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Despite generating losses, here's why Wall Street is optimistic about its future

by Concerns of the Future about a month ago in investing

Opendoor is winning the iBuying battle and the company continues to fire on all cylinders amid a historic housing boom.

Despite generating losses, here's why Wall Street is optimistic about its future
Photo by Breno Assis on Unsplash

This is not financial advice. All content should be opinionated. We are not responsible for any gains & losses. Please see a financial advisor before making investment decisions.

Last night, I was reading this article on Investorplace about a person's experience with using OpenDoor to sell their home. Reading this person's experience, the highlights I've gained were:

  • The entire process, from submitting an application to having the home tour and receiving an offer was fairly quick
  • They received an offer that was "well-above market value" and "well-above [their] expectations"
  • The final offer also included deductions for repairs and closing costs (which were fairly small) and the 5% service charge was better than having to pay a 6% fee in the traditional model
  • Surprisingly, the closing options were flexible and the offer was made in cash

To sum it up, the writer said:

"We were blown away by the offer. The price was great. The costs were small. The flexibility was unmatched. The perks were amazing."

The writer received fantastic service from OpenDoor. The service was so fantastic that I can understand why more people are looking to sell their homes to iBuyers like OpenDoor, Zillow, Offerpad, and more.

Technically speaking, even the home flippers that "buy ugly homes for cash" are considered iBuyers too.

While the writer is basing his bullish views on OpenDoor on the basis of his experience, it's important to note that the company continues to report losses. In the process, the company continues to raise more debt. With the terrible financial condition, how does OpenDoor make money?

According to OpenDoor, they make money by charging a service fee that is (on average) between 5-8%, and its maximum service fee is 14%. In the meantime, they take the risk of holding the property, making repairs and manage the maintenance of it, and find a buyer for it. With that, OpenDoor also makes money from the difference between the price it sold the home for and the cost of buying & repairing the home.

With that in mind, many worry that if the real estate market plunges, then OpenDoor would be hurt and that it will experience lower profits (or even bigger losses). OpenDoor relies heavily on being able to transact on homes as quickly as possible so that it will be less prone to the drastic changes that happen in real estate within a few months or more.

And interestingly enough, iBuying companies can leverage their economies of scale by saving money from outsourcing contractors and from improving their pricing algorithm (more data = better accuracy).

The iBuying business is capital intensive. At least Opendoor has $1.5 billion in cash on its balance sheets to help weather downturns in the real estate market and to continue making deals in a hot market like now. In the near future, the company will have to continue to raise more debt to boost its balance sheet if ever they need more money to fund more deals.

Compared to the other iBuying businesses like Zilow and Offerpad, OpenDoor is the best because it has the most housing inventory available. At the same time, it is a pure iBuying business, unlike Zillow and Redfin.

One underappreciated fact about Opendoor is that the company is already two years ahead of its original revenue projections. With the company firing on all cylinders and beating growth expectations at a high magnitude, I wouldn't be surprised to see the company becoming one of the largest real estate companies in the near future.

Conclusion

OpenDoor is the leader in iBuying. The company is fast-growing and it continues to achieve higher revenues amid a hot real estate market. With many positive reviews from customers, it's possible that iBuying will be the future of real estate buying & selling.

By making the real estate transaction process smooth, easier, less complicated, and cheaper while removing real estate agents from the middlemen game, OpenDoor is adding innovation to the real estate industry while also adding tension between itself and other iBuying firms to realtors.

OpenDoor, OfferPad, and other iBuying platforms are disruptive real estate agencies, similar to how Uber was disruptive to taxi companies and how SmileDirectClub was disruptive to orthodontists.

The future looks bright for OpenDoor.

investing

Concerns of the Future

The future is concerning. But at the same time, there are many things to be optimistic about.

*All views expressed in my articles are my own. Please do your own research and talk to a financial advisor before making any decisions.

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