Opendoor reported its Q4 and full year 2020 results a week ago, and I couldn’t get to looking closer at them until now. What I’m seeing is impressive as hell. It’s so impressive in fact that I broke my own self-imposed rule and decided to go long on Opendoor. So yeah, take everything I write here with whatever shakers of salt you’d like but I have a personal position in Opendoor.
My thesis is pretty simple. Opendoor was a victim of WeWork-Softbank implosion in 2019, and then COVID hit. It was fundamentally a very sound business, albeit a risky one that was pioneering the iBuyer industry. Once Social Capital stepped in and rescued Opendoor, infusing almost a billion dollars of capital into it, and the V-shaped recovery in housing turned out to be a rocket ship, it posted amazing results. Thing is, COVID simply accelerated existing trends, which means that absent some major change in the economy, regulatory environment, or what-have-you, Opendoor is back in full effect.
Let’s get into it.
As usual, you already have the generic numbers from Opendoor’s public filings. You can find those in the announcement of Q4 and 2020 results on Opendoor’s website. The headline numbers, depending on whether you’re looking at industry media or financial press, are dramatic decreases in revenue or dramatic improvement in margins.
Chances are, if you haven’t already seen article after article about Opendoor’s huge losses in 2020, and how this means they’re losing thousands and thousands of dollars with each sale, you will. There is a curious phenomenon in real estate where people and companies want to tell you things to make you feel comfortable, to tell you how nothing is going to change, and how there are no real threats or problems.
I don’t think that helps anybody. Basing strategic decisions on pretty lies leads to disaster. It’s far better to confront reality, no matter how harsh, and base your decisions on reality as you see it, not as you’d like to see it.
So let me lay out some key numbers from Opendoor. I know this is a big chart, but it’s worth looking over.
If we look at these numbers, what emerges is incredible signs of strength, especially on a per-home sold basis. Since 2020 was the Pandemic Year, it’s too easy to look at the big declines YOY and focus on that.
What I see is that despite pausing activities for a couple of months, despite having no funding runway for a while, despite all the uncertainty and chaos, Opendoor ended 2020 with revenues up 3.3% and gross profits up 38.4% over 2019 on a per-home basis. Opendoor’s gross margins went from 5.6% to 15.4% — almost tripled!
Then we have Contribution Profit, which is a key metric for Opendoor, as described in the 10K:
Contribution Profit provides investors a measure to assess Opendoor’s ability to generate returns on homes sold during a reporting period after considering home purchase costs, renovation and repair costs, holding costs and selling costs. Contribution Profit After Interest further impacts gross profit by including interest costs attributable to homes sold during a reporting period.
We believe these measures facilitate meaningful period over period comparisons and illustrate our ability to generate returns on assets sold after considering the costs directly related to the assets sold in a given period.
So after taking purchase price into account, repairs and renovations into account, holding costs and selling costs into account, Opendoor increased its Contribution Profit by 20% YOY, Contribution Profit After Interest by 197%, and on a per-home basis, both of those metrics were up 127% and 464% respectively.
And the results from Q4 shows that after the merger/IPO with Social Capital put them back on track with their immediate future assured, Opendoor blew the doors off. Look at everything on a per-home basis, since everybody (including Opendoor management) knew that they weren’t going to sell as many houses in the COVID year as they did in 2019:
- Revenue up 17%
- Gross profit up 206%
- Contribution profit up 919%
- Contribution profit after interest up 6,956%
In Q4, Opendoor made an after-interest profit of $35,664 per home sold. This is bad news? Gimme some more of that kind of bad news.
Uncomfortable Truth vs. Pretty Lies
The uncomfortable truth for legacy industry is that Opendoor is kicking ass and taking names, especially in the second half of the Pandemic year. This was a major question a few years ago when Opendoor and Zillow were really ramping up iBuyer. A lot of brokers and agents said, “Well, let’s see how they do in a hot seller’s market.”
We now know how they do in a hot seller’s market. Here’s Eric Wu during the earnings call:
First off, more and more home sellers are coming to Opendoor to request an offer to sell online. So far this year, we were sending over 50% more offers per month compared to this time last year and exceeding previous highs. What’s more exciting is that we are converting more and more of these home sellers.
A question we often get is if homeowners will choose Opendoor when the markets are hot, like we’re seeing right now. The answer to that is yes. Our seller conversion is exceeding historical highs. And most importantly, this year, our seller Net Promoter Score is trending over 80, which is up 10 points from 2020. We believe this is the future of real estate and it’s coming faster than expected. [Emphasis added]
Just how successful was Opendoor in appealing to sellers? Here’s Carrie Wheeler, CFO:
We purchased more than 2,000 homes in Q4, which reflected a strong acquisition ramp throughout the quarter. We ended the year with $466 million of inventory, representing 1,827 homes, which is up over 3x on September’s balance.
They bought 2,000 homes in one of the hottest, most insane seller’s markets in history. Two thousand. Wow. I expect that when they report on Q1 results, we will find that Opendoor will have purchased thousands of homes in a market where agents joke that they put a listing up six minutes ago and have gotten an over-list-price offer.
A bit further, there’s a Q&A about this specific issue of sellers in a hot market, and Eric Wu says:
When you think about the behavior itself… why your sellers [are] selling to Opendoor versus listing on the market? And I would highlight two things.
One is that even if it’s a hot market, you still have to list the home, put in capital for repairs, have open houses and wait the time. And that timing can be not necessarily flexible.
And the second piece is that, again, 2/3 of sellers are buying another home. And so they need to be ready to move on the next home at a moment’s notice. So having an Opendoor offer in their back pocket gives them flexibility to buy the next home on their time line. And so those are the 2 driving factors into the increasing conversion.
Is there any doubt that he’s correct if you spent even a few minutes thinking about it? Who wants to sell a house without having another one lined up and ready to go in this market? Investors, rich people who already have second houses, rich people who are building a custom home somewhere else, etc. The average family looking to move can’t do that.
The sister of a friend of mine ran into this exact issue. They sold their modest starter home wanting to move up to a bigger house; they sold it to someone who gave them six months to move out. Figuring they had six months to buy a house, they went on a shopping spree. By the time they lost their seventh offer (all of them for over asking price, contingencies waived, etc.), they were down to one month to becoming homeless. Imagine their desperation. Many of you reading this right now have clients who dearly wish they had sold to Opendoor to have that flexibility, ability to time the closings, etc. etc. You know you do.
In fact, the hot seller’s market was a boon for Opendoor, as it was for Zillow, because price appreciation between the purchase and the sale helped them. Here’s Carrie Wheeler, CFO, explaining why margins were so good in Q4 and why she expects margins to be healthy in 2021:
If you think about what drove margins, first of all, in Q4, that will help us talk about what’s going to happen for the coming year. There are really 2 main drivers of margins.
One was having a very fresh book of inventory consisting almost entirely of newly acquired homes, that was one.
Second driver of margin in Q4 was around a combination of the underlying market strength we’re all feeling today, coupled with the timing of home acquisitions. So the homes that we sold in Q4, just as a reminder, actually homes that we offered on and we acquired in Q2 and early Q3. And so that gap in timing drove — realized better-than-anticipated HPA [home price appreciation] gains.
It turns out that when homes are going up at 14-15% a year, holding a home for 3 months means a 3-4% increase in the price of the home without lifting a finger.
Of course Opendoor lost a ton of money in 2020. How could they not? They literally stopped being in business for a couple of months, had layoffs, and were scrambling to survive since nobody in March/April of last year knew exactly what this virus was, whether it was going to kill everybody off, whether it was the end of the world… nothing. None of us knew anything. Opendoor had to navigate that while enormous questions about whether they could raise enough capital to stay afloat was hanging around their heads.
Literally no one should have been surprised by the fact that Opendoor lost a lot of money. What was surprising was how strong its core business (reflected by gross profits and gross margins) was despite revenues being down so much.
But you know what Opendoor losing money doesn’t change?
It doesn’t change the consumer desire for a faster, easier, simpler, and more certain experience in buying and selling a house. The idea that the industry is wedded to, that sellers don’t want to leave all this money on the table for convenience, is countered by the fact that Opendoor saw record-high conversions during the hottest seller’s market in history.
That’s how bad the transaction sucks. Opendoor featured the Cummings family in the earnings call, and this is what they said:
I also didn’t have to worry about hiring a contractor to fix things around the house, nor did I have to worry about listing the home or showing the home around with 3 toddlers and a teammate.
I could tell you pretty lies. I could tell you that you’ve got nothing to worry about, because Opendoor will soon be out of business when Wall Street money dries up. Sorry, that might make you feel better, but it isn’t the truth. Wall Street knows the difference between gross and net margins, between core operational profitability and a startup spending millions on infrastructure, technology, overhead, staffing up, sales and marketing. For example, Amazon lost money for its first 17 quarters straight. Uber is still losing money. Tesla loses money on every car. AirBnB loses money.
I won’t — I can’t — tell you comfortable pretty lies. The truth, even if hurts, is what will save you.
If you are an industry leader, you need to think really, really hard about why Opendoor was able to purchase 2,000 homes in the midst of the hottest seller’s market in history. You need to prioritize what you and your agents need to do to make the process far less painful, far less anxiety-laden, and far less uncertain. Is it training? Better service? More technology? Deploy capital? Whatever it is, you need to take this very seriously, because Opendoor might in fact go bankrupt someday. Zillow might go down the tubes. Consumer desire is going nowhere.
Let’s move on.
The Cash-Backed Offer
One of the bigger announcements was that Opendoor is launching a bridge loan iBuyer product, the “cash-backed offer“:
All-cash home sales now make up about 36% of the market. Why? Sellers find cash offers more attractive because there is less chance of the transaction falling through during the financing stage. However, not everyone has enough money to make an all-cash offer. But with Opendoor, it’s now possible to reap the benefits of being an all-cash buyer.
No extra work. No surprises. And no additional costs. We give qualifying buyers the benefits of an all-cash offer while allowing them to skip the many hurdles required by other companies, such as a full pre-underwriting process or charging extra fees.
How does it work? Opendoor will back your offer with our cash. This means you can present the certainty of an all-cash offer to the seller, free of financing, appraisal, and home sale contingencies, even if you need a home loan. And if you want to move into your next home before you sell your current one, we can even buy your new home for you. You can move when you’re ready while we help you sell your old home with less inconvenience to you.
This is a potential game changer, and something I have long thought that Opendoor and Zillow and Redfin would eventually do. Market maker models really appeal to the seller, and to some move-up seller-buyers. But this cash-backed offer will appeal to buyers, especially in this crazy market we’re in.
That this program should help drive Opendoor’s mortgage play seems obvious. That it will help convince sellers to in fact move seems obvious. That it will start drawing buyers who don’t have a home to sell seems obvious.
It’s smart as hell, and frankly, this is the second time that Opendoor has out-innovated Zillow. The first time, obviously, was inventing iBuyer in the first place. I fully expect Zillow to introduce something similar in 2021 now, and Redfin really ought to do the same.
Add cash-backed offer to the “list with Opendoor” thing that they trotted out during the middle of the pandemic (pre Social Capital), at least in theory Opendoor now offers every option available, save one:
- Market Maker: “I’ll buy your home.”
- Bridge Loan: “I’ll buy your next home, if you qualify for a mortgage.”
- Traditional List-and-Sell: “I’ll list and market your home.”
The option missing? Auctions. Because that’s just not really a thing in the U.S. yet, though it is popular in Australia.
The Competition with Zillow
Clearly, Opendoor’s most serious competitor is Zillow, which has pivoted fully to making iBuying its top priority. In that competition, they have two disadvantages, only one of which was touched on during the earnings call.
First disadvantage is traffic: Zillow has it, Opendoor does not. That’s something they obviously know about, but have no clear solution to at this time. But with the volume of requests for offers coming in right now, and their plans to expand, it isn’t immediately clear that Opendoor needs more traffic. Seems to me that they have more than enough volume for the capabilities they have at hand.
Second disadvantage, if it is that, is what looks like Opendoor’s need to be a bit more circumspect on margins in iBuying. In the earnings call, we get this from Carrie Wheeler:
What I would say at a high level is really, first and foremost, our focus is on maximizing the growth we have right in front of us and to take advantage of the enormous market opportunity. That’s the #1 objective and we want to invest aggressively behind that growth objective. As evidence of that, I’d point to the fact that we just recently announced we’re going to double the markets we’re going to be in, in 2021.
But we will continue to do that as we have historically with a disciplined approach to unit economics. Building a sustainable durable business is — continues to be important to us. So I’m going to cheat a little bit and say, and, to your question. It’s an “and question” for us, I mean growth #1, but always in light of making sure that we are disciplined on our margin objectives at the same time. [Emphasis added]
The disadvantage here is that Zillow doesn’t have to be anywhere near as concerned about building a sustainable, durable business in iBuying as Opendoor is. I think we see that in the difference in gross margins: 15% for Opendoor vs. 9% for Zillow. Zillow can bid more simply because its margin goals (+/- 200 bps) are far lower and less important to the company’s survival.
Opendoor doesn’t have a website portal business throwing off a billion dollars in revenue each year. They don’t have a network of top producing agents and teams who are willing to pay for leads… at least, not yet. They’re ramping up their title, escrow and mortgage businesses but those are still in their infancy.
Plus, growth and market share remain the #1 objective for both Opendoor and Zillow for the foreseeable future. That ain’t gonna get easier for either of them.
On the other hand… at least there is legitimate competition now. Because Opendoor is back in effect.
The Updated Thesis: Shady’s Back
Let’s wrap with an update to my thesis about Opendoor.
For those who read my COVID report last year, you know that I thought Opendoor’s retreat began in 2019, not in 2020 when they paused activities. I thought it was because their main financial backer, Softbank, ran into trouble. But they were gearing up to go public sometime in 2020 after a strong spring market… then COVID happened, ruining everybody’s plans. Things like “list with Opendoor” were experiments for surviving until things got back to normal.
Social Capital rescued Opendoor, took them public, and injected a healthy amount of new capital into the business which was fundamentally solid. So Opendoor is back and in full effect. Their activities in 2020, especially in Q4 after the merger with Social Capital was a done deal, point to what they would have been, could have been, should have been prior to the twin Black Swan events of WeWork imploding and COVID. I think 2020 points to what they will be in 2021 and beyond.
The fundamental value proposition has, remains and will be convenience, certainty, and speed. It’s as Eric Wu said in the earnings call:
For the vast majority of the 5.6 million people who buy and sell a home every year, this process is still far too complex, stressful and time consuming. Less than 1% of transactions are online, involve dozens of steps and span multiple months. So I founded Opendoor in 2014 to build what consumers crave and deserve: a simple, certain and fast online experience. We are making it possible to buy and sell a home at the tap of a button…. As we enter 2021, I feel like we’ve been building Opendoor for many years behind the scenes for this very moment.
Well, the moment has arrived. Opendoor is back, with a partner who is equally focused on social enterprise as they are. They have the longest tenure, they have money ($1.4 billion in cash at the end of 2020), they remain focused on the original goal of “push button, magic happens” and they have a slew of new talent in management. Time will tell whether they can really contend, but if 2020 and especially Q4 are signs of things to come, then I think we can say that Shady’s back, back again.
It felt a bit empty without you.