I’ve been fascinated by Opendoor and iBuying for awhile now. Traditional real estate needed to be disrupted in favor of something more user friendly. iBuying provided an interesting opportunity.
The problem with iBuying is the economics never made sense, but yet something about it was always interesting about it. It was so different. If pricing was close to the market rate it was absurdly user friendly. Yet, pricing couldn’t be close to the market rate to make it work. iBuyers would have to purchase the home at a low enough price to make a profit, but still high enough that the customer felt like they were getting a good deal. This created a very small margin for error and customers were getting the favorable end of that error. If iBuying companies could not find a way to improve their efficiency, they would likely never turn a profit.
Hitting the Mark(et place)
Opendoor just put together a crazy quarter. Their financials were terrible. Billion dollar miss bad. Yet, in the sea of shit that was their quarter, an interesting development came out… Opendoor was launching its real estate marketplace. This wasn’t a rush announcement to offset a shit quarter (**cough** $NFLX ads **cough**), but rather a large step they’ve always planned. So what’s the big deal about this marketplace? Well, I don’t think anyone thought Opendoor was ready to release it… and maybe they aren’t. Let’s dive into how this would work.
Essentially, someone selling their house gets a floor iBuying offer for 14 days and the upside of listing your home on the open market. So for example, Opendoor offers you $350k for your home AND puts it on the market for 14 days to see if anyone else will beat that offer. If someone beats that offer, Opendoor acts as your real estate agent and takes a cut. If no one beats your offer, then you have the option of accepting the floor iBuying offer, then Opendoor buys your home.
Below is the idea I’m wrestling with in my head around this new business model. From a user standpoint, this is a no brainer. You get a floor iBuying offer for 14 days and the upside of listing your home on the open market. If it’s a no brainer
One of my worries around Open was around their reliance on forecasts, but sneakily becoming a marketplace removes that worry. Essentially, you price what you think the market will beat, but still good enough to get the seller interested. They can manage to a % iBuying vs marketplace… rather than managing growth vs market expectations, etc…
Missing the Mark(et place)
All of this tip toes around a key portion of a marketplace… the demand. Opendoor is fundamentally focused on supply, but marketplaces need both. In thinking through marketplaces, I could only find one marketplace that successfully built through supply… Silk Road. Opendoor isn’t selling crack. I’m not sure Opendoor is ready for this marketplace, but the reality is only time will tell. Either way, I think this is an uphill fight for Opendoor from a demand standpoint.
Furthermore, the iBuying business was already struggling with margins and I worry this transition will only make this worse. If users are heading towards the new marketplace model, then anything that Opendoor ends up buying will have already sat on the market for 14 days without any better offers than Opendoor’s cost. What is Opendoor going to do to fundamentally increase the offers when they now own the home? I’d worry iBuying margins get even worse if the marketplace scales…
Wrap It Up
Yet, worrying about the marketplace scaling leading to low iBuying margins seems a little trivial. At this point, Opendoor would kill for that problem. If your marketplace has scaled that far, you are making more than enough on the marketplace to offset the iBuying business. The real concern here is twofold: do users opt in and do buyers find their way into the marketplace? Only time will tell, but I’ll be watching from the sidelines.