Home Real Estate Opendoor.com and the Power of Radical Questions

Opendoor.com and the Power of Radical Questions

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A couple of days ago, a friend of mine in the commercial real estate space asked me about Opendoor.com. I had no idea what he was talking about, so I went over to look at what that’s about. Well, this is what the website looks like right now:

opendoor

Hm. “The easiest way to sell your home”? Receive an instant offer online and close in 3 days? What the hell???

Then I looked into them a bit more, and spoke with a friend at Inman (where I am this week) who is in the know and connected to the venture world more than I am. You know, despite the fact that the real estate industry will be talking about Zillow’s acquisition of Retsly (as we should), because Zillow drives all conversations in real estate these days, I actually think that Opendoor.com might be the story of 2014. Might.

Since it hasn’t launched, no one really knows what’s what. But what Opendoor.com says to me is that strange and magical things happen when you ask the really radical questions. There is so much power in asking Why Not? and Why Must Things Be This Way?

In an industry where every little thing is marketed as a “game changer” and a slight twist on the decades-old home search process is lauded as “disruptive”, Opendoor.com shows us what real disruption looks like, and how it begins.

A Bit of Background

opendoor-team-photo
The Opendoor team

Opendoor.com is the brainchild of one Keith Rabois, an experienced tech entrepreneur with stints at Paypal, LinkedIn, Slide, and Square. He is, in the words of my friend Galen Ward, “a baller”. Yeah, he is that…

The concept is one that Rabois has been thinking about for 11 years, according to this story in Venturebeat from April of this year:

The idea for HomeRun cropped up in 2003.

“My friend Peter Thiel suggested that I come up with an idea to innovate in residential real estate,” Rabois said, referring to the PayPal and Palantir co-founder.

“It’s the largest part of the economy unaffected by the Internet. And that was definitely true then, and even with things like Trulia and Zillow, it’s fundamentally true today. But the process of (selling a home) hasn’t been transformed by technology.”

HomeRun’s approach, Rabois said, is simple.

“We have to value the home, sight unseen,” he said. “You can put in your address and we tell you what it’s worth instantly. And we’ll want to buy it from you for that price.”

Underneath the covers, HomeRun will analyze lots of data — some being proprietary, some not — to make an split-second calculation, with minimal human interaction. It’s “pretty complicated stuff,” Rabois said.

Well, Opendoor.com is HomeRun made real. One of the co-founders is Eric Wu, formerly of Movity and Trulia, who knows a thing or two about real estate.

The TechCrunch article discussing Opendoor.com provides a bit more color:

The company, now called OpenDoor, just closed $9.95 million in what appears to be an insane party round. (To be clear though, Khosla Ventures is the lead.)

Who’s involved?

Paypal co-founder Max Levchin, Former YouTube and Facebook CFO Gideon Yu, Eventbrite co-founder Kevin Hartz, Y Combinator’s Sam Altman, Quora CEO Adam D’Angelo, Yammer co-founder David Sacks, Angelist’s Naval Ravikant, Yelp CEO Jeremy Stoppelman, Box CEO Aaron Levie, Initialized Capital’s Harjeet Taggar, Garry Tan and Alexis Ohanian, Former Twitter vice president Elad Gil, Blippy co-founder David King, Flixster co-founder Joe Greenstein, Angel investor Mike Greenfield, Quora co-founder Charlie Cheever, Path’s Dave Morin, Facebook vice president Dan Rose, Trevor Traina, Resolute Ventures’ Mike Hirshland, Caffeinated Capital’s Ray Tonsing, Felicis’ Aydin Senkut, True Ventures’ Om Malik, Thrive Capital’s Josh Kushner, Crunchfund’s Michael Arrington (who disclaimer: founded TechCrunch) and SV Angel.

Um, that list of investors reads like a Who’s Who of Silicon Valley. $10 million to these fellas is chump change. The network represented in just those names is absolutely insane.

Now, we won’t know exactly what Opendoor will do, and exactly how it’ll go about doing it, but based on the above, here’s what I imagine it’ll look like.

Speculation Time!

Seems to me that Opendoor.com will be using some sort of AVM to price homes. Most AVM’s have an error rate below 10%. Here’s one opinion from the lending world:

One of the biggest misconceptions about AVMs is that they are inaccurate. Last month, we revealed the fact that standard error rates of AVMs are actually lower than those of traditional appraisals. While my aim is not to rank one form of evaluation above another, it is to point out that AVMs can be quite reliable and highly appropriate for lower risk activities and transactions. I’d also like to remind you that there is no benefit to using an unreliable tool, not where data and decisions are concerned. Accuracy matters.

Now, the real estate folks love to bash on Zillow and its Zestimate (which is a type of AVM), but here’s Stan Humphries, Chief Economist at Zillow, addressing that issue in the Washington Post:

One way of providing context is to compare Zestimate accuracy to the accuracy of initial listing prices set by real estate agents themselves. We have conducted such a study in the past for all homes nationwide, and recently conducted a similar analysis for the Washington, D.C., metro, based on 38,438 closed sales over the past year. We found that initial Zestimates — the Zestimate at the time the property was first listed for sale — were within 5 percent of the ultimate sale price 46 percent of the time in the D.C. area. Initial list prices set by agents in and around D.C. came within 5 percent of the final sale price 76 percent of the time. The median error rates for initial list prices and initial Zestimates was 2.2 percent and 5.5 percent, respectively, in the D.C. metro. The margin narrows to 3.5 percent and 5.5 percent, respectively, when you remove listings that may have potentially underpriced the home.

It seems clear to me that Opendoor intends to use AVM’s to price homes sight-unseen, and then make an offer to the homeowner based on what the AVM says the property is worth.

This is not as crazy as it sounds initially, because the business of Opendoor.com is not the same thing as the business of a real estate agent.

A real estate agent owes a fiduciary duty to the seller; part of that duty is to maximize the price of the home. Even a 5.5% error rate could mean thousands of dollars lost for the seller. That’s unacceptable for the real estate agent, and rightfully so.

But Opendoor is buying the home itself. It’s using its own money, and if its computers make a mistake, only Opendoor is harmed by it. Even if the error is 10%, so Opendoor overpays by 10%, that only hurts Opendoor. As long as the homeowner accepts the price being offered by Opendoor, who is harmed by it?

I’d imagine that the process will likely involve a home inspector coming out to make sure the property isn’t completely a wreck, or some such, but we’ll see about that.

I’d imagine that Opendoor — knowing that its AVM’s have an error rate — would probably bid under what the AVM says the property is worth. Every offer, then, will be a “lowball” offer in some way, to minimize the risk for Opendoor. Again, the homeowner doesn’t have to accept that lowball offer; s/he can just go the traditional route and list the home with a broker.

Once it has bought the house, I’d imagine Opendoor would just turn right around and sell the house for whatever it paid plus a markup to a buyer, once again leveraging its financial resources to make that easy and painless as well.

Here’s the thing: I actually think that the Opendoor model will be extraordinarily attractive to a whole lot of sellers.

Personal Anecdote Time & Why This Is Appealing

I sold a house last year, using a real estate agent. But going into it, I knew that the process of selling a home is filled with pain, annoyance, and inconvenience. We had to stage the house, and having staged it, we couldn’t let our children mess things up. Every time there was a showing, we wanted to be out of the house, as buyers don’t want the homeowner hovering around when they’re trying to imagine the house as theirs.

So my instruction to my listing agent was to try to pre-market the house, or pocket-listing the thing, for a week or two. And if we got an offer within 10% of our asking price, we would take it, just to save ourselves the headache of selling.

I don’t think we’re some sort of unique strange creature. I think quite a few homeowners are more than willing to accept a “lower price” in exchange for less pain and faster closings. And if you stop and think about it a moment, time truly is money for homeowners.

If the typical real estate transaction takes 90 days from contract to close, the seller is paying the carrying costs during those 90 days, from the mortgage to utilities to property taxes to whatever else. Those three months could mean thousands of dollars in additional costs for the seller.

Plus, there’s the whole uncertainty of whether the buyer will actually get the mortgage approved, whether inspections will come in clear, whether the property will appraise, etc. etc. and so on. Who the hell wants to deal with any of that, especially if you’re selling the home so that you can buy your next home?

Power of Radical Thinking

This post isn’t to pimp out Opendoor.com; I have no relationship with any of those folks, and I don’t even know what their actual product/service will be. But what is so striking about this is how powerful the original question that Keith Rabois must have asked is: Why Must Things Be This Way?

See, within the real estate industry, even “disruptive” innovators like Trulia and Zillow take certain things for granted. They are simply the facts of life. One of those things is that real estate transactions are difficult, time consuming, filled with pitfalls, and expensive. Here’s Spencer Rascoff making this point:

Rabois looks at the same situation and asked Why the transaction must be complex, emotional, expensive, and infrequent. Could that be changed?

His answer appears to be that yes, that could be changed, IF there were some company with enormous financial resources sitting between the home seller and the home buyer. Market makers exist in the stock market and in the commodities markets. Why not real estate?

That’s a Big Idea. And the type of people who have put money into Opendoor are “ballers” who can make that Big Idea reality.

It just so happens that today, major Wall Street institutions are putting billions of dollars into buying residential real estate. Companies like Black Rock, Blackstone Group, Colony Capital, KKR, and others are serious players with serious money who have been doing this. Opendoor could make that so much easier for those companies.

Who knows if Opendoor will ultimately be successful or not. History is littered with the corpses of companies that had an idea but failed for one reason or another.

But the really interesting point here is the power of that radical question. One wonders why no one in the real estate industry asked that question. Why must the transaction be so difficult? Why does it have to be complex? Why accept the status quo as the Only Way Things Can Be?

So we argue over syndication, and talk about drones, and give awards for disruptive innovations to companies that have never asked any radical questions. Meanwhile, big players with huge resources look at the way things are and ask how that can be changed.

I think there’s a lesson in there for all of us.

-rsh

5 COMMENTS

  1. I’m selling my home and this option is the best I’ve found. Yes, it costs a bit more than traditional sale but the benefits outweigh the fees in that I got a fair offer, time constraints are gone. I picked the closing date and now I’m on my way to moving on from my house. When I initially saw this I thought how can this be? There are so many people, like me who come into a situation such as illness that don’t have a year to sell their home. Opendoor is the answer. Thanks!

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