A case for Opendoor

August 11th, 2021

Had an interesting conversation with a friend about Opendoor. Disclaimer, I own a decent chunk of the stock.

Opendoor has a pretty simple hypothesis. The real estate market’s transaction fees are too damn high. Both in terms of fees (6+%) and time (often months). None of these realtors have market domainance, yet they are charging Ebay-like fees. It seems obvious that a platform that could facilitate these transactions would and should win. But real estate has been surprisingly resistant to tech incursions. Why?

Real estate isn’t just another consumer good. A person’s home is the most valuable asset they own. That’s because overwhelming in America, people have lived in single family homes, complete with half an acre of yard to mow. People might move once or twice in their entire life. In a world where 80% of your net worth sits in an asset that you sell once every three decades, of course you want have a “personal touch” and to get as much as you can for it. That’s why Zillow is now just basically a Craigslist of real estate. The power sits with the sellers and sellers might trust you to host their photos, but they don’t trust you to get the best price for your home.

So what’s changed? I think part of this is the slow trickle of the effect of the Internet on society. Whereas once local community mattered so much, the Internet has meant that I can keep in touch with old friends or find new common interest groups online. I’m in my 30s and none of my friends really know their neighbors (unless those neighbors exist in the same work networks). We’re not attached to our local communities like we were in the 1990s. As an immigrant, we moved around a lot — I’ve never lived in the same house for more than 8 years. I’m sure this frenetic pace will slow, but I doubt my first house will be my last…or even my second last. I can easily see myself changing through at least three homes in my lifetime. No one I know wants to live in their parent’s home when they die. Fashion is moving faster than ever. Furnishings and especially automation from 20 years ago feel incredibly dated. Overall, the market is become more liquid and as a part of that, should shift towards efficiency.

I don’t think platforms like Zillow have the same unassailable distributional advantage that Google might have over Yelp. Housing might become more liquid but it will still remain expensive. The audience is not the buyers of homes, but the sellers of homes. Demand aggregation here is getting the estimate on your home value. If Opendoor can get 10% of home buyers to get an estimate and 10% of those people to sell to Opendoor, they have 1% of a trillion dollar market. What matters is the technology to deliver an estimate that Opendoor is willing to stand behind and with each estimate, Opendoor is getting more and more data about the local market. Google had an unassailable advantage in search not because it was better at ranking pages (that was their initial advantage which only lasted a decade before competitors caught up), but because they had a steady stream of search terms that allowed them to better understand how people were searching and what pages they were going to, not just what Google was indexing on the web. Opendoor’s ability to deliver faster and more accurate offers has the potential of becoming a similar advantage.

Yes, Zillow is still positioned well, but so much of this has to do with velocity. All firms are just made of people after all, sometimes even the same people moving between competitors. What matters is what the firm has chosen to focus on and whether that focus is a wedge to a market that is growing faster than competitors can pivot into.

Finally, Opendoor itself (if successful) has the potential to shift consumer behavior in both the current homeowner market and the rental market. Tesla is still a tiny fraction of the car market but it singlehandedly moved the car industry to embrace electric. If Opendoor is successful in its ability to vastly simplify selling your home, an increasing segment of the population will move not just 1-2 times in their life, but maybe each time their income doubles. Assuming you get a 6% raise each year, you might move once every twelve years, so during your working life, you’d move 3-4 times. On the other side, I rented my last apartment for nearly eight years. I would have been open to purchasing an apartment, but the time commitment, not only of viewing homes but gaining expertise in the home buying process seemed overwhelming.

Consider the flip side of renting. Right now, conventional wisdom is if you’re only going to be somewhere for four years, you should be renting. Also, that homeownership and landlording is a good business. That the current system of small proprietors running little rental business is the more efficient way to run the market. A market where individual proprietors are advertising their properties on Craigslist or Facebook, not to mention the subletting market which is even less efficiently run. Very few rental units have good photos or 3D tours, so even finding a rental requires you showing up in person to inspect the property. Most landlords are their own supers, managing broken pipes or animal infestations. Renters themselves aren’t good. We aren’t owners, so incentives are very poorly aligned. Renter’s rights and rent control make the entire business very dicey for landlords, if they rent to a bad actor. Even if you yourself are a well-behaved renter, you rent is paying for these bad actors. Finally, you’re very unlikely to make improvements to the property because you’re never really sure how many more years you’ll be staying there.

Of course, some percentage of the population should be renting. If you’re uncertain about the duration of your stay, renting can make sense because it will always offer a greater flexibility because you’re not tying up your capital in a down payment. You might also simply lack the capital to buy. From my experience, a significant portion of the rental market should be buying, if only the market itself had significantly less friction in time and money.

It’s interesting reflecting on the differences between WeWork and Opendoor, as both sort of operate in the real estate space. Opendoor critically focuses on the technology of home value estimation. Everything else is just the logistics to turn that technology into a useable product. WeWork, on the other hand, had massive real estate obligations on its balance sheet and…it was really unclear what technology it was building. It was clear they had the opportunity to build technology for better managing office space, but….without the market pressures to actually force the building of great technology and product, why would they be any better positioned to do so than any other startup? True, WeWork was building a brand and brands also have massive value. But definitely not $50b, especially now after its branch has been so tarnished.

In that sense, I still think that Opendoor has tremendous potential. Five years from now, I can definitely imagine them doing $50b in transactions (though…not necessarily their money/credit), where they have a 6% take. At $3b in gross revenue, they should be worth at least $20b market cap. I can’t speak to their value tomorrow, but I do feel comfortable holding them until they climb back to that price.

November 3rd, 2021 Update

Zillow just took a huge punch to the gut, bowing out of the iBuying business. Stratechery posted a particularly well-thought-out piece on this. Zillow is an aggregator and it’s almost never a good idea for aggregators to compete with their own supply, particularly when the margin from vertically integrating is no better than just taking your tax from your normal suppliers. Being an aggregator means you reap already tremendous rewards from the market. To make vertical integration worthwhile, you not only need to make more money than if you had vertically integrated, but more margin based on the invested capital.