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Sunday, May 16, 2021

Open Door paints a different picture for the future of the American real estate market

In a unique and inspiring move, the emerging Opendoor company has accumulated billions of dollars by convincing investors of its ability to reshape the US housing market and turn it into a better market for consumers.

Certainly, the US real estate firm’s approach to massive home sales has proven popular with home sellers and has become a source of inspiration for the industry. This paved the way for the company to go public by merging with an acquisition company. However, the company still needs to stop the bleeding losses achieved before announcing the success of its IPO, although its shares rose by 5.9% on the first day of its public offering on December 21, 2020.

The idea of ​​”Open Door” is based on the fact that people who want to sell their homes are willing to accept a lower profit, in exchange for offering a quick deal, avoiding hiring a broker, opening their homes to strangers, and bargaining with them, and waiting weeks for the approval of the mortgage for new buyers.

In this sense, the company uses algorithms to find homes and make an offer to buy them from their owners within hours, and when the owner agrees to the submitted offer, the company buys this house and makes some light repairs in it, then offers it for sale again in the market.

In contrast to the traditional business, OpenDoor does not try to buy homes at low prices and sell them again at high prices but rather seeks to make a profit by imposing a commission on the sellers, usually ranging from 6% to 9%, to simplify the process.

OpenDoor function
Satisfying the aspirations of the sellers is often not easy, as most homebuyers begin to calculate the value of their estimated earnings from a property as soon as they purchase it.

In this case, the function of “Open Door” is to estimate the home’s value within a few months, along with determining how long the resale will take, which is very important given the accumulation of interest payments, property taxes, and insurance premiums for the owner, as long as he still retains ownership of the property. . Which suspects a drain of funds for the company.

OpenDoor’s profit margin was less than 1% on homes sold in 2019, which includes interest expenses, but does not include the wages of people who create price algorithms, or the cost of the advertising campaigns that are used to attract sellers. The company has completed 80,000 deals over the past six years and lost up to $ 989 million during the same period.

“The things that OpenDoor is promoting is the digital utopia for buying and selling homes, and they are good at what they do but are really losing a lot of money,” says Mike Delbretti, a real estate technology strategist who has studied the company.

There is a clearer risk that can be faced, which is the possibility of a decline in house prices while the “Open Door” maintains a group of homes, and it seems that this matter could happen in light of the outbreak of the epidemic.

The real estate company has laid off 600 employees – about a third of its employees – and is considering putting up some of the properties it holds for rent. Then came the hot housing market – there is a low stock of real estate with many buyers – which derives its energy from buyers looking for larger homes to also use as offices because they work remotely.

Strong demand for technology stocks in the markets has made profitability a secondary concern for the company. In September, OpenDoor struck an IPO deal by merging with a private acquisition company led by venture capitalist Chamat Palihapitiya. This deal provided the company with nearly $ 1 billion that is said to fuel an expansion that would allow it to sell more than 37,000 homes in 2023.

It is the same year that the company believes it will be earning adjusted EBITDA. At that point, the company would be selling more homes annually than all American construction companies, except for two of the largest homebuilders in the United States.

But the journey to building successful mortgage or insurance companies will be a long and arduous one. Real estate brokerage firms have tried to sell their subsidiary services for years without achieving much success. And penetrating into the real estate of mortgage loans and insurance products means working in new regulatory frameworks and dealing with existing companies, not to mention breaking the status quo.

However, OpenDoor has exceeded all expectations. After Clelia Warburg Peters, a partner in Bain Capital Ventures and who is also the head of a Manhattan real estate brokerage was one of the early skeptics, she became convinced. Later on, the company works. “What they have accomplished so far is not enough,” she said, “but the mountains that await them are fewer than the ones they have actually succeeded in climbing.”

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