iBuyer business model (Opendoor)
Consumers today can tap a button to book a flight, order food, and even buy a car(Vroom, Carvana), yet in the U.S. the real estate market remains unchanged with only 1.3% home purchased were transacted online in 2021.
iBuyer, a platform facilitate home seller and buyer to sell and buy home online without experiencing time-consuming process as tranditional homes buying and selling do. Opendoor allows home sellers to simply use app or website to request a competitve cash offer online and eliminates the need for sellers to make required repairs during the sale process and allows for a felxible closing date. Basically, one-stop shop for home sellers of residential real estate.
- Tranditional home selling process
- iBuyer model’s pros and cons
- How Opendoor make money? Business model
- why opendoor’s pricing strategy is better than Zillow, Offerpad, Redfin(Zillow announed out in last fall)?
Tranditional home selling process in the United States
The following tranditional home selling process can let you have a whole picture of how time-consuming and exhausting the process is. In States, it takes averagly 6–9 months for a family to sell his own home and get in enw home. And it’s a lenghty process before and after the listing, including cleansing, negotiating price, and a lot expense on maintence, repairment and staging, third-party examination, real estate insurance, home mortgage, and Title and escrow. At the end, homeowner need to pay around 12% of transaction price as a fee(the 12% including aboved mentioned fee, broker agent usaully charge 6%).
iBuyer (homeowner)
iBuyer can let homeowner sell their homes with or without approaching any agents or ibuyer employees and homeowner can easilly get a initial cash offer via internet and just need to prepared some materials and tap a button, then the home is sold. Take a look at these links Sell your home the Opendoor Way — YouTube& consumer review.
The way iBuyer provide homeowner offering price :
- Opendoor : homeowner need to answer some basic questions of house and do a video walkthrough and show out every rooms or any feature in house, Opendoor will ask some questions as you’re doing the video tour via zoom call (only virtual, it’s good when pandemic became kinds of flu and also for millenium generation). After self-tour, Opendoor will give out a cash offer online ( a price valuation range based on their pricing algorithm), then will send a crew to see around your house but exterior (they won’t get into your home until the deal is done). And homeowner just need to set up the deal closing date and if you need to stay over the closing date, opendoor offer the lease-back service, homeseller can stay but need to pay a daily rental fee. When homeowner really need to move out, they even don’ t need to clean up and appliances can also sell to opendoor.
- Offerpad(The quickiest) : will offer homeowner a preliminary price only if you answer some basic questions on the website, and the inpection fee and 6% service fee will be deduct then you get your proceeds. And they reserve the right to change the offering price in the last minute.
- Zillow(the difficult one) : will offer homeowner a preliminary price only if you answer some basic questions on the website, too. And Zillow will send their clerks to inspect your home(need physical contact), around 6–8% service fee.
iBuyer model (homebuyer)
Customers can buy a home from opendoor in three ways :
1.buy from Opendoor inventory directly((w/o an agent)
2.buy from Opendoor inventory(with an agent)
3.buy from outside opendoor inventory with an agent
Home buyers can use app or website to self-tour or virtually tour homes at their convenience, shop for financing, submit an offer and close on their timeline. Opendoor also introduced “Buy with Opendoor” in 2019 in select markets to bring this seamless, digital home buying experience to all homes on the market in addition to Opendoor inventory.
Pros and Cons for homeoner working on iBuyer versus tranditional realtor
Pros : Time saving, sell online, no bothering realtor and annoying home visitors. Homeowner don’t need to clean up home, open to home visit, and can choose the closing date whatever they want, which is a huge difference for homeowner because contigencies(1), refinance, emergiences, etc used to be the most trublesome stuffs during the selling process. Opendoor also provide Title and escrow service(1) and mortgage, re-decoration team. By selling to Opendoor, homeowners can avoid the stress of open houses, home repairs, overlapping mortgages and the uncertainty that can come with listing a home on the open market. Using our mobile app and website, sellers can receive a competitive cash offer online.
Cons : sometimes will charge homeowner few grand more than tranditional realtor did, sometimes initial price offering will have a big difference with final price, iBuyer usaully have buy-box, most iBuyer have a ceiling on the maximum value of the home. (Offerpad has a maximum of $400,000 and OpenDoor has a maximum of $300,000) Some companies will not purchase a home if it is on a septic system. Other criteria might include the age of the house, HOA costs, and restrictions such as an age-restricted community, or a gated community.
Business model
Basically, $OPEN is a market maker in real estate, but the difference is $OPEN uses their model to derive a price and get the spread margin between the offering price to homebuyer and selling price for homeowner. And $OPEN aims at providing customers those tranditional home services, whose total fee is ~12%(such as broker commission, seller concessions, closing costs, home renovations/repairs, double mortgage, moving costs, staging, home warranty)
Customers engagement : Among those high intent customers, 65% will browse for a quote and leave, and 35% are real home sellers, and among real sellers, 90% sell their home without agent. And based on $OPEN experience, real seller conversion is negatively related to service fee. Moreover, homesellers’ NPS exceed 80 (*NPS>40 is high)
Opendoor‘s revenue comes from 6 ways :
1.buy from Opendoor inventory directly((w/o an agent) : revenue recogniztion is the value of home sold and Opendoor will give customers 1% incentiveif they don’t have an agent, which accounted as a selling cost.
2.buy from Opendoor inventory(with an agent) : revenue recogniztion is the value of home sold and Opendoor will give agent 2%, which accounted as a selling cost.
3.buy from non-opendoor inventory with an agent via Opendoor brokerage : revenue recogniztion is 1% referral fee on home value.
4.list with Opendoor brokerage without selling to Opendoor : revenue recogniztion is 5% listing fee on home value.
5.Opendoor home loans : origination fee (Opendoor serves as a correspondent lender and sells originated loans to third party investors)
6. Title & Escow : service fee
Cost of revenue : Net purchase price (net of service charge) + Net repairs + Adjacent service COGS
Gorss Margin : LT thinking is 4–6% service fee, 1–2% renovation fee, 1% HPA, and 1–2% adjacent service fee.
Contribution Margin : Gross Margin — Inventory impairment& restructuring cost — selling cost — holding cost
Selling cost have been mentioned aboved, customers buy with Opendoor with an agent, Opendoor will give agent 2–3%, if customers buy w/o agent, Opendoor give customers 1% incentive. And vst majority buy with agent.
Holding cost is Property taxes, utilities, insurance, cleaning, and HOA dues
Adjusted EBITDA :excludes non-cash / non-recurring items
Total Contribution profit less Marketing Spend, Operations spend, fixed opex,
timing adjustments/other
why opendoor’s pricing strategy is better than Zillow, Offerpad, Redfin(Zillow announed out in last fall)?
In terms of this question, still no one can answer, except Opendoor employees. Each time, when analyst ask this question in concall, Opendoor always say proprietary pricing model differentiate them from other ibuyers, and Zillow launched iBuyer and exit within a year, because Zillow said they cannot predict accurate pricing that can benefit them, Zillow’s buy-to-list premium is negative.
How Opendoor offer home price to home seller
Opendoor have developed purpose-built software to guide home assessment workflows and collect over 100 unique data points regarding a home’s condition and quality, such as MLS transaction, MLS prices, 3rd party HPA(home price appreciation), seller input flow, home assessment detail, visitor traffic, time spent in home, historical underwriting, etc. Once completed, Opendoor will take any necessary repairs into consideration, and produce the purchase agreement for the seller.
Next part will cover why I bought Opendoor, and why Opendoor stock price drop last year, financial model, valuation, risk, and if Taiwan have iBuyer, will they become a arbitrage tool or a fair value anchor.
Glossary
Contingencies : Many Americans cannot purchase their next home until they sell their existing home. Few Americans can qualify for two mortgages and few have enough money for two down payments. These buyers often have to submit offers contingent on selling their current home, putting them at a disadvantage versus other buyers.
Double move : homeowners can sell their current home, move into a rental and then buy a new home, forcing them to move twice and bear those costs.
Title and escrow: 買賣雙方要將資金及房產證明交由第三方公正暫時保管，條件滿足後雙方才能履行合約
staging : there will have a company re-order your indoor decortion and change the alignment.
Home Loans: In late 2019, Opendoor launched Opendoor Home Loans, a tech-enabled mortgage platform for customers looking to buy or refinance a home. Opendoor have built this platform from the ground up and have combined savings, convenience and certainty into a simpler, more transparent mortgage process for customers.
buy box In real estate investing, a buy box is an investor’s description of the types of homes they want to buy — and most of the time when investors create a buy box, they’re focusing on different attributes of the homes they want to buy
