Opendoor Recalibrates to a New Environment

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Opendoor is rapidly recalibrating its business to a new environment: operating expenses have been cut in half while purchase volumes are down to levels not seen since the pandemic.

Why it matters: A sustainable future for Opendoor revolves around tight cost control and operational efficiency, reducing customer acquisition costs through partnerships, and finding the right balance between offer quality and purchase volumes.

Opendoor’s monthly purchases have dropped eightfold, to levels not seen since the early days pandemic.

  • The company has gone from purchasing 160 homes per day in June 2022 to purchasing less than 20 homes per day during the first three months of 2023.

 
 

Opendoor is purchasing fewer homes by choice – and doing so by offering less competitive offers to homeowners (offer quality).

  • This creates a greater “spread” and improves Opendoor’s ability to resell the homes for more on the open market, giving it a buffer against future market uncertainty – and exposure to profitable upside.
     

  • For example, in the Zillow + Opendoor seller options marketplace, Opendoor’s cash offer is usually considerably lower than Zillow’s estimated market value.

 
 

This quarter, Opendoor invented a helpful new financial metric, Adjusted Operating Expenses, which excludes variable costs related to selling a property: broker commissions, holding costs, and transfer fees and taxes.

  • What it reveals is Opendoor’s fixed operating expenses, a helpful measure when thinking about cost control, expense management, and operational efficiency. 
     

  • The net result is clarity around Opendoor’s recent cost-cutting: fixed operating expenses are down $100 million, or 50 percent, from Q2 2022, driven through a reduction in advertising spend, layoffs, and other cost-cutting measures.

 
 

Opendoor invested $200 million in advertising during 2022, including a significant shift to brand marketing (Opendoor’s marketing team visited my class this semester).

  • But in a shifting environment, Opendoor has slashed its advertising spend by half during the first quarter of 2023 compared to the same time last year.

 
 

A side effect of this shift is skyrocketing customer acquisition cost (CAC), as measured by total advertising spend divided by the number of homes purchased in a period.

  • Compared to 2022, Opendoor’s CAC has tripled to $16k during the first quarter of 2023 – a very unsustainable number in the long term, but one reflective of sustained brand marketing coupled with markedly fewer purchases.

 
 

The bottom line: With $1.3 billion in cash, Opendoor has the time and space to retreat, regroup, and realign the business to not only stem its losses, but position itself for future growth.

  • The evidence shows that Opendoor is making significant changes to become a more efficient operation.
     

  • Just cutting expenses at the current purchase volumes is not a sustainable strategy – but it is an important first step as the company reorients for the future.

'Go Big or Go Home': Opendoor's High-Stakes Game of Disruption

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Opendoor recently posted its Q4 financial results, revealing mega losses alongside early signs of a possible turnaround.

Why it matters: In 2022, Opendoor experienced an absolutely devastating test of its business model – a worst case scenario event – and survived. 

  • The damage was brutal in terms of financial losses, but the company is still around and operating, whereas most companies would have succumbed to this type of existential event.

Behind the numbers: Opendoor posted a net loss of $1.4 billion in 2022, on top of already sizable historical losses.

  • Opendoor, and many other venture-funded disruptors, are burning billions of dollars to grow new business models – and the lack of profitability just doesn’t matter.
     

  • The most noteworthy fact is that Opendoor lost $1.4 billion in 2022 and is still operating (albeit with a new CEO).

 
 

Cash is king: Manufactured financial metrics aside, Opendoor has plenty of (but not unlimited) cash reserves.

  • Opendoor ended 2022 with $1.3 billion in cash, cash equivalents, and marketable securities – down from $2.2 billion at the beginning of the year.
     

  • That’s cash burn of $934 million – massive losses, but a scenario that Opendoor was able to weather without raising additional capital (or going bankrupt).

Like many companies, Opendoor is racing to cut its operating expenses as quickly as possible.

  • In November, it laid off about 18 percent of staff, and just recently announced that it had reduced its run-rate expenses by approximately $110 million.
     

  • Operating expenses are trending significantly lower – a positive sign for a company looking to conserve cash (note: sales, marketing and operations flex up and down based on the number of home sales).

 
 

The focal point upon which the future of the business rests is when Opendoor will turn the corner and stop selling homes for a loss.

  • Homes that Opendoor purchased in Q3 and Q4 are performing much better, with positive gross margins.
     

  • Yes, but: The first homes to sell always have the best gross margins – over time, with price reductions, gross margins fall – as expertly illustrated by Datadoor.io.

What to watch: Cash, cash, cash – Opendoor’s future as a going concern rests on its ability to fund loss-making operations.

  • With $1.3 billion in the bank and the worst behind it, the company appears to have plenty of runway.

The bottom line: Opendoor is playing a high-stakes game of disruption. 

  • With billions in the bank and billions in losses, the company is living by the creed, “go big or go home.”
     

  • After experiencing its single largest challenge in a challenging history, Opendoor persists – which may be the biggest takeaway from a brutal year.

Opendoor Slows Home Acquisitions Amid Strategic Shift

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After a brutal Q3 in a rapidly shifting market, Opendoor has significantly slowed down its pace of home acquisitions.

Why it matters: Profitable or not, an iBuyer must buy homes to generate revenue and remain relevant.

  • Opendoor's drop in purchase volume was rapid and extreme, but not dissimilar to changes in the past.

  • Opendoor has demonstrated an ability to quickly ramp up and down -- a sensible feature, and not a bug, of iBuying.

 
 

Lower purchase volumes mean less homes coming to market, resulting in fewer sales generating less revenue.

 
 

But Opendoor's bigger challenge is being able to resell its homes for a profit.

  • It's difficult to imagine a sustainable business model selling homes for less than it bought them for, regardless of fee.
     

  • The rubber hits the road with Opendoor's buy-to-sale premium, and the following chart from Datadoor.io shows that, improving purchase cohorts or not, Opendoor continues to sell homes at a loss.

 
 

A four year view of the same buy-to-sale premium, this time from YipitData, shows that Opendoor is well and truly in uncharted territory (and not in a good way).

 
 

What to watch: With a rapidly changing market, reeling from unprecedented financial losses, and operating under new leadership, Opendoor is undergoing a transformative moment in its history.

  • It appears to be buying fewer homes while shifting towards more asset-light models, such as Opendoor Exclusives and Power Buying (Buy with Opendoor and Opendoor Complete).
     

  • All of which raises an interesting side question: If Opendoor is buying significantly fewer homes and is guiding more consumers to its Power Buyer products, why would Zillow want to partner with them?

The bottom line: Homes are the fuel that powers the Opendoor machine.

  • As Opendoor dramatically slows down its purchase of homes, it will lose less money — but it also loses its ability to make money.
     

  • Think about it: If a coffee shop loses money on each coffee it sells, the solution is not to sell less coffee; it’s figuring out a way to sell coffee profitably. 

One Year Later: Zillow Offers & Opendoor

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Last week Opendoor announced that it lost nearly $1 billion during the third quarter of the year — the result of selling too many homes at a loss.

Why it matters: Exactly one year ago Zillow faced a similar situation with its iBuyer business, Zillow Offers — and subsequently shut it down.

  • The cause and effect in each case is similar, with nearly identical financial implications, but the paths forward differ.

Dig deeper: Opendoor’s net loss of $928 million for the quarter is more than double Zillow Offer’s net loss of $422 million in Q3 of last year.

  • It’s a matter of scale: Opendoor sold more than twice as many homes as Zillow (8,520 vs 3,032).

  • The net loss also includes significant inventory write-downs: $573 million for Opendoor and $304 million for Zillow.

 
 

On a per home basis, each company incurred similar losses.

  • The write-down per home in inventory is nearly identical, showing that both companies were guilty of “unintentionally purchasing homes at higher prices than current estimates of future selling prices.”

 
 

Zillow’s decision to shut down Zillow Offers in Q3 2021 likely protected the company from at least a billion dollars of additional loses.

  • It also returned the company to profitability (on an adjusted EBITDA basis) and removed the uncertainty of wild profitability swings.

  • Meanwhile, Opendoor will endure at least six months of unprecedented financial losses.

 
 

(Adjusted EBITDA excludes inventory write-downs, stock-based compensation, and property financing expenses.)

What to watch: Opendoor is making significant changes to reduce its risk in response to the volatile real estate market.

  • It is buying significantly fewer homes, and making lower offers on the homes it does purchase.

  • The company launched a new, asset-light marketplace to connect buyers and sellers, without Opendoor actually purchasing the home (more on this in a future analysis and my upcoming webinar).

  • Opendoor also quietly shut down its entire mortgage operation, Opendoor Home Loans.

Key learnings: It is very challenging for an iBuyer to respond to sudden market volatility, especially changes in home price appreciation.

  • At the desired scale iBuyers want to operate at, the results of downward pricing pressure can be financially catastrophic.

  • Asset-light — not buying the actual house — is taking more prominence in the evolution of the iBuyer business model (and is a key component of the Power Buyer model).

The bottom line: In retrospect, Zillow’s decision to shut down Zillow Offers was the right call: it prevented additional loses, preserved the core business, and positively refocused the company.

  • But while Zillow Offers folded, Opendoor has no choice but to continue on in a challenging and volatile market — making adjustments to its business model as it goes.

For First Time, Opendoor Selling Homes for a Loss

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Opendoor's buy-to-sale premium -- the difference between the purchase and resale price of its homes -- has reached a record, negative low.

Why it matters: For the first time in its existence, Opendoor is entering territory, where, in aggregate, it is selling homes for less than their purchase price.

  • This certainly puts the company (and business model) under pressure, and is reminiscent of the situation faced by Zillow last year.

Go back: Opendoor outperformed Zillow during the dark days of 2021 (when Zillow Offers imploded); its buy-to-sale premium never dipped below zero percent.

 
 

But 2022 is different; transposing Zillow's performance in 2021 to Opendoor in 2022 shows a similar deterioration in the buy-to-sale premium.

  • Even Opendoor's pricing operation can't keep up with the rapidly changing market (or perhaps this was a calculated risk Opendoor was willing to take).

 
 

(I've estimated a negative two percent buy-to-sale premium in September, but it's still too early to know where the month will land.)

While Opendoor's buy-to-sale premium is approaching the same negative levels that sunk Zillow last year, it doesn't mean the result will be the same.

  • Zillow experienced a system-wide iBuying failure, and exited because it was unwilling to accept the risks to its entire business going forward.

  • Opendoor, built from the ground up as an iBuyer and willing to accept those same risks, is vigorously managing the current situation.

Opendoor's buy-to-list premium, a leading indicator of future profitability, appears more optimized than Zillow's in 2021; the distribution is less concentrated with more potential resale upside.

  • It would be fair to say Opendoor's pricing operation is more nuanced and sophisticated.

 
 

Opendoor is also leveraging aggressive price cuts.

  • The initial buy-to-list premium (blue line) represents new houses listed in a current month, while the current buy-to-list premium (pink line) includes houses listed in previous months.

  • The difference is price cuts; Opendoor cutting the initial listing price down to the current listing price -- which it is doing energetically across its markets.

 
 

Some perspective: Opendoor is selling around 2,000 houses per month with an average sale price of $400,000. A buy-to-sale loss of two percent amounts to a $16 million loss.

  • Yes, and: Opendoor is racking up other expenses, including $3,500 buyer agent commission bonuses and seller concessions, to previously unseen levels.

  • The result is going to be a pretty tough Q3.

The bottom line: This is market whiplash -- just six months ago I was talking about how Opendoor was going to make record profits from home price appreciation.

  • You can't have highs without the lows -- this is the nature of iBuying, and now is Opendoor's chance to prove its model works during a significant downturn.

Thank you to my friends at Datadoor.io, Yipit Data, and Max Mitchell for their help with data for this analysis. "In God we trust; all others bring data."

Opendoor's Buyer Agent Commission Advantage

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Even in a cooling market, Opendoor's buyer agent commissions -- the fee paid to a buyer's agent when a house is sold -- remain significantly lower than market averages.

Why it matters: Leveraging its powers of scale, Opendoor is pushing down buyer agent commissions in order to reduce its expenses -- a trend that began in early 2020.

  • Opendoor's buyer agent commissions range from 0.5 to 1 percent lower than the market average (typically, but not always, three percent).

  • At scale, this could save the company over $50 million in commission fees annually.

Dig deeper: The data above, collected from Datadoor.io, looks at over 9,000 listings in Opendoor's 20 largest markets as of September 2, 2022.

  • There were also 226 listings with buyer agent commissions above three percent -- typically on houses that are struggling to sell.

 
 

The bottom line: Opendoor is deftly turning the buyer agent commission into a competitive advantage to optimize its business model.

Opendoor Doubles Its Ad Spend

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Opendoor's advertising spend has skyrocketed this year, higher during the first six months of 2022 than ALL of last year.

Why it matters: Even in a slowing market, Opendoor's foot is firmly on the accelerator, growing the business and educating consumers at a scale never seen before.

  • In addition to key partnerships, Opendoor is taking its message of a quick, instant sale directly to consumers in a big way.

Opendoor's increased advertising spend is driving an increase in home purchases; it's already purchased nearly twice as many homes in the first six months of 2022 compared to the same time last year.

 
 

Opendoor is becoming a real estate advertising juggernaut as it strives to become a leading consumer brand.

  • Compared to the same time last year, Zillow spent $12 million less on advertising (largely due to its exit from iBuying), while Opendoor's ad spend surged $71 million.

  • At its current rate, Opendoor could eclipse Zillow's ad spend in 2022.

 
 

The bottom line: At a time when other real estate companies are slowing down and cutting expenses, Opendoor is accelerating.

  • It's notable that Opendoor hasn't enacted layoffs, isn't unilaterally cancelling purchase contracts, and has increased its advertising spend.

  • With a strong balance sheet, Opendoor is taking a long-term view of the business and enthusiastically investing now for future growth.

The Zillow & Opendoor Partnership

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Last week, former rivals Opendoor and Zillow announced a partnership to provide Opendoor's instant cash offers to Zillow's audience.

Why it matters: This is a big move for both companies. It reaffirms the continued relevancy of iBuying, gets Zillow back into the seller lead game, and gets Opendoor access to its largest customer acquisition channel yet.

But, why: It's a match made in lead gen heaven.

 
 

This partnership gives Zillow the ability to generate and monetize high-quality seller leads (consumers that are considering selling their home), something it lost when Zillow Offers was shut down last year.

  • Historically, Zillow was only able to convert 10 percent of sellers who requested an instant offer; the other 90 percent are high-quality seller leads.

  • Those leads are worth their weight in gold and can be monetized through Zillow's premier agent network (yes, I've been talking about this since 2018).

For Opendoor, this partnership represents an incredible -- and perhaps the industry's largest -- source of customer leads.

  • It extends Opendoor's ecosystem partnership strategy, which includes deals with Redfin, realtor.com, and eight of the top ten homebuilders.

  • The potential benefit to Opendoor is economic: lower customer acquisition costs, which were around $5,500 during the most recent quarter.

 
 

Perhaps most important, a Zillow Advisor will be the first point of contact for consumers requesting an instant cash offer.

  • This effectively cements Zillow's powerful position at the top of the funnel with continued, full access to the customer.

  • A Zillow Advisor will be able to discuss an instant cash offer alongside a traditional sale (seller lead), in addition to Zillow Home Loans.

Without the opportunity to upsell adjacencies, Opendoor becomes a fulfillment engine, similar to its other industry partnerships, focused on the core iBuyer transaction (buy, fix, sell).

The bottom line: This deal is both a confirmation of the relevancy of iBuying, and a continuation of that relevancy through Zillow's promotion of instant offers across its massive platform.

  • It puts Zillow back in the potentially-lucrative seller leads business, and gives Opendoor access to millions of potential customers. Win-win.

For more on iBuyers, portals, and the major shifts across the industry, check out my keynote presentation, 2022 WTF, from Inman Connect Las Vegas.

Building a Better Mousetrap: Zillow vs. Opendoor

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Opendoor made over two million offers to curious homeowners in 2021, exponentially more than ever before.

Why it matters: This highlights the growing potential of Opendoor's "top of the funnel" customer appeal -- which is beginning to rival Zillow.

  • Opendoor and Zillow are both in the game of attracting consumers and converting them to monetizable customers.

Dig deeper: Of the 2.1 million offers Opendoor made in 2021, it only purchased 1.8 percent, or around 37,000, of those houses.

  • Based on the company's numbers, of those 2.1M offers, five percent, or 105k, represented unique "real sellers." Of those, 35 percent sold to Opendoor.

  • That purchase rate has decreased over time as Opendoor has ramped up the number of offers it makes while automating the offer process.

 
 

A low purchase rate does raise questions of product/market fit.

  • Based on the total offers sent out, a very small number of consumers are deciding to sell their home to Opendoor.

  • But of "serious sellers," one in three ain't bad.

Yes, but: Hundreds of thousands of consumers are actively deciding to visit Opendoor to request an offer.

  • Even if Opendoor doesn't buy the house, the company still touches a homeowner during their home buying/selling journey, creating an opportunity to cross-sell adjacent services (brokerage, mortgage, leads to agents).

  • And, as we'll see below, overall customer conversion is on par with Zillow.

Zillow's powerful top of the funnel customer acquisition tool is its web site, which generated an estimated 21M leads in 2021.

  • Of those, 1.4M were "real buyers" and 26 percent of them (360k) ended up transacting with a Zillow Premier Agent.

  • That results in an overall conversion rate of 1.7 percent, exceedingly similar to Opendoor's 1.8 percent.

 
 

Zillow's dominance at the top and bottom of the funnel is clear: 10x larger than Opendoor.

  • But surprisingly, Zillow, the decades-old industry heavyweight, is only 10x larger than Opendoor, which has made notable gains.

  • There are variations in conversion rates throughout the funnel, but overall efficacy is nearly identical.

Remember: Zillow is optimized around home buyers, while Opendoor is optimized around home sellers.

The bottom line: With similar conversion rates, neither company has built a better mousetrap, but Zillow's mousetrap is exponentially larger.

  • In terms of customer reach and the sheer quantity of leads generated, Zillow has a huge advantage.

  • But with its ongoing national expansion, heavy advertising investment, and automation of the offer process, Opendoor is making significant gains -- and the growing power of its top of the funnel customer acquisition can't be ignored.

A note on data: The last time Zillow reported the number of leads generated annually was 17M in 2016. My assumption of 21M leads in 2021 is a well-informed estimate.