Opendoor suffered losses as soft market bites iBuyer
As the real estate market softens, Opendoor’s results appear to be following suit.
The giant iBuying is selling houses at a loss for the first time. Analyst Mike DelPrete said in a research note that this is the result of a rapidly changing market, cooled by rising mortgage rates and uncertainty in stock markets.
These factors have combined to hurt home values at a time when Opendoor is on the hook for properties it acquired in a historically hot market. A Bloomberg analysis of Yipitdata indicates that as a result, the company lost money on 42% of its sales in August.
“Opendoor doesn’t necessarily have a crystal ball to see the future with 100% accuracy,” DelPrete said. “A lot can change in a few months.”
The company’s struggles are reminiscent of Zillow’s entry into the iBuying marketplace through Zillow offers. Unlike Opendoor and Offerpad, Zillow bought too many homes for too high a premium in 2021, forcing the company to end its iBuying business with losses of over $1 billion over three and a half years.
Opendoor’s buy-to-sell premium – the difference between the price at which it buys a house and the price at which it sells it – had never fallen below 1%, including at the height of the pandemic, when it reached just under 4 percent. But Yipitdata cited by DelPrete shows that after peaking at nearly 12% earlier this year, the premium has fallen to just below zero.
Opendoor sells about 2,000 homes per month with an average sale price of $400,000, according to DelPrete, which means it would lose about $16 million if it suffered overall losses of 2%.
The company seems to have reacted by increasing the number of transactions it carries out in the third quarter, which ends at the end of the month. The company offered buyers’ brokers a one-time commission bonus of $3,500, according to DelPrete, and gave buyers money with which to buy out their mortgage rates.
A spokesperson for Opendoor said the company expected lower trading volume in the third quarter in the guidance provided in its latest earnings report, as well as longer holding times for inventory.
“We acted quickly and decisively to prioritize inventory health and risk management,” the spokesperson said in a written statement.
DelPrete said he wasn’t sure why the company would try to ramp up sales when it was losing money on those sales, but said it could hint at an even slower winter. It is also lowering its initial asking prices, as well as the prices of homes already on the market.
“The first assumption is that they wanted to record as much revenue as possible in the third quarter,” he said. “The second would be that they think things are going to get worse – better to lose a little money now than a lot of money later.”
But DelPrete doesn’t think headwinds pose an existential threat to Opendoor — at least not yet.
“They’re not going to run away, they’ve been building the business for years just for this moment,” he said.