The Amazon of Housing? Opendoor Styles Itself as Ecommerce for Homes

Eric Jackson, a hedge fund manager who founded EMJ Capital, is an activist shareholder in the real estate tech company Opendoor. On social media, Jackson uses the hashtag #OPENArmy to draw attention to the company. Jackson has also targeted the rapper Drake in marketing stunts. He says Opendoor’s stock could be worth hundreds of dollars. He views Opendoor as the “Amazon of housing.”

Wall Street investors reacted with enthusiasm when pressure from Jackson led to the removal of its ex-CEO. The new CEO is a former Shopify exec.

Opendoor stock has surged in response. But can the cheerleading for Opendoor be sustained? And most important of all: will any of this make a difference for the person who needs to buy or sell a home?

Opendoor Stock Rises to Dizzying Heights—Wait…

As an iBuyer, Opendoor Technologies Inc. of Tempe, Arizona is a platform for sellers and buyers. It’s a broker that provides insurance, escrow, and settlements, and collects fees for these services.

A seller can list a home through Opendoor and receive a cash offer. The tech company does the flipping, and connects buyers with the homes they resell.

Zillow describes iBuyers as “home buying and selling services that typically buy off-market homes directly from sellers at market rate and quickly list them for sale on the open market after making light repairs and updates.” The business model is promoted on the idea of quick, convenient transactions for sellers and buyers. But Zillow has given up on iBuying, suggesting it’s a tough business model.

Business leaders might seize on artificial intelligence (AI) to market transaction processes as easier and more convenient than before. That seems to be the plan at Opendoor.

Most recently, Opendoor has appeared in the news for bringing on Kaz Nejatian, formerly Shopify’s chief operating officer, as its CEO. Opendoor describes Nejatian as “an AI-native executive.” And the media have been oohing and aahing over Opendoor’s dizzying share price rise after it announced the new CEO.

Then the other shoe dropped. At the time of this writing, shares in Opendoor are volatile and it’s clear that speculative traders are driving unpredictability. Hedge fund managers are now showing up to rain on the shareholders’ parade, criticizing the company’s business model and announcing that they’re shorting the stock.

In the background, we know that margins are tightening for real estate flippers. Many people are sidelined with home prices higher than ever before relative to U.S. incomes. With the stage set like this, is a turnaround story for Opendoor sustainable?

Slashing the Employee Base

To deal with risk in a shaky market, the company has also brought back its co-founders, Keith Rabois and Eric Wu, who now serve as board members. Keith Rabois is chair of the revamped board. Rabois’s venture capital company is injecting $40 million worth of private equity into Opendoor.

At the same time, Rabois has announced plans to slash the company’s population of employees from 1,400 to under 200, saying he doesn’t know what most of them are doing.     

But the newly installed CEO gets high praise from Rabois: “He is the right leader to unlock Opendoor’s unique data and assets as we build on Opendoor’s original mission, now enhanced as an AI-first company.”

Looking into the future, the company could be slashing its expenses in order to focus on a lean model that thrives off commissions and fees rather than fixing and flipping.

Tough Market for Turnarounds

The question, then, is whether an “AI-first company” is equipped to make grand strides in an environment like the U.S. housing market.

The new CEO says Opendoor’s AI tools can make things “radically simpler, faster and more certain” for sellers and buyers. From a business perspective, this would mean Opendoor focuses on training algorithms on its trove of customer data, using the data to drive revenue, along the lines of what Amazon and Shopify do.

AI could also help the company calibrate pricing so as to squeeze the most juice out of each transaction.

In any case, at least for now, Opendoor is totally focused on profiting from buying, touching up, and reselling homes for profit. This business model can thrive in hot markets. But what about when selling and buying activity sinks into a lull? Looking back, Opendoor has always been struggling to become a profitable company. Even when its founders were leading it the first time.

The real estate market will not be lending itself to a turnaround any time soon. The interest rate on a 30-year, fixed mortgage is above 6%, while four in five deed holders have mortgages under 6%, so they’re still hesitant to sell and move. As for buyers, they’re coping with inflation that makes it hard to save for a down payment.

Yes, the Federal Reserve is lowering interest rates for banks — but that’s not likely to bring down mortgage rates significantly over the next year. And the next year will be critical in Opendoor’s turnaround story.

Read our take on what’s next for mortgages, now that the Federal Reserve is announcing interest rate cuts.

Can Opendoor Defy Gravity and Keep Its Investors?

Ecommerce writer Annie Palmer at CNBC writes:

Nothing has fundamentally improved for the company since [investor Eric] Jackson bought shares of Opendoor in July. Opendoor remains a cash-burning, low-margin business with meager near-term growth prospects.

That appears to be a fair and accurate assessment.

Opendoor acquired 1,757 deeds in the second quarter of this year. That’s a drop from the same point last year. The company estimated on its earnings call that during this quarter it will acquire only 1,200 deeds.

Why is the company having trouble bringing in inventory? Given the state of the market, iBuyers are making lowball offers for homes these days. Word is getting out to potential sellers.

Not long ago, Opendoor was at the threshold of delisting its stock. Shares were trading for less than a dollar. When retail investors move on to another bright, shiny AI story, what’s to say Opendoor can defy gravity?

Meanwhile, for buyers looking for tiny homes, Amazon itself has entered the chat.