Opendoor is a San Francisco based start-up that steps into the real estate business, trying to make this process as easy as possible for the sellers and buyers. They are basically an intermediary in the market that brings together buyers and sellers. They buy real estate for cash, fix it and sell it for a small premium.
Business Model and Value creation
Opendoor uses an algorithm to determine what price to offer to the people that want to sell their homes via Opedoor. This algorithm includes thousands of variables, including for example square footage, numbers of bedrooms etcetera. Furthermore, Opendoor uses questionnaires to determine the preferences of the buyers and sellers, incorporating this in their model. In this way, the customers are actually co-creating the houses that Opendoor fixes. In the future, Opendoor also wants to offer customer mortgages and home decorations. Overall, the value that Opendoor adds is providing a service that takes away the burden of the customer to buy or sell houses and using the preferences of the customers in this process.
Opendoor buys family homes built after 1960 in the price range of $125000-$500000. Opendoor makes the homeowner an offer and once he accepts, inspects the house and closes the deal in cash. 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 the riskiness of the transaction what 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 can look at the property and they receive a 30-day guarantee that Opendoor will buy it back if they’re not satisfied. (Forbes Welcome, 2017) (Opendoor, 2017)
Efficiency criteria and risks
When we look at the efficiency of the value system of Opendoor, we can look at two criteria, the joint profitability and the feasibility of required reallocations. (Carson et al., 1999) Opendoor definitely offers joint profitability, because consumers can easily sell or buy their homes via the platform, and Opendoor can profit by making money from the fixed houses. The second criteria is more difficult because Opendoor solely depends on investors and loans and when they don’t make profits they cannot reallocate their assets to satisfy their investors. Next to that, trust issues are also important to take into account. Opendoor cannot see the homes before they make an offer an have to rely on trust. Finally, competitors will not be that happy with Opendoor and therefore legal aspects will be important to consider while expanding.
The business model depends on whether the algorithm is right or wrong. If it is right then Opendoor will earn money, however, if the price is lower, Opendoor will make a loss. Next to that Opendoor pays in cash and loans this money. It is dependent on investors and if they encounter a low in the market they have a problem. They did not face a crisis like the one in 2008. All in all, let’s keep a close watch at this company and see whether they will conquer the real estate market.
Carson, S. J., Devinney, T. M., Dowling, G. R., & John, G. (1999). Understanding institutional designs within marketing value systems. Journal of Marketing, 115-130.
Forbes Welcome. (2017). [online] Forbes.com. Available at: http://www.forbes.com/sites/amyfeldman/2016/11/30/home-shopping-networkers-opendoor-is-upending-the-way-americans-buy-and-sell-homes/ [Accessed 14 Feb. 2017].
Opendoor. (2017). [online] Opendoor.com. Available at: https://www.opendoor.com/about [Accessed 17 Feb. 2017].
Saarijärvi, H., Kannan, P. K., & Kuusela, H. (2013). Value co-creation: theoretical approaches and practical implications. European Business Review, 25(1), 6-19.