Homecoming: Opendoor tries iBuying in Bay Area

Company will purchase homes in 200 zip codes ranging from $400K to $2.5M

Jessie Smith, general manager of Opendoor’s Northern California operations (Opendoor, iStock)
Jessie Smith, general manager of Opendoor’s Northern California operations (Opendoor, iStock)

Opendoor, the San Francisco-based iBuyer, will attempt to flip homes in the nation’s priciest housing market — its own.

The leading iBuyer among the three still operating after Zillow’s stunning withdrawal is entering the Bay Area market, covering 200 zip codes from Sonoma to Santa Clara in Silicon Valley, the company said Tuesday. It will target homes ranging from $400,000 to $2.5 million, or about 60 percent of the market.

Zillow’s admission that it was losing a fortune on iBuying raised doubts about the business model’s viability, especially for unique and expensive homes not easily valued by metrics alone.

But Opendoor believes its eight-year track record, “robust” risk management and “significant investments” in engineering, data science and pricing systems allow it to expand the range of homes it can buy, Jessie Smith, general manager of Opendoor’s Northern California operations, told The Real Deal.

“We’re really confident at this point in our ability to provide [Bay area] sellers with competitive offers while also building a durable business,” she said. “We feel confident valuing all kinds of homes at different price points.”

Opendoor and its competitors, Offerpad and Redfin, use proprietary algorithms to estimate the value of homes and make cash offers, thereby allowing owners to sell “at the tap of a button.” If iBuyers’ calculations are accurate and market conditions remain favorable, the companies profit by renovating and flipping the properties at scale, with less friction than individuals’ home purchases entail.

The iBuyer model, which emerged early last decade, has not been tested in a bear market.

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For sellers, iBuyers promise a quicker sale without agents and showings. But detractors say instant offers have exacerbated the frothy housing market and elbowed aside traditional home shoppers — particularly first-time buyers — who can’t compete with cash-rich institutional players.

Flipping homes is a risky enterprise. Zillow laid off a quarter of its staff upon bowing out, citing the unreliability of its price estimate model and pandemic-related operational challenges, notably the supply chain crisis and tight labor market. As of early December, Zillow Offers still had half of its backlog of homes to offload. Zillow’s stock price is down more than 75 percent from its peak.

Opendoor, which pioneered iBuying and went public in late 2020, appears to be doing better. The company expanded its footprint to 44 markets from 21 last year, and bought a record 15,000 homes in the third quarter alone, doubling its revenue and narrowing its losses.

Still unconvinced are investors, who have bailed on proptech SPAC mergers in recent months. Opendoor’s stock now trades below the $10 SPAC buy-in price of early February and is down by more than 50 percent since Zillow quit iBuying in early November.

Operating in the San Francisco Bay area, where the average home price is more than three times the national average of $375,000, presents its own challenges for iBuyers. With higher-end homes, the correlation between size and price is more unpredictable, and value can be significantly perception-based and hard to quantify. A famous previous owner or other such attribute can affect a property’s appeal dramatically.

Pricier homes also are often less “cookie cutter,” with idiosyncratic features and bespoke design elements. Two homes on the same block, but with significantly different views, decor or layouts, might fetch much different prices.

While homes are more expensive and variable in San Francisco than in Opendoor’s other markets, Smith said the city’s dynamic is similar to others where Opendoor has recently launched, such as San Diego, Miami and Washington, D.C. The company charges a 5 percent service fee to cover any prospective holding costs, including utilities, maintenance and taxes, she added.

“We really believe that the work we’ve put into building our technology and systems over the past eight years — from pricing and data, operations and customer experience — set us up to be able to launch in a market as dynamic as the Bay Area at this point with conviction,” she said. “It’s less a zip-code-to-zip code thing and more a home-to-home question.”

Opendoor says it has facilitated more than 100,000 home transactions. The company will report its fourth quarter results on Feb. 24.

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