Opendoor uses a proprietary algorithm and public records to value homes and make quick cash offers with the backing of large amounts of venture capital. Once they’ve made minor repairs, Opendoor resells these homes on the open market.
It’s a fast process that helps home sellers avoid the anxiety and suspense of a traditional home sale.
- Opendoor was the first iBuyer — a company that uses large amounts of venture capital to buy and sell homes on a massive scale.
- Opendoor makes a small profit from reselling houses, but their greatest revenue opportunities are with additional services like home loans and title insurance.
- Opendoor had it’s initial public offering in December, 2020 and is currently valued at over $15 billion.
- Opendoor charges a 5% service fee to sellers, which is one of the lowest compared to other top iBuyers.
Spending money to make money
However, the cash-intensive nature of Opendoor’s high volume, low margin business model means that the company has yet to reach profitability, despite overall increases in revenue.
Opendoor doesn’t aim to make most of its revenue primarily from selling the homes it buys; it aims to make most of its money from service fees built into each transaction, which is capped at 5%. (Before September 30,2020, it was on a sliding scale — according to Opendoor, their service fee “has historically been as high as 14%.)
While Opendoor has shared its roadmap to profitability (which we’ll touch on below), it remains to be seen whether it’s a company built for the long run, or another tech unicorn that can’t live up to the hype.
Opendoor fast facts
|Founders||Eric Wu, Keith Rabois, Ian Wong, Justin Ross|
|IPO||Dec. 21, 2020|
|Headquarters||San Francisco, CA|
Opendoor’s Business Model
Opendoor does bring in some money by buying properties and then selling them for a profit. The fact that they’ve integrated a lot of tech innovations into the way they do business, along with their huge reserve of investor cash, means they’ve been able to tweak and reinvent the traditional real estate model.
Opendoor has three primary sources of revenue:
- 💰 Service fees
- ➕ Add-on services (mortgage, title, etc.)
- 🏠 Home sales
Opendoor charges a 5% service fee for every home they buy. Think of this as the iBuyer equivalent to the traditional commission — a baked-in, percentage-based transaction fee. Though Opendoor’s service fee historically ranged from 6-14%, it’s now capped at 5%.
Opendoor’s service fee is based on a number of factors, including the repairs required, the projected sale price, and how long they think it will take to resell the property. Essentially, it’s an expression of risk, expenses, and carrying costs — with a little profit thrown in.
By comparison, Zillow Offers charges a service fee that can be as high as 9% while Offerpad’s service fee ranges from 6-10%.
The speed, ease, and security of an iBuyer sale (Opendoor makes an all-cash offer within 48 hours) is clearly enticing to a lot of sellers. In this New York Times article from 2017, Opendoor says that 30% of sellers accept their initial offer.
Profit from Opendoor Home Sales
This is Opendoor’s most traditional income stream; they resell the houses they buy for a profit. The main difference compared to the traditional model is that instead of acting as a middleman who matches a seller with a buyer (as a conventional agent/broker does), they themselves front the money on the purchase and then sell it later at a time and for a price of their choosing.
This business model isn’t without risk; if the market fluctuates before they can sell, they could very well take a loss. And even in good times, it’s not a proven approach.
So how much profit do they make on an average transaction? In 2016, an analyst looked at Opendoor transaction data and estimated the average Opendoor property appreciated 5.5% between the time it was bought and the time it was sold.
Opendoor’s latest strategy to become profitable is to bring title, mortgage, and escrow services in-house. The fact that they sharply reduced their service fee late last year suggests they’re all in on this strategy. So far, they’ve had varying degrees of success.
Opendoor’s seen very good results with their title services — for example, recording 2020 attach rates of 85% in Nevada and 79% in Florida. Of course, title insurance is easy to bundle into the transaction as it’s simply added in by the seller — in this case, Opendoor.
Where they’ve had a little less success is with mortgage services which buyers have to opt into voluntarily. Opendoor launched “Opendoor Home Loans” about two years ago and has seen much slower growth. In Arizona, for example, they’ve had a title services attach rate of 61%, compared to a mortgage services attach rate of only 1.9%.
Still, this area has seen steady growth for Opendoor and has definitely boosted their bottom line. The question now is if they can get those mortgage numbers up.
If Opendoor can achieve high attach rates for the most high-cost services, like mortgages, then it’s possible that they’ll see long-term profitability.
When will Opendoor become profitable?
It’s difficult to say exactly when Opendoor will generate enough revenue to become profitable.
Projections from a recent Opendoor investor presentation indicate that the company will reach profitability by 2023, but it depends on how rapidly they are able to scale their services.
Market fluctuations could also accelerate or slow down Opendoor’s push towards profitability.
While Opendoor was founded in 2014, the idea behind it was actually thought up by a Silicon Valley investor named Keith Rabois way back in 2004. Rabois saw that while real estate was the most valuable investment most people owned, it was extremely difficult and time-consuming to convert it to cash. He envisioned a site where you could sell your home instantly with the push of a button.
It took Rabois more than a decade to realize his vision, by partnering with an Arizona-based real estate investor named Eric Wu to start Opendoor.
Wu had started a company called RentAdvisor and then sold it to Apartment List. Next, he started a company called Movity and sold it to Trulia. He met Rabois while enrolled in a startup incubator program, and Opendoor was born.
Opendoor quickly raised money and began buying homes in the Phoenix area in December 2014. Within two years, they were already making 2% of all home purchases in the booming Phoenix market and averaging over 120 sales a month.
From their initial launch cities of Phoenix and Dallas-Fort Worth, Opendoor expanded to eight more markets by 2016, including Atlanta, Charlotte, Las Vegas, Nashville, Orlando, Raleigh-Durham, Tampa, and San Antonio. Today, they operate in 23 major U.S. markets.
Increasing transactions and funding
In 2019, Opendoor sold nearly 19,000 homes in 21 U.S. cities, most of them concentrated in the southern U.S. In 2020, Opendoor briefly paused home purchases, which led to a 59% drop in transactions. Despite that, they were able to go public in late 2020, briefly making their co-founder, Eric Wu, a billionaire.
In 2019, Opendoor also generated revenue of $4.7 billion — but recorded a loss of $339 million. And in the first three quarters of 2020, they recorded a loss of $199 million on revenue of $2.3 billion. According to Bloomberg, Opendoor has lost nearly a billion dollars since its founding in 2014.
Opendoor’s IPO in late 2020 quickly raised $1 billion from their stock sale, and a month later, Opendoor announced plans to sell another 24 million shares of stock, worth about $680 million.
Some analysts say Opendoor’s lack of profitability shouldn’t be worrisome — after all, revenue increased 161%, year-over-year, in 2019.