
Opendoor, a startup worth emulating - mooreds
https://stratechery.com/2016/opendoor-a-startup-worth-emulating/
======
harmmonica
Have you given thought to opening up your pricing model/algorithm to the
public for every home in a market (a la Zestimate/Redfin estimate) as a means
of eventually driving seller inventory even if someone is not ready to sell
today?

If someone could look up what their place is worth and, unlike Zillow and
Redfin, actually be told explicitly why it's worth that as opposed to being
told a "black box" value, you'll open the top of the funnel by driving folks
who aren't yet ready to sell (today's owner is tomorrow's seller). And since
those values change frequently the not-ready-to-sell owner could track the
changes to value and the underlying data driving that value, which would keep
you on the tops of their minds when they're ready to sell down the road.

If you think the pricing model/algorithm is too proprietary to share beyond
the "I'm ready to sell today" market, I'll stop by for a coffee to try and
convince you otherwise.

Good luck. I'm stoked to see someone trying to fundamentally change the
residential market.

Edit: oh, btw, not advocating sharing the actual algorithm, but the results of
it (e.g. your house is worth 5 psf less than the comp from 3 blocks over bc
your place is directly under the airport's flight path).

~~~
jdross
I am personally a big fan of this and want to ship it but resource constrained
right now on engineering. So yes, let's do that coffee?

~~~
hanniabu
I've never heard that saying before. What does "let's do that coffee" mean?

~~~
bcook
He's referring to harmmonica's "I'll stop by for a coffee".

People commonly say "let's do lunch/coffee."

------
jdross
Co-founder here, I'll do my best to answer questions. The number one question
we get is likely "what happens in a downturn/recession?", but that's more of a
blog post than a HN answer. Anything more detailed/technical though, shoot!

~~~
johnlbevan2
Have you considered offering a "chain breaker" service?

What is a chain? (provided in case this is a UK specific term) A common
problem with buying & selling property. In order to buy a new house you first
want to know that your current one will be successfully sold. As such, you may
have a queue of buyers all waiting for someone down the line to get a buyer
for their property; as if they fail to get a buyer they drop out causing the
next person in the chain to have to find a new buyer before they can buy.
Equally sometimes people waiting in a chain are "gazumped" (another buyer
makes a better offer to the current buyer), thus pushing out the current buyer
and impacting the buyer's chain from the other end).

You could provide a service whereby buyer and seller have already met, but are
stuck in a chain. You'd be able to buy the seller's property and hold it for
the buyer until they're ready. \- If they're able to sell their property they
can then pay you the price of the new property plus the "holding fee" before
moving in. \- If they're unable to sell their property they have the option to
sell their current property to you and take the new property as described in
the previous step; or to remain where they are simply paying you the holding
fee for having held the original property for them, with the new property then
entering your portfolio of properties to do up and sell on to the highest
bidder. \- These holding fees could be charged monthly up front should that
prove simpler than lump sum amounts at the point of decision.

Your service already avoids the need for a chain; but this alternate offering
allows you to capture a part of the market of those people not interested in
your full service, by having the potential buyers ask that the property be
purchased by you instead of the sellers coming to you.

~~~
xherberta
My favorite chain breaker service has to do with kidney transplants:

Some economists noticed a few cases where would-be kidney donors who weren't
compatible with their family member who needed a kidney were able to find
another incompatible donor-recipient pair, and were able to swap so that each
donor was able to gave to the other donor's loved one.

Of course, this only works if the medical compatibility works out between the
pairs. To facilitate more transplants, economists created a donor-matching
network that could handle cases where three incompatible donor-recipient pairs
(or even thirty!) could work out an exchange allowing all of the recipients to
get a suitable kidney. Naturally, laws prevent money from changing hands for
kidneys, everywhere on earth except in Iran.

Heard about this here:
[http://www.econtalk.org/archives/2015/07/alvin_roth_on_m.htm...](http://www.econtalk.org/archives/2015/07/alvin_roth_on_m.html)

~~~
johnlbevan2
That's an awesome idea; thanks for sharing.

------
tommynicholas
One thing not mentioned: Opendoor absolutely does not have to carry the
balance sheet risk of owning the homes forever. They can chop up those assets
and sell them to anyone (hedge funds, banks, individual investors, etc) at any
point. At scale, they'd be able to do this and still maintain most of the
upside.

At some point, Opendoor will be able to let businesses that simply manage
financial risk for a living (i.e. banks) spread the downside risk out over the
entire financial system, while Opendoor takes advantage of its customer
acquisition and data advantages to capture the bulk upside. It's not a
perpetually risk model if they don't want it to be.

~~~
phire
Also, their position in the market gives them a very good insight into the
likelihood of a crash. As demand for their services will increase whenever
sellers are desperate to sell their houses.

If they track those indicators, they will be able to dynamically decrease
their purchase price based on the likelihood of a crash and (in the worst
case) limit their exposure to only the housing stock they had at the start.

In the best case, desperate sellers might accept the much lower price and
Opendoor will make a profit off the crash.

~~~
LordHumungous
> their position in the market gives them a very good insight into the
> likelihood of a crash

LOL what? What insight into the market will opendoor have that is not publicly
available? Sorry but this is magical thinking

~~~
phire
There are two reasons why someone might sell their house to Opendoor...

A) They are willing to sacrifice some of the money for a much easier sales
experience. B) They really, really need to finish the sale now.

The size of the first group will follow a constant trend, but the second group
will fluctuate based on various factors. So Opendoor can infer the desperation
of the sellers in the market based on their numbers of sales.

Most other factors are publically available, but the desperation of sellers
isn't publicly tracked. Regular real-estate agents will be exposed to the same
desperation, but it's in their best interest to hide any desperation, to
maximise the sale price.

Lenders will also know when some homeowners are falling behind on payments,
but again they don't publish those numbers until a foreclosure actually
happens.

It's not like Opendoor is going to predict the crash before it happens, but as
long as they can spot the crash early, before it really picks up steam, they
can minimise their exposure.

------
free2rhyme214
The issue a lot of people have with OpenDoor is their business model. Only
some people in silicon valley can raise $320mm to wholesale homes using
algorithms. The skepticism I have is that OpenDoor isn't disrupting anything
because they're not Airbnb or Uber. They're not going after unused inventory
and taking huge amounts of business from incumbents, they're simply amassing
massive amounts of debt like no wholesaler could and when the economy crashes,
and it will as nothing goes up forever, they're going to have this backfire on
them. And then what?

When the economy goes down, Airbnb will do just fine. More people will want to
do short term hospitality to earn cash and more people will want to drive for
Uber. OpenDoor will have to liquidate their debt which will prove difficult.
Also if I remember correctly, Keith Rabois said he was talking with Peter
Thiel and Peter mentioned how real estate has rarely changed. Later Keith
helped create, more like fund, OpenDoor. What I wonder is, why hasn't Peter
invested in Keith's new company? It's not because he's too busy with Trump's
transition team.

OpenDoor isn't a startup you should emulate. I wholly disagree with this
article.

~~~
jdross
Hey, definitely appreciate the criticism.

Without going into too much detail, investors aren't generally in the business
of losing money and at the scale of investment we've taken we're far beyond
"bet on the team" kind of diligence.

Managing inventory and pricing risk is a key piece of this business and has
been since day 1.

We really owe the world some blog posts, but until then hackers, data
scientists, and predictive modelers are always welcome to come by the office
for lunch!

~~~
WhitneyLand
>>investors aren't generally in the business of losing money...we're far
beyond "bet on the team" kind of diligence

Sure, in principle large investments should mean good DD. But Magic Leap fans
were pretty surprised this week. Theranos also raised more than Opendoor.

It's not fair to put other company's problems on Opendoor, but the point it's
hard to accept the large cap/DD argument with so many counter examples.

In any case, it would be great to see you succeed - good luck.

~~~
jdross
That's fair and those are embarrassing tales in Silicon Valley. One difference
is they were/are bets on a technology that wasn't in the market yet.

We buy and sell thousands o homes, hopefully at the appropriate price for the
market's current level of risk. Hard, deeply appreciated by customers, but not
much handwaving on how it will go to market.

------
WhitneyLand
The article talked about Opendoor being able to increase liquidity. However a
lot of real estate illiquidity is due to people who refuse to sell at market
value for irrational reasons.

For example, "I paid X so I won't sell below that", "I added a pool plus 100k
in renovation so I should get that much of a premium", "I'll just wait a few
months and see if prices get better".

A big function of realtors is to console and convince people to sell at a
realistic price.

This behavior makes it harder for OD to improve liquidity, and in fact
liquidity could take a hit with no realtor therapy for sellers.

I predict a major issue for Opendoor will be seller sticker shock. Many will
balk at paying 8-12% in fees _even if it 's in their best interest_.

Willingness to paying more for convenience or speed is not a constant. See
mental accounting from University of Chicago, or ask any realtor about seller
psychology.

~~~
LordHumungous
>Willingness to paying more for convenience or speed is not a constant

Especially regarding the largest financial transaction of one's life, in many
cases.

------
nostromo
I wish a startup would decrease the transaction costs of buying real estate
rather than increasing them.

~~~
jdross
Give it some time. Useful to look into why Redfin never really took off.

There's so much fat in real estate outside of the agent fee, too. Mortgage
closing costs, title insurance, escrow fees... it's ripe for improvement full-
stack.

~~~
coredog64
The fact that real estate agents haven't suffered from the same negative
publicity as banks for their part in the housing bubble tells you everything
you need to know about their political power.

------
hkmurakami
It's amusing that the article labels this as "flipping" instead of being
framed as a market maker function in an illiquid asset class.

~~~
jdross
Market making is much closer to how we at Opendoor think of it internally.
Flippers buy distressed assets at a huge discount and plow money into
renovations and repairs. Not really our business.

~~~
genericpseudo
It strikes me that maybe the best analogy for your financial model is old-
school 19th-century shipping (as in; the reason London is London, more or
less)? You're taking a trading risk on illiquid goods but your holding times
are reasonably short (certainly under a year, presumably much less than that
in hot markets).

What a cool business. Congratulations.

~~~
jdross
Thanks, if you're ever in the Bay Area you're welcome to come by for lunch and
learn more! I'm jd@opendoor.com

------
mbesto
> Or, in the next downturn, the entire company might go bust.

> To that end I hope Opendoor succeeds simply so it can be a role model for
> tech: taking on big risks for big rewards that create real value by solving
> real problems is the best possible way our industry can create benefits that
> extend beyond investors and shareholders;

The only reason (ok one of the big reasons, not the only) Opendoor exists is
that the massive amount of capital deployed has the potential to make
investors and shareholders a ton of money. It's an all or nothing proposition.
Furthermore, I don't think the author has rightly assessed (or assessed at
all) the negative externalities associated with Opendoor's model to the
economy. Part of the whole reason the housing market revelation of "too big to
fail" of banks was exposed was because too much of the real estate market was
tied up in too few organizations (Fannie/Freddie, Wells, etc), which means
when it crumbles down, our economy cannot sustain the burden. If OpenDoor's
risk mitigation model is to basically "own more of the market" it means that
if/when the market does go for a downturn and OpenDoor goes bust, then it's
not just VC's who lose, but a whole lot of homeowners, or even worse,
homeowners and taxpayers.

That's hardly a model I'd admire or try emulate, unless of course, I want to
make a buttload of cash (or fail very hard trying).

> Opendoor is creating value as opposed to taxing a few bucks off the top of
> an existing market or simply trying to be cheap.

Opendoor's arbitrage is no different then an ad network, they're both
exploiting inefficiencies. I'm really having a hard time understand why it's
so much more "benevolent" as it's suggested here.

~~~
nostromo
> it's not just VC's who lose, but a whole lot of homeowners, or even worse,
> homeowners and taxpayers.

Unless I'm misunderstanding their model, it is only OpenDoor and their
investors that will lose.

The house sellers already got their cash. And it seems very unlikely the
taxpayer will end up bailing out a risky startup.

~~~
aptwebapps
[https://news.ycombinator.com/item?id=13164392](https://news.ycombinator.com/item?id=13164392)
According to `jdross, purchases are funded with a small amount of equity and
the rest with "debt-like instruments" so the taxpayer is still potentially on
the hook. But, yes, homeowners don't seem to be at risk.

------
retube
> To succeed, it has to price the homes it buys accurately, without seeing
> them,

Which is why this will fail. No way you can get that right. Even in a block of
identical flats there will be a range of prices: what floor, proximity to
lift, aspect and a hundred other little things, not to mention the condition
and style of internal fixtures and fittings. Having recently seen a lot of
houses, every house is unique.

I once viewed two identical flats in a new block on the same floor right next
door to each other, both facing the same way. One ended up selling for 30k
more than the other. Why? because the view across town was partially blocked
for one of the flats by a building across the street.

~~~
georgyo
I don't think it matters that much. They will offer the lowest their algorithm
thinks is correct. And then they send an inspector who where dictates which
repairs the seller has to make out of pocket.

And if the home is worth more than what they paid and listed the home for, the
market tends to adjust.

Trying to buy a home in NYC, everything I like is generally bid 10-40% above
asking. And since open door already paid the seller, they likely pocket the
difference, still collecting their 6-12% on top.

With the potential to make 30% on many million dollar homes, they will likely
be fine.

~~~
LordHumungous
Problem is no one in NYC or any other profitable market will use them, because
no seller is going to accept 10-40% lower price AND a higher fee in a market
where it's already easy to sell.

~~~
georgyo
They already do. People paying all cash saves the seller at least three
months. Sometimes the bank won't close for 8 months because of reason and then
denies the application forcing the seller to start from the beginning.

People do accept all cash bids for less than asking. People know this, and
there are tons of places that will pay all cash for your home right now for
less. If you live in a place condo or a house, you will get letters asking to
buy the house all cash.

~~~
LordHumungous
K. So why use opendoor and pay an 8% fee when people are sending me cash
offers in the mail?

------
guest2143
I could see OpenDoor working with large companies on relocation outsourcing.
An employee needs to move, maybe on condition of hiring, and the guaranteed
sale provides the removal of an obstacle to say no I can't move and sell my
house... or the discussion really devolves not into schedule but money. If
it's not the market rate, the company could pay the difference, or part of it.

For bigger companies, Starbuck, HP(E), IBM, I could see Opendoor simplifying
the HR conversations. Especially when companies reorganize and want to move
people around.

------
LordHumungous
>Opendoor is betting that there are hundreds of thousands of Americans who
value the certainty of a sale over getting the highest price

How does that work in hot markets where sales are quick and certain? (a home
in Seattle usually gets 6-10 offers). As a seller you're asking me to accept a
lower price and pay a higher fee for little benefit.

Also, how does your model work if the housing market has a downturn? Suddenly
all those arbitrage opportunities are underwater. Seems like what you are
doing is basically real estate speculation.

------
klochner
Any concerns about adverse selection?

I'd want to use OpenDoor if their pricing model came in above what I could
reasonably get in the market, and would be more likely to wait it out if they
came in low.

~~~
jdross
Across thousands of homes, we have a pretty good sense of the costs here.
Since we do the full home inspection before close, it's not as bad as you
might think. We've learned to ask about and look for the obvious things
(airplane noise, busy streets, recent crime, terrible new neighbors)

~~~
flente
How can you know a seller is telling the truth RE: matters that are hard to
validate in an inspection, e.g. terrible neighbors?

~~~
coredog64
Is there a set of public domain resources for police calls by neighborhood and
type?

~~~
xherberta
Trulia seems to be using such info to create color-coded crime maps.

~~~
jdross
So ironically that's a feature my cofounder/CEO at Opendoor Eric Wu launched
while he was at Trulia after they acquired his last company.

------
johnlbevan2
Presumably whilst any properties are in stasis (i.e. awaiting buyers) OpenDoor
could partner with AirBnB and rent out those properties to keep a cash flow
from any properties. They'd presumably not do this when they're expecting
buyers to look round, but could do it whilst minor maintenance is going on
immediately after sale, or if there's a quite time when views are deemed
unlikely.

~~~
jdross
Having the homes be vacant makes it hard, and we optimize heavily for
turnaround time, but maybe there's a non-linear innovation we're missing! Open
to ideas.

Maybe we could do "sleepover trials" for potential buyers!

~~~
johnlbevan2
Agreed that generally fast turnaround's a good idea were possible. Would you
guys hold on to property in some circumstances though; e.g. if prices are
rapidly escalating (e.g. as occurred in the UK around 2000:
[http://www.housepricecrash.co.uk/indices-nationwide-
national...](http://www.housepricecrash.co.uk/indices-nationwide-national-
inflation.php\);) where the expected benefit of holding out outweighs the
fluidity and lower risk of the quick scale; or would that be too close to
gambling?

------
jeffy
I wonder how this can be viable. The closing and transaction fees
(agent/title/escrow/closing/excise) make it tough for many home-flippers to
overcome and make a profit if no major renovations are done. 2-5% for closing
costs on the purchase and sale, as well as agent fees when selling mean they
have to gross at least 7-13% on every house just to break even.

------
xn
The Opendoor model doesn't seem much different than how relocation companies
work apart from more directly marketing to homeowners rather than corporate HR
departments.

------
samfisher83
This startup sounds like HomeVestors. The company with "We Buy Ugly Houses"
billboards.

~~~
jdross
They're a franchise with a network of flippers offering 65 cents on the dollar
to people with major issues who are desperate.

We offer 98 cents on the dollar to people with normal homes to sell on their
timeline so they can move once when they're ready. (Most people can't afford
two mortgages and need to sell before they buy, usually renting in the
middle). We're more like a trade-in for cars, or a market maker.

The only similarity is we make it easy to sell.

------
Mao_Zedang
Can you IPO so I can invest?

~~~
jdross
The best way to invest is to join and exercise your stock options :)

We're working hard to earn the right to operate as a public company.

~~~
anonymoushn
What if I apply to Opendoor, the #1 company I'd like to build software for,
but Opendoor turns me down for not being interested, so I end up going with my
second or third choice instead?

