Opendoor versus Zillow Group | In Practise

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Opendoor versus Zillow Group

Former Director FP&A at Netflix & Former Head of Strategy & Finance at Opendoor

Why is this interview interesting?

  • iBuying transaction process, fees, and costs
  • Importance of optimizing capital structure and operations to maintain margins
  • Drivers of a 5% gross margin and the cash flow profile for iBuyers
  • How Zillow could have an advantage due to organic traffic and lead gen scale
  • How and why Opendoor vertically integrated with agents and potential advantages over partnering with agents
  • Future of seller and buyer agent value proposition

Executive Bio

Bobby Tulsiani

Former Director FP&A at Netflix & Former Head of Strategy & Finance at Opendoor

Bobby has 15 years of experience in scaling consumer technology businesses. He is the Former Head of Strategy and Finance at Opendoor, the leading iBuying real estate company in the US, where he led sales, optimising financing and operational excellence. From 2017-19, during Bobby’s tenure, Opendoor scaled from 2 to 18 markets. Prior to Opendoor, Bobby was Director of Financial Planning and Analysis at Netflix where he was responsible for subscriber forecasting and devising a user engagement KPI framework. Bobby previously worked on NOOK for Barnes and Noble and in Digital Media at Forrester Research.Read more

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Interview Transcript

Bobby, can you provide some history of iBuying and Opendoor?

Opendoor got started in late 2013, to 2014, so it’s about six or seven years old. It was pretty much the pioneer in iBuying. There were other people buying homes and selling them, at scale. Webuyuglyhouses or products like that, but Opendoor was really one of the ones to say, we give you what is called a fair market value. If your house, on the open market, was around $200,000, maybe you would get $205,000 by listing and maybe you would get $195,000. Opendoor is going to give you that $200,000 or $201,000 and they’re going to do it instantaneously. Within a day or two of submitting a web form, you’re going to have your offer back and it’s going to be that price that is, essentially, a fair market value. You might get more; you might get less. But, essentially, within 24 hours you can sell your home at the click of a button. That was the value proposition. Of course, back then, they started in one market of Phoenix, where the housing stock is similar, where there’s lots of transactions per year. They’ve since expanded to over 20 markets and then pulled back, because of the Covid pandemic.

Each city is a little different in how they execute. But the simple value is, sell your home instantly, without having to get out of it, do open houses, get your kids out, get your pets out. A seller can have a lot of certainty as they go and seek their next move in life.

Can we walk through a typical iBuying transaction? So the average value of the house and then we can run through the fees and potential costs?

Let’s stay at the high level and then you let me know if we’re missing anything. Opendoor, traditionally, and other iBuyers, like Zillow and Offerpad, buy between $200,000 and $500,000, which is called their buy box. If they go above that, it’s very rare and it’s not also in their core area to do, because what they do like is housing stock that is very similar. Usually, these large sub-divisions in Dallas and Phoenix have all been built by one builder. If you build a three-bedroom or a four-bedroom, you can price somewhat algorithmically. That’s what they try to do the most.

You go on a web form, you enter your address, 100 Main Street, in Austin, Texas. Within a few hours or days, you’ll have an offer back that says – using that $200,000 price example – here’s your home; here’s our estimate, based on the age of the home, it’s a few years old, every house we’ve done requires at least $1,000 in repairs. On your web form, you gave us some more information that the paint or plumbing is in bad shape; we’ve added another estimate of $2,000, based on our previous history of repairs. Then they list, lastly, a fee. You know that if you were to sell this home on the open market, most realtors charge 6%. On $200,000, you’re going to sell it and you’re going to pay that realtor and the buyer-side realtor, 6%, or 3% and 3%, $12,000. Out of your $200,000, you’re going to net $188,000.

That $188,000 is a little bit of a red herring for sellers, as they start understanding the market, because they have to put in money for repairs and money for their time. Maybe they have to go and rent a different place, maybe they have to pay for cleaners. Opendoor are simplifying that transaction by saying, we’ll take the 6%; in fact, we’ll take a little more. This has been a big debate that we can go into later in our conversation, about what Opendoor should charge for this. Is it a premium service that demands something higher than a realtor? Or is it very comparable to a realtor and if they can be at price parity, or even below a realtor, because of technology and scale, they can offer a lower point, in the same way that, at some day, Ubers became cheaper than taxis. We know that’s not fully played out, but it’s sort of the vision and why would you sell it any other way.

Just back to the fee question. For $200,000, Opendoor is going to, say, mark up an 8% fee, instead of the 6% fee. So that’s going to be $16,000 instead of $12,000. Then they’re also going to say, we estimate it’ll need these repairs; let’s just say it’s $2,000 on their estimate. So that’s $16,000 plus $2,000, which is $18,000. Then there might be some miscellaneous fees that are less critical that we can walk through, if it matters. Essentially, Opendoor is now saying, it’s $200,000, minus $18,000; you’re going to net $182,000. In that other example, you’re going to net $186,000. The difference is, we’re charging you for the repairs upfront. We’re charging you because this takes 90 days, in places like Phoenix or other towns, before it resells. By the time you’ve put a sign in your yard, you get the mortgage, you get the closing, you get all the banks lined up and you’ll be paying an extra month’s rent, versus moving tomorrow.

They have experimented with a range of fees below 6%, above 6%. I think that the last research I read is that they’re targeting slightly above, around 7% or 8%. On that 8%, we can do the $16,000, we can do the repair scope of $2,000 to $3,000. Then net, the seller gets that. We can go into some edge cases, but they have made the product more convenient as to whether you want to close in 30 days or 60 days. Whether, afterwards, you want to rent it back for a few days, until you get your new home. So there can be a variety of fees but, essentially, it’s one fee and then repairs are described separately. They’ve experimented with the presentation of that tax, but those are the major costs.

In terms of the repairs, it’s almost just as important to estimate the repair, as well as the actual bid for the house?

Yes; this is a significant impact to Opendoor and other iBuyers, on where their margin can be made or lost. Every offer will have a follow-up inspection. This isn’t as simple a model as your typical ecommerce, Netflix, or maybe even Uber, where it’s a low price, $10 price point and the car shows up or the video starts streaming. You’re going to have a lead come in, fill out a web page that takes between 10 and 20 minutes, which is not an insurmountable amount of time, but it is effort, and that’s going to go to a back-end, where an algorithm is going to price it, if it can. A human is going to double check that and it gets sent out. Then they’re going to double check, if you said your paint is in fair condition or good condition. They’re going to send out an inspector and their initial estimate might have been $3,000 of repairs and they may take it to $4,000; or they may say, you were telling it too hard, it’s $1,000. But they really try to nail that down.

I was there, in the early days, when it was in one or two markets, as opposed to 20, and they learned that when you misprice a home, either because you weren’t aware of the repairs or you just thought the market was hotter or colder than it may be, you’re going to hold that home for a lot longer and Opendoor is going to bear the cost.

So I’d say the two they really try to focus on is pricing and repair scope, which are the two major levers there. The season also matters. It’s easier to sell a home, in most places, in summer than in December, so they charge a higher fee in November, knowing that they’re going to have to wait until the New Year, versus buying it in June and selling it immediately, in July. They have a variety of variables in there. For home repairs, anybody who has done it personally knows that they are usually over-budget and for any of these iBuyers, it’s not just an ecommerce tech funnel; they have to become operationally excellent. They employ hundreds of vendors such as painters, lawn mowers, housekeepers, plumbers, who are employed directly or they have a contractual relationship to manage these repairs. When we talk about a 6% to 8% margin on the product totally, that can eat up a lot of costs. They are putting a lot of scrutiny into those areas.

You can’t really get scale, especially locally, in markets with that cost line?

I think scale is an interesting question on how these buyers achieve it. It’s very low efficiency between you having great plumbers in Phoenix and how that helps in Dallas. Maybe there’s a southwestern plumber, or something like that. But you find vendors, locally, in each market. If you can guarantee a plumber in Phoenix that they can do 100 homes per month, instead of 10 homes, they may give you a preferred rate. They may, in fact, give you preferred hours and say, you’ve got a block Monday, Wednesday and Friday; you can schedule me as needed. You can really start to push that. I don’t know what the right number is; 100 homes, 300 homes, before you develop some CL. It doesn’t help you cross-market, but it helps within market. Then the more signs you have in a yard of Opendoor, Zillow, the more other customers will see that and enquire and start developing some scale in acquisition costs. It’s not even a lifetime value to most of these customers. It’s a single purchase. You sell a home every seven to 10 years. Uber you ride multiple times per month, or at least a year. I think they have to think about the economics a little differently from the traditional ecommerce company.

Let’s say you got $200,000 for the house, $16,000 margin, which is the net revenue for the iBuyer, $2,000 to $3,000 of repair costs; how do you look at the lead generation cost, typically?

The iBuying space is constantly evolving. Zillow has come in and so how do you get a customer to understand this as most of us are barely hearing about and it’s only in select markets? There has been a lot of advertising by both Zillow and Opendoor. Probably more by Opendoor, who is an unknown brand with a very new product. I think Zillow has done a nice job with what they call their Zestimate which is on every page, of every house, pretty much. We can debate the accuracy of that, but customers were constantly going there to check it. They can click a button next to it that says, sell my home, for this price. I don’t think Zillow can really honor that price, so they have to get better at it. But you can imagine that that is a huge organic source of traffic, for Zillow, with the time they’ve been in market, the brand, what they make in real estate, the type of agents and consumers that go there.

Opendoor has had to do a little more advertising in traditional CAC channels, like Facebook, direct mail and television and other mediums. But what I would say is, it’s definitely an advantage for Zillow, but it’s not exactly clear in that most people don’t know that Zillow, yet, are engaged in iBuying. Often, you may go and click on that Zillow estimate and go through all these steps, all to say no, because it’s just a convenient lookie-loo tool, which is the way I used my Zestimate for years. But yet, Zillow has to bear all these costs of having somebody in the back-end, verifying the estimate, sending out an inspector, all to hear no.

So all traffic is not equal. I would predict that Zillow has a lot more traffic but the amount of monetizable traffic, that can be moved into an actual sale is, I think, far less. Most people are going to check out their home and you’re going to be closer to a single-digit conversion versus a 20% to 30% type of conversion, especially with a wide funnel, looking at price.

Surely Zillow must have an advantage in just the level of organic traffic plus the data they must have, over the years, in pricing and bidding for houses, more efficiently than Opendoor?

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Opendoor versus Zillow Group

July 20, 2020

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