Opendoor, Redfin, Zillow vs The Real Estate Agent
Here in the Bay Area, we’ve heard of Zillow and Redfin. But what is Opendoor? You might have heard of it if you’re in the real estate business, or not, as they are currently not servicing San Francisco, even though they are based here.
Opendoor is a 4-year-old real estate business that buys homes from sellers and owns them. Unlike a real estate agent, they are not a matchmaker, they buy from the seller, fix up the house, and turn around and re-sell the homes in their website. They set the price for your property based on their algorithm, and they guarantee a fast sale, including transaction fees for their service, which starts at 6 percent to 12 percent or more for risky properties.
They won’t buy every house. The qualifying factor include single-family homes built after 1960 with a value between $125,000 and $500,000. They make money in two ways: from the service fees they charge, and from any difference between what it buys houses for and what it sells them for.
Opendoor works with real estate agents, offering to pay full buyer commissions, as well as seller commissions if a sale comes from an agent. They currently operates in Phoenix, Dallas-Ft. Worth, Las Vegas, Atlanta, Orlando, and Raleigh-Durham. It would likely be a while longer before it attempts to expand any of its home buying or selling operations to coastal metropolises like San Francisco, where it is based, or New York, where housing is more dense and the regulations potentially more complex.
Here are the big questions:
- Does the Opendoor model represent a viable (sustainable, profitable and scalable) platform for reinventing how homes are bought and sold?
- Is Opendoor, Redfin, or Zillow better than working with a real estate agent?
A strategic advisor in real estate tech, Mike DelPrete, put together analysis based on MLS records, listings from Opendoor’s web site, the Maricopa City Assessor’s public property records, and public records sourced from Redfin to gather the report you are about to read. He used industry benchmarks to estimate the costs and fees associated with flipping homes in Phoenix, to provide a very good look at Opendoor’s business. Let’s take a look..
Does the Opendoor model represent a viable (sustainable, profitable and scalable) platform for reinventing how homes are bought and sold?
Opnedoor’s business model is not a scalable one. By serving as an active middleman in the transaction, they effectively doubles transaction costs and incurs a wide variety of rehab and holding costs.
Below, we have done our best to estimate Opendoor’s gross profit per transaction in the Phoenix market. Again, we assume that on average Opendoor pays $217,370 for a home and charges a 9 percent fee, holds the home for 88 days, and sells it for 5.5 percent more than it paid:
For every month Opendoor holds a home, it spends roughly $500 per $100,000 of home value. it’s tough to imagine Opendoor being price competitive with agents. The best disruptors are both better and cheaper than incumbents, and we think cost has implications for Opendoor’s addressable market.
If Opendoor continues to profitably flip homes, we don’t see a compelling reason why an institutional investor with deep pockets won’t enter the market by hiring data scientists (or licensing an AVM from Redfin or CoreLogic) and undercut Opendoor by offering to beat any offer by an extra grand.
Is Opendoor, or Redfin, or Zillow better than working with a real estate agent?
There’s a general sense that the internet should do more than entertain window shoppers and generate leads for agents. It should actually make it easier and cheaper to sell a house. There’s just one issue: No one has figured out how to bypass the flesh-and-blood real estate agent.
Redfin’s low-fee model relies on an army of in-house agents who trade typical commissions for the volume that’s possible with internet-generated leads. A Redfin world isn’t a world without real estate agents, but it is one where fewer agents do more. The nation’s 1.4 million working real estate agents do not particularly like Redfin.
Zillow has a different approach. If anything, Zillow provides a lucrative opportunity for local agents to cement their relationships with the company, but the homeowner seller typically winds up banking less from Zillow than they would have from a traditional sale through a local real estate agent.
Opendoor’s “All Day Open House” allows buyers to find and unlock the house themselves with a smartphone. Easy, right? And yet most of them come with an agent, and the company says it’s one of the biggest payers of commissioners in its markets today.
So why hasn’t the internet cut out the agent, even as houses sell to internet companies with the click of a button? In part because people aren’t really trying to inject any flashy trend, disruptor, startup coolness into the largest and most complex transaction of their lives. They want to deal with a real life person they trust. Local knowledge remains invaluable. Relationships is invaluable. And a satisfied customer doesn’t want to deal with algorithms and systems processes.