When Opendoor reported its 2020 results, I was so impressed that I went out and broke my own self-imposed rule and bought some shares. It’s a small position but it is a position, and I’m long Opendoor. Well, the Q1 results lead me to believe I’ve made the right choice, despite the markets disagreeing with me. I’m long Opendoor because I have long been a bull in market maker iBuyers, and I think Opendoor is the purest market maker play today since Zillow is split between market making and aggregator businesses.
Opendoor’s Q1 results were even more impressive than Q4, in major part because of the insane market in which Opendoor posted such strong results. By just about every metric, other than total revenue (which we’ll look at), Opendoor killed it in Q1. And some of the signals coming from Eric Wu and Carrie Wheeler are extremely encouraging. They are out-innovating Zillow, their primary competitor in market making, which is saying something.
So in Q4, we saw that Opendoor was back in full effect. In Q1, we see that it can build on that momentum. The flywheel is getting going.
Let’s get into it.
The Numbers
As usual, you already have the generic numbers from Opendoor’s public filings and announcements. In a transparent attempt to frame things, Opendoor did a lot of “versus 4Q20”:
- Total Homes Sold of 2,462, up 190% versus 4Q20
- Total Homes Purchased of 3,594, up 78% versus 4Q20
- Total Revenue of $747 million, up 200% versus 4Q20
- GAAP Gross Profit of $97 million, or 13% of Total Revenue
I get it, but none of us are unable to look at YOY numbers. It isn’t clear why anyone would look at Q1 over Q4 of 2020. And on a YOY basis, Q1 did not look great on the topline. Revenues were down 41% YOY, and Opendoor’s losses widened to $270 million, more than triple the loss from Q1 of 2020.
That sounds like really bad news. But look a bit deeper into the details, especially the unit economics of their core market making business:
So much to get into here.
From these numbers, it becomes obvious that while total revenues were down 41%, on a per-home basis, revenues were up 19% YOY, while cost of revenue (basically, what Opendoor had to pay to buy) was up 11%. That gap seems significant to me, because at the same time, on a Q/Q basis, revenues were up 3.5% while cost of revenue was up 6.5%, signaling that Opendoor had to spend more to purchase homes sold in Q1 vs. homes sold in Q4. That broadly fits what we understand about market conditions.
The decrease in direct selling costs and holding costs are also quite interesting. In total, Opendoor saved:
- 53% on Direct Selling costs (commissions, title and escrow fees), 5.7% per home
- 56% on Holding costs, current period, 13.1% per home
- 84% on Holding costs, prior periods, 67.6% per home
Since holding costs are things like property taxes, insurance, utilities, maintenance costs, etc., it simply means that Opendoor turned inventory faster YOY, as Carrie Wheeler, CFO, said in the call: “Consistent with what we’re seeing in the overall market, we are selling up through our inventory in 21 days from list to pend relative to 65 days in Q1 2020.”
Taken together, on a per-home basis, total selling and holding costs were about $8,486 in Q1/2021 versus $10,247 in Q1/2020, almost 20% better.
Plus, the shorter DOM meant that inventory impairments were lower across the board as well as homes didn’t sit in inventory long enough. And interest expenses were lower, since homes were selling almost 3 times faster YOY. Which is why we get the amazing improvement in contribution profit after interest of $29,615 per home sold in Q1, versus $4,771 in Q1/2020, a 521% improvement YOY.
So why did Opendoor lose so much money? Turns out, it might be the hangover from going public via SPAC. Here’s Carrie Wheeler, CFO:
I’d also like to touch base on stock-based compensation expense this quarter, which was $239 million. As I noted in our prior earnings call, this expense is much larger than we’d expect in a typical quarter and is primarily related to historical equity awards to employees realized as a result of going public in December 2020. For your modeling purposes, you should expect stock-based compensation expense to be down to $175 million in Q2 and then settle in at approximately $70 million in each of Q3 and Q4.
Seems like a big chunk of the outsized expenses posted in Q1 is because of stock-based awards from going public. I don’t know how their grants work, but many startups accelerate vesting immediately if there is an exit event, like going public. Seems likely that a lot of Opendoor employees got years’ worth of stock options accelerated, which has to be accounted for. In other words, those are paper losses and one-time to boot.
The Core Value Proposition is Working
In the Q4 report, I wrote:
[Opendoor losing money] 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 was after Opendoor managed to purchase some 2,000 homes in Q4. Well, in Q1, Opendoor purchased 3,594 homes and they are under contract already to buy even more. Here’s Carrie Wheeler:
Looking ahead to the second half, we expect Q2 to mark a record number of home acquisitions. As another leading indicator of our momentum, we had a record 4,027 homes under contract to be purchased at the end of Q1 or $1.3 billion in value, which compares to 1,742 homes under contract at the end of Q4.
Again, this is in the midst of the most insane seller’s market we have ever seen. REALTORS everywhere on social media are bemoaning the fact that consumers are getting ripped off and taken advantage of by these iBuyers. Except that the people who are actually selling their homes to Opendoor don’t feel ripped off and taken advantage of….
In the Q4 writeup, I noted the Cummings family who had recorded a testimonial for Opendoor, saying:
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.
And Eric Wu noted that Opendoor has a “Net Promoter Score north of 80 from our sellers.” Note that some of the most beloved brands in the world have NPS in the 40s, like Apple with 47. According to this list, only two brands sniff Opendoor’s 80+ NPS: Starbucks at 77 and Costco at 79. That’s damn high satisfaction, y’all. Redfin, which has been using NPS and focusing on customer satisfaction since its founding, has a score of 26, which leads Real Estate Brands.
Since I went into this in detail in Q4 report, and in every report on Zillow’s iBuyer offering since like forever… I’ll leave that there. People are selling their homes to market makers, because the transaction sucks so badly. That should be nothing new.
What is new, however, is the emphasis that Opendoor is putting on its Opendoor Backed Offers — an innovation that I mentioned last quarter.
Market Maker and Bridge Loans: All Things iBuyer
Opendoor announced the cash-backed offer product last quarter, and I wrote:
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.
We don’t know, because no one asked and because Opendoor did not reveal (and if I’m them, I don’t reveal it either), to what extent this product helped them purchase 3,594 homes and put another 4,000 under contract in the hottest seller’s market ever seen. But you can’t tell me it didn’t have an impact.
The Bennett family was featured in the earnings call, and since their testimonial was not transcribed, I had to do it:
Once we decided that we were going to sell our home, we came across Opendoor. Opendoor offered a one-stop shop where you can sell, buy and finance through them. They offered great rates and competitive offers for us. We found a home that we loved, put in a bid for the listed price of $525,000 and even though our bid was not the highest one, because Opendoor guaranteed the purchase of this home through their cash-backed offer, we were able to win the bid.
In the Shareholder Letter, there was more detail:
The home Shermika found had only been listed on the market for two days, but already had four offers. She worked with an Opendoor agent to place a strong, competitive offer using Opendoor’s cash-backing. Shermika ended up winning the home with a bid that was $25,000 less than the highest bid. The Bennett family are now happily settled in their new home.
“I have three kids, so moving during this time was an experience. But everything worked out well and it was a smooth transition. I would definitely recommend Opendoor. We love our new home.” — Shermika Bennett
It wasn’t mentioned, but you cannot convince me that the Bennetts, who live in Atlanta — an insane market if there is one anywhere in the country — did not take into account how they were going to buy their next home when contemplating whether they should sell their current home to Opendoor, or to Zillow, or to Redfin, or to any one of a dozen investor types, or to list with an agent “for the most money possible!!!” Even if they could have made more money the traditional way — as Glenn Kelman of Redfin keeps saying — how were they going to buy their next house in the market craziness that is 2021?
Eric Wu followed up on that heartwarming story:
A special thank you to the Bennetts for choosing Opendoor. These are the stories that inspire us in our pursuit to make it possible to buy, sell and move at the tap of the button. Today, our digital products deliver far greater simplicity, certainty and speed than the traditional process. We always believe that the future of buying and selling a home can and will be as simple as hailing a ride or booking a flight. It seems that, that future is a lot less distant now. We are seeing increasing consumer demand for digital products in a manner that is permanent. This seismic shift is showing up in our numbers as in Q1, we set a number of records. We set a record number of offers, we saw record real seller conversion and we launched a record number of new markets. Lastly, we did so with a Net Promoter Score north of 80 from our sellers, telling us that customers love what we’re building.
Taking a step back, I often get the question whether Opendoor still resonates in today’s market. We are experiencing the fastest home price appreciation in decades, with stories of homes getting more than 50 offers in the first weekend. It’s certainly a seller’s market. Yet, our results and metrics are saying, yes, Opendoor resonates because for our customers, we don’t just stand for a cash offer and we aren’t an iBuyer to them. Opendoor gives our customers the ability to win their next home, select their preferred closing date and transact without open houses, dozens of steps and upfront repairs, saving them months of time. What we’ve built is a digital end-to-end experience that delivers confidence and peace of mind at every step.
This is an enormous win for Opendoor, even over its rival Zillow. Rich Barton has said, does say and will say more or less what Eric Wu said: that there is a shift to online for buying houses, that people want convenience, that people want certainty and speed, etc. But as of today, Zillow doesn’t offer a “Zillow Backed Offer.” The Shermika Bennett story doesn’t happen on Zillow.
This “cash backed offer” is, of course, something that the bridge loan iBuyers like Knock, EasyKnock, Flyhomes and others have pioneered. Opendoor has embraced it and launched it; neither Redfin nor Zillow has, yet. Traditional brokers and agents of course have not, because they just see iBuying as seller lead generation. (See Realogy’s take on RealSure, as an example.)
But all of those are ignoring something incredibly important and incredibly fundamental: nobody sells their home to become homeless. They sell to move up or downsize or move to another state or what-have-you. People don’t sell homes to make a bunch of money; they sell homes to buy another home, because they have to live somewhere.
In an insane seller’s market, sure, it’s easy to convince someone to sell and lock in their $250K gains. But if that someone is not an investor, where are they going to live? They have to buy a house, don’t they?
Being able to make a cash offer using somebody else’s money is an arrow in that consumer’s quiver that few others can offer. Being able to sell a home without doing any work is an arrow in that consumer’s quiver that only a few can offer. As far as I know, having a cash offer plus a cash sale on a date certain is an arrow in that consumer’s quiver that nobody else can offer.
Just put yourself in the seller’s shoes and ask, what is it that she really wants? As real estate industry people, we think the answer is something like, “she wants to sell her house for the most money” or “she wants to buy a house” or “she wants a mortgage with a great rate” or whatever. The truth is, she wants to live somewhere else. As the Bennett story said, “We love our new home.” That’s the goal, and everything between now and that goal is something she doesn’t want to deal with if she doesn’t want to.
Of all of the companies in real estate, only Opendoor seems to understand this fundamental truth. People don’t want to buy and sell houses; they just want to live somewhere else. Everything else leading up to living somewhere else is a hassle.
The Flywheel is Spinning Up
Which then leads to another very positive revelation. Opendoor gets asked about the cash-backed offers program and how that’s tying in with ancillary revenue streams. Here’s Andrew Kee, President:
If you actually go through the product experience, which I’d encourage you to do on Opendoor-backed Offers, you’ll see it’s totally seamless in terms of its integration with our mortgage offering. And that seamless customer experience, removing friction while creating value for them, we see turn into higher levels of attach. And we absolutely see our Home Loans product attach higher rates with Opendoor-backed Offers than we do in other places. So we view the uptake and the consumer acceptance of that product as a tailwind to the Home Loans side of things, absolutely.
We already know that Opendoor’s title is around 90% attach rates, which is awesome. We now know that Opendoor Backed Offers is creating a ‘flywheel’ effect. And just to make sure everyone understands it, here’s Eric Wu explaining it as analyst Jason Helfstein admits that Opendoor Backed Offer is a new product to them:
Jason, it’s Eric. Yes. No, it’s really just — it’s an option for the customer. And again, we’re excited because the customers are electing and choosing to work with Buy with Opendoor because of this feature. But it’s not required.
Again, we have two really big customer pools. One is that there’s hundreds of thousands of sellers coming to the site and requesting offers on a quarterly basis. And secondly, we also have hundreds of thousands, if not millions, of home visitors who also are coming to our homes and looking for a place to buy.
And so the two customer pools allow us to promote Buy with Opendoor, Opendoor-backed offers. And again, it’s not a requirement to use our service, but it’s certainly something we want to provide as a value, and customers are choosing it.
Breaking this down, Eric is saying that they have a pool of sellers who come directly to Opendoor.com to get an offer. When they request that offer, Opendoor is smart enough to know that they are going to want to buy a house somewhere, so they promote OBO to them. And if you’re going to look at OBO, why, you might as well see what Opendoor’s mortgage rates are, right?
They also have their owned homes in inventory on the website. Buyers are coming there because they want to buy a house. When they do, they are also told about OBO, which one assumes applies equally to Opendoor-owned homes as it would to a consumer-owned home. And yeah, why not look at Opendoor mortgage while you’re at it, right? And if you’re a buyer who happens to own a home… have we mentioned that we can buy that home from you for cash and line up the closing dates just-so?
That’s the flywheel in full effect. No one else in the industry has this. Yet.
I would be shocked if we don’t see cash-backed offers from Zillow and Redfin before the end of the year. In fact, I would worry about Zillow and Redfin if we didn’t see them offer something very similar by end of 2021.
Note on Competition with Zillow
Last quarter, I wrote that a major disadvantage that Opendoor had versus its primary rival Zillow was web traffic. Zillow has it, Opendoor does not. At the time, I wrote:
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.
With NPS north of 80, and the flywheel of Market Maker plus Bridge Loan plus Mortgage, Title, and Escrow… I’m now wondering if this is as big a disadvantage as I thought it was. NPS north of 80 suggests that its customers are all promoters. They’re telling their friends and neighbors about Opendoor. They’re testifying, ecstatic, because they achieved their goal — living in a new house — with a minimum of hassle.
Word of mouth is probably the most powerful advertising medium there is. Look at the growth of cryptocurrency, as an example. I’ve never seen an ad for Bitcoin; if anything, I’ve seen a lot of smart financial advisors warning against it. And yet… it keeps growing, and growing, and growing, predominantly through word of mouth.
I’m not sure that Opendoor isn’t close to hitting that point where users and their happiness won’t create more users, and drive CAC down even more.
Note: In Which I am Vindicated
For years now, I’ve been telling you all that to think of iBuyers as investors or flippers is a mistake. For years, I’ve been saying that there is no reason why iBuyers couldn’t work in seller’s markets, buyer’s markets, neutral markets, whatever markets… because they are fundamentally market makers who make life easier for buyers and sellers. And for years, doubters have told me I’m mistaken, that Opendoor and Zillow rip people off, and they’ll be kaput as soon as the market turns.
I consider this from Carrie Wheeler to be total vindication:
The second part of your question just was around record low inventory levels but also just what if the market were to go from being very HPA [home price appreciation] positive right now to something more neutral or even negative. And what I would say is our model is really designed to work across all kinds of markets: up markets, flat markets, down markets. You should think of us as a market maker and also a liquidity provider. So in a market environment where HPA would have turned negative, we can choose to increase spreads to account for that decline. So declines in HPA will be offset by increased spreads. And certainly, in a down market, which is more uncertain for consumers, we believe that the certainty our product provides will be an even greater value to customers in that scenario. [Emphasis added]
Please let’s not hear anymore about how these guys are going to lose their ass in down markets. They’ll be fine in up markets, down markets, flat markets, all markets. Because their game is to make markets in housing.
Part 2 of that vindication comes from the fact that Opendoor is expanding its buy box aggressively. An analyst asks why Opendoor is seeing so much higher revenue per home.
Carrie Wheeler answers, first by noting that it’s just huge volume growth, but then says:
There’s 2 factors to [higher revenue per home]: one is HPA [home price appreciation], as you know; the other factors are continued success in advancing our buy-box. Buy-box incorporates more things than just price. But certainly, price is a key component. I think that market you referenced was actually Los Angeles. We’re up to $1.4 million, $1.6 million right now in that market. And we’ll continue to edge up across all our markets over time. That’s one. [Emphasis added]
Opendoor is buying and selling houses that are $1.6 million. Sure, that’s in LA, where that might buy you a 3-bed, 2-bath bungalow, but still… it’s $1.6 million. And then Eric Wu jumps in:
Yes, the only thing I’ll add, Jason, is that our aspirations are to service all homeowners nationwide. And our teams are working hard and focused on expanding the buy-box and launching, obviously, new markets. And so we’re expanding the types of homes we operate in, the types of — the different price points. And really, the goal is to service every home in all the markets we operate in. [Emphasis added]
That is a market maker, not an investor, not a flipper. Opendoor can’t do it yet, and doing it will take far more money than they have today. The data is wonky for high end luxury, for weird one-off houses, for rural markets, for condos, for fishing shacks… we all get it. We all — including Eric Wu — understand how difficult it will be to make markets in non-commodity goods like houses. But that’s Opendoor’s goal: to service all homeowners nationwide. That’s their dream, and they’re taking steps by taking action in higher end markets and with higher priced properties.
If Opendoor can do this with million dollar houses in LA, why couldn’t they do it with $10 million mansions in Miami or $20 million shacks in San Jose? The sky is the limit, and the wheel in the sky is turning.
The Wrap-Up
Q1 is just the first step after Opendoor’s return in Q4. To me, it feels like they are getting back to form to where they were before the whole WeWork/Softbank debacle. They’re being aggressive, being innovative, and focusing on the core vision. Because they are so focused, it feels like they’re able to innovate faster, try new things faster, and get the flywheel of seller –> buyer –> borrower –> title/escrow –> seller –> buyer moving faster than others, including Zillow who is significantly larger and has significant competitive advantages.
The flywheel in the sky keeps on turning. I don’t know where Opendoor will be tomorrow, but I can’t wait to see where they’ll be and what that journey looks like.
-rsh
