Is Opendoor Amazon Homes to Buy or Just Another Caravan?

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It’s tough for startups that are capital-intensive and unprofitable right now. Anything related to the refrigerated housing market or SPACs is also specified. Opendoor Technologies Inc. puts tick many of these boxes – however this slander may be unfair.

Founded in 2014, the San Francisco-based company pioneered iBuying, a buzzing name for digital home flip-flops, though it abhors the description.

It went public in 2020 through a blank check company set up by Chamath Palihapitiya “SPAC King” who called it his “next big idea 10x.” Others proclaim it “Amazon Homes”. I was more skeptical. Last year, it sold more than 20,000 homes and lost more than $100 million, excluding stock-based compensation. (2)[2)

Disrupting a very large market, buying and selling expensive items on a massive scale, removing the friction from an often frustrating transaction, it all reminds me of Carvana Inc’s approach to selling used cars online. But those similarities don’t help for now: Carvana’s debt-driven expansion was derailed earlier this year as demand unexpectedly slowed, causing the stock to crash.

So far, Opendoor’s execution has been better, even though its shares have fallen about the same amount, hurting retail investors and hedge fund backers such as D1 Capital Partners LP and Altimeter Capital Management LP. Dan Loeb’s Third Point LLC sold its stake in Opendoor during the first quarter of 2022.

Opendoor’s $3 billion market capitalization is now little more than a cash pile. Nearly $1 billion of its 0.25% convertible bonds maturing in 2026 are priced at less than 60 cents on the dollar, or a staggering yield to maturity of 14%. One concern, however, is what happens to Upendor’s inventory of 13,000 homes if home prices suddenly fall.

Financial markets seem to be saying Opendoor should close rather than try to beat the housing downturn. This wouldn’t be the first: Zillow Group Inc. closed. Its iBuying unit last year after its algorithms failed to accurately predict home prices. This misadventure has fueled investor fears about the risks of buying online.

Although Opendoor is confident it can make money in any housing market, it hasn’t experienced a prolonged recession. The company’s profit margins were weak even during the market boom, in part due to higher advertising spending to support growth. Now, higher interest rates (affecting housing demand and Opendoor’s borrowing costs) and lower home prices are set to become headwinds.

But unlike its tech and real estate peers who have announced layoffs, Opendoor is still expanding. I recently started buying homes in New York and New Jersey, for example.

In theory, it doesn’t matter much whether the housing market turns into gangs or into chaos. Opendoor charges a 5% fee for making a quick cash quote on a home and collects the difference between where the property is bought and sold, including income from additional services like title and escrow insurance. It considers itself a ‘market maker’, not a home maker.

This strategy has worked well so far. Margins improved as the company became more efficient in screening and preparing properties for sale. While buttery home prices have helped—because a home is worth more by the time Opendoor comes to sell—that price hike is a relatively small part of the better unit economics, the company claims.

Opendoor turned a terminal profit for the first time in the first quarter of 2022, and the quarter ending now is shaping up to be perfectly fine. (It started pricing home buyers more conservatively at the end of last year, so it will benefit as home prices continue to rise.)

Of course, Opendoor could take a financial hit if prices rise and prices fall more than expected before it even completes the sale (Zillow’s mistake caused more than $400 million in inventory to be written). Any increase in the time it takes to sell homes — usually around 100 days — will also inflate holdings costs such as maintenance, property taxes and interest expenses.

Fortunately, few people expect a crash in home prices like the one that occurred a decade ago. Mortgage lending is wiser now and American consumers have a lot more equity in their homes, so there is less risk of forced sale.

Home prices also tend to adjust very slowly. Even in 2008, the largest national decline did not exceed 3% in a single quarter. And Opendoor’s ability to quickly offload inventory at the start of the pandemic is reassuring. Since mortgage rates rise for off-market buyers and homes take longer to sell, customers may prefer iBuyers’ express offers more (and may accept a lower price in return).

However, analysts expect Opendoor to print losses again in the second half of the year and to continue to do so for a few more years.

Only by keeping rock solid through the housing downturn will Opendoor be able to lift the cloud of investor skepticism about iBuying. Given the rapid transformations underway in the housing market, this is a challenging task. But no one said switching to Amazon Homes would be easy.

More from this writer and others at Bloomberg Opinion:

Phew! Opendoor Never Messed Up on iBuying Like Zillow: Chris Bryant

Zillow tried to make less money: Matt Levine

Rhino Billion Dollar Tech Eclipse Centauri: Lionel Laurent

(1) I wouldn’t normally rule out stock-based companies because they weaken shareholders. However, Opendoor’s employee share expenses were extraordinarily large last year. Net loss under GAAP was $662 million.

(2) See page 27 of this Opendoor presentation

This column does not necessarily reflect the opinion of the editorial staff or Bloomberg LP and its owners.

Chris Bryant is a columnist for Bloomberg Opinion covering industrial companies in Europe. Previously, he worked as a reporter for the Financial Times.

More stories like these are available at bloomberg.com/opinion

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