> Or, in the next downturn, the entire company might go bust.
> To that end I hope Opendoor succeeds simply so it can be a role model for tech: taking on big risks for big rewards that create real value by solving real problems is the best possible way our industry can create benefits that extend beyond investors and shareholders;
The only reason (ok one of the big reasons, not the only) Opendoor exists is that the massive amount of capital deployed has the potential to make investors and shareholders a ton of money. It's an all or nothing proposition. Furthermore, I don't think the author has rightly assessed (or assessed at all) the negative externalities associated with Opendoor's model to the economy. Part of the whole reason the housing market revelation of "too big to fail" of banks was exposed was because too much of the real estate market was tied up in too few organizations (Fannie/Freddie, Wells, etc), which means when it crumbles down, our economy cannot sustain the burden. If OpenDoor's risk mitigation model is to basically "own more of the market" it means that if/when the market does go for a downturn and OpenDoor goes bust, then it's not just VC's who lose, but a whole lot of homeowners, or even worse, homeowners and taxpayers.
That's hardly a model I'd admire or try emulate, unless of course, I want to make a buttload of cash (or fail very hard trying).
> Opendoor is creating value as opposed to taxing a few bucks off the top of an existing market or simply trying to be cheap.
Opendoor's arbitrage is no different then an ad network, they're both exploiting inefficiencies. I'm really having a hard time understand why it's so much more "benevolent" as it's suggested here.
It's not that it is 'benevolent' - I think the article was making the point that what OD is trying to do is harder, and socially more beneficial, than just matching demand & supply using an online service/app (like Uber, Airbnb, RedFin. etc).
The service OD is providing is liquidity - and the risk they are taking, which they are compensated for, is liquidity risk. This is what 'market making' is - you stand ready to buy & sell and create efficient market.
Beyond the 'data science' of pricing the property, and the tech of automated visits, - the main operational task would be to build an efficient market making business. Anyone who has spent any time in a bank trading desk would know how difficult this is. In a rising market - volumes and upward pricing and demand all tend to go hand in hand - the real test, will be when when the market turns - and maintaining liquidity (and a thin 'bid-ask' spread) in a falling market.
Someoned use the analogy of London trading houses... Another good analogy would be what Marc Rich (and others) did in the 1970s when the broke open the oil market - which had been dominated by long-term contracts - into a more liquid 'spot market'. OD is trying to create a liquid, 'spot market' for a previously illiquid market.
OF course - the market which need the most liquidity (ie the ones outside the 4-5 main metros) is where providing liquidity will also be the hardest. Unlike bonds, shares and oil - housing is not 'fungible' (for one, you can't move a house).
Sounds like a difficult but valuable enterprise - good luck to you and your team.
https://news.ycombinator.com/item?id=13164392 According to `jdross, purchases are funded with a small amount of equity and the rest with "debt-like instruments" so the taxpayer is still potentially on the hook. But, yes, homeowners don't seem to be at risk.
Possibly, but I think the simpler answer is that we have a product with...
- good unit economics in appreciating and depreciating sub-geographies
- customers who love us and great conversion rates
- a sane risk strategy
- a unique product with traditional economies of scale/economic moats that allow people who can't afford two mortgages to sell and buy at the same time, so they can move directly once instead of having to do the dance with short term rentals
- huge opportunities for growth from here, both within and across markets
I don't know why liquidity/trading in homes needs to be "all or nothing" to be a good business... it seems to work well enough for cars and other assets
> it seems to work well enough for cars and other assets
Definitely agree. Carmax being a great example.
> I don't know why liquidity/trading in homes needs to be "all or nothing" to be a good business
I didn't necessarily say that you couldn't build a good business, but the author is suggesting that the liquidity that your company creates will have a greater economic impact in that it will create a higher degree of mobility (which is then weighted against a supposed malevolence of investors cashing out big). If you're able to only operate in certain markets (like Carmax) then this theory starts to break down, because it becomes less of a universal truth. I'm simply dubious that the pronounced mobility will be as impactful to the market as suggested.
There are a few points you covered in your comment but the housing meltdown wasn't the result of purely a few large consolidated players. It was the fact that the debt should never have been issued in the first.
A person making $40k/yr is given a mortgage for $400k - that's upside down economics.
So loose debt created a lot of buyers, which then pushed prices up, with little regulation and oversight this created a large push in the housing prices to increase and the cycle lasted about as long as it took for the first massive wave of defaults.
That would have been just a normal reset, the problem was then how much debt everyone was carrying and that all of it was leveraged with not enough collateral to back it up.
If it was purely 1:1 debt to housing, instead of being wrapped up in CDOs that then had additional leverage placed on them several times over with various instruments we wouldn't have ended up in such horrid shape.
Now that's not to say there isn't risk with Opendoor, there is and everyone including the founder acknowledges that risk, but comparing Opendoor to the housing crash is a bit far fetched.
As long as they stay away from leveraged debt and they model things well they can stay a float in a down turn especially since as an organization it looks like they are trying to run a very lean ship by automating as much as possible.
Then when you consider the average transaction price as well as their cut, they don't have to move millions of homes in a calendar year to make serious revenue which means the real question is how long can they carry that debt and how is it serviced in the case of a downturn.
A lot of that also has to do with the markets chosen.
That would be my question. Sure the average buying/price selling price kind of dictates certain markets are out like prime-NYC and SF and secondary markets are in, but it seems that those bear the brunt of the downturn a bit more sharply than NYC.
NYC felt it at the high end, that's properties that were $5MM+, more like $10MM+, but in the low end there wasn't much of a dip. More like a bit of stall in housing price growth, and that was more related to the tightening of mortgages rather than the actual price dropping drastically because NYC still has very high demand. Especially in properties that are well below $1MM.
So there is something to be said about repeating this model in similar markets, but I think moving into a market that is dissimilar, while it won't be scalable, I think can provide some protection in a downturn.
> To that end I hope Opendoor succeeds simply so it can be a role model for tech: taking on big risks for big rewards that create real value by solving real problems is the best possible way our industry can create benefits that extend beyond investors and shareholders;
The only reason (ok one of the big reasons, not the only) Opendoor exists is that the massive amount of capital deployed has the potential to make investors and shareholders a ton of money. It's an all or nothing proposition. Furthermore, I don't think the author has rightly assessed (or assessed at all) the negative externalities associated with Opendoor's model to the economy. Part of the whole reason the housing market revelation of "too big to fail" of banks was exposed was because too much of the real estate market was tied up in too few organizations (Fannie/Freddie, Wells, etc), which means when it crumbles down, our economy cannot sustain the burden. If OpenDoor's risk mitigation model is to basically "own more of the market" it means that if/when the market does go for a downturn and OpenDoor goes bust, then it's not just VC's who lose, but a whole lot of homeowners, or even worse, homeowners and taxpayers.
That's hardly a model I'd admire or try emulate, unless of course, I want to make a buttload of cash (or fail very hard trying).
> Opendoor is creating value as opposed to taxing a few bucks off the top of an existing market or simply trying to be cheap.
Opendoor's arbitrage is no different then an ad network, they're both exploiting inefficiencies. I'm really having a hard time understand why it's so much more "benevolent" as it's suggested here.