Opendoor, a San Francisco startup that buys and sells homes online, has raised an additional $325 million from investors (including venture capital firms, homebuilding giant Lennar and Invitation Homes, the nation’s largest single-family home landlord).
Opendoor has been described as a flipper, but it’s not trying to make money by purchasing then rehabbing homes. It does painting and minor repairs before putting homes back on the market, typically within a week or so. It aims to buy and sell at the market price and make money the old-fashioned way, by charging sellers a commission. It’s typically about 1 percentage point higher than the going commission in each market, but it says sellers are willing to pay extra for the speed and convenience.
Process Begins Online
What makes it “techie” is that sellers can start the deal just by filling out an online questionnaire and, if they want, uploading photos. They’ll have a cash offer within a day or two. No need to stage the home, have neighbors traipsing through an open house or worry about the buyer’s loan falling through.
After viewing the home online, buyers can get in to see it — with or without their own agents — between 6 a.m. and 9 p.m. seven days a week. They open the house with a smartphone app.
If the buyer has an agent, Opendoor will give that agent the usual commission, typically 3 percent. If the buyer has no agent, Opendoor keeps the full commission.
Agents who are already working with sellers can also get an offer from Opendoor and if the seller accepts it, the agent will get a referral fee, which Opendoor would not disclose.
Computer Prices Homes
The company has licensed real estate agents on staff, but prices homes by using computer-generated formulas. “That’s where our data science team comes into play. They are building algorithms to accurately price homes,” said Julia DeWahl, chief of staff to Opendoor chief executive Eric Wu.
Venture capitalists have been pouring money into residential real estate, an enormous, politically powerful industry that has proven hard to disrupt. Offerpad, a Los Angeles company very similar to Opendoor, has raised $410 million in venture capital. Its lead investor is LL Funds of Philadelphia.
Altogether, Opendoor has raised $645 million from equity investors. It also has raised $1.5 billion in debt to finance its home purchases.
Zillow, which runs a house-hunting website, and Redfin, a discount real estate brokerage firm, have also become so-called iBuyers in select markets. Zillow is buying and selling homes, with the help of agents, in Phoenix and Las Vegas.
Opendoor is operating in 10 cities, mostly in the West and Southeast, plus Minneapolis. “We wanted to start in what felt like the average American city,” DeWahl said. That explains why it’s not in the Bay Area.
It has worked with almost 20,000 customers, which means it has bought or sold around 10,000 homes, although “we have bought a few more than we have sold,” DeWahl said.
Sellers Take a Discount
Nancy Robinson, regional vice president for Coldwell Banker in the Bay Area, said Opendoor is targeting a “very narrow” need in the marketplace, sellers who need cash quickly. “Sellers will take a sizable discount to achieve that liquidity,” she said. “What we see in the Bay Area—it’s not just about selling houses, it’s about selling houses for the best price. That’s where these tried and true real estate models are invaluable.”
If Opendoor is really trying to make money just on commissions—and not buying low and selling high—she wonders why the company is not active in the Bay Area, its home base. “We are the hottest real estate market in the nation. You’d think they’d go where that big pot of gold is,” Robinson said.
DeWahl said that “one in two sellers who get an offer from Opendoor is accepting it,” which indicates that its offers are fair.
Analyst Thomas McJoynt-Griffith of Keefe, Bruyette & Woods said investors typically pay less for homes than “a family who sees their kids playing in the backyard.” However, companies like Opendoor “have a pretty unique value proposition. If you scale up in certain cities, if you have contractors and the infrastructure to do quick fix-ups, I think these can be fairly profitable options. People do appreciate the convenience.”
Opendoor has done business with some of its investors including Lennar, which has participated in two rounds of financing including the latest one announced earlier this month. Move-up buyers interested in a new Lennar home can sell their existing home through Opendoor. This way they know exactly how much they will get and can close the sale shortly after they move into their new home.
“We kicked off that program almost a year ago,” said Jon Jaffe, Lennar’s president and chief operating officer. It started in Las Vegas and Phoenix and is now in all Opendoor markets. In each of those cities, around 20 Lennar buyers are selling their previous homes through Opendoor each month, on average. “We have seen that their valuation model works, that what they do for the customer really is frictionless,” said Jaffe, who is joining Opendoor’s board.
Invitation Homes, a publicly held company that started buying up single-family homes en masse during the recession and turning them into rentals, has purchased “a couple hundred” homes from Opendoor, said Dallas Tanner, Invitation’s chief investment officer. It has also purchased homes through Zillow and Offerpad.
“We are seeing that transactions are starting to happen through companies like Opendoor. It’s a nice alternative for buyers and sellers to transact with a considerably easier process than a traditional model. We are usually a cash buyer in these situations. The seller is looking for a cash price. Us being the largest single-family home owner in the U.S.,” the investment made sense, Tanner said.
Invitation has not sold any homes through these companies but “we would consider doing it in the future,” Tanner said.
Opendoor’s latest round of financing was co-led by General Atlantic, Access Technology Ventures, and Lennar with additional participation from new investors Andreessen Horowitz, Coatue Management, 10100 Fund, and Invitation Homes. Existing investors Norwest Venture Partners, Lakestar, GGV Capital, NEA, and Khosla Ventures also participated in the round.