In the summer of 2015, Ranjit Bosu, a 46-year-old systems administrator at General Motors, got the opportunity to transfer from Phoenix to Austin, Texas. He and his wife, Natasha, 41, put their home on the market, asking $335,000. Three months passed, as potential buyers came and went without making an offer. The Bosus tried cutting the price to $320,000. “Our Realtor kept telling us, ‘It’ll sell, it’ll sell,’ but then it was already September, and it was too late,” Natasha says. The failure to sell their home meant they had to pass on the transfer.
A year later they decided to try again. This time they contacted Opendoor, a San Francisco-based startup that buys homes for cash based on a black-box pricing algorithm. The Bosus filled out Opendoor’s online questionnaire, and within days, they accepted an offer of $334,000 for their five-bedroom home. “Initially, I thought they would probably lowball me,” Natasha says, “but when they sent me my offer I was pleasantly surprised.” They closed on the deal in August, and the family moved to an apartment and waited for the transfer to be finalized. In November they closed on the purchase of a new home in Austin.
Opendoor is betting that there are hundreds of thousands of Americans who value the certainty of a sale over getting the highest price. The company makes money by taking a service fee of 6%, similar to the standard real estate commission, plus an additional fee that varies with its assessment of the riskiness of the transaction and brings the total charge to an average of 8%. It then makes fixes recommended by inspectors and tries to sell the homes for a small premium. Buyers get to shop on their own timetable, using key codes for access to the properties, and they receive a 30-day guarantee that Opendoor will buy it back if they’re not satisfied and a two-year warranty on the electrical system and major appliances. “I’m obsessed with the pain points of moving,” says Eric Wu, Opendoor’s 34-year-old cofounder and chief executive.
There have long been small, often less-than-reputable outfits that buy distressed homes for cash. And Wall Street firms, notably Blackstone, have been opportunistic buyers of residential real estate. Opendoor, however, is making a different bet. Wu believes Opendoor can buy and sell homes, in quantity, by employing the type of data analysis that has powered so many Silicon Valley companies and by targeting the broad middle of the market. It deals in single-family homes built after 1960, priced between $125,000 and $500,000. It has no interest in distressed properties, which require too much work, or in luxury properties, which are harder to value.
Of course, buying up houses to make a market is capital-intensive, and the risks are great. Opendoor has raised $110 million in equity from Khosla Ventures, GGV Capital and Access Industries, among others, most recently at a valuation of $580 million earlier this year. And it has also raised more than $400 million in debt to buy the homes. To succeed, it has to price the homes it buys accurately, without seeing them, and it has to sell them quickly to minimize the costs of carrying them. As interest rates rise or housing prices fall, Opendoor will have to figure out how to respond. When market risk increases, the company may charge a higher fee, its own version of surge pricing. Behavioral economist Dan Ariely, who is not associated with Opendoor, believes people will be willing to sell their homes for less in return for reduced hassle and more precise timing–and that will be especially true during periods when home sales slow. “The less liquid and slower the market is,” he says, “the more people who are selling will value this process.”
Opendoor has launched in two markets, Phoenix and Dallas, and is buying homes in Las Vegas in advance of an official rollout there. FORBES estimates the company’s revenue will top $50 million this year and surpass $200 million next year. It plans to open in a fourth city by year’s end and, if all goes well, to expand to 10 cities in 2017 and go national, with 30 cities, in 2018. If that expansion succeeds, it should be profitable then. Opendoor is a big, bold play in a market with $1.4 trillion in annual transaction volume that’s been largely undisturbed for decades. Those numbers help explain why Opendoor gained a spot on our 2016 list of America’s next billion-dollar startups (FORBES, Nov. 9 ). Keith Rabois, Opendoor’s executive chairman and a senior partner at Khosla, who came up with the idea for the company over a decade ago, remembers being stunned by what the early models showed. “After a few years we [were projecting] revenues the size of Wal-Mart,” he says. “I don’t think Opendoor will have revenues the size of Wal-Mart next year, but we’ll be in the billions of dollars very fast.”
A member of the so-called PayPal mafia, the founders and early senior execs at the payment platform who went on to start many other companies, Rabois, 47, came up with the idea for Opendoor back in 2003 while doing a stint at Peter Thiel’s investment firm, Clarium Capital. Rabois recalls a time when he and a colleague presented an idea similar to Zillow, the online real-estate database, that Rabois says Thiel found so boring he kicked them out of the conference room. (Thiel did not respond to requests for comment.) Rabois then started thinking about how car owners can sell their used autos to dealers based on their Kelley Blue Book valuation and how he might create similar liquidity for homeowners.
He code-named the project Homerun and spoke with potential investors. But they were willing to put up only half the $10 million he figured he needed. Nervous, he dropped the plan, going on to become chief operating officer at Square before joining Khosla in 2013. But he never forgot about Homerun. “I spent the next five to ten years of my life trying to convince people to do it,” he says.
Wu was one of those people. In a recent meeting at Opendoor’s headquarters in San Francisco’s South of Market neighborhood, Wu, wearing tortoiseshell glasses and a black, puffy Opendoor vest, gave a visitor the tour. The office is typical tech startup, with a big open space for workers and a kitchen area featuring healthy food. On one wall, details of Opendoor’s business model had been painted in blue with tongue-in-cheek igloos and tree houses with “Open House” and “Sold” signs. Wu showed off the rebranding he’d been working on, pointing out new for-sale signs and brochures showing happy families in their new homes.
Wu grew up in Glendale, Arizona, on the outskirts of Phoenix, the son of immigrants from Taiwan. His father died when he was 4, leaving him and two sisters to be raised by their mother, a social worker who made around $30,000 a year. As a sophomore at University of Arizona, he bought his first rental property with a friend, seeding the purchase with scholarship money and using the rental income to pay for food and housing. In 2005 he graduated with a bachelor’s degree in economics–and a portfolio of homes. “Real estate is part of my DNA,” he says.
When Wu moved to San Francisco after graduation, the difficulties of that relocation sparked the idea for his first startup, Rent Advisor, a rental-apartment review company that raised $7.5 million before being sold to Vertical Brands. His second startup, Movity, a data-visualization company, gathered information on neighborhoods–crime, schools, etc.–and devised ways for homeowners and renters to easily understand it, such as a 0-to-100-point safety score. “The scoring was Eric’s idea,” Movity cofounder Vaughn Koch says. “He likes to arbitrage things by adding data and information.”
Wu and his Movity cofounders went through the Y Combinator accelerator in 2010, which led him to Rabois. “He was a mentor of mine,” says Wu, who sought advice and funding from the fast-talking multimillionaire. Rabois agreed to invest in Movity but tried to persuade Wu to tackle the idea that became Opendoor instead. “I was like, ‘Your idea is okay, it might work–but I’ve got a much better idea for you,’ ” Rabois says.
It took two more years for Wu to agree. After he sold Movity to San Francisco-based Trulia (now part of Zillow) for an undisclosed sum, he was ready. “I wanted to do something bold and something that I could do for ten-plus years in a category that I cared deeply about,” he says. He reconnected with Rabois, who suggested they meet at the cafe in his gym. Rabois arrived in his gym clothes. This time Wu was ready to give it a try.
To test the waters, he built a bare-bones splash page with a marketing message to would-be sellers. He asked them to enter their address, then got on the phone with them to learn whether they’d be willing to sell online. “There was such a positive response that I felt there was something real here,” Wu says.
Wu laid out a business plan for how he could cut through the pain by providing liquidity. In May 2014 Khosla led the Series A round, investing $6 million of a total $10 million. With Rabois’ name attached to the project, a Who’s Who of Silicon Valley elite joined in, including Max Levchin (PayPal), David Sacks (Yammer and Zenefits), Jawed Karim (YouTube), Logan Green (Lyft), Sam Altman (Y Combinator) and Jeremy Stoppelman (Yelp). Wu is Opendoor’s largest shareholder. Rabois, because of his position at Khosla, has no direct stake outside of his investments in Khosla’s funds.
The first step was to build the automated pricing model the business relies on. To do so, Rabois brought in Ian Wong, 30, a Stanford Ph.D. dropout who’d been Square’s first data scientist, as Opendoor’s third cofounder. (The company’s fourth cofounder, JD Ross, 26,
joined from investment-management technology firm Addepar, and works on Opendoor’s seller experience.) The valuation model takes into account thousands of variables, including the home’s square footage and number of bedrooms, its proximity to golf courses, parks and freeways, its curb appeal and interior condition. Wong hired 18 data scientists and data engineers from Square, Google, BlackRock and elsewhere, who tweak the model continually.
Wong says the key to Opendoor’s model is not just the quantity of data–it relies on a dozen data sets, some of which are publicly available and others it has created itself–but also the relationships between different pieces of data. For example, he says, most houses in Phoenix have pools, an extra that an appraiser might offhandedly value at $10,000. “A pool may be worth $10,000, but some pools only $1,000, and a well-decked-out pool in a good neighborhood $20,000,” Wong says. Opendoor’s online questionnaire asks sellers for the kind of seemingly minor home details that matter to buyers, like whether the kitchen countertops are quartz, marble or granite, and whether the appliances are stainless steel–details that Opendoor confirms during inspection. Those home inspections, done after Opendoor offers to buy a home but before it pays up, help it avoid overpaying.
Still, Robert Shiller, the Nobel Prize-winning Yale economist who helped create the Case-Shiller housing-price index, says that the big question for Opendoor (with which he was not familiar before FORBES spoke with him) will be whether its model can price accurately. Bid-ask spreads, he notes, reflect information asymmetry, and if home sellers know more about their properties than Opendoor does, it will be vulnerable. With so many variables, Shiller says, some of which may be anecdotal, such as whether the schools in the neighborhood are getting worse, it’s difficult to build a precise model. When he was building the housing-price index, Shiller notes, “I tried using neural networks and other fancy algorithms, but we always had some big misses.”
There are other risks. Homeowners may not want to rely on a service that doesn’t give them top dollar. And Opendoor may not be able to sell as quickly as it would like or for the price it would like. The Bosus’ home, for example, was on the market for a few months, and the price was cut to $331,000–which is less than Opendoor paid–before it went into contract in November. Most important, the model has yet to be tested by a recession or a market crash, which can catch even the smartest players by surprise. Wu says he modeled the business through the 2008 subprime crisis to understand the risk. In a down market, he found, Opendoor might simply charge sellers higher fees to cover its risk. Homeowners who need to sell, he reasons, would likely be willing to pay more for Opendoor’s service in a down market than they would when prices are rising and selling is easy. “When there is more risk and volatility,” Wu says, “the value proposition is even stronger.”
In December 2014, Opendoor launched in Phoenix, where the averageness of the market is a plus for the company. The median resale home price there is $230,000, a little less than the national median of $240,900, and homes sell in an average of 76 days–typical for cities other than San Francisco and New York. And as the country’s 12th-largest metropolitan area, it has a lot of transactions, some 88,000 a year. Within six months Opendoor’s blue-and-white for-sale signs were plastered around Phoenix, Scottsdale and other desert towns. “Everyone laughed at first, chuckled, snickered in the background,” says Neil Brooks, a Realtor with HomeSmart International in Scottsdale. “They’re not laughing anymore.”
Opendoor maintains a brokerage license in the states in which it operates but does not charge buyers fees. While some local real estate brokers have come to fear the newcomer, others are figuring out how to work with it. Brooks, for example, was recently referred by Opendoor to an older couple who wanted to move across town to be closer to their grandchildren. After they sold to Opendoor, they needed a new place to live, and Brooks represented them on the purchase. “The beautiful thing is Opendoor is a cash buyer,” he says, which means people who sell to it don’t need a contingency clause in their contract when they buy.
In less than two years Opendoor took 2% of the Phoenix market. The company says that when it makes an offer to serious sellers, which it defines as those who plan to sell within six months, the offer is accepted a third of the time, a much higher percentage than Wu expected and one that continues to rise.
In February Opendoor launched in Dallas, the country’s fourth-largest metropolitan area, and the concept has taken hold even faster than it did in Phoenix. Among the early sellers there were Shannon Mims, 43, a school-testing coordinator, and her husband, Richard, 45, a law enforcement officer. Never having sold a house before, they were daunted when they realized their family of five had outgrown their three-bedroom redbrick house in Balch Springs. “Getting it show-ready just stopped me in my tracks,” Shannon says. After hearing a radio ad for Opendoor on her way to church, she was intrigued. She filled out Opendoor’s questionnaire and got an offer of $148,000 (before fees), which was close to a preliminary estimate of $150,000 from a broker she met through a friend. “The tradeoff was worth it for us,” Shannon says.
Next up for Opendoor is Las Vegas, where it is already buying homes. While Wu won’t say which cities might follow after that, it’s likely they will have lots of midmarket, single-family transactions. Think Denver or Portland, Oregon, not New York City or San Francisco. “There are 50 to 70 cities that could use this product right away,” Rabois says.
On a sunny late-summer day in San Francisco, Evan Moore, Opendoor’s head of product, demonstrated a prototype of a buyer app to Wu. Gathered around a conference table were four members of the product team that had been working for eight weeks to get the app ready for its October rollout. Wu, who had a sore throat, got cough drops and scribbled notes by hand.
The app shows blue dots where Opendoor’s houses are and allows users to see photos of them. Moore, 31, and his team were hammering out how the app’s navigation would work and how it would be marketed. As Wu watched the presentation, he asked questions, requested the engineers build in a tutorial and occasionally remarked, “Oh, that’s cool” or “This is awesome.”
Since Moore, a cofounder of the on-demand restaurant-delivery service DoorDash, was brought in two years ago, Opendoor has been introducing features designed to attract buyers. Wu says the company’s homes receive three times as many visits as traditional listings, primarily because prospective buyers don’t have to make an appointment or hustle to get there at a set time.
In Wu’s vision, Opendoor will eventually offer one-stop shopping for real estate transactions, allowing home buyers to get a mortgage and even customize their new homes. If Opendoor were to take just 1% of the more than 5 million real estate transactions that occur every year in the U.S., at an average price of $250,000, it would secure more than $1 billion in revenue. And, as Glenn Solomon, a managing partner at GGV Capital and an Opendoor board member, points out, “Early experience with their initial markets, Phoenix and Dallas, suggests that demand from both sellers and buyers is much higher than that.” Solomon sees no reason Opendoor can’t achieve double-digit market-share penetration in its mature markets.
Opendoor may attract competition, but this is an extremely difficult business to start–as Rabois’ decadelong wait to launch showed–requiring both a viable pricing model and access to a lot of capital. “This is quite revolutionary,” says Rabois. “The idea that anybody can sell their house whenever they want to, with no pain and no friction, changes how people live.”