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DJ Opendoor Needs to Show Its Work -- Heard on the Street

· 02/05/2021 09:01
By Laura Forman

Opendoor Technologies appears to have solved the elusive iBuying equation, but the math is still a bit hazy.

Since competitor Zillow made its big push into iBuying in early 2019, investors have struggled to understand how such a capital intensive business so dependent on market fluctuations can reliably make money. They have good reason: In the most recent quarter reported, Zillow said it lost roughly $7,500 on average for each home it bought and subsequently sold after interest expense, despite the surge in overall real-estate prices last year. Zillow hasn't yet shown profitability in its iBuying business on that basis in any quarter and losses seem to be accelerating.

But things appear different at Opendoor. The company made about $5,000 per home after interest expense in the first quarter of last year, according to a November analyst day presentation. And, unlike Zillow, its contribution margin increased significantly as the year progressed, rising from 1.9% in the first quarter to 4.8% in the third quarter. Dividing its contribution profit by the total number of homes it sold shows that Opendoor made an average of just under $13,000 per home in the third quarter after interest expense.

Could Opendoor really be nearly three times better at making money in iBuying than a company with roughly 10 years more experience in online real estate? Investors seem to think it has at least some advantage: Opendoor's stock has soared 56% over the last three months, outperforming Zillow's 48% gain.

But it seems hard to believe that, in the algorithmic-based business of iBuying, a more established company could get outplayed in the data game. A 2019 analysis done by Mike DelPrete, a scholar in residence on real-estate technology at the University of Colorado at Boulder, found both Opendoor and Zillow purchase homes for just over 1% less than the value of the home as determined by a real-estate title insurance company. Indeed, Zillow's own analysis published last month showed it is offering within 0.09% of what a home goes on to sell for on the traditional market.

The devil may be in the details. Key to home flipping, of course, are the improvements made before the properties are resold. Here, Opendoor's 3 1/2 -year head start in the iBuying business might be paying off in terms of more practice in the logistics of staffing and strategic renovations. Does every room in every home have to be repainted in every market? How expensive of a paint job does a home need to look polished enough to sell? Experience is likely valuable and could explain why iBuyers seem to become less profitable when they enter a new market. It could be that it is the holy grail of iBuying, and Zillow simply lacks it so far.

Or it could be that it matters little. A close reading of Opendoor's S-4 shows its iBuying contribution margin is derived not just from home revenue but also revenue coming from attached adjacent services. That is a direct departure from Zillow, which breaks out these services into separate business segments. It is hard to imagine services are responsible for the entire difference in unit economics between the two businesses, especially since Opendoor says the vast majority of its revenues still come from home sales. However, it is worth noting that nearly 83% of Opendoor's home transactions in the third quarter came with attached title and escrow services, and the company says it expects growth of these additional services to be accretive to its contribution margins over time.

Zillow wouldn't argue with that. The company has consistently said its iBuying business isn't intended to be a money machine in and of itself, but rather a means to customer acquisition in more profitable areas like mortgage origination.

Investors may get more clarity when these companies report fresh earnings, beginning with Zillow's fourth-quarter report on Feb. 10. Opendoor will follow with its own year-end results on March 4 -- its first earnings report as a public company. For now, though, there is no clear formula for comparison: While Zillow has historically disclosed the renovation costs of its iBuying business, Opendoor hasn't.

If Opendoor really has all the answers, it shouldn't be afraid to show its work.

Write to Laura Forman at laura.forman@wsj.com

(END) Dow Jones Newswires

February 05, 2021 09:01 ET (14:01 GMT)

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