Last week I had the pleasure to visit Opendoor, the billion-dollar real estate disruptor, to give a presentation on emerging models in real estate around the globe. The presentation covered my two-year research into the winning models that are changing how houses are bought and sold.
There were some great questions from the audience, both on international models but also my thoughts on the Opendoor model itself. These thoughts, in addition to a number of recent conversations with investors interested in the space, led me to contemplate Opendoor’s future strategy and the complex competitive situation it faces.
The end result is what I call the Opendoor Paradox, and the premise is simple: the more successful the business becomes, the harder it will be to succeed.
Business model challenges
The business model of Opendoor and other iBuyers (those that buy houses directly from consumers and then sell them on) has a number of challenges:
An undifferentiated product. At its core, all iBuyers offer the same basic product to consumers: certainty and simplicity. There may be price competition or various technologies to support the process, but those advantages lie in the margins. The typical consumer only cares about one thing: instantly selling their house.
Resource intensive. The iBuyer model is expensive, and not just because it’s buying houses. To be successful, iBuyers need a lot of boots on the ground in each market they operate. These businesses are people intensive.
No repeat customers. This is true for all of real estate, but it doesn’t change the fact that without repeat business the cost of attracting new customers is expensive. There are no economies of scale around attracting and retaining a loyal clientele. Most importantly, this levels the playing field and reduces the barriers to entry for competitors.
The U.S. is big, but for whatever reason the growing pack of iBuyers have all decided to launch in the same bunch of cities. Phoenix, Las Vegas, Atlanta, Orlando -- that’s the battleground. It’s a mess of a competitive situation where they will end up spending valuable time and resources competing against each other instead of growing the market.
Traditional marketplace businesses have a first-mover advantage. The first to enter a market builds brand and audience, and with each day that advantage becomes harder to overcome (network effects).
But that’s not true with iBuyers. Being first to launch in a market doesn’t necessary bestow an unfair advantage.
Because of this, it’s most likely a winner-take-most market, similar to Purplebricks and the online agencies in the U.K. With a distinct lack of network effects, an undifferentiated consumer proposition, and no customer base, you end up with a healthy competitive field that, over time, is most likely dominated by one large player.
I would expect to see more competitors launch in 2018. The market is going to get very crowded very fast. And that forms part of the paradox: the more successful Opendoor and its model becomes, the more competitors will enter the space to get a piece of the action.
The real competitive threat: incumbents
While the various iBuyers might beat each other up through tough competition in each market, that’s not the biggest competitive threat they face. The top competitive threat is the massive real estate incumbents themselves.
This forms the next part of the paradox: the more successful Opendoor becomes, the more of a threat they become to industry incumbents, which forces them to respond. The most logical response from a major player such as Realogy or Keller Williams would be to launch their own iBuyer program.
This is what Redfin has done with Redfin Now. Redfin was able to spin this test up quickly and is now able to adopt a “me too” proposition when attracting new customers. For a small amount of effort, incumbents can blunt the iBuyer proposition.
It’s a simple extension: If a consumer decides to sell their home with an incumbent, they can choose the traditional agent services for a commission, or they can sell it instantly for a fixed offer and certainty.
Make no mistake, the offer and the experience from the incumbent is going to be bad. They’re simply not set up to provide the same quality of service as Opendoor, and most likely will lowball the seller to protect their margins. But the offer will be present and it will appeal to some sellers.
The proposition from the incumbents will be poor, but it will be enough to soak up a portion of the demand in the market and take momentum away from Opendoor and other iBuyers. And if Opendoor can’t scale or if it becomes too expensive to attract new customers, it’s game over.
The more successful Opendoor becomes, the more incumbents will be forced to react, and when they do it will harm Opendoor’s growth and profitability.
Opendoor faces a number of challenges over the next 12 months. The most pressing of which is how the business scales nationally.
The previous two years have been spent proving out the model. Opendoor has been refining its processes in its two core markets, Phoenix and Dallas, trying a partnership model in Las Vegas, and just recently launched in Atlanta, Orlando, and Raleigh.
But 2018 is the big test: going national. I expect Opendoor to meaningfully be in ten markets this year. This will put a tremendous amount of pressure on the business, the management team, and the well-refined processes to see if they can all truly scale. It’s like NASA going to the moon after conducting tests in Earth’s orbit (which is exactly what they did). It’s a big step.
It will also be interesting to see how Opendoor approaches advertising. In the U.K., Purplebricks ran a national above-the-line advertising campaign (TV and radio) to build brand. That will be expensive in the U.S., but it’s a critical component to scaling the business, especially long-term customer acquisition costs. It’s also necessary to start building a moat between itself and its iBuyer competitors.
Opendoor will also face a significant challenge as it scales its people. As I mentioned above, scaling the business is resource intensive and is people dependent.
To win, Opendoor needs to provide exceptional customer service and needs to hire exceptional people. The more markets it expands to, the more people it will need. And the more people it hires, the more effort it will take to find exceptional people.
This contributes to the paradox. The larger Opendoor gets, the more difficult it will become to find quality people and maintain a high level of quality across a growing employee base -- all critical ingredients in delivering a superior customer experience.
The question of fees
Opendoor -- and its peers -- will also face ongoing challenges around its fees, both clearly explaining them to consumers and reducing them.
Opendoor needs to be price competitive with traditional real estate agents to succeed. The lower it can drop its fees, the more customers will flock its way. From the outside looking in, it appears to be doing this with the current fee structure, which happens to coincide with a noticeable uptick in activity in Q4 2017.
But more fundamentally, explaining fees is complicated. The pricing charts on Opendoor and OfferPad’s websites are long and complicated, as they attempt to explain holding costs, hidden costs, and somehow compare apples to oranges. If it takes more then five seconds to explain this to someone, you’ve already lost them.
Key strategic questions
Opendoor’s path forward is far from clear. As with all trailblazers, the future is uncertain, and in this case there are a number of threats. I believe the key strategic question -- and the area of utmost importance and absolute focus for Opendoor -- must be how to deliver the best experience possible to its customers.
Growth is key. Opendoor must reach scale for the business model to be sustainable and turn a meaningful profit. So it must venture forward aggressively, enter new markets, compete with fellow iBuyers, and be prepared to meet the incumbent’s threat head-on.
Opendoor must continue developing technology to automate the process (to improve efficiency) and deliver a superior customer experience (all-day open homes).
As it scales -- and because the business is so reliant on people -- it must attract and retain exceptional talent in each market it enters. This will be a key challenge, but not impossible. Maintaining a customer-focused culture with each new hire and each new contractor is easier said than done, but a critical task nonetheless.
And lastly, Opendoor must grow as efficiently as possible. It must continue reducing its fees and maintain its impressive operational efficiency. The holy grail would be combining the low-fee proposition of a Redfin or Purplebricks with the certainty of an iBuyer, but it may not be possible.
Growth comes with its own challenges and that is especially true of Opendoor. And as it grows, it will face the paradox of its greater and greater success bringing greater challenges to overcome. But only with great risk comes great reward.
Facebook has always played a supporting role in the marketing portfolio of real estate professionals: historically, agents have been twice as likely to advertise on a listing portal than on social media. For its part, Facebook has never built features that cater directly to real estate consumers and professionals. Earlier this year, that changed—signaling a shift in strategy with major implications for real estate portals.
A month ago, Facebook announced a major update to the “Property Rentals” section on Facebook Marketplace, launching a new front-end that allows mobile users to search for rentals using a variety of new filters: rental type, location, number of bedrooms, pet friendliness and more.
Paired with this product update are new partnerships with Zumper and Apartment List—two of the most prominent online rental platforms, which collectively receive millions of unique visitors a month—which will directly syndicate “hundreds of thousands” of rental listings to Facebook.
This is the second major step that Facebook has taken into residential real estate in three months. September saw the launch of Dynamic Ads for Real Estate, which lets brokerages and real estate websites promote live listings to Facebook users.
What do these features reveal about Facebook’s real estate strategy, and what does Facebook’s growing interest in real estate mean for portals? In this article, we’ll take a closer look at Facebook’s recent moves into residential real estate, assess its motivations and forward-looking roadmap, and discuss the implications for existing players, especially real estate portals.
Facebook and Real Estate
Facebook cemented its status as an important marketing channel for rental managers and real estate agents well before the launch of Property Rentals and Dynamic Ads. On the rental front, Facebook has long hosted groups like Gypsy Housing, home to local classified posts from individuals and small-time landlords renting their property and rental seekers seeking the perfect match. Individual landlords have been able to post listings to Facebook Marketplace since the product’s launch last fall.
But rudimentary search and lack of quality inventory has stopped rentals from really taking off on Marketplace. Though we don’t have precise data from Facebook, this qualitative observation is reinforced by the continued growth of informal housing groups.
On the sale front, real estate agents have used Facebook to build local awareness of their services or conduct targeted promotion of their listings, taking advantage of relatively slim competition to generate strong ROI. When Inman News surveyed agents on their use of Facebook this past September, one agent noted that she once spent $750 on a listing ad that generated six contracts and “hundreds” of leads.
Another agent reports that his average cost per lead from Facebook is around $5, comparing favorably to an average of $100 per lead from Zillow—although that cost per lead has jumped sixfold over the past three years as more agents bid for ad inventory. In general, Facebook has delivered high ROI to agents, but only for those willing to manually upload listings, optimize ad creative and nurture leads over a longer time horizon.
Even without the benefit of any features specific to real estate, Facebook has already captured substantial mindshare among agents, with a September 2017 report by research firm Borrell Associates suggesting that agents are “more likely to buy ads on social media than all other forms of digital media, including listing portals.”
Assessing Facebook’s New Real Estate Features
The revamped Property Rentals section and Dynamic Ads for Real Estate seem like simple optimizations at first blush, but their impact will be substantial.
On the rental front, the product refresh and accompanying listing partnerships are game changers. Syndicating listings from established rental sites—and improving the user experience for renters—will make rental search far more useful on Facebook, attracting users who will ultimately incentivize more landlords to post inventory directly to Facebook.
Facebook isn’t settling for feature parity with powerful incumbents like Craigslist, encouraging landlords to post 360° photos to provide a better sense for what a listing is like.
Facebook is smart to focus on rentals, which are an ideal entry point into residential real estate because competition is fragmented: there is no MLS or single source of truth for rental inventory. By supercharging its network effect through listing syndication and user-side tweaks, Facebook has a shot at replacing Craigslist as the most comprehensive database of rental listings in America.
On the sale side, the launch of Dynamic Ads for Real Estate makes Facebook a far more powerful tool for real estate agents.
Until now, agents could only target broad audiences, capturing leads with less intent than users actively surfing a real estate portal for homes. By allowing brokerages to upload a catalog of live listings and target users based on their past interaction with specific listings, Facebook lets agents market to users who directly demonstrate affinity for their homes for sale, which should improve lead quality and ROI.
Facebook’s Real Estate Strategy: All About Inventory
What do these new features have in common? Both incentivize suppliers of real estate inventory—property managers and landlords on the rental side, agents and brokers on the sale side—to upload more listings to Facebook.
The fundamental competency of an advertising platform is surfacing the right product or service (in our case, inventory) to the right consumer at the right time (in our case, transactional intent): in other words, identifying a consumer’s need and offering a relevant solution. With more than two billion users between its various products, Facebook is one of the few platforms that already has the right consumer in its grasp—and its real estate strategy targets the other pieces of the equation.
Listing inventory is the bedrock of Facebook’s strategy to capture market share in real estate ad spend. Even if Facebook had perfect knowledge of a consumer’s intent to rent or buy a home, it can only monetize that intent if it has a “product”—a listing—to display.
Accumulating a greater volume and variety of real estate inventory has another major benefit: by giving consumers more opportunities to interact with real estate, Facebook learns more about their preferences and intent, which enables more effective targeting. For example, Dynamic Ads for Real Estate already helps agents automatically target consumers who have visited their websites and browsed their listings. But a strong rental platform allows Facebook to add another powerful targeting tool to the mix, letting them advertise to folks searching for rentals with demographic characteristics that also make them likely buyers.
The more precise targeting options available to agents, the stronger a case Facebook can make to brokers that they should syndicate listings directly to Facebook. This is when things get interesting: if enough agents use Facebook real estate ads in a given market, we can even imagine progressive MLS boards—who have been eager for more leverage against the portals—syndicating listings directly to Facebook.
This presents the billion dollar question: will Facebook attempt to compete directly with real estate portals? We don’t believe Facebook wants to launch map-based real estate search, or turn the Marketplace into a fee-generating product for rental and sale listings. In the short run, Facebook is laser focused on improving its advertising product for real estate professionals and capturing a higher proportion of ad spend from portals.
Things could get worse for portals in the long run. We discuss this in greater detail below, but as Facebook accumulates more inventory and learns how to precisely mate those listings to consumer needs, it may be able to leapfrog map-based search entirely by using natural language queries from the homebuyer and precise algorithms to match users with the perfect home for them.
This won’t happen for years, but inventory would make it possible—and as we’ll discuss below, cultivating and protecting proprietary inventory is one way that portals can fight back.
The Impact on Portals: Competition for Premium Spend
The primary impact of Facebook’s move, in the short- to medium-term, will be increased competition for premium ad dollars from real estate agents. In the U.S., 70 percent of Zillow’s revenue comes from real estate agents, and the trend extends to each major international market.
Facebook’s entry into real estate advertising represents clear and direct competition for this premium spend. Real estate agents will have another top-tier platform to spend money on to generate additional branding for themselves, generate leads, or promote the homes they are selling. Premium spend usually has no upper limit; agents can spend as much as they want to promote themselves or their listings.
Zillow Reacts: Premier Agent Direct
Facebook launched its Dynamic Ads for Real Estate product last August. Two months later, Zillow announced a partnership with Facebook and “Premier Agent Direct,” an advertising product that pushes ads directly to Facebook.
Zillow’s reaction is straight-forward: the move gives it a seat at the table. With Facebook’s potential competition in the space, Zillow has decided the best way to stay relevant is to embrace the new Facebook advertising product and offer it to its existing customers.
At the time, Zillow said it “wasn’t just buying ads and reselling them.” In reality, that’s exactly what it’s doing, but with the benefit of using Zillow’s user data to improve relevance and targeting. Zillow has assumed the role of a middle man. Agents can go directly to Facebook to spend their ad dollars, or they can continue spending with Zillow and get exposure on Facebook. It’s a win-win where Zillow stays relevant, Facebook generates ad revenue, and agents maximise their exposure across multiple channels.
Each option has its own benefits. Buying ads directly from Facebook gives agents more control and highlights their brand, compared to a co-branded experience through Zillow.
For Agents: Buying from Facebook vs. Buying from Zillow
The Two Key Strategic Pivot Points
Facebook’s entry into real estate will illuminate two key strategic pivot points, around which the Facebook vs. real estate portal competition will focus.
The first strategic pivot revolves around the user experience, pitting search vs. match. The current consumer experience on real estate portals is focused around searching and browsing. Visitors scan a map, enter search criteria, or browse through featured listings. It’s the equivalent of flipping through a glossy magazine or scanning the pages of a newspaper classified section.
The very nature of the Facebook product lends itself to matching experience. Real estate listings will be targeted to consumers based on what Facebook knows about them (in the same way it already targets advertising). This targeting is among the most sophisticated in the business given the amount of information Facebook knows about its users. The majority of Facebook users won’t be searching for real estate; they will see real estate presented to them.
The second key strategic pivot is all-of-market vs. some-of-market. Real estate portals maintain their reputation as the best place to find a home because they have all of the inventory available in the market. When a consumer is searching for a new home, they want to look where all of the properties for sale are available.
Facebook’s marketplace strategy, on the other hand, is not predicated on having all of the available real estate listings. At least for the foreseeable future, the listings available will be those uploaded by its advertising clients. So while the consumer experience on Facebook will target and match listings directly to visitors, it won’t represent the entire market of possible houses for sale.
This leaves a competitive opening for real estate portals. As long as the portals have a greater inventory than Facebook (which we believe will be true in the medium-term), their benefit to consumers is clear. Do you want access to all of the market or only some of the market?
Strategic Options For Real Estate Portals
Facebook represents a clear and present danger for real estate portals around the world. It’s here, it’s growing, and it’s coming to eat your lunch.
Competitive Advantages: Facebook vs. Real Estate Portals
We believe a response strategy should center around the following:
- Focus on providing value to agents. Deliver utility throughout the value chain and offer a more complete solution. Agents who get red-carpet treatment, free call center service, and unique online products will be less likely to defect. Ultimately the game is about delivering ROI, so push hard to deliver more value to your customers.
- Act local and leverage your sales team. Real estate is national. Real estate portals have the local knowledge, relationships, and brand that are necessary to thrive in the market. By building your local indispensability to the market you compete in an area where Facebook cannot.
- Sell Facebook’s ad product. Adopting Zillow’s strategy is controversial. Consider that Facebook already has an ad product for real estate agents, it already demonstrates good ROI, and agents are already spending money on the platform. In five years, will that still be the case, or will Facebook simply go away? We’re betting that it’s here to stay, and it will only get bigger, with or without the cooperation of real estate portals. So get on board while you can and leverage your local muscle to sell Facebook’s offering to your customers.
- Explore "match." If and when the buyer experience moves toward a matching experience, have a product that matches buyers with homes. Don’t be left flat-footed if consumer preferences change.
- Don’t compete on social. If you’re considering how to compete with Facebook through social products, you’re naively barking up the wrong tree. The absolute last thing you should do is compete with Facebook where it is strongest.
Facebook’s deeper move into real estate—both in rentals and for sale listings—represents an opportunity for agents and brokerages and a strategic threat to a range of existing businesses. For real estate portals in particular, the first battleground is agent premium spend. Facebook is giving agents a new, powerful choice for where to spend money on leads.
This situation poses a dilemma for real estate portals. Do they cooperate with Facebook as “frenemies,” as Zillow has done, or do they work to stifle Facebook’s momentum at all costs?
It is our belief that Facebook is here to stay in real estate, and will continue providing a positive ROI to agents looking for leads. In the near term, real estate portals need to take action to cement their position as the best place to advertise properties for sale and for agents to generate leads. The good news, for portals, is that they have a fighting chance.
This article was written by Mike DelPrete and Sib Mahapatra. Mike DelPrete is a strategic adviser and global expert in real estate tech. Connect with him on LinkedIn. Sib Mahapatra is an entrepreneur and real estate tech enthusiast based in New York City. You can reach him on LinkedIn.
Opendoor, the real estate startup that purchases homes directly from sellers, leads the pack of a new breed of real estate tech companies. It continues to innovate and improve the experience of buying a selling a home, and as the analysis below shows, is making significant improvements to its business model as it continues to grow.
I believe Opendoor’s ultimate metric of success is how many homes it sells. More than just buying homes (which anyone can do with enough money), the successful completion of Opendoor’s business model requires it to re-list and sell the homes it buys.
So it should come as no surprise that the first key number -- 150 percent -- is the growth in homes Opendoor has sold in 2017 compared to the same period last year. This is in its two biggest markets, Phoenix and Dallas.
The year-on-year growth is driven by Dallas, which came online in September of 2016. Entry into new markets will drive Opendoor’s overall growth. Over the same time period, Phoenix experienced a 55 percent increase in home sales.
The more recent growth in home sales has been driven by the Phoenix market, where Opendoor is selling a median average of 130 homes per month over the past three months, compared to 90 homes per month for the preceding three months.
After a big bump in Q1 of 2017, home sales in Phoenix are tracking in-line with last year.
However, there is a notable uptick in the number of homes purchased by Opendoor in recent months. Given that, we can expect a corresponding uptick in sales for the rest of the year and into early 2018.
This is the median average number of “prep days” between when Opendoor buys a home and subsequently lists it for sale. This is based on 50 recent transactions in Phoenix and Atlanta (where Opendoor recently launched).
Opendoor Prep Days
Impressively, this number is down from a median average of 20 days when I last did an analysis in December of 2016. That’s a 35 percent improvement! To quote that earlier analysis, “...given that Opendoor generally borrows 90 percent of the purchase price and is servicing that debt, time is money!”
That earlier analysis also predicted that a “battle-tested and efficient flip process” was one of three sources of competitive advantage for Opendoor. This improvement reflects strides made in Opendoor’s operational efficiency. It is clearly standardizing its operations and learning from past success and failures on big and small levels, to truly become a home flipping machine.
And it’s not just in Phoenix, Opendoor’s first market. It’s newest market, Atlanta, is on track just as impressively. Looking at 20 transactions shows a median average of 11 prep days. That’s a great start.
Most importantly, this shows that Opendoor’s growing operational efficiency is a transferable competitive advantage between markets. This is a critical ingredient for national expansion.
This is the median average number of prep days for Opendoor’s top competitor in the Phoenix market, OfferPad. This is based on a selection of transactions in July, August, and September.
It clearly shows that OfferPad is holding homes longer than its competitor -- over three times as long!
OfferPad Prep Days
In a world where time is money, this represents a significant business model and financial disadvantage for OfferPad. The longer it holds homes, the higher its holding costs.
It’s not clear what’s driving this number. Could OfferPad be spending more time and money fixing up houses before flipping them?
Regardless of the answer, the comparison of prep times between Opendoor and OfferPad illustrates stark differences in their respective business models. Opendoor aims to flip houses as quickly as possible with a super efficient process. OfferPad either has a different model, or is still working on optimizing its operations.
All businesses need to make money, and Opendoor is no exception. Outside of charging homeowners a fee for its services, the second way Opendoor makes money is the difference between what it buys and sells a home for. This difference is the gross margin, and in Q3 of 2017, Opendoor’s gross margin in Phoenix was 7.4 percent.
Gross margin is a top line number (hence “gross” and not “net”), meaning it does not include the numerous costs associated with holding, repairing, and reselling a house.
What’s notable about this number is that it’s up considerably over the past year. My previous analysis in December 2016 showed a gross margin of 5.5 percent, and a comparison to Q3 2016 shows a gross margin of 5.6 percent.
This data is based on all publicly recorded transactions, so it’s not just a selection or a sample.
So Opendoor has managed to increase its gross profit on each home it sells by about 30 percent. We can speculate that this is in line with its recent strategy of lowering the fees it charges to homeowners. If it can make a bit more on each home and charge homeowners a bit less, it all evens out in the end.
Working through this analysis highlighted a few key takeaways.
First off, Atlanta is off to a good start. The average number of prep days is strong and the gross margin is in-line with the more mature Phoenix market. It’s still early days, but this shows that Opendoor is able to transfer its honed operational efficiency to new markets, which is a requirement if it’s going national.
Secondly, Opendoor won’t achieve its goal of being in 10 markets by the end of 2017. Expansion is slower than originally thought. With over 100 employees in Phoenix alone, perhaps the Opendoor model is more time consuming and resource intensive than originally thought?
Lastly, and I believe most importantly, Opendoor continues to grow. The customer proposition is resonating with consumers in increasing numbers. The business model is being refined. And Opendoor is learning as it expands into new markets.
This new model of buying and selling homes is not going away. The entire industry can learn from the likes of Opendoor and the growing number of competitors that are popping up. Consumers are being increasingly drawn to new models that improve the customer experience of buying and selling a home.
A note on data: this analysis is based on MLS records, listings from Opendoor’s web site, the Maricopa City Assessor’s public property records, public records sourced from Redfin, and The Cromford Report, a specialist web-site monitoring the Greater Phoenix housing market. If you’re researching Opendoor and on the hunt for data, check out the iBuyer Analysis Pack.