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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 match

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.

w1ntermute 11y ago
> The combination of high leverage and complete property ownership seems incredibly risky to me. Perhaps they're hedging their exposure with property derivatives.
- humbleMouse 11y ago
  This was my thought as well.
- jdross 11y ago
  They don't exist, at least at any meaningful scale. You can hedge against mortgage defaults, but it's not really the same thing.
imglorp 11y ago
Not a money person. ELI5 why it's not like dollar cost averaging on their part, if they're set up for long term? They might be stuck with more inventory in the dips, but they'd also be buying in the dips and they'd be selling higher when the market recovered.
- arijun 11y ago
  It would be if you could weather the dips. But, given their high leverage, they might find themselves unable to pay the interest and default.
  - jdross 11y ago
    It's fair to say we spend a considerable amount of time thinking about this. I'll give more detail in answer to parent.
jdross 11y ago
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
- roymurdock 11y ago
  > liquidity drops, but doesn't disappear This would be the key sticking point - sure you could theoretically try to unload houses and close your positions at the first whiff of a downturn, but it seems to me that liquidity would dry up much quicker now than in 2008 (30% decrease in existing home sale volume from 2006-2007, bottoming out at ~50% decrease in 2010, so pretty drastic) given how much tighter the market is, as you describe yourself. You can also bet that Blackstone, who is effectively providing your business a baseline risk free rate of return right now, would immediately close their rent-to-buy fund if they saw any downturn in the existing house rental market, which is ultimately powered by consumer income strength. So if we don't see a meaningful increase in income, the tightness of housing liquidity would be my main concern in quickly offloading highly leveraged positions. My medium-term outlook is that we will see the verticalization of existing urban cores - SF, downtown LA, NY, Miami, Chicago, Cincinnati, etc. We had a great boom of prosperity WWII that allowed for an unsustainable amount of suburbanization. We are now entering an era of cost-cutting, scale, and efficiency: suburbs will lose population due to their relatively high maintenance costs - roads, grids, plumbing, delivery, transportation. I'm not sure if diversification is the right strategy.
- 11y ago

w1ntermute 11y ago

> The combination of high leverage and complete property ownership seems incredibly risky to me. Perhaps they're hedging their exposure with property derivatives.

humbleMouse 11y ago
This was my thought as well.
jdross 11y ago
They don't exist, at least at any meaningful scale. You can hedge against mortgage defaults, but it's not really the same thing.

imglorp 11y ago

Not a money person. ELI5 why it's not like dollar cost averaging on their part, if they're set up for long term? They might be stuck with more inventory in the dips, but they'd also be buying in the dips and they'd be selling higher when the market recovered.

arijun 11y ago
It would be if you could weather the dips. But, given their high leverage, they might find themselves unable to pay the interest and default.
- jdross 11y ago
  It's fair to say we spend a considerable amount of time thinking about this. I'll give more detail in answer to parent.

jdross 11y ago

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

roymurdock 11y ago
> liquidity drops, but doesn't disappear This would be the key sticking point - sure you could theoretically try to unload houses and close your positions at the first whiff of a downturn, but it seems to me that liquidity would dry up much quicker now than in 2008 (30% decrease in existing home sale volume from 2006-2007, bottoming out at ~50% decrease in 2010, so pretty drastic) given how much tighter the market is, as you describe yourself. You can also bet that Blackstone, who is effectively providing your business a baseline risk free rate of return right now, would immediately close their rent-to-buy fund if they saw any downturn in the existing house rental market, which is ultimately powered by consumer income strength. So if we don't see a meaningful increase in income, the tightness of housing liquidity would be my main concern in quickly offloading highly leveraged positions. My medium-term outlook is that we will see the verticalization of existing urban cores - SF, downtown LA, NY, Miami, Chicago, Cincinnati, etc. We had a great boom of prosperity WWII that allowed for an unsustainable amount of suburbanization. We are now entering an era of cost-cutting, scale, and efficiency: suburbs will lose population due to their relatively high maintenance costs - roads, grids, plumbing, delivery, transportation. I'm not sure if diversification is the right strategy.
11y ago