What the “Opendoor” Model Means for Real Estate
Will the tech startup Opendoor end the need for open houses, or is it just the latest upstart?
Anyone who’s considered buying or selling a house this millennium is familiar with Zillow, the online real estate database that’s been around for about ten years.
Much less familiar is Opendoor, a startup that launched about two years ago and, if the model works, promises to change the way homes are bought and sold nationwide.
Opendoor is a company that purchases houses (sight unseen except for one inspection) for a flat price determined by a complex algorithm. The company pays cash and the seller is quickly able to move on with their life—literally.
The exchange happens entirely electronically, except for the inspection to verify the seller-provided information.
Currently, Opendoor operates in two markets: Phoenix, Ariz. and Dallas, Texas. The company only deals in single-family homes, valued between $125,000 and $500,000, that were built after 1960. No fixer-uppers, “has potential” or luxury properties are allowed.
How, exactly, does Opendoor work?
Eric Wu, the 34-year-old cofounder of Opendoor, says that he wants to lessen the pain of moving for both sellers and buyers. To that end he put together a team that built a platform to streamline the process for both sides.
For sellers, that means first contacting Opendoor via their website and providing details about the house to be sold. Opendoor then makes an offer, if interested. If the offer is accepted (and the company aims to make accurate and competitive offers) then an inspection is scheduled.
Sellers then have a 60-day window for a closing date. On the closing date, which is set by the seller, the seller is paid and Opendoor (which handles all the “paperwork” details) owns the home.
For buyers, the process is a big step up from viewing property listings online. In addition to being able to check out the available homes, buyers can be connected to financing options. Another bonus: the ability to tour the home anytime between 6AM and 9PM, daily.
Remember, the houses are empty. Want to schedule a visit on the run? Opendoor’s got an app for that. Offers can be made electronically and reviewed quickly. On top of it, they even have a 30-day, money back guarantee.
The Good, the Bad and the Unknown
The model certainly has financial potential, according to the founders and their investors. Forbes called it one of the next “Billion-Dollar Start-Ups” because it taps into “a market with $1.4 trillion in annual transaction volume that’s been largely undisturbed for decades.”
Opendoor makes money by charging an (on average) 8 percent transaction fee to sellers. That’s obviously good for Opendoor, and the ease of selling is certainly good for the sellers.
But, there’s a downside. Opendoor is faced with the task of turning properties over, just like any real estate agent. Sitting on properties, or selling houses for less than the purchase price, isn’t going to turn a profit for the company.
Then there are the parameters, geographically and otherwise, of the model. Mid-sized markets, with new construction, like Phoenix and Las Vegas (where Opendoor is heading next) might work—but what about more established cities, like Boston, Mass.? Buyers in Boston like historic properties.
Buying into even larger markets, like New York, would also seem to be a non-starter. In 2015 the average price of a single-family home in Manhattan was $1.87 million. Of course, there’s always Queens where the average price was only $452,304.
Finally, while there is certainly a business and financial transaction happening, purchasing a home is an emotional decision as well. An “old fashioned” realtor knows this and can help guide buyers along the ups and downs of the journey.
So far, that’s something no online platform, even Opendoor, can realistically offer.