
Startup Pays Cash to Buy Homes, Flip Them - adamqureshi
http://www.wsj.com/articles/startup-pays-cash-to-buy-homes-flip-them-1453423774
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roymurdock
_OpenDoor is unique in that it owns all the homes it lists for sale,
countering the prevailing trend in Silicon Valley of solely running a
marketplace that matches buyers and sellers. As a result, OpenDoor’s strategy
is steeped with risk, potentially backfiring if the economy tailspins...The
company uses mostly debt financing to buy homes, improving returns. Mr. Wu
declined to disclose OpenDoor’s debt terms but said they are superior to what
a typical home buyer gets on a mortgage._

The combination of high leverage and complete property ownership seems
incredibly risky to me. If the country-wide housing market turns sour, not
only is the company left with swiftly depreciating assets on their balance
sheet as real estate values drop and people stop buying homes, but they are
also left paying (probably 1-2%) interest on houses that they "bought" with
these loans for $300k, but that are now worth $200k.

But the overall concept of increasing liquidity in the market by cutting out
the broker and his/her available hours, "automating" the valuation and bid
process, using low short-term interest rates to flip houses, and pricing for
volume and quick turnover is pretty cool. The key is sticking to "commodity"
housing (cheap-mid range) and timing the market correctly.

~~~
jdross
Your last paragraph is pretty spot on.

As for housing risk, we spend a lot of time on this. A few points:

\- Real Estate is very momentum driven and pretty slow. Markets don't crash in
a day, like stocks. The fastest price changes in 2008 were around 3% per month
for non-distressed homes in Phoenix (liquidity drops, but doesn't disappear).
Our model includes "insurance" that goes up and down as market conditions
change, and we believe it is pretty effective.

\- Diversification by city matters a lot. Phoenix plunged in the recession.
Dallas was flat. As we enter more cities, our inventory risk declines.

\- The risk of another housing collapse (versus decline) is small. Debt to
income ratios are sane, banks remain very cautious to lend, and there is a
massive buy-to-rent industry now, led by Blackstone, that came about during
the recession and quickly buys homes whenever they cross a price threshold to
return rental yield.

If you're a technical person in SF and want to come by the office to learn
more about our models and modeling pipelines (pricing, risk, days on market,
etc) shoot me an email: jd@opendoor.com

~~~
uptown
I've been following what you guys have been doing since when you were using
the name HomeRun, and really like how you're trying to change the way real
estate transactions function. Has OpenDoor considered the possibility of
converting housing inventory you're "stuck with" during a downturn into
rentals, or rent-to-buy, to weather a down-period, or is it better to just
offload it to Blackstone and get it off your books?

~~~
jdross
Yes, it's an option we've discussed. It obviously depends on liquidity in the
market at the time and the size of the decrease. It's worth remembering that
housing has only crashed like this twice in 100 years, and that a lot of
investors made a lot of money in the last downturn, if they were smart.

A good analogy may be CarMax, who shifted their mix in the recession towards
distressed cars and ultimately kept revenue/profits reasonably consistent. Of
note: This was at the same time car companies like GM and Ford were seriously
at risk of bankruptcy.

------
shah_s
How is this any different from the countless companies that have been doing
them for ages?

~~~
jdross
Hey, I'm JD, cofounder at Opendoor.

The biggest difference is price. Those companies offer 65 to 80 cents on the
dollar for homes. We offer full market value, and take fees that are
comparable to a traditional transaction when you consider the full cost of
selling. (Our total fees are generally 8 to 10%)

The article has many key inaccuracies that the reporter refused to correct,
mostly around profit. If we made $20k per home, we'd give most of that back to
sellers through higher offers and lower fees. And the data science team would
panic, since their key metric is accuracy.

~~~
shah_s
Hi,

Thanks for your response. I am not knocking on you or the product because it
is a lucrative market (if done right). So, you are taking the risk on the
houses? Do you guys rent out the house? What happens if it doesn't sell?

~~~
jdross
Yes, we buy (almost) all houses ourselves then sell them, taking on that risk.

If they don't sell, we lower the price until they do. Homes are hard assets,
and always have a price. In many cases, we lose money.

------
kapsteur
If the goal is to improve the house buying experience like uber did with taxi
business. Let's go Opendoor, for too long the real estate agents took
advantage from system

~~~
uptown
The transition to that model is tricky.

In the United States, buyers don't directly pay the realtor commission. The
seller generally pays ~6%, but sometimes that's negotiated down. This
commission is split between the buyer's agent and the seller's agent, with
their brokerage typically taking a percentage. But a buyer wants to use an
agent because their perception is that they're not paying for it, and most
buyers aren't well versed with the house transaction process, which is
complex.

You could certainly make the case that a transaction without agents would mean
either more profit for the seller, or a lower house price for the buyer, but I
think it will take many years until that is the norm. There are a huge number
of laws built around real estate transactions, and the NAR is a major major
lobbying entity.

~~~
goodJobWalrus
> The seller generally pays ~6%

This is gross. We just put our London place on the market, and the total
commission we will be paying (to a normal high street agent) is 1%

~~~
uptown
I agree. And it's particularly insane given the degree to which the tasks
traditionally performed by the realtor are now handled by more-informed buyers
and sellers. Information used to be locked in physical listing books. It then
moved online to disparate MLS's. Now you can view most listing data using a
combination of Zillow, Realtor.com and regional localized brokerage websites.
Good realtors still add some value, but framing it as a percentage of the
transaction is entirely the wrong metric given how the industry has evolved in
the past decade.

