Opendoor Business Model Analysis

Photo by Tierra Mallorca on Unsplash

Opendoor is a real estate company that operates digitally. Its mission is to empower everyone with the freedom to move.

It was reported that 89% of the sellers sold their homes through an agent and 74% would use the same agent again for their future transactions. It is understandable for home buyers/sellers to want to meet face to face for the purchases/sales for their homes as it is one of the largest expenditure in one’s lifetime.

Currently real estate transactions stands at 5.6 millions in number of home transactions and $1.9 trillion of transaction volume but less than 1% of the homes which were transacted online. There is ample room for growth for virtual home sales businesses like Opendoor.

Let us conduct 4 areas of analysis for Opendoor:

1. Revenue Tree Model
2. As-is, To-be
3. Problems it solved
4. Potential problems

Revenue Tree Model

Figure 1: Revenue Tree Model of Opendoor

The profit for open door comes from home loans and their listing platform. Opendoor provides a transparent mortgage process for buyers by using tech-enabled insurance, escrow and mortgage services. Sellers can sell their homes through “List with Opendoor”, where they can either sell directly to Opendoor (5–8% for service charges) or Opendoor can list their homes on market (5% fees) and they can wait for buyers to offer them.

The costs come from Opendoor bearing the maintaining costs of the homes for self-viewing purposes and also the homeowners’ costs such as property taxes and insurance fees. Besides, they are also listing their properties on various listing platforms and MLS, hence there will be recurring costs involved.

As-is

Figure 2: Process of buying & selling homes through a real estate agent

To-be

Figure 3: Process of buying & selling homes through Opendoor

What problems does Opendoor solves for the seller and buyers?

• Flexible timeline to sell the home — The problem faced by the homeowners is that they have to sell away their existing homes before they can buy the next home as few can afford to have mortgages for their new home and their existing one. Hence the solution is for them to sell away their homes, move to a rental and then buy the new homes. This will increase the total cost for the homes.
• Convenience — For home buyers, they often have to travel for the viewings of the properties and it takes time to settle on something they like. With Opendoor platform, they can view the house virtually, hence saving vast amount of time and effort!
• Shorten the duration of closing of deal— Homeowners can close the deal when they sell their homes to Opendoor for as short as 14 days. In comparison, it takes about 30 days for an agent to sell the home.

What are the potential problems for Opendoor?

• Holding period of the house is too long — According to Opendoor, the average holding period of the homes are between 70 to 110 days. It takes 14 days to close a deal and about 5 to 7 times longer time to sell the properties. Let’s look at the company’s inventory health. The days inventory TTM is 165.97, this means that it stays 165.97 days in the possession of Opendoor until it is sold. The inventory turnover ratio TTM is 2.2, this means that the company has replaced 2.2 times of the inventory that it has sold in the last 12 months. As a comparison, a typical agent takes approximately 3 weeks for the sales of a property.
• Cost of maintenance — Cost of insurances and property taxes.
• Cost of marketing the house on various platforms — Opendoor list the homes on other platforms to have greater outreach to potential customers.
• Valuation of homes varies across different time periods — Opendoor may end up selling at a loss if the housing sector is not performing well.
• High borrowing costs — Opendoor is a debt heavy company that buys real estates and keeps them as inventory until they are sold. While the properties are still in their possession, they have already incurred costs of interest rates and maintenance payments of the houses. During sales of the properties, they may not make a profit due to the lowered market valuation of the homes, borrowing and holding costs.

Summary

In conclusion, Opendoor is a great platform for transforming the real estate market as it allows buyers and sellers to move into their new properties as short as 14 days. By taking away the hassle of staging the homes and managing the paperwork, Opendoor has made transaction a smooth process. This will greatly benefit buyers and sellers.

As an investor, I think that it is an ideal real estate solution. However, I would be concerned about the profitability of the company’s business model and the sustainability of its borrowing.