Quick Reaction to Opendoor Layoffs

Was just sent this article on The Information by a reader, which says that Opendoor has laid off more than 600 people today:

Home-buying startup Opendoor laid off more than 600 employees Wednesday, one of the deepest cuts from a private tech firm since the coronavirus outbreak sent the economy into a tailspin.

The layoffs amount to 35% of Opendoor’s staff, CEO Eric Wu said in a statement. The company halted home purchases last month, cutting off the home-selling fees that are its main source of revenue. The pause also leaves Opendoor with a number of homes that the firm will likely have to sell for a loss, or pay to maintain as they await sale.

I need some time to think through the full implications, research what’s what, and so on but… as I am moving this week, thought I should share some initial thoughts first, then dive in later.

Very Bad Sign

I fully expected some layoffs, since other major companies who have all kinds of cash in the bank laid off or furloughed people — see, e.g., Redfin, eXp. But 35% of the staff is a bit different.

My reasoning was this: every company has people who shouldn’t be there. It’s kind of like T.O. and the locker room: addition by subtraction. But given the difficulty of firing someone these days, absent glaring cause (sexual harassment, embezzlement, etc.), most companies just kind of manage around such personalities. I figured, The Bug was a perfect excuse to trim some deadwood even for otherwise healthy companies. In fact, I’ve spoken to multiple CEO’s in real estate who have used this crisis to get rid of some problem children as well as “C-players” who weren’t doing very much.

But 35% of the workforce is not trimming deadwood. There’s no way Opendoor had more than 600 problematic personalities or underperforming staffers; if it had so many, then that’s a whole different ball of wax as far as problems go.

This feels like a real cutting to the bones. And that in turn forces me to view everything else, such as Opendoor’s pause in home purchases last month, in a different light.

Private Company, So No Real Data

Given that Opendoor is a private company, we don’t quite know what their balance sheet looks like or what their burn rate was prior to these layoffs. We do know that Opendoor raised a $300 million Series-E round in March of 2019 at a $3.8 billion valuation. From Techcrunch:

Last month, we reported that Opendoor — the startup that is taking on the real estate industry with its own platform for buying up homes and selling them on to interested buyers — filed to raise $200 million on a $3.7 billion valuation. Now, we can confirm that the round has closed, and it has turned out to be higher on both counts: The company has raised $300 million, and sources close to it tell TechCrunch that the valuation is now at $3.8 billion.

This latest round included previous investor General Atlantic, with participation from Hawk Equity, the SoftBank Vision Fund, Access Technology Ventures, Lennar Corporation, Fifth Wall Ventures, SV Angel, Norwest Venture Partners, NEA, GGV Capital, Khosla Ventures and GV, along with other, unnamed investors.

Opendoor has now raised $1.3 billion in equity, with some $3.0 billion in debt financing for buying properties.

I have to now assume that Opendoor has run through enough of the $1.3 billion in equity funding to seriously worry about surviving. Otherwise, the 35% cut in staff doesn’t make much sense.

Built for the Down Market

I also have to question Eric Wu’s statement from March of 2019:

“Our business is designed to operate in up markets, down markets and flat markets,” co-founder and CEO Eric Wu said in an email to TechCrunch. “During a slowdown, it becomes increasingly more painful to sell a home, which impacts mobility for homeowners and increases the need for reliable home sales through products like Opendoor. It is our responsibility to manage that risk and charge the proper fees to account for the volatility.” The company says that in 2018, more than 800,000 people toured Opendoor homes.

In previous writings, and in the COVID and Real Estate special report, I took the position that iBuyers generally would be one of the big winners when we eventually come out the other end. It simply made logical sense: vacant houses would be far easier to sell during and after COVID, given the likely psychological change in consumers.

What The Information suggests about Opendoor having to sell houses at a loss, or having to maintain them, doesn’t really add up for me. Opendoor’s houses are vacant. In many of their largest markets — Phoenix, Atlanta, Dallas-Fort Worth, etc. — real estate is an “essential activity” and buyers are out looking at houses as I write this.

Even if Opendoor has to take a slight loss on each home sale to get them off its books, it shouldn’t have enormous maintenance bills to pay during this crisis. And after we’re out of the lockdowns, it should be able to buy homes cheaper (cash is king when mortgage markets are in turmoil) and sell them at a profit.

So what gives?

Major Upgrade to Zillow, Downgrade to Redfin

My initial gut reaction is that this news is a major boon for Zillow, which now appears to be the only market maker with the balance sheet strength to remain standing. Depending on who Opendoor laid off, Zillow may be able to pick up talent on the cheap as well, and the lack of competition in many of the markets only bodes well for Zillow once we come out of hiding.

I think Zillow remains as the only contender now to have a national-scale market maker program, with Opendoor potentially receding into more of a regional role. I can’t imagine Opendoor expanding markets aggressively for the rest of the year, and maybe ever: how the hell do you expand into new markets when you have 35% fewer staff to do any expansion? Maybe Opendoor remains strong in its core markets, but any plans for secondary cities have to be considered shelved for the time being.

Absent entry by a major third-party player (think Quicken Loans, Amazon, etc.), I think this means that Zillow’s ascendancy to the Iron Throne is all but guaranteed now.

Conversely, given the big splash that Redfin made last year with its Opendoor partnership announcement, I have to think this is not great news for Redfin. If Opendoor is slashing that much meat from the bones, I have to wonder just how eager Opendoor will be to pay referral fees to Redfin for bringing them sellers. (Not that Opendoor is buying any houses right now anyhow….)

There is a scenario where Redfin comes back into the market making business in a serious way given Opendoor’s apparent weakness, but since Redfin has also made a bunch of cuts, is battening down the hatches, and given Kelman’s extreme conservatism, I can’t see that happening. So again, Zillow’s ascendancy to the Iron Throne seems like a pretty sure bet.

The more traditional companies — Realogy, RE/MAX and eXp — might be slight winners? Again, lack of competition means that their fauxBuyer (investors and flipper wolves in market maker sheep’s clothing) programs could get more traction. But none of those guys had issues with agent count or revenue growth; their issues had to do with profitability and agents taking more and more of the commission pie. I’m not sure how Opendoor’s weakness helps or hurts them there.

Perception is Reality, Until It’s Not

I fully expect (and I haven’t yet checked my social media feeds) that there will be much jubilation and “See, I told ya so” going on from a wide variety of REALTOR types. This move will absolutely be seen as proof that the market maker iBuyer model does not work, and that the only way to buy and sell houses forever and ever Amen is to hire a REALTOR at 6%.

And because perception is reality to a certain extent, we could see a slight retrenchment by consumers soliciting offers from various iBuyer types.

But perception is reality only until reality reasserts itself. We only need to look at all the ways that major media, the World Health Organization, the CDC, and various world governments got things wrong about COVID… until reality smacked us all in the face.

The market maker model makes far too much sense, especially in the post-pandemic era. Zillow remains, and even if Zillow should falter, there are a lot of really smart people out there with a lot of money who see the value of “sell a home quickly, and buy vacant homes with little human interaction” in the post-COVID world.

The danger to the industry is that it ceases the kind of innovating that it needs to become antifragile, because one of the threats has seemingly been neutralized. It has not. One of the companies, the pioneer of that threat, may have been neutralized. But that’s quite like thinking search engines are a fad because Yahoo! fell.

If you are one of my industry VIP members, let me suggest that you avoid the temptation. Keep becoming antifragile.

If you are one of my investor VIP members, consider taking a deep breath and thinking through what Opendoor’s layoffs means for the industry. Contact me if you need someone to help you think through those.

-rsh