the dollar for homes. We offer full market value, and take fees that are comparable to a traditional transaction when you consider the full cost of selling. (Our total fees are generally 8 to 10%)
The article has many key inaccuracies that the reporter refused to correct, mostly around profit. If we made $20k per home, we'd give most of that back to sellers through higher offers and lower fees. And the data science team would panic, since their key metric is accuracy.
Thanks for your response. I am not knocking on you or the product because it is a lucrative market (if done right). So, you are taking the risk on the houses? Do you guys rent out the house? What happens if it doesn't sell?
OpenDoor is unique in that it owns all the homes it lists for sale, countering the prevailing trend in Silicon Valley of solely running a marketplace that matches buyers and sellers. As a result, OpenDoor’s strategy is steeped with risk, potentially backfiring if the economy tailspins...The company uses mostly debt financing to buy homes, improving returns. Mr. Wu declined to disclose OpenDoor’s debt terms but said they are superior to what a typical home buyer gets on a mortgage.
The combination of high leverage and complete property ownership seems incredibly risky to me. If the country-wide housing market turns sour, not only is the company left with swiftly depreciating assets on their balance sheet as real estate values drop and people stop buying homes, but they are also left paying (probably 1-2%) interest on houses that they "bought" with these loans for $300k, but that are now worth $200k.
But the overall concept of increasing liquidity in the market by cutting out the broker and his/her available hours, "automating" the valuation and bid process, using low short-term interest rates to flip houses, and pricing for volume and quick turnover is pretty cool. The key is sticking to "commodity" housing (cheap-mid range) and timing the market correctly.
Not a money person. ELI5 why it's not like dollar cost averaging on their part, if they're set up for long term? They might be stuck with more inventory in the dips, but they'd also be buying in the dips and they'd be selling higher when the market recovered.
As for housing risk, we spend a lot of time on this. A few points:
- Real Estate is very momentum driven and pretty slow. Markets don't crash in a day, like stocks. The fastest price changes in 2008 were around 3% per month for non-distressed homes in Phoenix (liquidity drops, but doesn't disappear). Our model includes "insurance" that goes up and down as market conditions change, and we believe it is pretty effective.
- Diversification by city matters a lot. Phoenix plunged in the recession. Dallas was flat. As we enter more cities, our inventory risk declines.
- The risk of another housing collapse (versus decline) is small. Debt to income ratios are sane, banks remain very cautious to lend, and there is a massive buy-to-rent industry now, led by Blackstone, that came about during the recession and quickly buys homes whenever they cross a price threshold to return rental yield.
If you're a technical person in SF and want to come by the office to learn more about our models and modeling pipelines (pricing, risk, days on market, etc) shoot me an email: jd@opendoor.com
This would be the key sticking point - sure you could theoretically try to unload houses and close your positions at the first whiff of a downturn, but it seems to me that liquidity would dry up much quicker now than in 2008 (30% decrease in existing home sale volume from 2006-2007, bottoming out at ~50% decrease in 2010, so pretty drastic) given how much tighter the market is, as you describe yourself.
You can also bet that Blackstone, who is effectively providing your business a baseline risk free rate of return right now, would immediately close their rent-to-buy fund if they saw any downturn in the existing house rental market, which is ultimately powered by consumer income strength. So if we don't see a meaningful increase in income, the tightness of housing liquidity would be my main concern in quickly offloading highly leveraged positions.
My medium-term outlook is that we will see the verticalization of existing urban cores - SF, downtown LA, NY, Miami, Chicago, Cincinnati, etc. We had a great boom of prosperity WWII that allowed for an unsustainable amount of suburbanization. We are now entering an era of cost-cutting, scale, and efficiency: suburbs will lose population due to their relatively high maintenance costs - roads, grids, plumbing, delivery, transportation. I'm not sure if diversification is the right strategy.
I've been following what you guys have been doing since when you were using the name HomeRun, and really like how you're trying to change the way real estate transactions function. Has OpenDoor considered the possibility of converting housing inventory you're "stuck with" during a downturn into rentals, or rent-to-buy, to weather a down-period, or is it better to just offload it to Blackstone and get it off your books?
Yes, it's an option we've discussed. It obviously depends on liquidity in the market at the time and the size of the decrease. It's worth remembering that housing has only crashed like this twice in 100 years, and that a lot of investors made a lot of money in the last downturn, if they were smart.
A good analogy may be CarMax, who shifted their mix in the recession towards distressed cars and ultimately kept revenue/profits reasonably consistent. Of note: This was at the same time car companies like GM and Ford were seriously at risk of bankruptcy.
<Real Estate is very momentum driven and pretty slow. Markets don't crash in a day, like stocks. The fastest price changes in 2008 were around 3% per month for non-distressed homes in Phoenix>
A home in a non-distressed market losing nearly a third of its value in a year is "pretty slow"? That's a scary use of the term in itself.
If the goal is to improve the house buying experience like uber did with taxi business. Let's go Opendoor, for too long the real estate agents took advantage from system
In the United States, buyers don't directly pay the realtor commission. The seller generally pays ~6%, but sometimes that's negotiated down. This commission is split between the buyer's agent and the seller's agent, with their brokerage typically taking a percentage. But a buyer wants to use an agent because their perception is that they're not paying for it, and most buyers aren't well versed with the house transaction process, which is complex.
You could certainly make the case that a transaction without agents would mean either more profit for the seller, or a lower house price for the buyer, but I think it will take many years until that is the norm. There are a huge number of laws built around real estate transactions, and the NAR is a major major lobbying entity.
I agree. And it's particularly insane given the degree to which the tasks traditionally performed by the realtor are now handled by more-informed buyers and sellers. Information used to be locked in physical listing books. It then moved online to disparate MLS's. Now you can view most listing data using a combination of Zillow, Realtor.com and regional localized brokerage websites. Good realtors still add some value, but framing it as a percentage of the transaction is entirely the wrong metric given how the industry has evolved in the past decade.
This is astute, and most RE startups don't understand the importance of buyers "not paying" and also needing to sign with a buyer's agent in order to visit and view homes for sale.
NAR's stated purpose is to protect the commissions of the real estate agents. In some ways it's nice that they're so forthcoming about that, versus other lobbying orgs.
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[ 1.5 ms ] story [ 69.0 ms ] threadI'm hoping to see alternatives to the "I-saw-the-house-flipping-infomercial-at-2AM-and-want-a-piece" crowd.
What is the case is that finding cash buyers often requires some informal connections. My metro has a fair amount of flipping going on, but it's hard to point to the marketplace where all this occurs. There's the foreclosure trawlers, the agents who knows a guy who just sold his latest project and is looking for the next one, the guys from the billboard who are looking for total wrecks, ... It's daunting.
The biggest difference is price. Those companies offer 65 to 80 cents on the dollar for homes. We offer full market value, and take fees that are comparable to a traditional transaction when you consider the full cost of selling. (Our total fees are generally 8 to 10%)
The article has many key inaccuracies that the reporter refused to correct, mostly around profit. If we made $20k per home, we'd give most of that back to sellers through higher offers and lower fees. And the data science team would panic, since their key metric is accuracy.
Thanks for your response. I am not knocking on you or the product because it is a lucrative market (if done right). So, you are taking the risk on the houses? Do you guys rent out the house? What happens if it doesn't sell?
If they don't sell, we lower the price until they do. Homes are hard assets, and always have a price. In many cases, we lose money.
The combination of high leverage and complete property ownership seems incredibly risky to me. If the country-wide housing market turns sour, not only is the company left with swiftly depreciating assets on their balance sheet as real estate values drop and people stop buying homes, but they are also left paying (probably 1-2%) interest on houses that they "bought" with these loans for $300k, but that are now worth $200k.
But the overall concept of increasing liquidity in the market by cutting out the broker and his/her available hours, "automating" the valuation and bid process, using low short-term interest rates to flip houses, and pricing for volume and quick turnover is pretty cool. The key is sticking to "commodity" housing (cheap-mid range) and timing the market correctly.
Perhaps they're hedging their exposure with property derivatives.
You can hedge against mortgage defaults, but it's not really the same thing.
As for housing risk, we spend a lot of time on this. A few points:
- Real Estate is very momentum driven and pretty slow. Markets don't crash in a day, like stocks. The fastest price changes in 2008 were around 3% per month for non-distressed homes in Phoenix (liquidity drops, but doesn't disappear). Our model includes "insurance" that goes up and down as market conditions change, and we believe it is pretty effective.
- Diversification by city matters a lot. Phoenix plunged in the recession. Dallas was flat. As we enter more cities, our inventory risk declines.
- The risk of another housing collapse (versus decline) is small. Debt to income ratios are sane, banks remain very cautious to lend, and there is a massive buy-to-rent industry now, led by Blackstone, that came about during the recession and quickly buys homes whenever they cross a price threshold to return rental yield.
If you're a technical person in SF and want to come by the office to learn more about our models and modeling pipelines (pricing, risk, days on market, etc) shoot me an email: jd@opendoor.com
This would be the key sticking point - sure you could theoretically try to unload houses and close your positions at the first whiff of a downturn, but it seems to me that liquidity would dry up much quicker now than in 2008 (30% decrease in existing home sale volume from 2006-2007, bottoming out at ~50% decrease in 2010, so pretty drastic) given how much tighter the market is, as you describe yourself.
You can also bet that Blackstone, who is effectively providing your business a baseline risk free rate of return right now, would immediately close their rent-to-buy fund if they saw any downturn in the existing house rental market, which is ultimately powered by consumer income strength. So if we don't see a meaningful increase in income, the tightness of housing liquidity would be my main concern in quickly offloading highly leveraged positions.
My medium-term outlook is that we will see the verticalization of existing urban cores - SF, downtown LA, NY, Miami, Chicago, Cincinnati, etc. We had a great boom of prosperity WWII that allowed for an unsustainable amount of suburbanization. We are now entering an era of cost-cutting, scale, and efficiency: suburbs will lose population due to their relatively high maintenance costs - roads, grids, plumbing, delivery, transportation. I'm not sure if diversification is the right strategy.
A good analogy may be CarMax, who shifted their mix in the recession towards distressed cars and ultimately kept revenue/profits reasonably consistent. Of note: This was at the same time car companies like GM and Ford were seriously at risk of bankruptcy.
A home in a non-distressed market losing nearly a third of its value in a year is "pretty slow"? That's a scary use of the term in itself.
In the United States, buyers don't directly pay the realtor commission. The seller generally pays ~6%, but sometimes that's negotiated down. This commission is split between the buyer's agent and the seller's agent, with their brokerage typically taking a percentage. But a buyer wants to use an agent because their perception is that they're not paying for it, and most buyers aren't well versed with the house transaction process, which is complex.
You could certainly make the case that a transaction without agents would mean either more profit for the seller, or a lower house price for the buyer, but I think it will take many years until that is the norm. There are a huge number of laws built around real estate transactions, and the NAR is a major major lobbying entity.
This is gross. We just put our London place on the market, and the total commission we will be paying (to a normal high street agent) is 1%
NAR's stated purpose is to protect the commissions of the real estate agents. In some ways it's nice that they're so forthcoming about that, versus other lobbying orgs.
The buying experience is a key part of that. If you're in Phoenix (or Dallas soon), check out our homes anytime. It's fun.