Opendoor Business Model | How Does Opendoor Make Money?

Opendoor is a buyer and seller-friendly digital real estate portal. Opendoor is also a real estate company that purchases homes to resell them. 

Opendoor business model is based on commissions charged to sellers when their homes are sold through its platform, from homes purchased by sellers and resold on its platform, and from interest collected from home loans.

Opendoor, founded in 2014 in San Francisco, is the largest iBuyer in the United States, with a current valuation of more than $15 billion — up from $3.9 billion in 2019.

Opendoor, backed by considerable startup funding, utilizes a proprietary algorithm and public records to appraise homes and make swift cash offers. Once minor repairs are completed, Opendoor resells these homes on the open market.

It’s a simple process that relieves homeowners of the worry and anticipation of a typical house sale.

Opendoor is an online house-selling service that aims to reduce the time required to sell a home to a few days. The Company works hard to determine the value of each consumer’s home and makes it simple for them to sell at a competitive price. 

Opendoor assists clients in locating and simply purchasing their dream houses. Reports indicate that 89 percent of sellers used an agent to sell their homes, and 74% would use the same agent again. 

Logically, home buyers and sellers desire to meet face to face when making purchases or selling their homes, as this is one of the most significant purchases or transactions in a person’s lifetime.

What is Opendoor?

Opendoor is an online marketplace for buying, selling, and exchanging properties. The company uses artificial intelligence as well as other technological tools to improve its operations.

Opendoor’s business model is based on selling acquired homes profitably. A commission from sales (paid by the home seller) and interest from mortgage loans are also sources of revenue.

Opendoor Business Model

The San Francisco-based company was founded in 2014, and its business model has proven to be a resounding success. The company has raised over $1.5 billion in investment and has a market cap of $3.7 billion.

Company NameOpendoor
Company TypePublic
FoundersEric Wu, Keith Rabois, Ian Wong, Justin Ross
ProductOpendoor.com
Founded Date2014
HeadquarterSan Francisco, CA, US
Location ServedUSA
Websitehttp://www.opendoor.com/

How Does Opendoor Work?

Opendoor is an online real estate marketplace for buying, selling, and trading properties. Its technology enables them to make near-instant cash offers on homes within 24 to 48 hours of receipt.

The Opendoor app is an iBuyer (aka Instant Buyer). This real estate company employs deep learning and machine learning to determine the ideal price to buy and sell based on various factors such as market data agent input or home attributes. Offerpad, Redfin, and Zillow are also competitors.

You will not need to hire a real estate agent, pay for professional photography, list your home across multiple platforms, or negotiate with buyers or retain the legal services of a real estate attorney if you want to sell your home using Opendoor. Opendoor manages the entire sales process.

Opendoor will perform one final quality check on the residence after the seller accepts its offer. You are doing this to check the seller’s information and see any previously unknown repairs. 

The assessment findings are available five to seven days following the initial walk-through.

Opendoor then advertises the residences it acquires on its marketplace. Homes are available for purchase in around 20 cities throughout the United States. 

Customers can contract directly with Opendoor or engage an external agency to manage the purchasing process. Additionally, homes can be toured in person or digitally via the company’s mobile app.

Opendoor concentrates its efforts on cities with a median housing price (e.g., Jacksonville, Phoenix, or Orlando). The company claims to negotiate better deals — on both the purchasing and selling sides. 

The company’s algorithms are also more productive in these cities due to the lower price variance.

Additionally, clients can trade in their homes on Opendoor if they wish to do so. Opendoor calculates the old house’s value as a credit towards the purchase of the new house. 

Any difference is either refunded to the customer if the older house is more expensive) or they must pay it in case the new home is more costly.

Finally, Opendoor Home Loans enables buyers to finance their purchases. The service is available for both new home purchases and refinancing existing loans. Rates vary according to the loan’s term.

Opendoor Business Model

Opendoor’s primary objective is to earn money by purchasing a home from a seller and then reselling it for a profit, a process known as house flipping. 

Opendoor does offer several benefits to sellers, including a quick closing (15-20 days), no apparent closing concerns, and the flexibility to pick their actual move-out date (thus avoiding double activity or double mortgage if moving to another house). 

All of these features are pretty convenient and should contribute to the seller’s delight. Indeed, the corporation reports a Net Promoter Score of 70.

Opendoor charges a convenience fee in exchange for the convenience it offers. The “service charge,” as it is referred to, is approximately 5% to 6% of the purchase price (source: S1 file), plus an extra 2% to 7% for possible seller concessions and projected repairs, which are assessed following a house inspection. 

According to the company’s website, the “service charge” has historically been as high as 14% and has been between 6% and 9% in 2019. 

These charges are often comparable to what most sellers would pay if they utilized a real estate agent; total commissions range between 4-6 percent, plus additional costs may be associated with concessions/repairs. 

Thus, Opendoor is often priced in line with current market prices, which means it does not necessarily meet their low-cost objective, at least not yet.

How Does Opendoor Make Money?

Opendoor is fundamentally similar to any other real estate company. The company acquires houses intending to resell them for a profit.

Beyond having access to an almost limitless pool of investment funds, the company’s competitive advantage is its technology.

Opendoor Business Model

The following part will examine how Opendoor makes income and why its Instant Buying business model may prove effective in the long run.

Seller Fees

When Opendoor purchases a home from a seller, it charges a seller fee. This is a fairly standard practice in the real estate sector.

Agents charge an average of 6% for this service—meanwhile, Opendoor controls between 6% and 14% of the market.

The actual fee is determined by the extent of associated repairs, the anticipated sale price, and the amount of time required for Opendoor to sell the home successfully.

Therefore, how can the company charge more costs (while also offering a listing at a discount of between 5% and 10%)? Convenience and speed are the answers.

According to Zillow, one of its competitors, homeowners sold their homes in an average of 65 to 93 days in 2018. Meanwhile, Opendoor guarantees to submit a rival all-cash offer within 48 hours of receipt.

According to the startup, when it makes a purchase offer to serious sellers, defined as individuals who intend to sell within a half-year, the proposition is accepted around a third of the time.

Profit From Sales

When Opendoor acquires a home, it does it not for charitable purposes but profit from its resale.

As an iBuyer, the company earns money anytime the residence’s sale price exceeds the purchase price plus associated costs (e.g., inspections, repairs, etc.).

As previously stated, the business’s concept is built on accurately calculating sales and purchase prices. It is capable of doing so for a variety of reasons.

To begin, the corporation concentrates its purchasing efforts on single-family homes constructed after 1960 and priced between $125,000 and $500,000. Opendoor avoids distressed or luxury properties that are often more challenging to evaluate and requires significantly more labor.

Due to the number of houses with the data mentioned above points, Opendoor can train its algorithms on significantly more extensive data sets. 

This finally improves the efficiency of their valuation algorithms, improving the likelihood of profitably selling residences.

Additionally, Opendoor surveys its sellers to obtain the most accurate information possible. 

For example, rather than simply checking a box indicating that the house has a pool, Opendoor would inquire about the pool’s size, extra features such as hot tubs, and whether or not the house has a deck. 

The specificity of the questions enables them to assess the value of each dwelling item accurately.

Second, the company has established a marketplace on top, reaching a broader audience of potential purchasers. At its peak, Opendoor received over 1 million monthly website visitors.

The third reason is that Opendoor leverages technology throughout the purchasing experience, not just during the valuation process. Agents, sellers, and interested purchasers must organize the time and duration of their visit in a standard unoccupied listing.

How Fetch Rewards Makes Money?

With Opendoor’s open-house approach, interested purchasers can simply access and inspect a property using the company’s smartphone app. A real estate agent may be present, either in person or by video conference.

Finally, its sales process enables it to charge greater sales commissions and frequently pay less for the homes it purchases. 

This is especially true when sellers are pressed for time (i.e., they need to move) and rely on a quick sale.

The same level of convenience can be applied to the purchasing side. If you are dissatisfied with purchasing one of the ultra-accessible properties, Opendoor offers a 90-day money-back guarantee. Electrical systems and key appliances are also covered by a two-year warranty.

Home Loans

Through its Opendoor Home Loans business unit, home purchasers can borrow money from Opendoor. 

The service is available to everyone interested in purchasing a home, not just Opendoor subscribers.

Customers offer 30-, 20-, and 10-year fixed-rate mortgages. Down payments as low as 3% are possible.

Opendoor Business Model

Opendoor earns money by charging interest on the loans it makes. The company has raised more than $3 billion in debt financing, which enables it to go on home-buying sprees in addition to disbursing these loans.

An Opendoor-employed mortgage consultant assists each borrower. The company has no other fees involved other than interest and claims to charge rival lenders between $3,600 and $3,900 in processing fees.

Finally, borrowers can refinance their properties through Opendoor, which gives them greater flexibility in the long run.

What is the Funding and Valuation of Opendoor?

Crunchbase reports that Opendoor has raised a total of $1.5 billion in venture capital funding throughout eight rounds.

Opendoor’s largest investors include Softbank, Andreessen Horowitz, General Atlantic, and Google Ventures.

Opendoor launched its IPO on December 20, 2020. As of August 2021, Opendoor market capitalization is $18 Billion. 

What is the Revenue of Opendoor?

Opendoor shared some positive news on its second earnings call as a publicly-traded company. Opendoor reported revenue of $747 million in the first quarter of 2021, down from $1.2 billion in 2020. 

Success Story of Opendoor

Opendoor was launched in 2014 in San Francisco by Eric Wu (CEO), Ian Wong, Justin Ross, and Keith Rabois.

Wu, who earned his degree in Economics from the University of Arizona in 2005, is well qualified to deal in real estate.

As a first-generation immigrant raised by a single mother (his father died when he was four), he learned how to save and spend money wisely. Indeed, his mother was the one who piqued his initial interest in real estate.

Despite raising three children (Wu has two sisters) on a social worker wage, she could purchase a home for her family — despite her conviction that paying rent is a waste of money.

Wu borrowed a leaf from that playbook when he enrolled in college. 

He utilized $20,000 of his scholarship funds as a down payment on a three-bedroom property near the university. He subsequently rented the remaining two rooms to classmates.

He subsequently used the money he earned from rent (together with the house’s worth) as a down payment on another residence. Wu had close to 25 residences in the Phoenix area by the time he graduated.

Wu used the remaining time he had while growing his housing portfolio to learn how to code. 

After graduating from college, he combined his interests in technology and real estate to start RentAdvisor.com, a website where users can share their experiences with communities and landlords.

RentAdvisor was acquired by Apartment List for an undisclosed sum in 2013, but Wu had already moved on to launch his next enterprise. 

This enterprise evolved into Movity, a service that used local data (such as crime rates or commute times) to assist homeowners in their decision-making.

The firm was founded through the Y Combinator program and immediately raised $1.3 million before acquiring Trulia in 2010. Wu then spent the next two years as Trulia’s Head of Geo & Social Products.

While Wu’s record in the real estate industry is impressive, he did not originate the idea for Opendoor. Keith Rabois, who previously held managerial positions at LinkedIn, PayPal, and Square, conceptualized Opendoor in 2003.

He attempted to raise $10 million to launch the company (codename Homerun) but fell short due to investors’ concerns about the amount of capital and risk involved in such a venture. 

Nonetheless, the thought stayed with him. Rabois repeatedly pleaded with members of his network to pursue Homerun, but no one listened.

At least not until he met Wu at Y Combinator in 2009. Rabois became his mentor in the years that followed, encouraging him to pursue his notion. Ten years later, in 2013, that concept became a reality.

Wu created a modest one-page website to validate the concept of OpenDoor by encouraging prospective merchants to input their addresses and personal information. 

He would next contact them to ascertain whether the sellers were willing to sell their homes online. That test resulted in an overwhelmingly positive reaction.

Khosla Ventures (where Rabois served as Managing Director) led the company’s Series A round in 2014, investing $6 of the company’s total $10 million raised. 

Rabois attracted a group of noteworthy angel investors due to his broad network and reputation in the Valley.

Credit Karma Business Model

Sam Altman (former CEO of Y Combinator), Max Levchin (one of PayPal’s co-founders), Logan Green (co-founder and CEO of Lyft), Jawed Karim (co-founder of YouTube), and Jeremy Stoppelman were among them (co-founder and CEO of Yelp).

Rabois and Wu recruited two additional co-founders to round out the team. Ian Wong, a Stanford Ph.D. dropout who joined Square as the company’s first data scientist, was named CTO. JD Ross, a product executive at Addepar, joined the founding team as a complimentary member. 

Along with the founding team, Opendoor employed around ten data scientists to develop its valuation models.

The team began to work, their sights set on industry dominance. Opendoor started purchasing homes in the Phoenix region in December 2014. 

An average sale price of $230,000, a selling duration of 76 days, and over 88,000 annual transactions made it a perfect laboratory for testing the success of the company’s purchasing methodology.

Opendoor was able to train its algorithms on data from other metropolitan areas in the United States and apply the results when evaluating homes in Phoenix. 

By 2016, two years after its initial launch, Opendoor had already accounted for 2% of all Phoenix home purchases.

Opendoor proceeded to collect money at astronomical rates, acquire an increasing number of homes, and expand into new markets in the years that followed. In 2018, the company received over 11,000 and sold over 7,000 residences.

However, rapid growth brought its own set of complications. For example, people began sleeping in properties that were up for sale, necessitating their removal by police. 

As a result, OpenDoor’s open-house hours were reduced from 24/7 to 6 a.m. to 9 p.m. Additionally, they added motion sensors and began collaborating with local security organizations that often patrol their listings.

Opendoor, like numerous other businesses such as Airbnb, Eventbrite, and Carvana, has been adversely impacted by the coronavirus outbreak. 

It was forced to lay off approximately 600 employees, or 35% of the total employment. 

Additionally, the corporation was forced to temporarily halt its home-buying operations due to its inability to inspect prospective purchases personally.

Nonetheless, it appears as though the pandemic had no lasting influence on the organization. In September 2020, the company announced its intention to go public via a SPAC. It will work in collaboration with Social Capital Hedosophia II (led by Chamath Palihapitiya).

The startup now operates in more than 20 markets throughout the United States. So far, Opendoor has successfully assisted over 65,000 consumers in purchasing or selling a house.

Key Takeaways From Opendoor Business Model 

Opendoor is an online real estate platform headquartered in San Francisco. A property owner can use the website to market their property for sale and receive a value within 24 hours. 

Property owners then refurbish or repair their eligible properties as necessary and resell them for a profit.

NerdWallet Business Model

Opendoor functions like that of a standard real estate corporation, with one significant exception. 

The startup uses machine learning technologies to rapidly and accurately appraise a substantial fraction of profitable American homes.

Additionally, Opendoor provides no-fee financing to all house buyers, regardless of whether they use the site.

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