payday loan

Is Opendoor the payday loan of real estate?

  • According to research, median Opendoor homesellers give up 14 percent of their homes’ value through equity and fees.
  • The results for homeowners are like a payday loan: Some scenarios could push seller loss percentages into the 20s.

Opendoor is a venture-capital-financed property flipper with a $1 billion valuation.

Inman had a fantastic piece last week by Mike DelPrete analyzing Opendoor’s progress in its first two years. Read it.

Quick observations based on Mike’s piece:

  • Opendoor buys and resells homes. Sometimes it fixes them up a bit, but its average relisting time is just 20 days.
  • More than half the time, the gap between the price Opendoor pays sellers and its resale price on the flip is 5.4 percent or greater.
  • On about 1 out of 5 resales, Opendoor pockets price gains of 10 percent or higher.
  • Consumers are also charged 6 to 12 percent in fees, averaging between 8 and 9 percent.

To Opendoor’s credit: There is a need in some specialized cases to turn real estate into a liquid asset in short order.

Even if the assets are heavily discounted in the process, there’s a niche audience that requires this service. Opendoor’s founders are brilliant in creating and selling this marketplace, and the company’s growth is evidence of that.

There’s good cause for some buzz, but the fawning over Opendoor’s value to the consumer seems off-key.

Forget the buyback options, warranties and unmanned lockboxes — these flashy headline-grabbers distract from the meat of the story. The shine on this unicorn is blinding some to the casualties of its financial mechanics.

Friction and leverage

Much of the excitement around Opendoor is in its removal of “friction” from a home sale.

Friction can mean the preparation, negotiation, financing and other logistical checkboxes necessary to maximize returns in a traditional sale.

Friction also includes financial transaction costs, though. The company’s median sellers appear to currently spend around 14 percent of their homes’ value between fees and equity to work with Opendoor. A significant number lose 20 percent or more in equity alone.

Of course we can look at the possibility that improvements to the property contributed to price gains. But Opendoor’s average home only sits 20 days between closing and relisting. That’s enough time for a quick shine in most cases.

We also don’t know if a full-time, local specialist agent could market and negotiate the home to an even higher price than Opendoor. Its average sale is giving a 5 percent discount off the list price to the buyer. The company’s carrying costs on vacant homes (financing 90 percent of purchases) incentivize it to be flexible in negotiations to expedite turnover.

Some have touted the model creating “leverage” for sellers, who are viewed as an underserved market.

Although it’s true that there are few other avenues for sellers to offload a home this quickly, the simultaneous decimation of equity wipes out the benefit to the vast majority of sellers. For most homeowners, it’s more of an outlet to swift surrender than a gain in leverage.

Location, location, location

Opendoor is successful so far in Phoenix, where there are no transfer taxes.

What happens when it moves into cities and states where transfer taxes can absorb up to 2 percent of the value on each sale? The seller may pay one tax directly, but the tax on the second sale probably has to be built into the pricing model, as well.

Someone eats those costs. The percentage of the home’s value being absorbed or spent in fees, taxes and equity could start reaching into those magical mid-20s for some.

There’s a sector of consumer finance that squeezes these kinds of short-term gains out of consumers. It’s not a media darling like Opendoor. Its existence is the reason for an entire category of usury laws.

Blissful ignorance?

These sales look more like payday loans than consumer innovation.

There should be no joy in watching home owners squandering so much money, so quickly. Their equity, in the homes that we’ve assured them are the best investments of their lives, is plucked away in a swift and slick transaction.

It’s clear from the numbers that most of them would greatly benefit from hiring an agent and waiting it out — if they had those numbers.

Buying and selling a home is all about informational leverage, though. Opendoor’s pricing model is, apparently, highly advanced, and the company deserves credit for its technical prowess.

The most profitable course for Opendoor would probably be targeting homes where its lowball offer price is similar to an identified, public online valuation. You can imagine the conversation: “It’s close to the Zestimate. It’s easier. Why not?”

Set an extra $15,000 to $20,000 cash in front of the same Opendoor seller in Phoenix and ask, “Can you wait a little while for an agent to get you this much more from a buyer? It’s what you, and your retirement account, deserve.”

Who are we rooting for?

When consumers have access to quick money schemes, some willfully ignore the big picture ramifications.

Payday loans are popular for a reason, and it’s not because using them is a sensible long-term decision. We may not be in the business of regulating consumers away from their own poor decisions, but cheering them seems distasteful.

I’m impressed with Opendoor’s strategy and growth. If the company’s crafted storyline continues to be more visible to consumers than the actual financial results, it could continue to make a lot of money for its investors.

Sometimes new business models just find a better way to extract more money from consumers without creating significant new value for them.

That’s fair, but let’s not canonize Opendoor just because it’s using technology to increase its margins. The new “I buy ugly houses” guy is just better-financed, with a slicker pitch — and a higher fee.

Editor’s note: This story has been updated.

Sam DeBord is managing broker of Seattle Homes Group with Coldwell Banker Danforth and President-Elect of Seattle King County Realtors. You can find his team at SeattleHomes.com and BellevueHomes.com.