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How Does Opendoor Make Money? Opendoor Business Model In A Nutshell
Opendoor is a digital real estate platform for buyers and sellers. As a real estate company, Opendoor also purchases homes to sell them at a profit. Opendoor makes money via seller fees when homes are sold through the platform, profits from homes bought by sellers and resold on the platform, and home loans in the form of interest income.
Opendoor is an online real estate company based in San Francisco and founded by Keith Rabois, Eric Wu, and JD Ross.
Property owners looking to sell on the platform work with Opendoor representatives to formulate an estimated value. Importantly, the valuation process is free, virtual and there is no obligation for the seller to proceed with the sale. It is also rapid, with Opendoor using data-based machine learning technology to produce accurate valuations in as little as 24 hours.
If the seller is satisfied with the quoted price, they can sell directly to Opendoor for cash or list their property with a top agent. Acquired homes are then advertised on the Opendoor marketplace where they are displayed across the United States. In some cases, these homes may be renovated or repaired before they are listed to increase profit.
Opendoor mission is “to empower everyone with the freedom to move.”
Setting the vision to “reinvent life’s most important transaction with a new, radically simple way to buy and sell your home.”
Based on the two key players for the Opendoor digital real estate platform (buyers and sellers – based on whether they will list the property or sell it to Opendoor) we’ll have a few value propositions.
Value Proposition for Sellers
Selling on the platform can happen in two ways: either by listing the property on the digital platform, or by selling it directly to Opendoor. In these two cases, the workflow and therefore the value proposition for sellers will change slightly.
Listing with Opendoor
Image Source: Opendoor
As the company highlights the main advantage of listing with Opendoor is that of potentially having access to dozens of potential buyers, while saving on commission fees (a 5% commission compared to the canonical 6% fee) and that of optimizing the process for a higher sale bidding price.
Selling to Opendoor
Image Source: Opendoor
The advantage of selling directly to Opendoor is that of getting cash fast, while avoiding the whole selling process (Opendoor will sell the house at a profit to the final buyer).
Value Proposition for Buyers
The Opendoor digital real estate platform for buyers (Image Source: Opendoor)
On the other hand, buyers gain access to a simple to use the platform, where the process of buying a home is frictionless and with an intuitive UI. Opendoor also assists the buying process and provides potentially financing.
This is how Opendoor explains the main difference between the buying process with a traditional agency, compared to the buying process on the platform (Image Source: Opendoor).
The company explains the main difference with a traditional real estate agency in these terms:
Opendoor has streamlined the process to make buying any home easier and more efficient. You search for homes online and book on-demand tours for the ones you want to visit without having to wait for a specific agent to show you the home. Our team of licensed experts are only a few taps away when you need advice and info. And when you find the home you want, we’ll connect you to a top-rated local partner agent to help you make your offer and negotiate on your behalf. Plus, you’ll save up to 1.5% at close.
Opendoor offers a state of the art digital platform, with an extremely simple mobile UI for buyers, and a guided process for sellers. Technology is therefore used to enhance the value proposition for both buyers and sellers.
Let’s explore some of the ways technology is leveraged to enhance the value proposition on both sides of the platform.
Executing a transaction in a market typically depends on matching a buyer and a seller, or a buy order and a sell order, as to, for example, asset, price and amount. For a fungible asset, efficiently matching a buyer and seller or their respective orders, and realizing the asset’s liquidity, is a relatively common occurrence. However, for an illiquid asset, or asset of lower liquidity, efficiently matching a buyer and seller or their respective orders, and unlocking liquidity, is more challenging.
And it continued:
Shortcomings of existing techniques for matching buy and sell orders are overcome by the method and platform described herein, through which orders involving at least one asset, which can be of one or more types and/or from one or more sectors and from various participants (buyers, sellers, buyers/sellers and sellers/buyers), are efficiently matched. The present method and platform efficiently facilitate trades and unlock liquidity of markets, assets or both by reducing one or more transaction costs, including time, money and effort, typically associated with traditional price/time priority techniques for matching buy and sell orders. In some embodiments, the present method and platform efficiently facilitate trades and unlock liquidity of markets, assets or both by identifying one or more market gaps, generating one or more live, executable, non-negotiable orders to fill one or more of the market gaps and filling orders.
AVM (Automated Valuation Model)
On the buying side, Opendoor levaraged machine learning models to estimate the value of a property.
AVM, or automated valuation model, is the name given to a Machine Learning model that estimates the value of a property, usually by comparing that property to similar nearby properties that have recently sold (comparables or comps). Comps are key: an AVM evaluates a property relative to its comps, assimilating those data into a single number quantifying the property’s value.
An example of how Opendoor engineering team uses AVM models powered by deep learning to reinforce the process and make it more effective (Image Source: Opendoor Engineering Blog).
Opendoor uses a multichannel approach (paid advertising, earned media, and partnerships), focusing on low-cost growth (primarily via digital marketing channels).
The core marketingstrategy comprise earned media and online real estate partnerships with leading industry brands. These strategies are used to reduce the acquisition cost of both buyers and sellers.
Also, Opendoor enhances its distribution with agreements with resale brokers, where the company pays out broker commissions to real estate agents using the platform to sell homes.
Fundamentally, the Opendoor revenue model is quite similar to that of most other real estate companies. It purchases homes for a reasonable price and then endeavors to sell them at a profit.
However, the company is using technology to drive revenue generation in what is a typically conservative and inefficient industry.
Following is a look at how the company is using innovation to its financial advantage.
Seller fees
When Opendoor purchases a house, it charges the seller a fee ranging anywhere between 6 and 14%. Fees are determined by how much work the house needs before resale and how long the company expects it will take to sell.
In many instances, the Opendoor seller fee is much higher than the industry average of 6%.
This begs the question: why would a consumer choose Opendoor over a traditional avenue?
The short answer is speed and convenience. Using technology to value a home, Opendoor makes a promise that it can create a competitive cash offer in no more than 48 hours. This means the consumer can avoid a more typical wait time of two to three months elsewhere.
Profit algorithms
As mentioned earlier, Opendoor makes money when it earns a profit on its investments.
This ability is heavily reliant on the company having a stringent and accurate valuation process. Generally speaking, Opendoor will only purchase family homes build after 1960 with an estimated value of $125,000 to $500,000.
Since most American homes fall quality under these criteria, Opendoor has been able to refine its purchasing algorithm with a large data set to make it more efficient.
Home loans
Opendoor also offers home financing to buyers, regardless of whether they are purchasing on the Opendoor platform.
Unlike other mortgage providers, the company only makes money on the interest the loans generate. There are no establishment, processing, or maintenance fees.
Cost structure
In order for Opendoor to generate revenues, it will have to close the sales on the platform. Therefore, costs incurred to make a sale comprise the property purchase price (if it was bought directly by Opendoor), acquisition costs, direct costs for renovation and repairs. In addition, costs of revenues also comprise the expenses associated with delivering the service (like support to buyers and sellers).
Key takeaways:
Opendoor is a San Francisco-based online real estate platform. On the platform, a property owner can list their property for sale and receive a valuation in as little as 24 hours. Eligible properties are then renovated or repaired as required and sold for a profit.
Opendoor operates in much the same way as a traditional real estate company with one key difference. The company uses machine learning technology to quickly and accurately value a large subset of American homes it believes will be profitable.
Opendoor also offers no-fee financing to all home buyers, regardless of whether they are on the platform itself.
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