Opendoor is a new alternative real estate business. Opendoor is a super simple, low stress way to sell a home, however, it’s typically more expensive than using a real estate agent.

The company is based out of San Francisco but their initial focus was on the Phoenix real estate market where they refined their business model. This summer, they expanded into Dallas and Portland.

The best I can tell they got $6 million in seed funding, $10 million in an A round during the summer of 2014 and then a few months after opening for business, an additional $20 million in a B round last winter. I hope their burn rate isn’t too high because future rounds may not be as easy to get if we’re in a tech bubble as many people (me) think.

An Easier Way to Sell Your Home

If you live in Phoenix, Dallas or Portland, Opendoor will buy your home themselves, take ownership of the house, fix it and resell it.

It’s amazingly simple to start the process to sell your home to Opendoor, you just put your address into their website and they send you an offer. It’s not an estimate of your home’s value, it’s an actual offer to buy your house at that price. Incredible!

Opendoor

The offer is only subject to an inspection of the physical condition of the house. They don’t do an appraisal, they’re trusting their algorithm to determine the value of the house.

So how do they make any money if they’re paying what they think is fair market value for your home?

Fees = Currently 8% to 10.5% in Phoenix

Opendoor has 3 different fees they charge sellers, some flat, some variable. In metro Phoenix, their most active market, they charge home sellers fees that add up to 8% to 10.5% of the price of the home. I assume these fees vary from city to city, house to house and over time as Opendoor fine tunes their systems.

If you want to find out the exact amount they would charge you in fees if they bought your house (as well as, of course, the gross price they would pay you), I guess you have to put your home’s address into the Opendoor website.

If you were to hire a real estate agent to sell your house, you’d likely pay 6% so Opendoor is more expensive by 2% to 4.5% of the home’s value, at least in Phoenix today.

Advantages

It’s fast. Opendoor can close in as little as a week!

It’s certain. About 30% of homes listed for sale by real estate agents in a normal market don’t sell.

It’s less work. You don’t spend time and money prepping the home for sale and you can choose the date you want to complete the sale.

No appraisal contingency. The appraisal contingency adds a lot of stress to a traditional home sale.

No financing contingency. In a traditional sale, if it turns out the buyer can’t get a loan and cancels the contract after you’ve already moved out of the house, it’s an absolute nightmare for sellers.

Disadvantage

Money. You might keep as much as 2% to 4.5% more of the home’s value when you use a real estate agent to sell your home.

Summary

  • Opendoor = More convenient
  • Real Estate Agent = Less expensive

Ideal Times to Consider Opendoor

You Inherited a House. The higher cost of Opendoor would be split between all the heirs and they would likely get their money a lot sooner than if the executor hired a real estate agent.

You’re Holding On By a Thread. You don’t have a moment to spare with work, the kids and everything else and you’re barely holding it all together. Opendoor is more expensive but phenomenally less stressful, if you have enough equity to swing it.

You’re Divorcing. You two can’t stand dealing with each other so a quick, simply sale can have significant value for both of you.

You Just Want to Move On. You don’t want selling your house to be taking up mindshare when you need to be focusing on your new job or whatever.

You Hate Selling Homes. You’ve sold homes before and you’re willing and able to pay more to avoid the stress and potential for nightmares.

Their Biggest Threat – Adverse Selection

I think it’s great that home sellers have new options like Opendoor. I expect it to work very well for some home sellers. I hope Opendoor succeeds.

My biggest worry about their business model is what economists call “adverse selection.”

Opendoor’s algorithm determines what they’ll pay for a house and their algorithm isn’t perfect, some of their offers will be too high and some will be too low.

People who accept Opendoor’s offers will skew toward those people who received overpriced offers. This is “adverse selection.”

Key to success. The long-term viability of Opendoor comes down to how accurate Opendoor’s algorithm is. If their algo puts out too many high priced offers, they would have to compensate by increasing their fees which wouldn’t be good for business.

If Opendoor can get their algorithm to sing, they should be successful.

Takeaway

Opendoor is a cool new option that could work well for some home sellers.

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