Records show highly capitalised US-based property buying and selling platform OpenDoor Labs Inc owned about 30 homes it had failed to resell for at least six months.
The Wall Street Journal reports the San Francisco based business is factoring in losses on tougher selling properties by stating its resulting average profit would drop to a “low single-digit” percentage overall.
The San Francisco-based startup which launched in Phoenix, Arizona in 2014, has to date raised a total of $109.95 million in three funding rounds from 14 investors.
Just last October, OpenDoor Labs raised $80 million after raising $20 million in February of that same year.
OpenDoor Labs was founded by Keith Rabois, a venture capitalist who was an early executive at payments firms Square Inc and PayPal Holdings.
He and Chief Executive Eric Wu, who sold a prior startup to real-estate portal Trulia in 2010, attracted further investment from venture-capital firms and more than two dozen Silicon Valley angel investors like PayPal co-founder Max Levchin and Yelp Inc CEO Jeremy Stoppelman.
Armed with data scientists and software, the team at OpenDoor identify the right prices on homes and simplify the sales process online.
Unlike the usual online real estate model which connects buyers and sellers, OpenDoor Labs functions buy actually buying a property from its sellers.
The premise of the business is certainly tantalizing. It allows people to sell in a hurry.
The company even offers a 'Trade-In' policy to allow homeowners to sell their current home to OpenDoor while simultaneously buying their new home.
Sellers can pick a date when they can both close on the sale of their home to OpenDoor and complete the purchase of a new one.
After a seller fills out an online form, a quick market analysis generates an immediate offer. If accepted, the company sends an inspector to verify the home’s condition.
OpenDoor may also request repairs at the expense of the seller, who can still back out of the deal.
The seller selects the closing date and receives cash for the house. The company says it charges 7 to 12 per cent in fees.
OpenDoor’s unique approach includes 24-hour self-guided open houses, made possible by special door locks that people can open by texting the company, and cameras inside the home to monitor visitors.
“We’re introducing liquidity to a marketplace that doesn’t have any,” says Co-founder Keith Rabois.
For example one couple Luke and Suzie Dalien who were moving to Canada, sold their family home to OpenDoor within two weeks.
A month later, Opendoor had re-sold the property with an estimated $20,000 profit. The company has repeated this profitable ‘flip’ many times in the past year.
According tot the Wall Street Journal Report, an analysis of property records prepared by Michael Orr, a real-estate expert at Arizona State University, shows that, through mid-December 2015, OpenDoor had bought and sold just over 200 homes. It paid an average $230,000, reselling them within 90 days for an average of $245,000.
The Wall Street Journal report says OpenDoor made an average estimated profit of between $10,000 and $15,000 on these homes, when including the roughly 9 pr cent in fees it earns from the seller, and subtracting costs to resell the home such as renovation costs and broker commissions, according to the analysis and conversations with CEO Eric Wu.
The company uses mostly debt financing to buy homes, improving returns. While the Wall Street journal says Wu declined to disclose OpenDoor’s debt terms, it reports Wu as saying they are superior to what a typical home buyer gets on a mortgage.
The startup has avoided the pricier San Francisco market, growing well in Phoenix instead and has recently begun operating in Dallas with Las Vegas, Denver and Portland next on the list.
One week earlier in 2016 saw OpenDoor purchase a total of 500 homes and sell 300.
However clearly OpenDoor could face steep losses in an economic downturn because its equity would fall and it could get stuck holding too many homes.
Eric Wu counters this view saying the company would be protected from a downturn because sellers will be eager to unload their properties, and the company could charge them higher fees.
“Diversifying across cities will limit the risk,” Wu tells the Wall Street Journal.
“OpenDoor plans to eventually make more money arranging financing and selling home warranties,” he adds, giving used-car seller CarMax Inc. as an example of the model the company is thinking of.