I’ve been looking at the real estate start-up Opendoor for a very long time. While there are a number of real estate startups that address consumer facing rentals, broker assistance, or home-finding, Opendoor seems to be very unique in their quest to disrupt real estate. Their pitch is that they can simplify any real estate transaction. “Opendoor is an online home-selling service aimed at streamlining the sales process down to a few days.”
I think Opendoor is taking a very innovative way to take on an industry that is ripe for disruption and can grow to a $50MM+ revenue company within 3 years, with the upperbound potential to get $1B+ in revenue.
Why is this impressive to me?
I am very excited that Opendoor allows customers to sell their house within a few days. The real estate industry is one of the biggest but most fragmented industries. While real estate is 12% of 2013 US GDP (which equates to almost $2 trillion in 2013), real estate itself can be broken apart into so many industries (residential brokerage, commercial brokerage, residential renting, insurance, escrow…) (BEA.gov) . There are 318MM people in the United States of 2015, and every single one of these people need a place to sleep, eat, work, and play (Census.gov). This comes out just over a humble $6K per person per year. If you consider that the average rent of a 1 bedroom house in Seattle is ~$1.5K/month, and home values composed 67% of middle class wealth, this seems fairly reasonable (The Atlantic). Space, just like food and water, is a core basic necessity that every single person needs.
However, the location (location, location!) of a piece of real estate can simply not be changed. This leads to one of the major pain-points about any real estate transaction: non liquid state of each property. Unlike many other goods, each real estate piece is usually uniquely valued. A non-commoditized market means that each buyer and seller is unique. For any real estate transaction to happen, an extra-ordinarily large amount of friction must be over come between a buyer and a seller.
- Time: both parties must be interested in transacting at the same time
- Quality Product: It must be a good that that the buyer is interested in, and the seller must have it prepared in the exact (or minimally acceptable) shape
- Money: They must mutually agree on a price-point. Also, i must point out that most real estate transactions costs a lot of money for the average person (A home is generally 67% of the middle class wealth. In short, this is usually a very important transaction for both parties (The Atlantic).
The odds of the stars lining up for this are so low that it is no surprise that $117B ($76B residential) real estate brokerage market exists. There are 727K firms and 946K employees that focus exclusively on helping buyers find sellers and skimming a 6% commission off the transaction (IBIS World).
Opendoor is trying to improve this transaction.
How is Opendoor trying to take on the brokerage market?
It seems that Opendoor is attempting to be a consolidated, uniform service in an industry that is described as heavily fragmented. “The real estate sector is highly fragmented, with thousands of local and regional players serving the surrounding area.” (IBISworld)
- On a customer front: they are removing the aspect of time and guaranteeing a selling price on a set time-line (major customer selling point)
- On a business front: Opendoor is trying to offer a reliable service that scales independent of human brokers (faster more aggressive expansion, w/ a lower cost structure)
Considering that Keith Robaias, an ex-PayPal Mafia, is a cofounder, my guess is that Opendoor is making this possible by fronting the financing cost and holding the house as an asset in the time that a sellers wants to sell and when a buyer is actually interested in buying. They boldly claim that you can “sell your house within days” and that they are “on a mission to change residential real estate transactions by bringing world class software, data science, and design to an age-old industry. Making sure that we give accurate offers and price our homes accurately is vital to what we do.” It’s not a huge stretch of imagination to think that Opendoor’s business model involves 1) borrowing money to 2) buy algorithmically valued properties and then 3) later reselling them to future buyers. This means essentially removing the friction of time between a buyer and a seller. When a seller wants to sell, they can immediately sell to Opendoor. Opendoor, as a company with a bigger payroll and a much longer time horizon, can repeat this operation and break even on the cost of the house. Opendoor can monetize by either buy and then sell exactly at market value and taking the traditional 6% commission (split for the seller broker and the buying broker), or it can start adjusting prices (buying at lower prices and selling at higher prices).
My guess is that to balance risk, profitability, and growth, Opendoor is fine-tuning the price threshold for offers. To be truly competitive with traditional brokers, Opendoor needs to at least match the quality of service but truly blow them away with ability to deliver a sale on the promised time so they take a guaranteed selling offer. For many on a tight timeline, this is far more appealing than risking the free market and trying to find a live buyer. Nobel Prize winning economist Daniel Kahneman shows that in the presence of a 100% guaranteed sure thing, people are generally willing to compromise for an lower expected value/payout.
|Opendoor||Incumbent Brokerage Model||Who Wins?|
|Time||Opendoor can promise a transaction on a very fast timeline. For many people trying to move, buy a new house, and liquidate their old place, this is huge!||The presence of another party (the buyer) will increase risk of transaction.||Opendoor|
|Service||Opendoor should be able to offer a much seamless, consistent brokerage services, but their goals of automation means removing the human.||I believe that some brokers will be better and many worse, but I think the in person service is going to win here.||?|
|Price||This depends on Opendoor’s risk tolerance for the offering price.||?|
From a business model perspective, Opendoor’s innovative offering and cost structure seems far superior to incumbent brokers. The open big risk is how Opendoor holds the asset between buying it…and then reselling it. What will happen if the real estate market goes south when property is stuck on Opendoor’s balance sheets? This does beg the question, is there anyway for Opendoor to operate this model without directly holding the risk of holding a huge balance sheet of real estate prices? Is Opendoor perhaps operating with an unforeseen and more innovative model? For example, instead of holding the asset, could Opendoor perhaps have an impressively efficient back-end network of buyers that would instantaneously complete the sale?
|Opendoor||Incumbent Brokerage Model||Who Wins?|
|Cost Structure||Since Opendoor is operating at scale, they should be able to scale out to MANY more transactions with much less staff!||Brokers and real estate agents handle each transaction, and every single one is gunna want that money! There is no scale here beyond Franchising (already done).||Opendoor|
|Brand Equity?||Can Opendoor’s consistent product offering carry Opendoor’s brand further than normal brokers? With excellent processes and systems backed by algorithms: I believe, yes.||No matter the brand of the bigger company, every broker inside may result in fluctuating quality of work. Exceptional human service doesn’t.||Opendoor|
|Risk||Financial Risk of the properties they are holding drops in value.||Incumbent brokers may see less business if housing prices drop, but they will not be wiped out like a company that holds real estate assets that immediately devalued.||Incumbent Brokers|
Opendoor Business Opportunity
To estimate the upper-bound opportunity of Opendoor, I’m looking at the biggest 4 brokerage firms in the US. These numbers may a skewed quite higher because these top brokerage companies also work in commercial brokerage, but let’s say that’s okay for the sake of this rough upper-bound estimate. Realogy Holdings has the highest market-share at 3.6%, and the top 2 companies (Realogy and CBRE) pull in between $5.3B – 9B revenue a year (2014, Appendix 1). Realogy is has a ~$6B marketcap and CBRE has a ~$11B marketcap. I look at these two major brokerage companies as a proxy to estimate Opendoor’s potential upper-bound revenue and valuation. From a macro level, it seems optimistic if Opendoor can match one of the top 4 brokerage companies and top $1.5B in revenue.
Opendoor seems to currently be in 1 city — Phoenix. Phoenix is the 6th biggest city in the US, with a population of 1.5MM (Wikipedia). In 2014, Phoenix sold 63.4K homes at a median selling price of $190K.
How much of this market can Opendoor capture? A study “Market Share in the Real Estate Brokerage Industry” from the University of Illinois at Urbana-Champaign claims: “The market share of the firms under study has a wide range from zero percent up to 6.43% for sales and 7.91% for listings out of a total of 1232 listings and sales.”
Applying 8% marketshare penetration and a 5.5% commission, Opendoor’s penetration into Phenoix could result in an annual revenue of $53MM/year!
|Est: Opendoor Revenue Potential in Pheonix|
|Homes sold in Pheonix (2014)||63,509|
Realistically, it’s going to take some time for Opendoor to get to this volume. Regardless, each sell that it captures still means $10K in revenue! At a more pessimistic 2% penetration of the Phoenix Market, this is $13MM/year. 2% means 1.2K units a year, or 1K units a month. Within a year, I think this is reasonable.
3-Year Opendoor Business Opportunity
If Opendoor is able to enter the top 100 cities in the US and successfully capture 2% of the real estate market, Opendoor will be bringing in $500M in revenue a year. At a higher market penetration, they will be running head to head against the big 4 and would top $1.5B. Realistically, though, this is in years away. Right now, Opendoor needs to buckle down and knock out Phoenix, and (according to press) Dallas and Portland next.
- 2015: Phoenix entrance
- 2016: Grow in Phoenix, get to 2%. Enter toes into Dallas and Portland.
- 2017: Grow in Phoenix, get to 4%. Grow in Dallas and Portland. Start Poking into XX more cities
- 2018: Grow in Phoenix, get to 6%. Grow in Dallas and Portland to 2% each. Grow in other cities.
In 3 years, as long as Opendoor executes well, I think it’s reasonable that Opendoor starts pulling in north of $56MM in revenue ($40MM from Phoenix, 11MM from Dallas, and 5MM from Portland).
What is next?
From my personal perspective, Opendoor is playing in a fabulously fascinating space. How is Opendoor going to execute against these markets? What cities will Opendoor expand to? How much runrate does Opendoor have? More to come.
Appendix 1: Top 4 Real Estate Broker Competitors
|Major Companies||Market Share||Annual Rev||Employees||Years||Notes|
|Realogy Holding Corporation||3.60%||$5.3B||10,800||1990, but Realogy split apart in 2006||Owns 18 franchises. For example, their Francise, Coldwell Banker, has 82K employees.|
|CBRE Group Inc||1.50%||$9.0B||52,000||1906|
|Cushman & Wakefield Inc||1.00%||est $1.2B||16,000||1917|
|Newmark Grubb Knight Frank||1.00%||est $1.2B||?||1929|
|Top 4 firms||7.10%||est $16.7B||78,800||n/a||4 firms|
|Average Brokerage||92.90%||est $100.3B||867,200||n/a||727K firms|
Appendix 2: Excel Analysis
Feel free to look through my analysis of Opendoor’s market opportunity.