A key component of the long-term profitability of iBuyers is their ability to attach adjacent services such as mortgage and title insurance. Opendoor's mortgage attach rate in Arizona has recently shifted dramatically -- up from around two percent during the past 18 months, to nine percent in April and a record 12 percent in May.

While the improvement is significant, there are a few points worth clarifying:

• While the percentage is high, the raw numbers are low. May's numbers equate to about 19 transactions where Opendoor sold a home and attached its Opendoor Home Loans product.

• Attach rates and loan numbers in other markets remain low (roughly two percent attach in Texas). In May, there were five transactions attached to Opendoor Home Loans outside of Arizona.

• As context, a 12 percent mortgage attach rate is an improvement, but still well-below industry averages and the Power Buyers.

The Cost of Gaining Market Share

Opendoor is making impressive gains in Arizona, but what's driving the momentum? It appears to come down to financial incentives: Opendoor is offering an additional two percent discount to buyers that use Opendoor Home Loans. As of writing, this promotion appears to be live in the Phoenix and Atlanta markets.

Opendoor offered the following table to prospective buyers (and their agents), showing the savings when using Opendoor Home Loans.

The challenge with these discounts is that Opendoor is giving away all of its margin to gain market share. In its investor presentation, Opendoor states a target margin of $5k on home loans -- which instantly disappears with a two percent back promotion.

Opendoor's rising mortgage attach rate in Arizona appears to be the result of significant financial incentives, or a "let's throw money at the problem" strategy.

Strategic Implications

There are two sides to Opendoor's "Throw Money At It" strategy. On the one hand, Opendoor effectively has unlimited access to capital, and is leveraging that competitive advantage by competing where it can win.

On the other hand, throwing money at the problem is a relatively unsophisticated, brute-force approach to gain traction and demonstrate top-line growth -- but at what cost? How valuable is a service if you need to pay people to use it?

Losing money on the core iBuyer transaction with hopes of making money on the mortgage (which is also losing money), doesn't balance out. Two loss leaders don't make a profit. For any company attempting to generate profits from adjacent services, and there are a lot, mortgage remains hard; it is no panacea for profitability.