When Zillow announced that it was hitting pause on its iBuying operations earlier this week, the news sent shockwaves through the real estate industry.
Zillow blamed the pause on labor and supply constraints that were hampering its ability to quickly renovate and efficiently turn over its housing inventory. The announcement sent Zillow’s stock plummeting 10% in the day after the report, while driving competitor Opendoor higher.
Given the overlap between operations — Opendoor is in 23 of the 25 markets where Zillow was purchasing homes — there was some question about whether Opendoor was affected by the same shortages. But while Zillow is pulling back, Opendoor says it is plowing ahead.
Over the past nine months, Opendoor has aggressively expanded operations and has been growing its inventory. The company purchased 8,500 homes in the second quarter — more than double Zillow’s tally — and said it had contracts to purchase another 8,200 homes in the third quarter.
Shortly after Zillow confirmed the pause in its iBuying operation, Opendoor issued a statement which said, “We know how important certainty and convenience are to homeowners seeking to move and we’ve worked hard over the past seven years to ensure we can continue to deliver our experience at scale. Opendoor is open for business and continues to scale and grow.”
Basically, Opendoor has no plans to slow down anytime soon. The company can cite a combination of proprietary data, centralized operations and an increasingly digital process for evaluating homes and making offers as just some of the reasons why it has been able to more than double the number of markets it operates in over the past nine months.
Data, data, everywhere
The key to any successful iBuying business is the use of data to make a competitive offer to sellers while also having a strong understanding of the price you can expect to garner when you put the home back up for sale.
That data, and how you model it, becomes even more crucial in a dynamic real estate market like the one that has emerged over the past 18 months, where historically low interest rates and unprecedented demand constrained inventory and led to home price appreciation in a very short period of time.
“Our job as a company is to provide a really compelling and competitive offer to sellers,” said Opendoor CTO Ian Wong. “If we can’t offer a competitive offer on the single largest asset most people have, they simply won’t take [it].”
He added that there is an element of convenience, certainty and instant liquidity for sellers, which they’re willing to pay for. “But if you’re really off from a valuation perspective,” he said, “people aren’t going to accept the offer. They’re not going to sell it for a discount.”
Opendoor takes in massive amounts of third-party and first-party data, normalizes it, standardizes it and then rolls out algorithms to come up with offers to sellers. Third-party data can include multiple listing service (MLS) data and public records data, as well as data sets that take into account the geography, topography and other information the company can use to understand a neighborhood or a particular house.
But those data sets are table stakes, according to Wong. Opendoor also has a large and growing set of first-party data that it collects through the seller information flow, as well as in-person and now virtual inspections that it has conducted over the years.
“The quality of the data matters a ton in order to come up with a good valuation. So a lot of our first-party data is oriented around how we come up with a really high-quality picture of the home,” Wong said.
Given that Opendoor has conducted more than 175,000 inspections since being founded and collects more than 100 data points in each, it has millions of in-home pieces of data to draw from. That information doesn’t just extend to a particular home but can also be used to ascertain certain things about its neighbors or other buildings in a particular market.
Going lean in-market
The key to Opendoor’s recent market expansion can be tied to a fundamental retooling of its playbook for launching in a new city or region. What once was a process that could take up to six months was streamlined in a way that enabled Opendoor to launch 23 new markets in the first three quarters of 2021, including several simultaneous multicity launches.
According to Opendoor Chief Customer Officer Megan Meyer Toolson, entering a new city prior to 2019 was a fairly manual process.
“We had to hire dozens of teammates locally, train them locally and ensure that we went through a pretty rigorous process in the many weeks before a launch to really deeply understand the local real estate dynamics, the local assets, the soil, the weather, all the things that impact our operations,” she said.
In the years since, Opendoor has worked to centralize more of its operations and hire ultra-lean teams to launch service in new markets.
By leveraging all of the data collected from first-party and third-party sources over the years, Opendoor usually has a pretty strong understanding of market dynamics before entering a city. It pairs that tech and data with a small but efficient local team, along with a number of local construction and renovation vendors it leans on to get houses it has purchased ready to sell.
“Locally, we have only one type of employee, and that’s a home construction expert,” Toolson said. “That person is responsible for managing local vendors to renovate the home so that it is at market standard or for listing. They partner with vendors and local small businesses to do that work, but everything else to run the operation is centralized or is automated.”
In other words, Opendoor seeks to centralize any part of the buying and selling process that doesn’t have to be done in person. That’s enabled the company to expand to new markets much more quickly and with less upfront investment.
Streamlining operations during the pandemic
Opendoor’s iBuying process has also evolved substantially during the pandemic, which has pushed the team to virtualize even more of its processes over the last 18 months. Like Zillow, the company paused homebuying operations when the health risks became clear in early 2020.
When Opendoor began rebuilding its inventory late last year, the company knew it needed to introduce new protocols and tools for its home inspection process. Prior to COVID-19, the company sent employees to seller homes to conduct inspections that would frequently take about three hours.
To replicate the inspection process and collect the data needed to assess the home values without sending an employee in to inspect the property, Opendoor rolled out a mobile app for self-guided walkthroughs. And it found that the app, paired with its existing data set, was able to match the pricing accuracy of its previous, more intensive process and make a competitive offer.
Noting that Opendoor still has the opportunity to go through the home in-person after purchase to assess renovation needs, Toolson said, “We found the combination of video and our data is as accurate as what we were doing previously, which was that detailed, three-hour inspection.”
Adjusting to an ever-changing market
As it expands, Opendoor operates under the assumption that more mature markets will produce higher margins than newer ones. That’s not surprising, considering that the more data Opendoor has about a particular market, the better it can model offers as well as the general cost of repairs and upgrades that are necessary to get a home market-ready.
More data also increases the breadth of homes it can purchase and number of sellers it is willing to make offers to. As Opendoor wrote in its second-quarter letter to shareholders, “As our pricing platform continues to ingest new data to learn and improve our price accuracy, we are able to expand the breadth of price points and home types that we can address.”
That led to a 15% increase in Opendoor buybox coverage (i.e., the group of assets Opendoor feels it can underwrite based on its risk tolerance) versus the previous quarter and overall a 50% expansion of buy-box coverage compared to the end of 2019. The company noted that, as of the end of 2019, it would not have been able to make an offer on more than 35% of homes purchased in the second quarter.
At the same time, there’s no doubt that shifting dynamics in real estate over the last year and a half have tested iBuyers’ ability to adapt to what many saw as an overheated market in the U.S.
“We were able to bring in a lot more sophistication in terms of not just valuing a home at this point in time, but also structural modeling of how those might trend and do more sophisticated modeling around what a competitive offer means not just in a static environment as we saw in 2017, but a very dynamic environment like we’re seeing today,” Wong said.
On the flip side, the company must make smart decisions related to renovations and repairs, as well as pricing homes it sells appropriate. Opendoor says its business model is designed to generate margins from a service charge to sellers and additional products and services it offers in addition to the transaction, and “not from the spread between acquisition price and resale price.”
At the same time, its renovations are focused on high-return investments and the company continuously adjusts its repair strategies based on operating experience in markets and reviewing neighborhood-level resale outcomes.
Wong noted that Opendoor’s goal is to be a market maker in real estate, to quickly and efficiently turn assets over and unlock capital that can be used to purchase homes from its next batch of sellers.
In its second quarter earnings filing, Opendoor said that its average hold period for homes purchased in the previous 18 months ranged from 70 to 100 days from acquisition to resale. Updating its models to keep inventory low is a key part of operating in a market that is constantly changing.
“The last 18 months have been a very dynamic time for the housing market, to say the very least. So we’ve had to be very competitive since things are so dynamic and price appreciation has been very strong,” Wong said.
With aspirations to expand nationwide, leveraging that data and streamlining operations will be the key to continued expansion of its service — in new markets as well as those it already operates in.
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