Thinking Through the IPOB-Opendoor Investor Call

So with the news that the rumors of a “merger” between Opendoor and Social Capital (IPOB) were in fact true, I thought a quick followup might be helpful, if not to you, then to me as I think through things by writing about them.

It would be worthwhile for you to watch the presentation, especially since it is Chamath Palihapitiya himself who gave most of the first half of the presentation and it gives us a good look into his/Social Capital’s reasoning behind doing this blockbuster deal.

This post might be a bit disorganized, because I’m thinking through what I’m hearing, and pulling in various threads I’ve been writing about over the past few years.

Consumption & Modern Software

So the first premise that Chamath (I’m just going to use his first name, even though we’re not on first name or any name terms, simply because it’s easier to type out) discusses is the idea that consumption is moving online, because “buying and selling things offline is just too cumbersome.” So the solution is modern software.

So we get the statement that whether we’re talking about buying or selling clothes, groceries, cars or anything and everything, it’s moving online. And then we get this slide:

(The whole presentation is available, by the way, on the SEC website, but it’s low resolution so I apologize for that.)

I’m not sold on that idea… at least as it comes to houses. We might get there some day, but as I wrote about in The Relationship Narrative and Its Flaws, I think there’s something in human nature that makes houses different:

I do think there is something in human nature that wants validation from another human being when making important life decisions, and few life decisions are as important as buying or selling one’s home. I am one of those people who believes that the consumer-agent relationship cannot be disrupted, no matter what happens with technology, because of that aspect of human nature.

And I was generally critical of the idea that real estate is nothing but relationships. Of course technology matters, and convenience matters, and price matters. I’m as big a booster of market making as there is anywhere, and even I look a bit askance at the idea that buying and selling anything and everything can be all moved online and done via modern software.

Tailwinds…

Chamath’s logic is that category leaders in moving consumption online have important tailwinds which protects their competitive advantage. So he goes through it. 68% of Americans are homeowners, and the rest want to become homeowners. It’s a huge undisrupted market, worth $1.6 trillion annually. And it’s highly fragmented, low trust and convenience, and 28% of the people doing real estate are doing it as a part-time job.

But then he goes through tailwinds for Opendoor, and names five important trends.

1. Low inventory has led to constrained supply.
2. Increasing state taxes and elimination of SALT deductions are driving people out of high tax states into low tax states… which is where Opendoor has really scaled operations.
3. COVID has resulted in work from home, so urban residents are looking to move to the suburbs.
4. 75 million Millennials are forming families and entering the housing market, with massive purchasing power.
5. Interest rate is near zero, so that has supercharged Americans’ ability to buy homes.

I think there’s a lot more nuance to these tailwinds.

Low inventory has led to constrained supply… that’s true. But what that has to do with Opendoor or any market maker is beyond me. That’s a tailwind for rising home prices, which means higher commissions for real estate agents, so I assume that means Social Capital believes that Opendoor will be the less expensive alternative?

I suppose. On the other hand, as we are hearing from brokers and agents across the country, low inventory and constrained supply reduces the appeal of market makers generally. The transaction is not quite as inconvenient or time consuming when you can put your house on the market on Friday and have 22 above-asking price offers by Monday.

Increasing state taxes and SALT and so on is a tailwind for deurbanization… but those haven’t really resulted in mass migration out of blue states and into red states in the past. What changed in 2020 is a combination of COVID and social unrest, right? Both of those strike me as a once-in-a-lifetime Black Swan event, rather than a persistent tailwind.

Keep in mind that I was one of the first of the commentariat to talk about deurbanization in Silver Lining from Pandemic, #3: The Rise of the Exurbs. I’ve researched the issue. I think it’s real and happening. So I get it.

As for Millennials… longtime readers already know that I think Millennials are the most divided generation in history and the idea that they’re all going to get married, form families and buy houses is… delusional. Here, go read a few of my posts tagged “Generation Screwed” and see for yourself. I wrote a whole 90-page Red Dot report on the topic (February of 2019 — let me know if you’d like a copy).

I don’t think Millennials are a tailwind; I think they’re a headwind. Except for the elite 20% or so, they’re not getting married, they’re plagued with economic uncertainty, and they’re not buying houses because the price of housing has far outstripped wage gains. I mean, one of the slides literally talks about housing unaffordability… but Millennials are a tailwind?

In fact, you don’t have to believe me. Go read FML and see if you think Millennials are any kind of a tailwind for housing.

Finally, zero interest rates are a tailwind, yes… but it isn’t clear that it’s a particular tailwind for market maker iBuyers.

So Opendoor As Dominant Category Leader…

So Chamath moves to why he loves Opendoor so much.

He talks about how Opendoor has created an amazing product with machine learning, great user experience, and wonderful operations to create a “1-click experience” for homesellers and homebuyers. He reveals that Opendoor did $4.7 billion in revenues in 2019, which is fantastic and new since Opendoor has never disclosed any data before this.

Then he talks about “compounding advantages” with this slide:

I mean… yes… that’s all true… but…

It’s as if Chamath has never heard of Zillow. Which can’t be true, because who hasn’t heard of Zillow by 2020? And it further can’t be true because no one would be putting a dollar into Opendoor without at least considering its most significant competitor.

Zillow has literally every single thing in this compounding advantages cycle… plus one incredibly important factor: Customer Acquisition Cost, or CAC. Chamath casually mentions that what Opendoor built “allows a person to come to Opendoor.com” for that 1-click experience.

Then we have to at least mention how many people are coming to Opendoor.com, versus how many people are coming to Zillow.com, no? Because in that dimension, there’s simply no comparison today. But let’s go ahead and compare, shall we?

Similarweb.com (you decide whether that’s a reliable source or not) has this:

I mean… I want to believe. I really do. Maybe only like 200K of the 290 million visits are on Zillow Offers? Maybe. Maybe more of the 636K visits on Opendoor.com result in a request for an offer, because the only people going to Opendoor.com are there to solicit an offer. Who knows? But boy, that’s a big gap.

But let’s also talk about “the more homes they buy, the more homes they sell” as Chamath mentions.

This is some information I put into my Q2/2020 Residential Real Estate Report for my new Investor Network clients. I figure it’s okay to share some of this with you VIP folks now that we’re working on the Q3 Report.

As you can see, Opendoor slowed down dramatically in its purchases… in September of 2019. Naturally, since you can’t sell what you don’t own, its sales fell off in February of 2020:

Obviously, both companies slammed on the brakes when COVID broke out, so there really isn’t much to see from Q2 data, but we’ll see from Q3 data what’s been going on. But here’s what my data tells me from July of 2019 to February of 2020:

If we go by Chamath’s logic, then Opendoor is hardly the dominant category leader anymore… Zillow is. Maybe there’s some missing data somewhere, or my data is jacked up. Show me, and I’ll change my mind, because I form my opinions based on facts and data. I’m happy to receive and process any data that anybody wants to provide. But until then, I have to go by what data I have.

Nonetheless, seeing as how Zillow has already posted some $1.2 billion in revenues from its Homes division in the first six months of 2020, and Opendoor is now projecting $2.5 billion in 2020 revenues… I’d say that’s pretty neck-and-neck if things play out.

Yet, this is where I can’t get away from the CAC advantage that Zillow has. Opendoor has to spend money on marketing, on getting people to submit inquiries. Zillow doesn’t, because it owns the dominant category leader for online real estate — and that dominance is not questioned by anybody. That has to translate to dollars somewhere, no?

Let me add one final note, because this is literally hearsay and not evidence.

In the course of conducting research for my various papers (working on Q3!), we interviewed a top broker in a mature Opendoor market. According to that broker, Opendoor’s properties are looking abandoned — uncut grass, lack of maintenance, etc. And he said that all happened since COVID broke out. That’s one person relating just his impressions, so make of that what you will.

Remember the Pivot?

Interestingly, neither Chamath nor Eric Wu said one word about Opendoor’s pivot to brokerage. Instead, we find the two buried under “adding high margin services” on page 33. I assume Buy with Opendoor is the Home Reserve bridge loan model thing, and List with Opendoor is the pivot to brokerage.

It’s almost like they don’t even want to admit that they pivoted because of COVID. Pivot? What pivot? Those were just additional high margin services, like title and escrow.

Right. Because this is just like title and escrow and other add-on ancillary services:

At the very least, I think I can say I was right in my previous post when I wrote:

But more broadly, that transaction opens a new chapter in the competition for the Iron Throne and for who will be the market maker for housing. I expect Opendoor to quickly abandon its pivot to brokerage, with Social Capital and its billions behind them, and go back to what it was created to do: make markets in housing, thereby eliminating much of the pain of the modern transaction process.

Opendoor never wanted to do any of the traditional stuff. I mean, Eric Wu spent a lot of words talking about how the traditional model sucked ass. He talked about the reason for starting Opendoor in the first place being the horrible experience he had buying his first investment property. I mean, look at this slide:

Fact is, Opendoor didn’t want to  take listings and do things the traditional way. Opendoor didn’t want to do the buy-now-sell-later Reserve thing. It wanted to go back to what it was created to do: make markets in housing.

Now, with Social Capital and its billions behind it, Opendoor can go back to doing that.

The True Narrative

I think the true narrative here is that Opendoor was doing great until 2019. It was doing fantastic. It was going gangbusters. It was the dominant category leader. Zillow was trying to catch up and failing.

Then WeWork happened, and through no fault of its own, Opendoor suddenly found themselves in a giant hole as Softbank pulled back its funding. I suspect that Softbank likely told Opendoor to IPO because they weren’t gonna get any more money from Daddy Softbankbucks.

So Opendoor stops buying, keeps on selling to improve margins, to show big revenue growth, and to de-risk the balance sheet. They were likely targeting announcing an IPO in March sometime.

Then COVID hits, everything goes to hell in a handbasket, and all IPO plans are put on hold along with a total freeze in market making activities. So they scramble, try to figure out how to stretch what capital they had until the crisis was past, and how to show a path to profitability. That explains the launch of the Home Reserve bridge loan model, as that model is far less capital intensive, and finally the pivot to brokerage. That was in May, y’all.

After that, silence… until the merger with IPOB. Suddenly, Opendoor is back and sounding strong and confident and telling us all that they dominate the category, and they’re the future of buying and selling houses, and so on and so forth. Now it’s suddenly, don’t call it a comeback, Opendoor’s been here for years and putting suckers in fear.

Opendoor was too big, too good, and too innovative to let COVID kill its revolutionary dreams. And Keith Rabois is too much of a baller in Silicon Valley to just let his dream (look up “Project HomeRun” sometime) die on the vine. Enter fellow Silicon Valley royalty venture capitalist, Chamath Palihapitiya and Social Capital. I mean, there is literally no way those two do not know each other.

I think that’s what really happened here.

And yes, I saw the presentation slides about having $2.4 billion in non-recourse financing in place, all the wonderful work done to drive borrowing costs down, and having $560 million in cash, etc. not to mention the de-risking (~$900 million between February and July?) and still somehow maintaining really strong margins.

It’s not that I don’t believe those numbers, because numbers are numbers…. It’s that the story doesn’t add up for me. If all of that is true, then why the big pullback on purchases in Q3 and Q4 of 2019? If all of that is true, why do the deal with IPOB with $600 million in PIPE (below market sale of stock to private investors) and all that instead of just going public on your own? If all of that is true, why the pivot to Reserve and “list with Opendoor” brokerage and all of that in May, which gets not a word after the IPOB deal a scant four months later?

Just doesn’t make sense to me. I’ll stick with my version of the true narrative until I see and hear facts and data to change my mind.

With All That Said…

I could not be more excited at the rebirth of Opendoor. It’s another publicly traded company in residential real estate, and one that will attract massive amounts of attention, thanks in part to IPOB and Chamath Palihapitiya’s involvement. And it is a legitimate market maker whose only real business is buying and selling homes. It is going to have to report unit economics and talk about unit economics, so that we all can compare how Opendoor does things to how Zillow does things.

In particular, Opendoor went deep into detail about ancillary revenue of title, escrow and mortgage that Zillow thus far has only hinted at.

Just look at those attach rates!

If Opendoor can get 83% attach rates on title and escrow, well, I think we can guess what attach rates Zillow Closing Services will get. The same with mortgages, home warranty, home insurance, upgrade and remodel, and even moving services. We can all now get a bit more transparency into some of the data where the profits really live and compare them to what traditional players get. (Hint: from what I know, it ain’t 83%….)

Plus, I agree with IPOB and Opendoor executives when they say this is only the beginning. People like Eric Wu, Chamath Palihapitiya and Keith Rabois are smart enough to know that they have to deal with the CAC disparity that Opendoor has versus Zillow, its sole competitor. They have to know that making money can’t be the priority right now; getting market share and becoming the dominant consumer brand for market making has to be.

And it just so happens that Social Capital’s entire business model is buying companies through its SPACs (Special Purpose Acquisition Company). I think we are in for a wild ride of an acquisition binge by Social Capital… and since there is one whale going around snatching up companies, other whales are going to have to think hard about getting involved too.

For someone like me, I couldn’t ask for more. The next few years are going to be exciting, chaotic, filled with change, big blockbuster deals, and smaller tuck-in proptech acquisitions galore. The only people happier than me, I suspect, are investment bankers just licking their chops at the M&A business that real estate technology space will generate.

Don’t Call it a Comeback

So let me end this by congratulating Opendoor and the team over there. It could not have been easy navigating the multiple crises, none of which were of Opendoor’s own making. With the new capital behind them, and the right kind of capital (as I discussed in my previous post), the coast is now clear for Opendoor to contend with Zillow to become the market maker for housing.

I can’t help but feel like a new chapter is being opened here, and I’m excited to see what happens next.

I won’t call it a comeback, because it is true that Opendoor has been here for years. But yo, after some of your more recent moves, don’t hate me if I actually compare you to the rest that might get sliced and diced… until you actually make the competition pay the price.

Because while you were gone for the past year or so, a new clan has taken your spot, and they’re controlling the globe slowly and proceeding to blow swingin’ swords like Shinobi.

-rsh