SF Business Times last week asked Opendoor CEO Eric Wu if the capital intensive nature of buying homes from consumers and selling them later is a challenge, and he said this:
It’s a challenge up front, but it becomes a competitive advantage over time. In order to deliver a one-click home sales experience we have to deliver on that promise to consumers and provide that financial guarantee because they’re using that capital for something else.
Note the vision statement: Deliver a one-click home sales experience.
Opendoor lets a home seller fill out a quick form online and sell their home to Opendoor within days. The seller pays a slightly higher fee, and some argue the sale price could be lower due to automated valuations, but the seller is done immediately without having to list their home, show their home, pay for staging, etc. Then Opendoor owns the homes they buy, and they list all that inventory on their site for buyers. They’re literally buying listings.
It’s real estate brokerage reimagined. Another firm called OfferPad does this too, and my firm loanDepot has partnered to let OfferPad provide financing to sellers and buyers, which further streamlines the consumer experience. Redfin is also dabbling in this with a $10m initial investment that they’re now increasing to $20m. And Zillow is now experimenting with the model too, and we can expect they’ll dive in deeper very soon.
The model makes sense for consumers, but is indeed capital intensive. It’s resoundingly similar to mortgage banking in that you take an asset on your balance sheet for a certain period (in this case, the home instead of the loan). There are three key questions as this space is being defined:
(1) For the companies and the financial system, what happens if home prices started falling and these firms have a bunch of depreciating inventory on their balance sheets? From a systemic standpoint, this is still a niche business and most homes trade the old fashioned way, one seller-to-buyer at a time using real estate agents repping each side. From a company standpoint, they do have real assets (the homes) on their balance sheet and if they couldn’t sell them in a down market, they could rent them until they got back into their target price range. In other words, the early thinking says they could withstand market cycles.
(2) For the consumer, how long before this is a truly viable model nationwide? In a fully mature model, this makes selling a home just like selling a car. You just trade in your old home and get a new one. Pretty damn cool, and with our visionary hats on, it makes a ton of sense. It’s just going to take time, and I believe that the financing must be integrated for it to work properly. I love Wu’s one-click home sale vision, but a sell is mostly paired with a concurrent buy, which requires the seller to be pre-set with financing for the new home for the transition to come off seamless for the consumer. Which brings us to question three.
(3) For the competitive space overall, who will control this model in the end? Consumers do indeed need mortgage to be part of a seamless experience, and countless failed mortgage startups in recent years prove that doing mortgages well at scale is way harder than it looks. So these firms can build mortgage organically like Opendoor and Redfin are attempting at this stage, or partner like OfferPad has done with loanDepot. Scale and experience in mortgage is critical to ensure simplicity for the customer, and also for pricing. Small-scale mortgage arms of firms like Opendoor and Redfin won’t have the best process or rates, and mortgage arms can only be a loss-leader for these firms for so long.
It’s too early to tell how all of this plays out. But there is zero question technology is causing lending and real estate services to converge extremely fast. The consumer wins no matter what. As for the companies, more below on the four main sectors that are converging. And more coming shortly on the one-click mortgage.