Five months ago, iBuying startup Opendoor was in survival mode: It paused home buying, laid off 35 percent of its staff and raced to sell $1 billion worth of homes on its books.
Now, the company is going public through a $4.8 billion deal with Chamath Palihapitiya’s blank-check company. Invoking past investments in Bitcoin, Amazon, Tesla and Virgin Galactic, Palihapitiya, the founder and CEO of Social Capital, called Opendoor his next “10x idea.” But by merging with a special purpose acquisition company, or SPAC, Opendoor is avoiding much of the scrutiny of a traditional IPO, where potential investors get a peek under the financial hood via a company’s prospectus.
Still, during a Sept. 15 investor presentation that coincided with news of its SPAC deal, Opendoor disclosed a pattern of losses that was prevalent even before Covid struck. In 2019, the company lost $339 million, up 41 percent year-over-year from $240 million. Revenues last year hit $4.7 billion – this year, projected revenue is $2.5 billion, a drop of over $2 billion.
As for home sales, Opendoor expects a slight uptick in activity this year, projecting 19,732 home sales in 2020 compared to last year’s 18,799.
Given that it has lower revenues, bigger losses and only a slight increase in home sales, many in the real estate industry and startup communities are asking: How is Opendoor valued at $1 billion more than it was last year?
“Opendoor needs to raise more capital — it’s losing money,” industry analyst Mike DelPrete said this week. Since 2014, Opendoor has raised $1.5 billion from investors, including SoftBank, General Atlantic, New Enterprise Associates, Lennr and real estate-focused VC Fifth Wall Ventures. It hit a valuation of $3.7 billion in March 2019 when it raised a $300 million round led by General Atlantic.
This spring, DelPrete compared Opendoor’s suspension of iBuying to an airliner losing both engineers mid-flight.
“With no revenue — Opendoor’s engines — the company will glide until it either manages to once again generate revenue, or runs out of money,” he said at the time.
In a May report, DelPrete noted that Opendoor’s home purchases “dropped off a cliff” during the first quarter. Its February acquisitions were down 20 percent year-over-year and March purchases were down 47 percent year-over-year.
By reducing its exposure, Opendoor had fewer homes on the books during the pandemic. But observers said it begged the question if the company was running out of cash.
“If what they’re doing is offering liquidity in a market, they should have been crushing it,” said Kevin Clark, an adjunct professor at NYU’s Schack Institute of Real Estate.
The top iBuyers accounted for 0.5 percent of the U.S. housing market last year, generating roughly $8 billion in sales, according to DelPrete. Opendoor controlled 64 percent of the iBuying market, followed by Zillow with 18 percent (Other established brands such as Coldwell Banker, Realogy and Keller Williams have also entered the fray). Zillow, which is publicly traded, disclosed losses of $312 million on iBuying last year. Still, Zillow’s CEO Rich Barton said in October that not betting on iBuying would be an “existential threat” to the company.
Last July, Opendoor co-founder and CEO Eric Wu said he saw iBuying as a “winner-take-most” market.
“The classic example is Amazon,” he told Inman. “Though it’s hard to imagine that they get to a winner-take-all position given how many e-commerce competitors exist, Amazon certainly has and will capture the vast majority of value in the ecosystem.”
During the Sept. 15 investor presentation, Opendoor said its contribution margin — or profit per home — is $5,000 after interest payments. In Phoenix, its most established market, that rises to $8,000 per home. WU claimed Opendoor is 12 times more efficient at selling a home than a traditional agent and has been able to reduce its per-home expenses by 50 percent.
The deal with Palihapitiya’s Social Capital Hedosophia Holdings II will give Opendoor a $1 billion capital infusion and the firm will have $2.4 billion in available debt, CFO Carrie Wheeler said during the investor presentation.
Proceeds from the deal include $414 million in cash and $600 million through a PIPE, or private investment in public equity, the companies said, with Palihapitiya investing $100 million personally.
“Before the end of 2021 they’ll be back in a really solid place to where they were and growing again,” he told the Financial Times. During an appearance on CNBC, he said if Opendoor uses its current playbook to capture 4 percent of the U.S. housing market, it will be able to generate $50 billion in revenue.
Palihapitiya has good reason to hope that’s the case. He and Ian Osborn, co-founder of Social Capital, are receiving $82.8 million worth of founder shares in Opendoor, as per the FT.
“I just don’t understand why all of a sudden it’s OK for banks to make money,” he said, of receiving shares, “but it’s not OK for other people to make money.”
Schack’s Clark said Opendoor’s first-mover advantage – if there was one to be had – should have been clear by now.
“If you look at the rest of the iBuying market, no one has cracked the code,” he said. “No one has figured out if there’s a way to make money doing this. My guess is that there probably isn’t.”