🔑 Key takeaways
History of Opendoor
Opendoor was founded in 2014 by Eric Wu (the current CEO), Ian Wong, JD Ross, and Keith Rabois.
From the beginning, Opendoor's mission was to create an end-to-end online home selling experience.
In 2017, Opendoor hit a valuation of $1 billion. That same year, the company reached another milestone: they had helped 10,000 customers buy and sell their homes.
In 2019, Opendoor launched Opendoor Home Loans as a way of providing mortgages to their customers while simultaneously diversifying their revenue stream.
Opendoor also acquired title company OS National in 2019 in order to integrate title and escrow services into their platform.
The peak year for Opendoor's home sales was 2019 when the company sold over 1,500 homes per month.
Opendoor layoffs & IPO
In 2020, Opendoor laid off 35% of their employees and put a freeze on purchasing homes for three months due to the pandemic.
In December 2020, Opendoor went public as part of their merger with Social Capital Hedosophia II, a special-purpose acquisition company (SPAC) run by Chamath Palihapitiya.
San Francisco, CA
Dec. 21, 2020
$15 billion (as of Feb., 2021)
Sell to Opendoor, Buy from Opendoor, List with Opendoor, Opendoor Home Loans, Opendoor Title
The Opendoor business model
As an iBuyer, Opendoor leverages large amounts of capital to buy and sell a high volume of homes.
Sellers can submit their information online and receive an offer in as little as 24 hours.
Opendoor makes money by:
- Charging a service fee (5%)
- Selling houses for more than they paid
- Providing additional services (mortgage, title)
While this model did earn Opendoor $4.7 billion in revenue in 2019, their best year to date, Opendoor is not profitable yet. Projections from Opendoor suggest that their cash-intensive business model will reach profitability in 2023.
Opendoor service fees
Opendoor charges sellers a service fee that ranges from 3.5-5% of the purchase price.
This fee is used to help Opendoor cover their carrying costs while they own the home, and to mitigate the risk that comes with purchasing a home with the intent to sell it quickly for a profit.
Opendoor's service fee is comparable to the 6% commission that sellers typically pay real estate agents, and that's intentional.
In the past, Opendoor's fee was as high as 14% in some markets, but they've capped it at 5% to be more competitive with realtors.
Buy from Opendoor
Opendoor cleans and makes repairs to the houses that they purchase before listing them on the open market.
Obviously, Opendoor's list price is greater than what they paid for the home, but their profit margin per home is slim because they're focused on a high volume of transactions.
For example, a quick check of the current Opendoor listings revealed that one of their properties in Phoenix, which they purchased for $311,000, is being resold for $330,000. That's only a difference of $19,000 (a 6.1% increase).
An analysis of Opendoor transactions by iBuying expert Mike DelPrete found that Opendoor sold homes for 5.5% more than they paid. However, the study is several years old and takes data from a time when Opendoor had a variable service fee that was as high as 12%.
Opendoor Home Loans and title services
Opendoor now offers mortgages through Opendoor Home Loans and title insurance and escrow through Opendoor Title.
By building these services into their platform, Opendoor is hoping to be able to generate more revenue while streamlining the transaction for the customer.
In reality, "streamlining" could limit the value that customers get from Opendoor if these services are being attached to extract more profit. While having these services bundled together could be convenient, the most value might still be found by shopping on the open market.
One unique selling point of Opendoor Home Loans is that they do not charge and loan origination fees, which can be as much as 1% of the loan amount.
According to data from Opendoor, the "attach rate" for these services has been increasing year-over-year, to the point where 82.9% of Opendoor transactions now include one of these services.
High attach rates for the most lucrative services, however, are more important than the combined attach rate of all services.
The potential revenue from attached title insurance, for instance, is much smaller than the revenue from other services that Opendoor might be able to offer in the future, like home warranties.
Source: Opendoor investor presentation.
Opendoor has plans to introduce other services that can be attached to the transaction in order to increase their revenue. Future services include:
- Home warranty
- Upgrade and remodel
- Home insurance
By adding these services, Opendoor projects that they'll be able to reach a contribution margin of $19k per home.
What makes Opendoor unique?
What experts are saying
Matthew Frankel, a Certified Financial Planner, says that Opendoor has a lot of potential, but they need to prove that they can capture enough of the market to become profitable:
"Opendoor, if you believe in the potential of iBuying, could be a fantastic investment. But that's a big if at this point."
"...if they could figure out how to make $2,000 per house, that would be a $120 million per year in profit. That's a pretty good business, and that's with the 1% market share. So that's a pretty impressive business. I would say that there is potential there. It remains to be seen if that could be done profitably, because if you ask anyone who fix and flips houses, you need to really be present to make a profit. It's an involved business. Flipping one house is a job."
Mike DelPrete, a real estate consultant and iBuying expert, believes that Opendoor's greatest challenge will be keeping up with a rapidly growing business:
"Growth comes with its own challenges, and that is especially true of Opendoor. And as it grows, it will face the paradox of its greater and greater success bringing greater challenges to overcome. But only with great risk comes great reward."
How does Opendoor make money?
Opendoor makes money by buying and reselling homes, charging a service fee to sellers, and offering additional services like homes loans, title insurance, and escrow.
Is Opendoor profitable?
No. Opendoor is on the path to profitability, but the large amount of capital required to start and grow the business has prevented the company from generating a net profit. Opendoor says it could be profitable by 2023, given current margins.
Is Opendoor a public company?
Yes. Opendoor had its initial public offering (IPO) on December 21, 2020, and Opendoor stock now trades under the ticker symbol OPEN.
What is Opendoor's valuation?
As of February 2021, Opendoor's valuation is approximately $15 billion.
BizJournals. "$1B Silicon Valley unicorn Opendoor landing in Scottsdale." Accessed February 16, 2021. Updated January 25,2017.
Opendoor. "The Past, Present, and Future of Opendoor." Accessed February 16, 2021. Updated December 22, 2020.
Yahoo News. "Opendoor and other iBuyers sales stall despite hot housing market." Accessed February 16, 2021. Updated October 7, 2020.
Opendoor. "Opendoor Investor Presentation." Accessed February 16, 2021. Updated September, 2020.
Mike DelPrete. "Inside Opendoor: What two years of transactions say about their prospects." Accessed February 16, 2021. Updated December 14, 2016.
The Mortgage Reports. "Average closing costs in 2021 and how to keep yours low." Accessed February 16, 2021. Updated February 12, 2021.
The Motley Fool. "Here's Why Opendoor Could Be Such a Great Long-Term Investment." Accessed February 16, 2021. Updated December 20, 2020.
Mike DelPrete. "The Opendoor Paradox: A Strategic Analysis." Accessed February 16, 2021. Updated February 5, 2018.
Forbes. "Opendoor's Cofounder Talks Covid, Growth, And The Quest For Profits As The Company Goes Public." Accessed February 16, 2021. Updated September 16, 2020.
Forbes. "Opendoor Seeks To Cash In On Hot Market—Again—With $680 Million Public Offering." Accessed February 16, 2021. Updated February 2, 2021.