inside opendoor: what two years of transactions say about their prospects

Prepared by Mike DelPrete and Sib Mahapatra – www.mikedp.com – December 2016

Inside Opendoor: what two years of transactions say about their prospects


The goal of this analysis is to answer key questions about Opendoor’s business model and prospects:• How much money does Opendoor make per

transaction? Is Opendoor offering its customers a fair value for houses?

• How big could this model really get in the U.S.?

• Does Opendoor have a sustainable competitive advantage against competitors that might enter the space?


But first, an overview of its business model• Opendoor buys houses and owns them, acting as a

middleman (as opposed to a matchmaker) in residential real estate transactions.

• Opendoor won’t buy every house—qualifying properties include single-family homes built after 1960 with a value between $125,000 and $500,000.

• Opendoor makes money in two ways: from the service fees it charges, and from any difference between what it buys houses for and what it sells them for.

• Opendoor works with real estate agents, offering to pay full buyer commissions, as well as seller commissions if a sale comes from an agent.


Opendoor is building strong traction in its first market, Phoenix

Strong uplift during the end of 2016

The equivalent of more than 4 home sales each day


The price Opendoor buys homes at are tightly clustered

The average price paid by Opendoor for a home in Phoenix is $217,370

Sweet spot


Time is money: Opendoor typically relists homes 20 days after buying them


Opendoor typically lists homes for $20,000 more than it buys them for

Its pricing strategy shows a clear intention to make some money off each sale


On average, Opendoor sells houses for 5.5% more than what it buys them for

• The average appreciation in value is about $10,000 per home

• This does not include the investment Opendoor puts into each home

• The number is lower than what a typical home-flipper would expect


As of Dec 1, Opendoor was holding homes for an average of 98 days

This includes homes that were still actively listed for sale


Traction in its second market, Dallas, is ramping up quickly

Dallas has reached just under half the volume of Phoenix in its first three months.


Estimated 2016 revenues in the Phoenix market are north of $30 million


Opendoor breaks $1B in annual revenues by launching into 20 markets


An estimated unit economics breakdown shows slim margins

Estimated Unit Economics, Phoenix Amount (% of home value)

Revenue $31,479

Fees $19,563

Appreciation $11,912

Cost of Services $23,159

Closing costs on purchase (escrow, title, transfer tax) $4,347

Rehab (replacing carpets, landscaping, exterior/interior paint) $4,000

Holding costs (financing, property tax, utilities, HOA, home ins) $3,872

Buyer concessions (closing costs on sale, paid by Opendoor) $4,347

Buyer agent commission $6,592

Gross Margin $8,320

All costs are assumptions,not actuals.

Gross margin does not include costs such as salaries, marketing, tech, and overhead.


There is a high degree of risk in the modelOpendoor says three factors mitigate risk of holding homes:

• Data lets them detect and react to downturns faster

• Diversification across geographies

• Ability to wait out a downturn with a longer hold/rent-outOur take: Calling the market is one thing, but conviction

to act is another. Geographic diversification smooths risk in placid markets but provides less protection in a major downturn. Feasibility of waiting out a downturn depends on terms with debt issuer.


Possible sources of sustainable competitive advantage

• Proprietary automated valuation model (AVM)

• Access to capital

• Battle-tested and efficient flip process

Our take: Opendoor’s brand, flip process and AVM reduce costs and provide some protection. But competitive pressure will likely drive margin below where it sits today. The core customer experience—a fair, fast offer—is replicable by new entrants with deep pockets.


Concluding thoughts• For home-sellers willing to pay a premium, Opendoor

creates a dramatically smoother customer experience• Transaction data (unit margin, buying and selling 100’s of

homes/month with positive slope) suggests Opendoor’s business model is sustainable

• At scale, not unreasonable to see Opendoor generating over $1B in annual revenue and operating profitably in “normal” markets

• Two major hurdles: proving out risk management approach to decrease financing costs, and differentiating from new entrants to avoid a race-to-the-bottom price war that kills margin

• True disruptors are both better and cheaper than incumbents; Opendoor must address cost or will face a limited total addressable market


A note on dataThis analysis is based on MLS records, listings from Opendoor’s web site, the Maricopa City Assessor’s public property records, and public records sourced from Redfin. We used industry benchmarks to estimate the costs and fees associated with flipping homes in Phoenix. The data out is only as good as the data in, and the MLS system can be inaccurate. The analysis should be taken as such—a review of available public records—and not a verifiably complete picture. While absolute numbers may be off, we believe that directionally our analysis provides a very good look at the business.

Contact the author, Mike DelPrete, at: [email protected] my blog, Adventures in Real Estate Tech, at: www.mikedp.com

inside opendoor: what two years of transactions say about their prospects

Business