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Few people can have seriously expected Opendoor Technologies Inc to suffer the sort of calamity that real estate listings giant Zillow Group experienced recently at its so-called iBuying unit. The housing market has cooled a little but it’s still a great time to be flipping homes, providing you don’t mess up the basics.
Still, there was understandable relief when Opendoor reported strong results for the July to September quarter. That demonstrated that its home-buying algorithms are working broadly as they should. Opendoor’s home purchases have soared but, unlike Zillow, it’s still managing to sell those properties for more than it paid for them.
While Opendoor booked a $32 million housing inventory impairment this quarter, that’s pretty modest compared to the $6.3 billion of real estate it owns. And it’s a fraction of the roughly $570 million that Zillow will have to write down on its disastrous home-flipping experiment.
No wonder the shares surged 17% in the pre-market which, if sustained, would push Opendoor’s market value towards $14 billion. Smaller iBuying rival Offerpad Solutions Inc. also reported decent results.
Yes, to a point. Opendoor is executing well, and customers seem to appreciate the low-hassle, digital service it provides. Sensibly it plans to slow home purchases this quarter to ensure it doesn’t suffer Zillow-like labour issues.
However, the San Francisco-based group still loses money once an assortment of other expenses are included. The real test will be how it copes if house prices one day decline for a sustained period.
Opendoor benefited a lot from rising home prices this year. By the time it came to selling an acquired property — typically after around 85 days — the house was worth much more than the company paid for it.
Opendoor hasn’t quantified the uplift to profit margins, though some analysts have tried and it’s probably a lot.
This tailwind is now fading and Opendoor is guiding investors to expect a further moderation in its contribution margin — the money left over after accounting for selling and holding costs.
In fairness, iBuyers like Opendoor say they’re not trying to make a lot money guessing the direction of the housing market.
—Bloomberg