Tech-focused real estate company Opendoor is set to be taken public via SPAC when it merges with blank-check company Social Capital Hedosophia Holdings II (IPOB). And if you aren't familiar, Opendoor's core business consists of making as-is offers on homes, making some cosmetic repairs, and then reselling the homes (hopefully) at a profit.
Despite major growth in its core "iBuying" business in recent years, Opendoor and its rivals haven't yet figured out how to profitably scale this type of real estate business. In this Dec. 1 Fool Live video clip, two experts from our Millionacres real estate brand, Matt Frankel, CFP, and Deidre Woollard, discuss why investors are so excited about Opendoor's future -- and why they might be right.
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Deidre Woollard: Opendoor is really that pure-play iBuying. They don't do anything else to the extent that they do iBuying. They were founded as an iBuyer. They've started to flirt with loans a little bit and a little bit with traditional brokerage, I think to some extent in Phoenix, iBuying is really the main thing that they do. They've just been the leader of so far, but they're not making a profit on it either. Major companies with a lot of funding trying an idea that is interesting, but still a very small part of the real estate market and not really a fully baked idea, in my opinion.
Matthew Frankel: Yeah. Opendoor, if you believe in the potential of iBuying, could be a fantastic investment. But that's a big if at this point. I mentioned 6 million homes sold in the U.S. last year. For the sake of argument, say that Opendoor gets 1% of that. Ultimately, they are buying and selling 60,000 homes a year, which would be 1% market share. If they could figure out how to make $2,000 fixing and flipping a house, which an actual individual home flipper would consider a terrible profit margin, by the way -- if they could figure out how to make $2,000 per house, that would be a $120 million per year in profit. That's a pretty good business, and that's with the 1% market share. So that's a pretty impressive business. I would say that there is potential there. It remains to be seen if that could be done profitably, because if you ask anyone who fix and flips houses, you need to really be present to make a profit. It's an involved business. Flipping one house is a job.
Frankel: It remains to be seen if you can do this by the thousands while still being efficient and doing it correctly. But there's money to be made. Actual fix and flippers make tens of thousands of dollars each deal. If it's successful.
Woollard: Yeah. We call it flipping, but it's not really a flip. Because like most fix-and-flippers, they're taking a house that is a disaster.
Woollard: They're putting a lot of money into it. I would say mostly cosmetic repairs, paint, flooring, things like that.
Frankel: First of all, the iBuyers, they're not going to offer what people are going to get on the open market.
Frankel: Part of it is, if there's value in the convenience of getting an instant offer, being able to control the closing timeline, which is a big deal. A lot of these iBuyers let people close whenever they want to up till like a year away in a lot of cases, there's value in that. The idea is that they are essentially lowballing the seller in exchange for that convenience. Do a few cosmetic things and sell it at full market value. Just saying it like that. You can see that there's potential in the business. But like I said, it just remains to be seen if it can be done profitably. Like I said, Zillow (ZG 2.28%) (Z 1.81%) is losing about $4,500 per house that it's doing this on. All the transaction fees are getting paid to Zillow, and there's still losing money on these. They're not paying Realtor commissions; they're getting paid the sales commissions. It baffles me why they're not able to make a profit doing this yet, Especially since they've scaled it up to over 2,000 homes per quarter. They've scaled this considerably. I'm not totally sold on the iBuying thing yet. I don't own any of the stocks of the iBuying companies including Zillow or Redfin (RDFN -0.13%). I'm not about to put money into Opendoor just yet, but it's definitely an interesting company for the long term.