Opendoor in 2023: The iBuying king and a business model in turmoil

​​This is the fourth in a series of 10 reports on the challenges the country’s largest brokerages, portals and iBuyers face in 2023. Check back as Inman dives into the biggest obstacles of the new year for RE/MAX, Offerpad, CoStar and more all this month. And look back at the challenges they faced in 2022 here.

Let there be no elephant in the room: Things did not go as planned for iBuying in 2022, and who but Opendoor is the king of the iBuyers.

A year that was supposed to chart a clear path to profitability ended with the company facing an existential dilemma to reinvent its business model, its public shares falling and its future more uncertain than ever before.

In 2022, Opendoor laid off staff and shut down some of its ancillary services. Rather than scaling up its pace of buying homes, it closed 2022 pulling back after reporting losing almost $1 billion in three months ending in September. It shifted its focus to a new side of its business. Then it its president departed and its founder and CEO stepped down and took a new role in the company.

Even as it remained the clear front-runner in the space, Opendoor went from simply trying to weather a once-in-a-generation housing downturn to reinventing itself entirely.

As we’ve done in the past two years, Inman reached out to Opendoor and industry observers to gauge the company’s possible paths forward and the biggest challenges in the way heading into the new year. 

“The larger challenge here is credibility,” said Mike DelPrete, an industry analyst who closely follows iBuyers. “Last year, Zillow flamed out. [In November], RedfinNow flames out. Offerpad’s stock price has been below a buck for weeks now.”

“All the questions are, can this business survive? They’ve just lost $1 billion,” DelPrete continued. “Now what? And is there a future for iBuying?”

Moving on from the ‘Q2 cohort’

The source of much of Opendoor’s recent financial pain can be traced back to homes like 1776 E. 2700 S., in Salt Lake City’s Highland Park neighborhood.

Listed for $745,000 before the peak of the market, this three-bed, two-bath Opendoor home didn’t sell quickly like so many others nearby. Nor did it sell when the firm dropped the price to $734,000 in March or $707,000 in April.

Month after month, as homes in Salt Lake City and nationwide continued their unprecedented run-up in price, Opendoor was lowering the listing price on scores of its homes. At the same time, interest rates were quickly rising and buyers watched their purchase power rapidly shrink.

Opendoor bought the home at 1776 East for $678,000 in August 2021, according to MLS records. It eventually sold for $570,000, a 16 percent loss. 

Now amplify that by thousands of homes in markets across the U.S. that are going through the same market correction and it amounts to a challenge for the company, which emerged as the iBuying frontrunner by growing to buy and sell billions of dollars of homes every few months.

Many of the homes it was buying during the lead-up to the peak of the housing market remain in its inventory, many now worth less than they were when the company bought them.

The company has a mundane-sounding name for one of its biggest problems: “The Q2 cohort.”

This is the stock of homes Opendoor bought between April and June. Opendoor bought 3,653 more homes in the second quarter of 2022 — when the market reached its peak — than it sold.

After the initial shock and blow to its bottom line starting in the middle of 2022, Opendoor is now moving to offload these money losers quickly so it can regain a book of inventory that might make it profitable again.

“We’re continuing to clear the book of inventory we acquired in Q2. We’re doing that fast,” said former President Andrew Low Ah Kee in an interview shortly before he resigned in December. “The reality is we own those homes and we’re going to sell through them as quickly as we can.”

Opendoor moved into a conservative stance toward the end of the year, buying far fewer homes and shifting focus to new tools and features it hopes will make up a bigger portion of its business moving forward.

But the pain may continue. The company posted a near $1 billion loss in the third quarter, and company leaders have shared wary outlooks recently.

“Q4 is going to be the trough for us,” Low Ah Key said.

Clawing out of a deep hole

Ongoing financial trouble preceded a clearing out of the company’s leadership team. In December, the company announced founder Eric Wu would shift out of the CEO position and President Andrew Low Ah Kee resigned.

Low Ah Kee will act as an adviser until the end of the first quarter before departing. Wu will act as president of Marketplace, one of the company’s key new focuses.

The moves made clear the company felt it needed to make big changes to right the ship. Yet among investors, the move was met with a question: Why now?

“This change obviously is coming at a very turbulent time for the company,” said Ryan Tomasello, a trader with Keefe, Bruyette & Woods. “Navigating this housing slowdown. This shakeup, I think investors will think of as adding to the list of risks that the company is currently facing in terms of execution.”

In the weeks following the leadership change, the company’s stock fell toward a dangerous threshold right around $1 per share. Below that point, the company risks being delisted from the Nasdaq.

Company officials suggest they are in a good position to withstand market headwinds for years as they shift their business model.

In November, the company had up to $11.8 billion in borrowing capacity, $8.2 billion of which was committed. It had another $1.5 billion in cash on hand and $6.1 billion in homes.

“We know we have a strong capital base, a product that consumers love and want, and a belief I would say that the real macro trend that we’re playing against isn’t volatility in the real estate market but is consumers’ desire to shift from an offline to an online transaction,” Low Ah Kee said.

Some investors, however, aren’t as optimistic, saying the company has “downplayed” the near-term risk to the company.

“Beyond the transition to Exclusives, we also see continued tail risk from [Opendoor’s] iBuyer financing, where aging inventory and additional impairments could trigger more margin calls that further reduce liquidity,” Keefe, Bruyette & Woods said in a December outlook on Opendoor.

That firm now expects a rough year for Opendoor throughout 2023 even in the best scenario, with the company underperforming the broader market.

Opendoor’s “abrupt pivot to the uncertain ‘Exclusives’ strategy leaves the company without a proven business model during a turbulent housing correction,” Keefe, Bruyette & Woods said.

Not all investors are singing the same tune, however, and public shares rebounded slightly in early January.

Financial services and analytics firm BTIG set a new price target for the company’s shares at $6, and Opendoor shares rose to $1.66 by Jan. 13.

Maintaining credibility

One bedrock that Opendoor falls back on is its credibility among consumers.

Company leaders said Opendoor’s Net Promoter Score (NPS), or a gauge of customer satisfaction with a company, is strong at between 80 and 90 out of 100. That means customers that have experience working with the company have enjoyed the experience. 

The company says difficult but strategic decisions made in 2022 have helped to keep it in good graces among customers and the public.

At the first sign that interest rates would dramatically cool the market, company officials say they made a difficult but strategic decision to honor contracts for homes they knew might fall in value.

“It’s a belief that trust is important,” Low Ah Kee said. “That actually was behind and underneath our decision not to cancel contracts earlier this year.”

In effect, the company said it was holding onto the Q2 cohort despite knowing they were likely to fall in price. That had a tremendous impact on the company’s financial performance in the months to come. 

But with several billion dollars in its coffers and a conservative approach to buying homes in today’s market, the company is focusing on creating new tools that can build on the popularity of the brand name. 

Opendoor’s challenge, according to DelPrete, is maintaining credibility with a long list of players.

“That can be credibility to investors, executives in the real estate space, real estate agents,” DelPrete said. “All the questions are, can this business survive? They’ve just lost $1 billion, now what and is there a future for iBuying? Is there a path to profitability? That’s the biggest challenge: There’s a credibility challenge.”

Finding the right scale

In the lead-up to 2022, as in years past, Opendoor was focused on acting as a market maker.

In a new and tech-driven model of buying homes, fixing them up and reselling them — ideally at a profit — Opendoor chose to set itself as the leader by increasing its volumes.

Whereas Offerpad was operating in volumes of hundreds, Opendoor was buying and selling tens of thousands of homes worth billions of dollars in several quarters. The unprecedented run-up in home prices helped the company post its first and only profitable quarter in the first months of 2022.

When it had a handful of competitors, Opendoor’s strategy was to grow bigger than the rest. When Zillow bowed out of the iBuying game in 2021, Opendoor was moving full steam ahead.

In the four quarters beginning July 2021 and ending June 2022, Opendoor scooped up 47,975 homes. It sold 38,933 homes during that same time frame.

That scale-up, DelPrete said late last year, was “exponentially increasing its risk.”

When 2022 saw a major slowdown across the real estate market, that risk proved extreme.

“When Zillow and Opendoor got to scale, it coincided with big market fluctuations and they got punched in the face in a major way,” DelPrete told Inman in late 2022.

Indeed, what started as a central way to make it the king of iBuying rapidly changed to one of the biggest threats to the company. As it works to offload its overpriced homes, Opendoor is committed to a conservative, “risk-off” business model to start the year.

“We’re not offsetting that, by design, with much in the way of new acquisitions,” Carrie Wheeler told investors just weeks before being named CEO. “We’re risk-off.”

Opendoor will continue to buy and sell homes, its leaders said, and the conservative approach to buying homes is helping to balance out its inventory with homes that it is selling for a profit.

“That new book, those are coming in at positive margins,” Low Ah Kee said. “They’re going to perform just the way we expect them to.”

Building ‘Exclusives’

Toward the end of 2022, Opendoor began increasing its focus on its “Exclusives” marketplace, the new focal point of the company in the immediate future. 

The company hopes its Exclusives marketplace will attract independent buyers and sellers and put the company in the middle of consumers’ real estate transactions. Opendoor charges sellers a 5 percent fee but avoids having to put up its own cash to buy or repair homes.

“We’re going to be the platform to connect buyers and sellers,” Low Ah Kee said. “Marketplace isn’t a pivot. It has been there since the [beginning]. We’ve been working on the pieces for a long, long time. We’re going to continue to innovate around that because it’s what we do.”

By the end of 2022, Opendoor hoped Exclusives would account for 30 percent of its transaction volume.

To some, the shift moves Opendoor closer to the realm of existing models in real estate.

“It’s FSBO, but it’s For Sale By Opendoor,” DelPrete said. “And to be clear, this Exclusives marketplace, when you think about that pitch to sellers…that sounds exactly like a real estate agent. It should be noted that Opendoor’s pivot in this direction is pivoting closer to the traditional model.”

During that pivot, Opendoor will have to outperform the outlook of the analysts at Keefe, Bruyette & Woods, who said the shift to Exclusives would “drive significant operating losses” throughout 2023.

Redefining iBuying 

It’s the moment many have been waiting for: If Opendoor could only eke out a profit during one of the longest bull market cycles on record, how would it fare when things turned south? 

“If they’re at 5-6 percent (margins) on their best quarter after 10 years, and a brokerage can make the same exact profit margin but not have to spend $4 billion in a quarter to get that, why in the hell would you spend that much money just to make the same return?” said Hank Sorensen, an area manager for RE/MAX Realtec Group in Florida. “I don’t see a path for them.”

Even if the new marketplace proves to be profitable, Opendoor leaders said the company would continue making cash offers on homes.

That puts the company in a position to carry on its original iBuying model, but with a more conservative approach and a source for backup offers if a house doesn’t meet Opendoor’s needs.

“That helps us connect consumers that maybe aren’t in our buy box to buyers that are in our network,” Low Ah Kee said. “It lets us connect sellers who may think our offer isn’t strong enough to a buyer who’s in our network who has the ability to give them something compelling.”

The key will be in operating the business profitably moving forward, DelPrete said.

“I can go to my favorite coffee shop and get a coffee for free and think it’s great,” DelPrete said. “But as a business, it has to work and make sense.”

With the nearest competitor well in the rearview mirror and the market red hot, Opendoor was set to cruise ahead as the market maker.

Instead, the year very much did not go as planned for the iBuying king. Twenty twenty-three will be a fight for survival.

“It’s easy to make money when everyone’s making money, sure,” said Mike Drutar, principal broker and owner of NextHome Paradise Realty in Hawaii. “But math is math, and the market is going down.”

Email Taylor Anderson

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Editor’s Note: This post was updated to more accurately reflect the job change of the company’s former CEO.