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Prepared by Mike DelPrete and Sib Mahapatra – www.mikedp.com – December 2016
Inside Opendoor: what two years of transactions say about their prospects
Prepared by Mike DelPrete and Sib Mahapatra – www.mikedp.com – December 2016
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?
Prepared by Mike DelPrete and Sib Mahapatra – www.mikedp.com – December 2016
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.
Prepared by Mike DelPrete and Sib Mahapatra – www.mikedp.com – December 2016
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
Prepared by Mike DelPrete and Sib Mahapatra – www.mikedp.com – December 2016
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
Prepared by Mike DelPrete and Sib Mahapatra – www.mikedp.com – December 2016
Time is money: Opendoor typically relists homes 20 days after buying them
Prepared by Mike DelPrete and Sib Mahapatra – www.mikedp.com – December 2016
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
Prepared by Mike DelPrete and Sib Mahapatra – www.mikedp.com – December 2016
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
Prepared by Mike DelPrete and Sib Mahapatra – www.mikedp.com – December 2016
As of Dec 1, Opendoor was holding homes for an average of 98 days
This includes homes that were still actively listed for sale
Prepared by Mike DelPrete and Sib Mahapatra – www.mikedp.com – December 2016
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.
Prepared by Mike DelPrete and Sib Mahapatra – www.mikedp.com – December 2016
Estimated 2016 revenues in the Phoenix market are north of $30 million
Prepared by Mike DelPrete and Sib Mahapatra – www.mikedp.com – December 2016
Opendoor breaks $1B in annual revenues by launching into 20 markets
Prepared by Mike DelPrete and Sib Mahapatra – www.mikedp.com – December 2016
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.
Prepared by Mike DelPrete and Sib Mahapatra – www.mikedp.com – December 2016
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.
Prepared by Mike DelPrete and Sib Mahapatra – www.mikedp.com – December 2016
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.
Prepared by Mike DelPrete and Sib Mahapatra – www.mikedp.com – December 2016
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
Prepared by Mike DelPrete and Sib Mahapatra – www.mikedp.com – December 2016
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: mdelprete@gmail.comFollow my blog, Adventures in Real Estate Tech, at: www.mikedp.com
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