Tyler Okland, Stanford-educated surgeon and Opendoor bull, who I interviewed in a Notorious POD a few weeks ago, has published an eye-opening article on Datadoor.io, the company he founded to track Opendoor’s iBuying operations. You should read the whole thing, because it’s excellent and filled with real data.
Since I too am a big Opendoor bull, and I’m currently long OPEN, I think I’m generally biased to Tyler’s perspective. However, there are a couple of details that are worth flushing out and thinking about, especially from an industry perspective.
TL;DR — Opendoor Exclusive is innovative, and is perfectly in line with Opendoor’s DNA in fixing the broken real estate transaction. It is not all that disruptive, actually, and the real question to be asked is why Opendoor felt it had to do the program outside the MLS system. The program makes sense from a buyer experience perspective, but I don’t think Opendoor Exclusives will scale as Tyler seems to think. I definitely don’t see the Third Party Marketplace concept coming about for a variety of reasons.
Since Tyler does such a good job of describing it and explaining it, I’d simply recommend you go read the article.
The key pieces are:
- Exclusive inventory, not available anywhere else, for two weeks prior to going public (i.e., listed in the MLS)
- Lower price by 2%
- No haggling at all: “this is ‘buy it now’ not ‘best offer'” as Tyler says.
- Simple transaction, using TREC contract (in Austin and Houston, which is where this is offered)
These two images from Tyler’s article, I think, tell the story pretty well:
The main takeaways for Tyler, who has spent months investigating this program (which is not at all publicized), are:
- Opendoor Exclusives improve Opendoor’s profitability by removing agent commissions from the unit economics;
- Opendoor Exclusives can become a third party marketplace.
Again, read the article in full.
Profitability By Not Paying Commissions
Basically, Tyler believes that agent commissions make the difference between hitting profit targets and missing them:
Similarly, when Opendoor sells to a homebuyer, they pay 2.5 – 3% to the buyer’s real estate agent. In Q1 2022, Opendoor spent 2.6% of revenue, or $136 million on “selling costs,” which is primarily agent commissions. This is material for a company who lives and dies on a razor thin margin. In fact, selling costs are the largest individual drag on Opendoor’s contribution profit margin each and every quarter (Remember that contribution profit is simply gross profit minus selling and holding costs).The commission is 50 – 75% of Opendoor’s contribution profit margin targets of 4 – 6%.
But because Exclusives are off-market listings, there’s no real estate agent involved. This means the 2.5 – 3% commission is not subtracted from the sale.
Tyler believes, therefore, that Opendoor can sell homes to buyers for lower prices and still make more profit, by skipping out on paying the agent commissions on the sale — especially the cooperating compensation of 2.5% to 3% that Tyler mentions.
On Twitter, this is where everyone is focusing and arguing over. Opendoor “saving” 2.5% from agent commissions but lowering the sale price by 2% is a wash, as some argue.
I think that whole line of thinking is somewhat irrelevant. As I’ve written over the years, Opendoor is not primarily motivated by money or profit. It is primarily motivated by fixing a broken transaction process, and if they happen to make money along the way, so much the better.
For one thing, I’m not seeing anything in Opendoor Exclusives as described by Tyler that prohibits the buyer from paying buyer agent commissions. Quite a few buyer agents these days have Exclusive Buyer Agency agreements, and I know of more than a few brokerages who require that their agents get the buyer to sign said EBA agreements before showing the buyer a single house. In fact, the 2% discount offered easily translates to the buyer being able to afford to pay the agent out of pocket.
For another, after the reforms from NAR due to DOJ action, every MLS in the country allows the listing agent to put in $0 for compensation. Not many do, but they are allowed to do so, because the industry recognizes that forcing sellers and their agents to pay compensation is an antitrust problem.
The True Motivation
Since Opendoor has never once made any noise about paying agent commissions, I genuinely do not believe that figuring out how not to pay agents is the real motivation behind Opendoor Exclusives.
The genuine motivation, I believe, is what Opendoor’s mantra has always been on the seller side: speed, certainty, and hassle-free. Selling one’s house to Opendoor might actually be more expensive than using a real estate agent. AFAIK, Opendoor has never marketed its services as being cheaper than using an agent. What Opendoor has marketed its services as being is faster, more certain, and less painful/stressful than using an agent… even if at a slightly higher cost.
Thousands and thousands of homeowners have taken Opendoor up on that value proposition.
Opendoor Exclusives is applying the same principles to the buy-side of the transaction. How do you make buying a house fast, certain and hassle free? You do things like “no more bidding” where there is a no-haggle “buy it now” price instead of a list price. You do things like appraisal price match guarantee. And money back guarantees right up until the actual closing. Then you do things like “fill out this contract here online, and we’ll get it done.”
What is intriguing, troubling, and fascinating to me as an industry observer is that Opendoor felt that it could not do any of those things working within the system of traditional real estate.
The System Is Inhospitable to Innovation
Fact is, what we all should be talking about is why Opendoor felt they had to launch this program as Opendoor Exclusives at all. Why couldn’t it have been Opendoor Fixed Price Listings within the MLS?
There are only two possibilities:
- Opendoor asked the MLS whether they could do fixed-price listings and was told No; or
- Opendoor didn’t bother asking the MLS because they assumed that the answer would be No.
If the answer is #2, you can hardly blame Opendoor. Protech and vendor side of real estate are filled with people who know they wanted to try this or that innovation… except that the MLS would not let them.
For example, the n0-haggle “buy it now” price likely won’t be allowed by MLS and REALTOR rules and policies that say you have to accept offers from Participants and present all offers to the Seller.
But think about this. Fixed price, appraisal match guarantee, and reserving the offer for an hour while paperwork gets filled out are not threatening to the MLS, to the agents, to the brokers, to anybody that I can think of. The issue is simply one of “you won’t offer compensation” which is an outdated concept after the latest round of NAR rules and policies that clearly say that the listing agent can offer nothing at all. What follows is a bureaucratic response saying “Nyet” without actually thinking about what is being proposed.
The MLS has a reputation for saying No to innovation, because it earned that reputation by saying No to all manner of innovations over the years from all kinds of innovators. The entire system of real estate is inhospitable to innovation, and that is the sad truth of the matter. Don’t take my word for it: go ask your technology vendors and proptech entrepreneurs. If they are honest with you, they’ll tell you that the MLS is not the enabler of innovation, but the barrier to be overcome.
Just imagine how different the industry would be today if the MLS tried like hell to find a way to say Yes instead of trying like hell to find a way to say No.
I honestly do not believe going the Exclusives route was about saving 2.5% buy-side commissions; I honestly believe that Opendoor thought it could not do any of these faster, more certain, and more hassle-free things while abiding by all of the written and unwritten rules of the MLS. If there is something worth really talking about here, it isn’t Opendoor Exclusives; it is why the industry has a well-earned reputation for being hostile to innovation.
Third Party Marketplace
Let us then examine Tyler’s second main point:
It’s hard not to look ahead to what Exclusives could become. While today it’s an exceptional consumer experience redefining the homebuyer process, tomorrow I believe it can become a capital-light 3P [“3rd Party”] marketplace.
This all follows the inherent unit economics of an Exclusives sale. If there’s no agent commission, there’s again opportunity to design a product that is both less expensive to consumers and more profitable for Opendoor.
He believes that Opendoor could and would just open up its platform to homeowners who don’t want to sell to Opendoor directly, but will pay a lower fee (1-2% he says) to have Opendoor manage everything for them.
He acknowledges the major problem with this idea, which is to get it off the ground in the first place, but he has an answer:
But building a flourishing marketplace is no easy task. Marketplaces require network effects, and there’s the cold start problem to overcome. How do you reach a sufficient critical mass of buyers and sellers where this process works more times than not? How big must Opendoor’s Exclusives marketplace become for this model to flourish?
Truthfully, I think these are the wrong questions to ask. Rather than asking how many, we should be asking what.
The answer is, according to Tyler, to focus on “quality” over quantity. Just like HBO got huge subscription boosts from having quality shows like Game of Thrones, Tyler believes that Opendoor can create network effects to get the 3P Marketplace going by focusing on the “best” homes in an area:
To break this behavior, Opendoor must truly aggregate unique content. Not the most homes, or the most expensive ones, but the best ones. In every neighborhood in the U.S. there is one home that stands alone as the best on the block. The head-turner, the “wow,” the envy of the book club. Whether it’s curb appeal, size, or some combination thereof, this is the house every prospective homebuyer wants to at least tour.
If Opendoor can identify these homes and add them to its Exclusives inventory, it has a real shot at breaking antiquated, offline consumer behavior. And Opendoor has an entire team dedicated to identifying these “x factor” features to automate identification of the best homes on a given street.
I imagine a homebuyer touring an MLS-listed home next door to an Exclusives listing, seeing the Opendoor Exclusives for-sale sign and asking their realtor to visit that home next. The realtor says “Uh, actually I can’t show you that home (remember, no commission).” “Why not?” (because I won’t be paid for it).
Unsatisfied, that consumer will download the Opendoor app, find the home on the Exclusives tab, tour the home themselves, and thus the behavior has broken.
I think this… is a step too far where Tyler’s knowledge of Opendoor and his passion for fixing the broken transaction process fall short of the reality of the marketplace.
The Reality of Unique Homes
Let’s start with what I think is a non-controversial statement: when you’re hot, you know you’re hot.
I can’t find whether it was the great Patrice O’Neal (RIP) or Bill Burr who made the point that women who are 9s and 10s know that they’re 9s and 10s because every guy they have ever met since they were in junior high school have been drooling after them.
So if you’re the homeowner and you have the home that is “best on the block” and is the envy of the book club… you know it. You’re not left wondering what the value of your home is; everyone you know in the neighborhood, not to mention every single agent with a strong listing business in your area, will let you know that you got the special “wow” house.
Such unique houses rarely hit the market, if ever. The homeowner simply needs to mention to her friends at the book club that she’s thinking about selling, and her friends will straight up ask her to name the price. If not, she merely needs to let it be known in the neighborhood that she’s considering — haven’t decided, but merely thinking about it — selling, and she will instantly be besieged with offers from her neighbors, or from agents who know her neighbors.
This happens not only at the individual property level, but often at the neighborhood level. I live across the street from one of the most desirable neighborhoods in Las Vegas. That neighborhood rarely has hot homes ever hit the market because the neighbors keep it to themselves and sell to each other or to each other’s family and friends. I hear they have a secret Facebook group that you can’t get into if you don’t actually live in the neighborhood.
If a house does make it to the open market, it’s usually because the owner thinks she can get more from the open market than from her neighbors and friends, or because there’s something less-than-ideal about the property. By definition, that isn’t the “wow” house.
The Real Estate Agent and Unique Homes
The other thing to consider is that nobody but nobody knows more about unique homes than the local real estate agent. A friend of mine lives in a pocket neighborhood here in Las Vegas; she says that if you want to buy or sell in that neighborhood, you have no choice but to work with one of two agents. They know everyone, have decades-old relationships with all of the owners, and have long lists of people who (a) want to move into that neighborhood, and (b) can afford the entry price.
There is no chance that such an agent who has been farming that neighborhood for years and years would not know about the wow home, and would not have already made it perfectly clear to the owner that she would happily list that home for sale at deep discount on her commission fees. Because she knows that the wow home will bring her hundreds of potential buyers. And the owner knows that too.
According to my real estate broker wife, it is common for the agent to list wow homes for next to nothing in fees, because she will more than make up for the lost revenue from buyer leads she will get from the wow home, and the owner knows that if she won’t do it, the next agent or the agent after that will.
The Reality of Human Nature
Also, there is something that I think Tyler overlooks: simple human psychology. I find that this is pretty common among people who are very well educated and extraordinarily intelligent about technology. We don’t quite know why, but human beings need affirmation from other human beings about important choices. Maybe it has to do with us being tribal animals from an evolutionary standpoint, but most of us seek counsel, advice and affirmation from others on major life-changing decisions.
It’s not a psychological weakness. Needing approval and affirmation all the time might be, but even the most psychologically healthy and balanced among us don’t decide on careers, marriage, and yes, buying and selling a home without at least asking someone somewhere for some advice.
This is one reason why FSBO remains at about 8% of sale transactions, even in the internet age. It isn’t because people don’t know how to list their homes on Zillow or on FSBO platforms or even how to negotiate. It’s mostly because most of us deep down have that need to get somebody else’s (preferably expert and wise) opinion on what we’re looking to do. The need for a real estate agent is real, and it’s human and it’s fundamental.
That doesn’t necessarily mean, of course, that any agent will do at any price. Of course we care about who we’re getting advice and affirmation from, and of course we care what it costs. You could be Jesus of Nazareth born again, but if your commission is 70%, I’ll look elsewhere. A meth addict might only charge $5 to list and sell my home, but again, I’ll look elsewhere.
The point is that a Third Party Marketplace, even when all of the services are provided by Opendoor at lower cost, doesn’t scratch the psychological itch of sellers. Either they’ll call a real estate agent friend that they trust to help them with the Third Party Marketplace (which means commissions one way or another) or Opendoor will need to offer that expert advice and affirmation to the seller.
Which makes Opendoor a brokerage offering real state brokerage services… which brings us to…
The Reality of Industry Rules & Practices
Industry rules may be powerless to stop Opendoor from doing whatever they want with their own properties. But they are most definitely not powerless when it comes to properties owned by somebody else.
To use one example, Clear Cooperation Policy might not apply to Opendoor inventory owned by Opendoor, since that’s basically a FSBO. It most certainly applies to somebody else’s home that isn’t in the MLS already.
As far as I know, Opendoor is a REALTOR member of every MLS in markets where they are active. That subjects them and all of their in-house agents to NAR Code of Ethics which has all kinds of things to say about things like “reserving the home” or “buy it now” price.
Violate any of those, or even appear to violate any of those, and the industry will come down on Opendoor like a hammer. Not to mention, the blacklisting and the steering that will start (?) to become more widespread.
Finally, there are some other considerations if Opendoor tries to open up Exclusives to third parties to create Tyler’s “capital-light 3P marketplace.”
Most importantly, sellers are emotional. Even if Opendoor somehow manages to get the “wow” home owner to use its 3P platform to sell their house, they’re going to be calling the Exclusives Product Specialist three times a day to see what’s happening, if there are any offers, and start freaking out. As a market maker, Opendoor has no emotions about some property they bought in January, fixed up, and has put up for sale. For Opendoor, like most investors, the property is just an asset. For the homeowner who might have raised her children in that house, it’s not merely an asset. They’re going to have emotions. Just dealing with that will take a level of customer service and customer care that may wipe out any margin gains from 3P marketplace.
In addition, some of the core value propositions of Opendoor Exclusives — like the ability to “select a convenient closing date” — go out the window once the home belongs to somebody else instead of Opendoor.
And once Opendoor starts operating what is effectively an MLS, all of the MLSs that Opendoor belongs to will look for reasons to stop having Opendoor belong to them. It isn’t clear what methods the MLS will use, and it isn’t at all clear whether those methods would or would not be legally copacetic, but like Zillow, Opendoor doesn’t really want to find out what the MLS will do to them in response. They have much bigger fish to fry, and operating an MLS is just a low-reward, high-risk game.
There is a reason why Zillow has never tried to start an MLS. The juice just ain’t worth the squeeze.
Let’s wrap up.
On the whole, I think Tyler’s take on Opendoor Exclusives is spot-on. It is an innovative new offering, and one that will make things a lot easier for hundreds (thousands?) of buyers who choose to go down that path.
It might improve Opendoor’s unit economics, and therefore lead to margin improvement… but it might not be the kind of lift that Tyler thinks could happen. It might be breakeven or tiny improvement at best (5bps, not 250 bps) because of the discount offered on Exclusives.
What it will do is throw down yet another gauntlet in front of the traditional industry — including Zillow, by the way — who needs to come up with a way of offering that fast, certain and hassle-free experience that Opendoor Exclusives offers. Except none of those brokerages or agents own the property, which limits their options in terms of features, value propositions, and techniques.
To the more enlightened participants in the real estate industry, the big question should be why Opendoor felt they had to go outside the system in order to offer an innovation like Exclusives at all. Why do tech companies, entrepreneurs, and innovative visionaries think of the MLS and the industry as barriers to be overcome or sidestepped, rather than enablers of innovation?
If there is a culture of “No” in the industry, how do we convert that to a culture of “Yes”?
Of course, on the subject of Third Party Marketplace… I just don’t see it for all of the reasons I cited. It’s high risk, low reward, and gets Opendoor into lanes they ought not to be in when they have such a gigantic opportunity in the lanes they are already in: making markets in residential real estate.