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OPEN - Opendoor


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How was the OPEN ticker not already taken? Opendoor is the Chamath Palihapitiya (I have no idea who that is) SPAC that is going to be in the house flipping business, usually in houses under $500,000. The idea is that these houses are a commodity and OPEN can simplify the process of buying and selling and reduce contractor expenses by taking all rehab expenses in-house. It seems like a really capital intensive business with a lot of exposure to housing prices, but maybe it will work? Real estate agents make way too much in the US and a homeowner might just want to get out of his home fast and will sell at a discount for the sake of getting a check as fast as possible. Chanos is very bearish on Zillow and Open.

 

https://seekingalpha.com/article/4395578-opendoor-in-lifetime-play-on-real-estate-market-transformation

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I personally think this can be really disruptive to the current status quo, because the current status quo sucks and everyone knows it. These players can take a significant amount of friction out of the process, and by controlling contractor resources they can likely leverage those contacts into doing what ANGI has so far failed to do, which is deliver more standard pricing for other home improvement tasks. For Opendoor/Zillow, they could access a lot of data on how much material and time certain tasks take and leverage that to develop a fair price for doing particular tasks, even if there are some out there which end up being more difficult and others that end up being less difficult than average.

 

I know this is a lot of pie-in-the-sky type stuff and so far I have not been comfortable enough to invest because of the capital-intensiveness but I think if they make it to the other side, watch out. 

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i think if you own a house, particularly one in a high transaction cost area, you are long Z/OPEN's disruption.

 

If Z/OPEN can get transaction costs down, then that will increase the value of my home equity.

 

Transaction cost for my 2019 house purchase in suburbs of DC on Maryland side were a 8.8% (5% Realtor fees, 1.5% transfer taxes, 0.5% Title Insurance were the biggies, + some others). We used a discount realtor who rebated me 2/3 of her cut of the 5%*, which took a bit out of the sting. Optically we paid about 1% and the seller paid the rest, but everyone pays t-costs eventually.

 

Z/OPEN can't do anything about the taxes part, but the 5%-7% in realtor fees and title insurance seems like a pretty big profit pool to attack.

 

I'm hoping that if I sell in a decade, Z/OPEN will have cut that 5.5% down by 1/2 - 2/3 and I'll benefit. We'll see.

 

*she still got paid $9K for no more than 8 hours total work, we found the house we bought on Zillow and put in an offer day after listing in a bidding war. I actually think the model of a competent discount independent agent is not bad for an aggressive self-starter. She does a pretty mean business basically processing transactions. see she's done like $1.5-$2mm / month (selling 2-3 house) of gross and is banking 1%-1.5% on those and has no cost or agency to share with.

 

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I would think the only way to disrupt those fees are to have an all in one platform. The realtors are really the biggest cost cog. Title stuff is a joke. Mortgage stuff is another area of high profit too, but as someone who's done a good half dozen transactions over the past half decade Ive always gotten the impression that theres a whole lot of room to disrupt a rather archaic process. Ive dealt with realtors who are good, and also ones who are dumb as rocks. People who are dumb as rocks are largely the ones who have seen their high paying jobs disrupted the most by the tech revolution. Will be interesting to see how this plays out. No position although Ive long watched Zillow and wanted to buy but been a chicken.

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i think if you own a house, particularly one in a high transaction cost area, you are long Z/OPEN's disruption.

 

If Z/OPEN can get transaction costs down, then that will increase the value of my home equity.

 

Transaction cost for my 2019 house purchase in suburbs of DC on Maryland side were a 8.8% (5% Realtor fees, 1.5% transfer taxes, 0.5% Title Insurance were the biggies, + some others). We used a discount realtor who rebated me 2/3 of her cut of the 5%*, which took a bit out of the sting. Optically we paid about 1% and the seller paid the rest, but everyone pays t-costs eventually.

 

Z/OPEN can't do anything about the taxes part, but the 5%-7% in realtor fees and title insurance seems like a pretty big profit pool to attack.

 

I'm hoping that if I sell in a decade, Z/OPEN will have cut that 5.5% down by 1/2 - 2/3 and I'll benefit. We'll see.

 

*she still got paid $9K for no more than 8 hours total work, we found the house we bought on Zillow and put in an offer day after listing in a bidding war. I actually think the model of a competent discount independent agent is not bad for an aggressive self-starter. She does a pretty mean business basically processing transactions. see she's done like $1.5-$2mm / month (selling 2-3 house) of gross and is banking 1%-1.5% on those and has no cost or agency to share with.

 

Is OPEN claiming it will reduce transaction costs or are they claiming they can redirect those transaction costs into their own pockets?  See, e.g., the Opendoor "fees" on slides 12 and 15, the proposed ancillary product offerings on slide 43 and the long-term margin targets on slide 51 [https://investor.opendoor.com/static-files/36610f42-ec46-4933-bc8d-8348671e9c86]  The model also creates the added financing costl of carrying the housing inventory, though that may be a wash to the extent that some sellers and/or buyers may otherwise have to carry two mortgages for a time. 

 

Put another way, if competition from Opendoor in the market compresses real estate commissions to 3% rather than 6%, then what would slide 12 of that presentation look like and how much demand would there be for Opendoor's service? 

 

EDIT:  I forget about the other major additional cost -- putting an intermediary like Opendoor between the ultimate buyer and seller likely requires the real estate transfer taxes (quite substantial in some states) to be paid twice.  Given that additional financing cost and significant tax drag that seems to be inherent in this model, I don't see it actually lowering the true cost of selling the home, though it may transform those costs from items paid out of gross proceeds into reductions in the gross proceeds initially received by the seller.

 

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