Moving into a new home can be a time-consuming, costly, and chaotic process. Selling your current home can drag on and on as brokers field offers, negotiate, and finally close. The closing date may not line up with the move-in date for the new home, leading to either two mortgage payments for the month or a gap in time that requires temporary housing.
But two tech companies, dubbed “iBuyers,” are streamlining the home-selling experience in hopes of making the move-out and move-in process as seamless as possible. Opendoor and OfferPad can make an offer on your home in a matter of hours and can close within a week, giving movers the flexibility to move into their next home exactly when they want to.
The concept has caught on, as both companies are expanding rapidly. Opendoor is currently in eight markets and plans on expanding aggressively in 2018, with hopes of eventually having a footprint everywhere in the country. Now valued at $2 billion, Opendoor is reportedly about to close on a $200 million round of funding, adding to the $320 million venture capitalists have already contributed to the company.
“When you talk about disruption, most of the disruption occurs in terms of [iBuyers] being buyers and consumers being sellers,” said Stephen Kim of the investment advisory firm Evercore. “I think there is a potential that this can be somewhat disruptive. I don’t think it’s going to take over all transactions but I do think it can fill a niche.”
Here’s how it works if you’re looking to sell a home. You answer some questions about the condition of your home on their website, and the company uses an algorithm to assess the value of the home. When Curbed tried it with Opendoor, we got an offer within an hour for a three-bedroom house in the Dallas metro area.
Should you accept the offer, the company could close on the deal with an all-cash offer as quickly as within a few days. It would then clean and fix up the home for you and sell it on their website just like any other brokerage that has real estate listings online.
The advantages of selling a home through Opendoor or OfferPad is, again, primarily the speed with which you can close the deal and move into your new home. It’s also remarkably convenient; the questionnaire to request an offer for your home takes only a few minutes. Unless a homeowner grossly misrepresents the condition of their home in the questionnaire, there’s certainty the deal will close as there’s little risk the company would back out of the deal at the last second, which can be a problem if the home is sold to an individual.
Opendoor claims the algorithm produces an offer at a “fair market” price, and it collects a fee for conducting the transaction, usually around 7 percent, although it can vary depending on the condition of the home and the city it’s in.
Customers selling on Opendoor or OfferPad are certainly paying a premium for the convenience. The 7 percent fee is higher than a traditional brokerage fee, which tends to be around 5 percent. Sellers are also potentially leaving money on the table by not fielding offers that could drive the selling price above the figure the algorithm spits out. That premium would ultimately go to Opendoor or OfferPad when it sells the home.
Media reports often call these companies “home flippers,” but they take exception to that characterization. On Opendoor’s website, there’s a section devoted to explaining why the company isn’t a home flipper. The distinction the company wants to highlight is that its business model is set up around collecting a transaction fee, not on capitalizing on home price appreciation between the time it buys and sells the house.
“The vast majority of [revenue] is our fee,” said Opendoor co-founder JD Ross. “We aim for that to be 100 percent. For us, we treat home price appreciation gain as an error in our model. Our service in our mind isn’t that we buy and sell a home. Our service is that we enable you to move really, really easily.”
Yet, when buying and selling homes in an environment where home prices are rising, it’s almost impossible not to capitalize on home price appreciation if the home is sold on the open market. An analysis by real estate advisor Mike DelPrete on 350 Opendoor listings in Phoenix concluded that the company sold properties at an average price appreciation of 5.5 percent.
The company’s insistence that it’s not a home flipper may be about avoiding the negative connotation associated with the term “home flipper” more than anything. But to its credit, Opendoor and OfferPad undeniably offer customers benefits that a traditional home flipper doesn’t—convenience, speed, and certainty.
And for what it’s worth, Opendoor believes its model would still work if home prices fall, which is happening in some of the neighborhoods in which the company currently operates. According to Kim, Opendoor would need to charge a higher fee and sell the home as quickly as possible to make it work.
There are some companies that have incorporated aspects of Opendoor’s model such as Knock and Redfin with its Redfin Now program. Zillow recently announced it’s putting more resources into its Instant Offers program. Knock’s model is almost the inverse of Opendoor’s; it first helps someone buy a home to move into, and then handles selling the old home.
But it’s hard for copycats to get started because the barriers to entry are high. A company would need access to a large amount of capital in order to buy homes in all-cash transactions. It would also need people on the ground in any market it operates in to assess purchased homes and fix them up for resale.
“I don’t see people doing it like [Opendoor and OfferPad],” Kim said. “There’s a substantive difference between [iBuyers and] Knock and others. [With some of the other companies,] you’ve got to do all the things you’d normally do if you’d be selling your home—get it all fixed up, get it cleaned up, be ready to vacate it in a moments notice when someone wants to come look at it, all that stuff.”
Correction: This story has been corrected to accurately reflect Knock’s business model.