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This isn't game changing, this is just good marketing. The real game changers are the ones over at OpenListings (YC F15) who are giving back commission checks a

This isn't game changing, this is just good marketing. The real game changers are the ones over at OpenListings (YC F15) who are giving back commission checks and doing their best to eliminate the real estate agent entirely. He's not trying to fundamentally change the market. Just like someone else mentioned, this basically a bonafide residential REIT. They're introducing MORE costs to the transaction, creating a closed marketplace where another closed marketplace already exists, and framing it as some revolutionary startup. They're only doing this because they're big name valley guys who raised a ton of money.

harmmonica 10y ago
I believe they are trying to fundamentally change the market. For a fee (I guess it's 1-6% on top of the typical 4-6% commission?), Opendoor removes the pricing (list price), appraisal and financing risk and let's the seller unlock the value of the house in a fraction of the time. On top of that, and unlike the current process, if I'm understanding correctly, they also make it explicit to the seller why their house is worth what it is. And I can't belabor that point enough: the reason the residential real estate market is so opaque is because of the uncertainty/inaccuracy around pricing. Realtors do their best to determine value, but there is a specific reason properties sell in 2 days (priced low) or 6 months (priced high) and it's strictly because of erroneous pricing (btw, this isn't true in SF, for instance, where agents intentionally price low to get bidding wars, but that is not the norm nationwide). We've reached this point where the data is largely available so that the historical method of picking a few "comps," licking your finger and seeing which way the wind's blowing will soon be a thing of the past and that's the crux of what OD is doing. If that means they're not fundamentally changing the market, I'd ask you to look into how property gets priced today by the two parties responsible for making sure the deal gets done (the broker/agent and the appraiser). As for how the seller perceives things, if I tell a seller your home is worth X, and here's all the data supporting that--actually quantifying why your friend John's house down the block sold for 5% above what we're offering you--the seller is informed and can decide if they're willing to assume those risks I mentioned above to get a higher price than OD is offering. Assuming I have a house at the average US home price ($190k or so?), if you tell me that I can take OD's $186k "no risk" offer or wait it out and hopefully get the full 190k given all those risks mentioned above, I suspect many people would just take the 186 and move on. And either JD's in his own little reality distortion field (probably somewhat true) or he and their investors are actually seeing this work with the unit economics to back it up. One last note in this horribly long comment: there is so much opportunity for economies of scale here with the pricing of items like marketing costs, inspections, repairs, appraisal costs--heck, even financing rates--that I suspect and probably hope in vain that over time OD will accept even lower fees. In some fantasy land I can imagine OD getting confident enough in their pricing that transactions end up costing the seller 2% (total, completely wiping away the need for a real estate commission on the sell side and once they merge/acquire Openlistings they'll drive down the buy-side commission rate as well). And of course if this ends up working at scale for OD every deep-pocketed institution will create divisions that do this as well, which will just mean that OD is the first of many new-age residential real estate broker (call them a market maker or REIT if you like that label better, but everyone will sell in this more liquid, transparent way in the future... how long will that take? Well, if there's another housing bubble right now, all bets are off, but otherwise this could happen relatively quickly).
- panabee 10y ago
  what's the dream business model of every VC? a marketplace. the ideal outcome, though perhaps improbable, is likely to become the ebay of real estate. what they lack is critical mass. today, they're focused on seeding the marketplace with sellers, that is filling the supply side, which is the natural place to start. this is a long way of saying that it seems not at all unreasonable to hope they will emulate amazon's AWS strategy of reducing fees as costs fall, not only to deepen their competitive advantage but also to drive them closer to critical mass. but given the high costs and uncontrollable risks, they need to, in the early stages, compromise growth for unit economics and cash flow. fundamentally, they're using machine learning and automation to remove guesswork and fat from real estate transactions, so this company will be interesting to watch. what many commentators miss is that OD is selling a service to home owners. it would be helpful if knowledgeable real-estate people focused on (a) estimating how many sellers want this service; (b) if 2% seems reasonable for OD's service; and (c) if this initial market is large enough to jumpstart their marketplace ambitions (assuming this is the end goal).
  - harmmonica 10y ago
    I agree with so much of what you say here (hope for the AWS strategy; the fact that this is a service business, which is what the existing brokerage business is as well of course; using data/ml to remove (massive) fat), but I'm torn about whether their end goal is actually, or even should be a marketplace in the traditional ebay/zillow/trulia sense. There are countless residential marketplaces with good reach already that as long as their pricing model works really well they can focus on supply side exclusively (i.e., buying for 98 cents on the dollar) and then using the existing marketplaces to market. They have to find buyers, of course, but that doesn't mean they need to directly source the buyer. In this model, as the old real estate adage goes, you make your money when you buy the property (that's not meant literally of course).
    - panabee 10y ago
      you could be right. i only started thinking about OD with this thread and have no inside information. that said, a marketplace seems like the ultimate ambition for two reasons. 1. one co-founder is a VC who previously led a marketplace business, paypal. VCs are already conditioned to aim for marketplaces. tasting marketplace success as an operator probably only deepens this reflex. it's harder to eat ground beef when you're used to wagyu. 2. if a marketplace is possible, why not? it creates a larger moat to keep out competitors and assuming they don't abuse monopolistic power, a single marketplace can make pricing fairer (more buyers, more sellers) and more efficient (lower fees). instead of 6%, what if OD enables a world where transaction fees are 0.5% or 1%? the classic disruption playbook (hi, telsa!) is to aim for a dominant market position by starting high, then using technology to steadily reduce prices, expand use cases, and gain market share.

harmmonica 10y ago

I believe they are trying to fundamentally change the market. For a fee (I guess it's 1-6% on top of the typical 4-6% commission?), Opendoor removes the pricing (list price), appraisal and financing risk and let's the seller unlock the value of the house in a fraction of the time. On top of that, and unlike the current process, if I'm understanding correctly, they also make it explicit to the seller why their house is worth what it is. And I can't belabor that point enough: the reason the residential real estate market is so opaque is because of the uncertainty/inaccuracy around pricing. Realtors do their best to determine value, but there is a specific reason properties sell in 2 days (priced low) or 6 months (priced high) and it's strictly because of erroneous pricing (btw, this isn't true in SF, for instance, where agents intentionally price low to get bidding wars, but that is not the norm nationwide). We've reached this point where the data is largely available so that the historical method of picking a few "comps," licking your finger and seeing which way the wind's blowing will soon be a thing of the past and that's the crux of what OD is doing. If that means they're not fundamentally changing the market, I'd ask you to look into how property gets priced today by the two parties responsible for making sure the deal gets done (the broker/agent and the appraiser). As for how the seller perceives things, if I tell a seller your home is worth X, and here's all the data supporting that--actually quantifying why your friend John's house down the block sold for 5% above what we're offering you--the seller is informed and can decide if they're willing to assume those risks I mentioned above to get a higher price than OD is offering. Assuming I have a house at the average US home price ($190k or so?), if you tell me that I can take OD's $186k "no risk" offer or wait it out and hopefully get the full 190k given all those risks mentioned above, I suspect many people would just take the 186 and move on. And either JD's in his own little reality distortion field (probably somewhat true) or he and their investors are actually seeing this work with the unit economics to back it up. One last note in this horribly long comment: there is so much opportunity for economies of scale here with the pricing of items like marketing costs, inspections, repairs, appraisal costs--heck, even financing rates--that I suspect and probably hope in vain that over time OD will accept even lower fees. In some fantasy land I can imagine OD getting confident enough in their pricing that transactions end up costing the seller 2% (total, completely wiping away the need for a real estate commission on the sell side and once they merge/acquire Openlistings they'll drive down the buy-side commission rate as well). And of course if this ends up working at scale for OD every deep-pocketed institution will create divisions that do this as well, which will just mean that OD is the first of many new-age residential real estate broker (call them a market maker or REIT if you like that label better, but everyone will sell in this more liquid, transparent way in the future... how long will that take? Well, if there's another housing bubble right now, all bets are off, but otherwise this could happen relatively quickly).

panabee 10y ago
what's the dream business model of every VC? a marketplace. the ideal outcome, though perhaps improbable, is likely to become the ebay of real estate. what they lack is critical mass. today, they're focused on seeding the marketplace with sellers, that is filling the supply side, which is the natural place to start. this is a long way of saying that it seems not at all unreasonable to hope they will emulate amazon's AWS strategy of reducing fees as costs fall, not only to deepen their competitive advantage but also to drive them closer to critical mass. but given the high costs and uncontrollable risks, they need to, in the early stages, compromise growth for unit economics and cash flow. fundamentally, they're using machine learning and automation to remove guesswork and fat from real estate transactions, so this company will be interesting to watch. what many commentators miss is that OD is selling a service to home owners. it would be helpful if knowledgeable real-estate people focused on (a) estimating how many sellers want this service; (b) if 2% seems reasonable for OD's service; and (c) if this initial market is large enough to jumpstart their marketplace ambitions (assuming this is the end goal).
- harmmonica 10y ago
  I agree with so much of what you say here (hope for the AWS strategy; the fact that this is a service business, which is what the existing brokerage business is as well of course; using data/ml to remove (massive) fat), but I'm torn about whether their end goal is actually, or even should be a marketplace in the traditional ebay/zillow/trulia sense. There are countless residential marketplaces with good reach already that as long as their pricing model works really well they can focus on supply side exclusively (i.e., buying for 98 cents on the dollar) and then using the existing marketplaces to market. They have to find buyers, of course, but that doesn't mean they need to directly source the buyer. In this model, as the old real estate adage goes, you make your money when you buy the property (that's not meant literally of course).
  - panabee 10y ago
    you could be right. i only started thinking about OD with this thread and have no inside information. that said, a marketplace seems like the ultimate ambition for two reasons. 1. one co-founder is a VC who previously led a marketplace business, paypal. VCs are already conditioned to aim for marketplaces. tasting marketplace success as an operator probably only deepens this reflex. it's harder to eat ground beef when you're used to wagyu. 2. if a marketplace is possible, why not? it creates a larger moat to keep out competitors and assuming they don't abuse monopolistic power, a single marketplace can make pricing fairer (more buyers, more sellers) and more efficient (lower fees). instead of 6%, what if OD enables a world where transaction fees are 0.5% or 1%? the classic disruption playbook (hi, telsa!) is to aim for a dominant market position by starting high, then using technology to steadily reduce prices, expand use cases, and gain market share.