[mconnolly]

This isn't game changing, this is just good marketing. The real game changers are the ones over at OpenListings (YC F15) who are giving back commission checks and doing their best to eliminate the real estate agent entirely.

He's not trying to fundamentally change the market. Just like someone else mentioned, this basically a bonafide residential REIT.

They're introducing MORE costs to the transaction, creating a closed marketplace where another closed marketplace already exists, and framing it as some revolutionary startup. They're only doing this because they're big name valley guys who raised a ton of money.

[harmmonica]

I believe they are trying to fundamentally change the market.

For a fee (I guess it's 1-6% on top of the typical 4-6% commission?), Opendoor removes the pricing (list price), appraisal and financing risk and let's the seller unlock the value of the house in a fraction of the time. On top of that, and unlike the current process, if I'm understanding correctly, they also make it explicit to the seller why their house is worth what it is. And I can't belabor that point enough: the reason the residential real estate market is so opaque is because of the uncertainty/inaccuracy around pricing. Realtors do their best to determine value, but there is a specific reason properties sell in 2 days (priced low) or 6 months (priced high) and it's strictly because of erroneous pricing (btw, this isn't true in SF, for instance, where agents intentionally price low to get bidding wars, but that is not the norm nationwide). We've reached this point where the data is largely available so that the historical method of picking a few "comps," licking your finger and seeing which way the wind's blowing will soon be a thing of the past and that's the crux of what OD is doing. If that means they're not fundamentally changing the market, I'd ask you to look into how property gets priced today by the two parties responsible for making sure the deal gets done (the broker/agent and the appraiser).

As for how the seller perceives things, if I tell a seller your home is worth X, and here's all the data supporting that--actually quantifying why your friend John's house down the block sold for 5% above what we're offering you--the seller is informed and can decide if they're willing to assume those risks I mentioned above to get a higher price than OD is offering. Assuming I have a house at the average US home price ($190k or so?), if you tell me that I can take OD's $186k "no risk" offer or wait it out and hopefully get the full 190k given all those risks mentioned above, I suspect many people would just take the 186 and move on. And either JD's in his own little reality distortion field (probably somewhat true) or he and their investors are actually seeing this work with the unit economics to back it up.

One last note in this horribly long comment: there is so much opportunity for economies of scale here with the pricing of items like marketing costs, inspections, repairs, appraisal costs--heck, even financing rates--that I suspect and probably hope in vain that over time OD will accept even lower fees. In some fantasy land I can imagine OD getting confident enough in their pricing that transactions end up costing the seller 2% (total, completely wiping away the need for a real estate commission on the sell side and once they merge/acquire Openlistings they'll drive down the buy-side commission rate as well). And of course if this ends up working at scale for OD every deep-pocketed institution will create divisions that do this as well, which will just mean that OD is the first of many new-age residential real estate broker (call them a market maker or REIT if you like that label better, but everyone will sell in this more liquid, transparent way in the future... how long will that take? Well, if there's another housing bubble right now, all bets are off, but otherwise this could happen relatively quickly).

[panabee]

what's the dream business model of every VC? a marketplace.

the ideal outcome, though perhaps improbable, is likely to become the ebay of real estate. what they lack is critical mass.

today, they're focused on seeding the marketplace with sellers, that is filling the supply side, which is the natural place to start.

this is a long way of saying that it seems not at all unreasonable to hope they will emulate amazon's AWS strategy of reducing fees as costs fall, not only to deepen their competitive advantage but also to drive them closer to critical mass. but given the high costs and uncontrollable risks, they need to, in the early stages, compromise growth for unit economics and cash flow.

fundamentally, they're using machine learning and automation to remove guesswork and fat from real estate transactions, so this company will be interesting to watch.

what many commentators miss is that OD is selling a service to home owners. it would be helpful if knowledgeable real-estate people focused on (a) estimating how many sellers want this service; (b) if 2% seems reasonable for OD's service; and (c) if this initial market is large enough to jumpstart their marketplace ambitions (assuming this is the end goal).

[harmmonica]

I agree with so much of what you say here (hope for the AWS strategy; the fact that this is a service business, which is what the existing brokerage business is as well of course; using data/ml to remove (massive) fat), but I'm torn about whether their end goal is actually, or even should be a marketplace in the traditional ebay/zillow/trulia sense. There are countless residential marketplaces with good reach already that as long as their pricing model works really well they can focus on supply side exclusively (i.e., buying for 98 cents on the dollar) and then using the existing marketplaces to market. They have to find buyers, of course, but that doesn't mean they need to directly source the buyer. In this model, as the old real estate adage goes, you make your money when you buy the property (that's not meant literally of course).

[panabee]

you could be right. i only started thinking about OD with this thread and have no inside information. that said, a marketplace seems like the ultimate ambition for two reasons.

1. one co-founder is a VC who previously led a marketplace business, paypal. VCs are already conditioned to aim for marketplaces. tasting marketplace success as an operator probably only deepens this reflex. it's harder to eat ground beef when you're used to wagyu.

2. if a marketplace is possible, why not? it creates a larger moat to keep out competitors and assuming they don't abuse monopolistic power, a single marketplace can make pricing fairer (more buyers, more sellers) and more efficient (lower fees). instead of 6%, what if OD enables a world where transaction fees are 0.5% or 1%? the classic disruption playbook (hi, telsa!) is to aim for a dominant market position by starting high, then using technology to steadily reduce prices, expand use cases, and gain market share.

[harmmonica]

I come from a marketplace background myself and went through two bubbles so you were spot on when you said it was easy for me to say "bets are off in a bubble"--it was easy! And it would have been even easier for me to say marketplace = no brainer. But I just think there are some benefits to leveraging existing demand-side players.

At the risk of agreeing with you too much, though, "why not?" is true, but I think the numbers could be pretty attractive regardless if they ever go/get there.

No inside info here either, btw, though I like to think I get some of the nuances in this market. Sounds like you do as well.

[panabee]

upon further reflection, changed my assessment. think the goal is to become the amazon of real estate, that is the default place for buying, selling, and leasing real estate. details: https://medium.com/@panabee/analyzing-opendoor-unicorn-or-bu...

[Schwolop]

This whole system is so bizarre to me. In Australia, standard practice is that a seller pays ~2% to an agent to have them sell their house. They then pay a sales tax to the state government, that scales weirdly, but call it ~0.5 to 0.75%.

Buyers pay nothing to anybody, except ~$1000 to a conveyancer/lawyer to sort out paperwork when the deal is done (and of course the price of the house, to the seller or mortgagee...)

[harmmonica]

It is bizarre. The difference in numbers between what you're saying exists in Australia and the US is staggering. I'm clueless about the market there, but even if there are laws on the books that better protect buyers/sellers, and so there's some justification for the "risk premium" that US buyers and sellers pay for protection throughout and after the transaction, I'd wager a princely sum that the magnitude of that premium is in no way justified.

Btw, this wasn't always true. Some of the protections/standardizations introduced post-recession actually makes the US residential market more ripe for an OD-type model. I could go on and on about why that may be the case, but I'm guessing others are sick of me writing long-winded comments in here even though you and I are probably the only people still interested in this thread.

As someone else said, though, sure is interesting to watch.

[ensignavenger]

So do Australian buyers not usually have an agent to represent them? Does this put them at a disadvantage?

[Schwolop]

It is possible to hire a buyer's agent, but I don't know anyone who has. Everyone is on an equal footing, sellers just want to sell to the highest paying buyer.

The most common way of selling is via public auction. Each weekend for 6-8 weeks beforehand there's an hour long "open house" where the sales agent shows people through. Then on auction day, interested parties bid in public. I don't see how a buyer's agent would help change an auction's outcome.

Sometimes sellers elect to sell by other methods; best offer, best offer by set date, sales agent to negotiate with interested parties, etc. I suppose in those flavours a buyer's agent might be of some assistance.

I can only assume in the US that there's more risk of something going wrong - do buyers drop out frequently after making an offer or something like that? How else are the fees anywhere near justified for a simple transfer of property?

[ensignavenger]

In the US sometimes auctions are used, but it is not the norm for most markets. Usually the seller will hire a real estate agent, who helps the seller determine what to ask for the home. Then, the sellers agent will be responsible for listing and marketing the home. The cost of marketing is usually paid by the real estate agent, so that can be part of why the commission would be so high. Back in the day when there was no Internet and listings were primarily advertised in newspapers and special directories, marketing was probably a much higher cost.

As far as the buyer goes, they will usually have a buyers agent to help with showings, negotiations and to coordinate the process. An offer is usually contingent on several things- the main ones being 1) home/pest inspections; 2) Appraisal, 3) Financing.

So real estate deals do fall through often enough. Maybe somthing is noted on the inspection- the buyer might ask the seller to pay for a repair, and the seller decides not to. FOr example, when I was shopping for my first home we found a nice little place, I was little concerned about a few things with the roof, but I made an offer contingent on an inspection (as well as the other things noted above). My offer was accepted, so I had it inspected. The roof was really the only concern, the inspector felt that it should be replaced. I told the seller about the problem, and they decided that they were not going to pay anything towards a new roof, so we mutually agreed to nullify the contract.

Later I found another home- it passed all inspections, but the appraisal came in $900 less than what I had offered. The seller was going through a bankruptcy and had to have the sell approved by the bankruptcy judge, and since they had already approved it at my asking price, it was not worth delaying the closing over getting the price reduced $900, so the bank and I agreed that I would just pay an additional $900 down at closing to bring the debt/value ratio to where they wanted it, and we closed. (If it had been a more significant proce difference, that may not have worked out, resulting in another voided contract.)

In other cases, financing may not come through- the lender will pre-approve the buyer, but that is not a guarantee- the lender can decide they don't want to lend on a property due to the condition or something else, they may discover something during underwriting they weren't aware of about the buyer, the buyers situation may have changed, or the market conditions for loans may have changed (interest rates increased); all of which may result in a denied loan, and thus a voided contract.

Real estate agent are supposed to make this all as smooth as possible and help inform buyers and sellers to minimize the risk of any of these things happening.

I agree that with modern technology the current commission structure is probably not optimal, though.

[panabee]

on the surface, it's easy to say "all bets are off" in a crash/recession, but would you say the same for retailers like gap and tiffany?

the business models are conceptually similar: buy a product from suppliers (clothing manufacturers for gap, home owners for OD) and hold in inventory until a seller is found.

the key difference, of course, is cost of goods. each product costs OD hundreds of thousands of dollars (and eventually millions) while each gap product only costs a few dollars.

like gap, OD can directly control how much it buys from suppliers while indirectly controlling how much it sells via discounts.

predicting home demand is obviously much more difficult, because both the buying psychology is different and the sheer volume of apparel transactions makes forecasting demand more reliable.

nonetheless, the principles of managing cash flow and inventory risk remain the same. provided OD isn't carrying excessive inventory, the business model can survive downturns in different geographies. (what they can't survive is an environment where homes everywhere perpetually depreciate.)

put another way, if people can earn money in the stock market during a recession, why can't OD do the same for the housing market? OD can treat homes like equities in a stock portfolio where they try to balance losses in one area with gains in another.

in summary, OD's fatal flaw won't be a housing bubble (unless it's global and permanent), the fatal flaws will be the risk, pricing, and inventory models. and until you have insight into those, it's impossible to properly assess OD's prospects.

it's also important to note that inventory risk could decrease over time, as once the pricing and demand models are honed, they could allow third-parties to finance some transactions (e.g., home X has a 80% chance of turning over in 30 days).

[harmmonica]

Nice to see someone still reading this. I again agree with almost everything you're saying here. Plenty of companies flourish in difficult climates, but the margin for error is much greater in a rising or static market. In a falling market there's just less room for failure (like there is for most things). Put another way, in reference to my previous comment, I'd be more comfortable betting that this new, more efficient residential real estate market will emerge sooner if there is not a housing bubble (or rather a bubble that bursts).

[panabee]

it seems we nearly agree 100%. the comment about a crash/recession was because it seemed like you were interested in joining the company but were concerned about the repercussions of a bubble.

if you have coffee with the founder, instead of focusing on macro risks, perhaps focus on OD's models for risk, inventory, and cash flow. because they can cherry pick geographies, it's actually easier for them to grow now during a recession than when they're much larger and need more transactions to move the needle.

if you believe the models are sound, then focus on whether you believe the team can adhere to these models, that is whether they can resist the temptation to grow at all costs -- and thus place riskier bets.

we also agree OD could stop short of a marketplace and remain an attractive company. we only diverge on their marketplace ambitions.

[LordHumungous]

So it's a real estate speculation company. Fine. But let's not pretend like some tech wizardry bs is going to give OD an advantage over any other speculator

[panabee]

you're right. we don't know enough about OD's tech and models to conclude anything about OD.

however, most believe information confers an advantage in asset speculation. so if machine learning and data can provide someone with faster, more accurate pricing, that someone -- whether OD or another startup -- possesses a competitive advantage in terms of purchasing and selling real estate.