Ep 4: Liquidity Creation in Real Estate Markets - Market-Making with Opendoor

Micah Ng
May 1, 2020
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Selling a home can be a long and arduous process. According to Zillow, most homes remained on the market for an average of 65 to 93 days in 2018, from listing to closing. Similarly, individual commercial buildings can only be sold to institutional investors as the cost is too immense for almost all individuals.

We are joined this episode by Sam Stone, Product Lead for Pricing. In this episode, we look at how Opendoor provides liquidity to residential real estate through its market-making services. Opendoor allows homeowners to sell their homes quickly. Customers can either sell their home directly to Opendoor at a competitive price or list their property on Opendoor to entertain third-party offers.

Episode Transcript

Hey, everyone, thank you so much for coming. I want to welcome you to the second part of the Liquidity Creation in Real Estate podcast, which is part of the PropTech series hosted jointly by the Rotman Commerce FinTech Association and Rotman Commerce Proptech. Tech Talks is a new Rotman Commerce initiative that seeks to create an approachable and accessible environment for the University of Toronto. This allows students to engage with industry professionals and academics with the goal of understanding technology's growing impact and influence in business.

Over the course of the 2020-2021 academic year, we'll be delivering workshops, keynotes and panel sessions as well as podcasts with experts from diverse backgrounds. In order to provide wider access to students attending to all tech talks events, whether live or prerecorded webcast like this one is free for all UofT students. We welcome five dollar donations from all attendees, which will be donated in full to the local charity. You can donate on our site, our tech talk and simply click community support.

Today, we have Sam here from opendoor, and rather than having me introduce him, I think I'll let him introduce himself.

Great, thanks, Micah. So my name is Sam Stone and I lead product management for the pricing group at Open Door, which is a real estate technology company, were based in San Francisco and we operate in twenty one cities throughout the US and we are the first instant buyer or buyer of homes.

Right. So let's talk about open door and how a traditional home buying transaction would go as opposed to how open door does it.

Sure. So let's start with a traditional sale process, at least in in the US. So traditionally, people will want to sell their home. They will start by hiring a realtor or an agent might use those words interchangeably. So the first step is even figuring out which agent you want to go with. Then they'll probably do a bunch of work to prepare their home for showings.

So that would involve things like doing repairs, maybe repainting, maybe fixing a bunch of things on the outside or getting some of their lawn taken care of. Then they'd have a series of like open houses and showings, which can be quite cumbersome. Normally the owners to clean up all their stuff, they probably have to leave the homes so that other people can come in. Then they might after either a few days or a few weeks or sometimes many months, they'll start to get offers.

Some of those offers will probably be not very attractive. If they get a good one, they may move forward with that. But that offer may fall through. Maybe the buyer backs out at the last minute or the buyer can't get their mortgage together. And so then they have to put the home back on the market. And so all in it, it's a fairly lengthy and stressful and inconvenient process. And it's also expensive. The traditional like depending on the market in the US, the traditional fee is about six percent.

Open door provides a much more convenient, faster and more certain alternative. And the way that we do that is we allow people who are interested in selling their home to come to our website, put in their address, answer just a handful of questions about their home, and we will provide them with an offer on their home. And that means they don't have to go through the process of hiring an agent, doing all these repairs, having a bunch of open houses and listing appointments.

They get their offer very quickly, normally within a couple of days, if not even faster than that. And it certain, opendoor is very clear. And we have we have a lot of financing. There's no risk that we're not going to be able to buy your home because a mortgage doesn't fall through or something like that. You can trust us that we won't back up.

I see, so if a person wants to sell a home rather than go through the lengthy process, all you have to do is sell sell your home directly to open door. Is that correct?

That's correct.

Right. Do you guys also offer services where you list your house on open door to see if anyone else would be interested in purchasing?

We do. We offer a variety of other services in addition to what I just described, which is like the product. What I just described is called Sell Direct, and it's the product that we we started in that. Now there's kind of a whole industry around. In addition to that, we offer if you if you want to sell directly to us, you can list with us. We also help buyers so you can buy with us and then a variety of other kind of real estate transaction related products like title and escrow and home loans.

I see, I just want to get an idea of how listing with open door compares to selling directly to open door. So when you when you buy a home, when opendoor buys a home directly, like, how do you determine the offer price? Is a is it like. Similar to like market rate and then. Probably just when when open door purchases a home, how do you determine what the offer price will be?

Yeah, so so the goal is this is this is like a core part of our mission. We aim to provide fair market value offers on homes. We are not trying to go in and like make a profit by buying a lot of homes low and selling them high. Our business model is actually very different than that. We do charge a fee for the service we provide, which is which is liquidity prevention. So for getting that convenience, speed and certainty, we charge a fee which is normally pretty similar to what a realtor would charge.

Sometimes it's less, sometimes it's more. That's what our business model is focused on, is that consistent revenue that can come from the fee. But just making a fair offer on the home as to how we make a fair offer and how we determine what fair market value is for a home, that's really a combination of man and machine. And so we have a variety of algorithms. We have what's known as an automated valuation model. We call that the open door valuation model, or OBM, and we have a variety of pricing professionals that work hand in hand with the open door valuation model to figure out what is the right price for each home.

And we're looking at a wide variety of data sources, some public data, some proprietary data. We have data that comes from tax appraisal, our tax records from the multiple listing service. We're also looking at data that imagery, data map data, lot pastel boundary data and all of that figures that helps us understand all of the details of the home, of the details of similar homes that have sold recently.

And that goes into determining what is the value of a home as of today. I see, so you use that to determine the fair market value and then you take a fee when you buy the house and that allows you to have your source of income, essentially.

So is this similar then? If you decide to list with open door? It's also like it's also like percentage of the sale price then? That's right.

And I think the key difference between listing with open door versus selling with open door is that there's a higher degree of certainty when you sell to open door. You can you can kind of sign on the dotted line very, very quickly. Whereas if you're listing with open door, there's a little bit less certainty your home might start on the market for five days, but it might also sit on the market for five weeks or five months. But there's also more upside because maybe there is a buyer out there who really loves your home and is willing to pay more than fair market value.

And the listing process is designed to help you find that buyer who might especially love your home. So if you have a little bit more time and you're a little bit more focused on like seeing if there's upside, I think listing with Open Door is a great option. If you really value kind of speed and certainty and convenience, then I think selling to open door is a great option, right?

That makes sense. As for open door buying property, how do you manage your risk as you're holding holding these homes? Yeah, so it's a great question and it's something that I spend a lot of time thinking about along with my team, I do. There's two broad components to how to think about risk and liquidity provision business like ours. The first is just accuracy around pricing what you're buying up front. Like the biggest risk is not something to do with market conditions or necessarily inventory management.

It's simply that you buy things, you pay more for things than they're actually worth, and that can be just because you make mistakes in pricing. And so we're very focused on that, that man and machine combination that we use to assess fair market value up front. The second part of risk management is understanding how our inventory should change over time. So we kind of think about like what percentage of our inventory should we be selling within 30 days of listing what percentage of it should be selling within 60 days, what percentage of it should be selling within 90 days.

And there's a tension there because, you know, you can sell your inventory really quickly by discounting it, but that that comes at a cost to your own. And so we look at things like, well, how quickly on the market our home is selling and we benchmark ourselves to that. We also recognize that some of our costs are different from that of a traditional seller on the market. For example, what we're paying in utility bills or for people to go out and visit our homes and make sure that that they're kept up and accessible.

That might be different than when an owner and owner and occupier is paying to make sure their home is listed in a good condition. I see, so rather than being being strictly focused on the how is you're selling your inventory for your you have to be sure that when you when you purchased the home that you're essentially getting your purchasing it for the correct price. That's right. OK.

Is there any worry about, let's say, like a market downturn such as in 2008? What happens when you're you're holding a portfolio of properties across the United States? And then we see something we see somewhat of a downturn in the real estate market? Yeah, absolutely.

That is a concern. I would say there's there's two things in our business model that are that are pretty fundamental that help us mitigate that. The first is. Part of the fee that we charge is based on our own cost structure and our own cost structure, we bake into that. What do we think the market appreciation will look like over the period for which we have to hold a home? So if we think the market is really hot and we're going to buy a home on day zero and we're going to sell it 60 days later after we've done a little bit of repair and renovation work and and then listed it, maybe we capture a little bit of market appreciation over that period.

We put that into our fee and it lowers our fee. It actually means returning dollars to the seller. So in a hot market will charge sellers less. Conversely, if the market is if we think the market is going to depreciate, if we're in a real estate recession, we have to take that in for our own costs. And thus we would charge a little bit of a higher fee and that would allow us to still hit our target margins, kind of despite whether the market is super hot or super cold.

The second thing that I'd point out is that the real estate market is actually a lot less volatile than other asset classes, tends to have a lot of momentum.

And so when it does go into a recession, which obviously it does, and they can be prolonged and they can be deep, they tend there tend to be warning signs. And there's often a period of a couple of months where you can actually see that the real estate market is turning and then we can price that into our own our own forecasts. Right. So when you charge a seller a fee that that the market condition is essentially priced into what you charge them.

That's right. Right. So while we're on the subject of fees, how else do you determine how much you charge a seller? What other factors do you consider when you do that? Yeah, so so the biggest component of of our fee is essentially like what is going to be our cost to provide the convenience, speed and certainty that we want to, to sell. Right. And we're taking the risk of of listing the home and whether that's five weeks or five months, we're taking that from the seller and assuming it ourselves.

That's basically what we're charging for. And so what we want to understand is. What is the liquidity on this home likely to be, or how many days is that likely to take to sell this home once we put it on the market? So the most important driver of our fee is our estimate of time to sell or what we call internally days to pander DTP. I see. As for services you offer to buyers, could you walk me through how a buyer might purchase a home from open door?


So Open Door helps you with a couple of different things on and on the buyer side, kind of at each step of the journey that a home buyer goes through, the first step is really shopping. And that's even before you started seeing homes in person. You're looking at pictures, you're looking at online listings, and you're trying to figure out what matters to you. One of the things that we say a lot is that selling is financed by his romance.

Dollars matter to buyers. But there's so many other things that really matter. What's the neighborhood? What are the specific features of the home and to the shopping phase is really focused on that. And we give buyers a wide variety of tools to help them figure out what matters to them and start to build collections of homes that they're really interested in. The second part we hope with is to it. It's actually pretty painful and this is especially true during covid to go ahead and tour homes.

And so we help buyers make that that really easy. Oftentimes you actually have to have an agent with you to go to our homes. And the third part is closing on and off or putting in an offer and closing on it. And that's a pretty complicated, paperwork intensive process in many markets. And so by working with Open Door, once you figured out that this is a home you want to live in, we can offload and help you put in a good offer and then make sure that that that offer actually goes through with all the crosses, the T's, dot the I's and ends up with you actually being the owner of the home at the end of the day.

Right. And as for financing the home purchase, the help source mortgages, or do you carry these yourself in-house? We actually provide mortgages. This is a relatively new product line I think we launched within the past year. It's called open door home loans. And it's something that we provide. If you're buying with open door, you can even use it. If you're if you're not buying with open door, maybe you're selling to open door. But you just you like the rates or the terms of our mortgages.

I see. And do carry them or do you sell them to banks or other third parties.

You know, I'm not I'm not super knowledgeable about the details of what we do with the mortgages after they're after they're written. But I know we work with a variety of partners around providing that. I see. With the recent events covid and the recession, how do you see this affecting your business model and what do you foresee market conditions being like over the next year?

Great question. The short answer is, I think that that we are well positioned and that that digital real estate companies are going to benefit from a general trend of more more transactions, moving it to becoming purely virtual or heavily virtual. I think that's a trend that we're seeing playing out across a number of industries, not just real estate. When covid initially hit, we were very concerned and we were really concerned about safety. We offer a nearly entirely digital process, but there's still some human touch points for, for example, we send some of our our home operations professionals to homes that we are about to buy, to inspect them in person and make sure that things like the foundation look OK.

And so when shelter in place regulations started to go into effect, we had to make sure that our customers were safe and that our home operations professionals were safe. And so we figured out a way to go all virtual. So they've never had to be any physical interaction between a customer and any of our our teammates. And within a couple of weeks, we were able to get comfortable that we could provide convenient speed and certainty in a way that's entirely safe to everyone who's involved. And since then, we have really been leaning back in to acquiring as many homes as possible. With people spending more time in their homes now, and obviously part of that is because of shelter in place, but I think that will continue even after.

Because we've now realized that a lot of a lot of teams and companies and entire industries can work successfully, remotely, so with people spending more time in their homes, the value of your home has increased. And a lot of people are moving because they realize, well, I'm not spending Saturday and Sunday at home. I'm spending seven days a week at home, or I'll be spending five days a week at home and I want a larger space.

And so we're actually seeing that the the volume of home sales is going way up. And that's really good, I think, for the industry. And it's it's good for the heavily virtual model that we've pioneered at open door. Right. So it seems like PropTech companies such as Open Door actually quite well positioned better in terms of covid and everything, since you're able to go virtual a lot easier than, let's say, traditional real estate agencies.

I think that's exactly right.

Yeah, that's really cool. All right, thank you so much for agreeing to this interview. And I learned a lot about the home buying process through.

It was fun talking to. Thanks a lot. Thank you.

About The Association
Rotman Commerce FinTech Association
Tech Vlogger & YouTuber

The Rotman Commerce FinTech Association (RCFTA) is an undergraduate interest group at the University of Toronto. Our mission is to educate students on the growing relevance of technology in finance by providing hands-on learning opportunities to enhance technical and soft skills through workshops and case competitions.