Opendoor Expands as Zillow Retreats - Real Estate News

Zillow's iBuying Pause and Opendoor's Response

The recent announcement from Zillow regarding the suspension of its iBuying program has generated significant disruption within the real estate sector.

Zillow attributed this decision to difficulties stemming from limitations in both the workforce and the availability of necessary supplies. These constraints hindered their capacity to rapidly renovate properties and efficiently manage their housing stock.

The news resulted in a substantial 10% decrease in Zillow’s stock value the following day. Conversely, competitor Opendoor experienced a positive market reaction.

Operational Differences and Market Overlap

Considering the considerable overlap in their respective markets – Opendoor operates in 23 of the 25 areas where Zillow was actively acquiring homes – questions arose regarding whether Opendoor faced similar challenges.

However, while Zillow is retracting its iBuying efforts, Opendoor has affirmed its commitment to continued expansion.

Opendoor's Growth Trajectory

Throughout the last nine months, Opendoor has been actively increasing its operational scope and expanding its inventory of homes.

In the second quarter alone, the company acquired 8,500 properties, exceeding Zillow’s acquisitions by a significant margin. Furthermore, they reported having agreements to purchase an additional 8,200 homes in the third quarter.

Opendoor's Official Statement

Following Zillow’s confirmation of the iBuying pause, Opendoor released a statement emphasizing its stability and growth.

The statement read, “We know how important certainty and convenience are to homeowners seeking to move and we’ve worked hard over the past seven years to ensure we can continue to deliver our experience at scale. Opendoor is open for business and continues to scale and grow.”

Factors Contributing to Opendoor's Success

Essentially, Opendoor has no current intentions of reducing its operational momentum.

The company attributes its success to a combination of factors, including the utilization of proprietary data, streamlined centralized operations, and an increasingly digitized process for property evaluation and offer generation.

These advantages have enabled Opendoor to more than double the number of markets in which it operates over the past nine months.

The Central Role of Data in iBuying

Successful iBuying operations fundamentally rely on data utilization. This data is essential for formulating competitive offers to potential sellers and accurately predicting resale values.

In rapidly changing real estate landscapes, such as the one experienced over the last year and a half, data modeling becomes even more critical. Historically low interest rates and exceptional demand significantly limited housing supply, resulting in rapid home price increases.

Competitive Offers and Seller Acceptance

“A core function of our business is delivering offers that are both attractive and competitive to homeowners,” explained Ian Wong, CTO of Opendoor. “If our offer doesn’t align with market value for what is, for most people, their largest asset, they won’t consider it.”

Wong further noted that sellers value the convenience, certainty, and immediate access to funds that iBuying provides, and are willing to pay a premium for these benefits. However, he emphasized that “a significant valuation discrepancy will deter sellers; they won’t accept discounted offers.”

Data Sources and Processing

Opendoor integrates substantial volumes of both third-party and first-party data. This data undergoes normalization and standardization processes before being fed into algorithms designed to generate offers.

Third-party sources include multiple listing service (MLS) data and public records, alongside datasets incorporating geographical, topographical, and other relevant information for neighborhood and property assessment.

However, Wong asserts that access to these datasets is merely a baseline requirement. Opendoor also cultivates a substantial and expanding collection of first-party data.

The Value of First-Party Data

This first-party data is gathered throughout the seller interaction process, including both in-person and virtual property inspections conducted over the years.

“Data quality is paramount for accurate valuation,” Wong stated. “Therefore, a significant portion of our first-party data collection focuses on creating a detailed and precise representation of each home.”

Leveraging Inspection Data

Having completed over 175,000 inspections since its inception, and collecting more than 100 data points per inspection, Opendoor possesses a vast repository of in-home data.

This information extends beyond individual properties, enabling the company to draw inferences about neighboring homes and broader market trends.

• The company uses this data to understand neighborhood characteristics.
• It also helps to assess the condition of similar buildings within a specific market.

Streamlining Market Entry: Opendoor's Approach

Opendoor’s recent growth in new markets is directly linked to a significant overhaul of its strategy for initiating operations in a new city or region. A process that previously required as much as half a year has been optimized, allowing Opendoor to introduce services to 23 new markets during the first nine months of 2021, including several launches occurring concurrently across multiple cities.

Megan Meyer Toolson, Opendoor’s Chief Customer Officer, explains that prior to 2019, launching in a new city involved a considerably manual approach.

“Previously, establishing a presence required onboarding and training dozens of local team members. A thorough investigation of local real estate conditions, property characteristics, environmental factors, and weather patterns was essential during the weeks leading up to launch,” she stated.

Since then, Opendoor has focused on consolidating more of its operations and deploying exceptionally small teams to initiate service in new areas.

The company utilizes extensive data gathered from both internal and external sources to gain a robust understanding of market dynamics before entering a new city. This technological and data-driven insight is combined with a small, highly effective local team and a network of local construction and renovation professionals who prepare purchased properties for resale.

“Our local team consists of a single role: a home construction expert,” Toolson clarified. “This individual manages local vendors responsible for renovating properties to meet market standards or prepare them for listing. They collaborate with vendors and local businesses, while all other operational aspects are either centralized or automated.”

Essentially, Opendoor aims to centralize all aspects of the buying and selling process that do not necessitate a physical presence. This strategy has facilitated faster expansion into new markets with reduced initial investment.

Key Elements of Opendoor’s Lean Launch Strategy

• Centralized Operations: A shift towards managing processes from a central location rather than relying on large local teams.
• Data-Driven Insights: Leveraging comprehensive data to understand market dynamics before entry.
• Lean Local Teams: Employing only essential local personnel, specifically home construction experts.
• Vendor Partnerships: Utilizing a network of local vendors for renovation and construction work.
• Automation: Implementing automated systems to streamline operational tasks.

By prioritizing these elements, Opendoor has demonstrably accelerated its market expansion capabilities. The focus on efficiency and scalability has proven crucial to its growth trajectory.

This approach allows Opendoor to quickly assess the viability of new markets and deploy resources effectively, minimizing risk and maximizing potential returns. The company’s ability to adapt its launch process has been a significant factor in its success.

Adapting Operations Amidst the Pandemic

The iBuying procedures at Opendoor have undergone significant changes as a result of the pandemic. This situation compelled the company to increasingly digitize its operations over the past year and a half.

Similar to Zillow, Opendoor temporarily suspended its home purchasing activities when the public health concerns escalated in early 2020.

Upon resuming inventory acquisition late in the previous year, Opendoor recognized the necessity of implementing new procedures and technologies for evaluating homes. Previously, the company dispatched personnel to sellers’ properties for inspections, which typically lasted around three hours.

To emulate the inspection process and gather the necessary data for property valuation without on-site personnel, Opendoor launched a mobile application enabling self-guided property tours.

The company discovered that this app, when used in conjunction with its existing data, could achieve pricing accuracy comparable to the former, more thorough inspection method, allowing for the formulation of competitive offers.

It’s important to note that Opendoor retains the option to conduct an in-person assessment of the home post-purchase to determine renovation requirements.

As Toolson explained, “The integration of video data with our existing datasets proved to be as precise as our previous three-hour, detailed inspections.”

Key Changes to the Inspection Process

• Shift to virtual inspections via a mobile app.
• Reliance on existing data sets for valuation.
• Maintained pricing accuracy despite reduced in-person assessments.
• Continued ability to perform post-purchase inspections for renovation planning.

These adjustments demonstrate Opendoor’s adaptability and commitment to maintaining efficient and accurate home valuations even under challenging circumstances.

Navigating a Dynamic Marketplace

As Opendoor grows, its operating principle centers on the expectation that established markets will yield greater profit margins compared to newer areas. This is logical, as a more extensive dataset regarding a specific market allows for more accurate offer modeling and a better understanding of repair and upgrade costs needed to prepare a home for sale.

Increased data availability also broadens the range of properties Opendoor can acquire and the number of sellers it can confidently approach with offers. As stated in Opendoor’s second-quarter shareholder communication, “Our pricing platform’s continuous learning and improvement through new data ingestion enables us to address a wider spectrum of price points and property types.”

This resulted in a 15% increase in buybox coverage – the range of properties Opendoor is willing to underwrite based on its risk assessment – compared to the prior quarter. Overall, buy-box coverage has expanded by 50% since the end of 2019. The company highlighted that, as of late 2019, offers couldn’t have been made on over 35% of homes purchased in the second quarter.

However, the considerable shifts in the real estate landscape over the past year and a half have undoubtedly challenged iBuyers to adapt to what many perceived as an overheated U.S. market.

“We’ve significantly enhanced our capabilities, not only in current home valuation but also in developing structural models to predict future trends and creating more sophisticated strategies for competitive offer formulation, moving beyond the static conditions of 2017 to the highly volatile environment we face today,” explained Wong.

Conversely, the company must make judicious decisions regarding renovations, repairs, and the pricing of homes it resells. Opendoor emphasizes that its business model relies on generating revenue from service fees charged to sellers and supplementary products/services, “rather than the difference between the purchase price and resale price.”

Furthermore, renovations prioritize investments with high returns, and the company consistently refines its repair strategies based on operational experience and analysis of neighborhood-level resale data.

Wong emphasized Opendoor’s ambition to function as a market maker in real estate, facilitating rapid and efficient asset turnover to free up capital for acquiring homes from subsequent sellers.

According to Opendoor’s second-quarter earnings report, the average holding period for acquired homes over the past 18 months ranged from 70 to 100 days, from purchase to resale. Maintaining low inventory levels through model updates is crucial in a constantly evolving market.

“The housing market has experienced significant volatility in the last 18 months, to put it mildly. Consequently, we’ve had to remain highly competitive, given the dynamic conditions and substantial price appreciation,” Wong stated.

As Opendoor aims for nationwide expansion, leveraging data and optimizing operations will be essential for continued growth, both in existing and new markets.

Key Strategies for Market Adaptation

Data-Driven Offer Modeling

The core of Opendoor’s strategy involves utilizing comprehensive data to refine its offer prices. A larger dataset allows for more precise modeling of repair costs and necessary upgrades, ultimately leading to more competitive and profitable offers.

Expanding Buybox Coverage

• A 15% increase in buybox coverage was observed compared to the previous quarter.
• Overall expansion of buybox coverage reached 50% since the end of 2019.
• This indicates an increased ability to assess and acquire a wider range of properties.

Dynamic Pricing and Competitive Offers

Opendoor has implemented sophisticated modeling techniques to account for fluctuating market conditions and formulate competitive offers. This is a departure from the more static pricing strategies employed in the past.

Strategic Renovations and Repairs

The company focuses on renovations that deliver the highest return on investment. Repair strategies are continuously adjusted based on real-world operating experience and local market data.

Efficient Inventory Management

Maintaining a low inventory holding period – averaging 70 to 100 days – is a key priority. This is achieved through ongoing model updates and a focus on rapid asset turnover.

Revenue Model Focus

Opendoor’s revenue generation is primarily based on service charges to sellers and additional offerings, rather than relying on the spread between acquisition and resale prices.