Opendoor

On the path to bankruptcy

Introduction

In a past life, I was a real estate investor. By the age of 28, I had built a $1M real estate portfolio comprising seven properties. Along the way, I learned the ins and outs of real estate and the fundamentals of running a business. A couple of years ago, I decided to exit my real estate portfolio and move on. The simple reason is that the economics of real estate today are not nearly as good as they were ten years ago. The business has become vastly more competitive, and margins have thinned. It’s still possible to do well in real estate, of course. But there are often better prospects in the public equities markets these days. I mention this because I have a deeper understanding of real estate than your average public equity investor. As a result, I can provide better insights into Opendoor’s current state and the business’s future. With Opendoor becoming a meme stock and retail investors becoming enamored with the company again, I wanted to give an honest account of the business.

Opendoor background

I remember when I first heard of OpenDoor back in Late 2018, when they raised $400M. I knew immediately that the business model would never work. I was honestly surprised they were able to raise as much money as they did. My guess, which I believe is ultimately correct, is that they showed continued revenue growth and declining losses per home flipped. VCs will always chase growth and hope to flip the company onto someone else later on down the road. This proved true, as the company would go on to IPO with much fanfare in 2020 during the SPAC craze. The stock ultimately peaked in early 2021 at around $20B market cap. Unfortunately, the margins for flipping are thin, and even thinner when you’re trying to do it at a national scale. They did their best to ramp up the operation, believing that scale would deliver cost efficiencies and drive profitability, but instead it led to a $1B loss in 2022. The CEO at the time, Eric Wu, would ultimately step away from the business, and his CFO, Carrie Wheeler, would step into the CEO role. Around then, Open Door pivoted the company, focusing on higher-margin flips and driving it towards profitability. To Carrie Wheeler’s credit, she has reduced the annual losses. However, even today, by focusing on higher-margin flips, they’ve still struggled to reach profitability. I find it unlikely they’ll ever reach genuine profitability, and even less likely that their current valuation is justified. The new CEO, while having a tech background, lacks a clear understanding of real estate and basic business fundamentals. I believe the following will happen in the future of Open Door:

1. The business will ultimately go bankrupt. Whether that’s five or 10 years from now, I don’t know.

2. The new CEO will increase losses for Opendoor in the short term, claiming that this is driving the business in the right direction, while it will simply accelerate their bankruptcy.

3. The company lacks a clear game plan, and I expect that they will try to sell themselves heavily as an AI play. I suspect the acronym “AI” will be one of the most used words on the upcoming earnings transcript.

Financials

Throughout the article, I’m not going to spend a lot of time discussing their financials. It’s simply important to know that they are losing money and have never managed GAAP profitability. The $1.3B loss came in 2022 when trying to scale the business aggressively.

What does Opendoor do

Opendoor’s goal is to improve the home-selling and buying process. Here is the process to sell your home today:

1. The seller finds a real estate agent who will help list the home.

2. The seller prepares the home for sale — cleaning, painting, and making modest renovations as needed.

3. Once ready, the home is listed. At that point, prospective buyers will come to view it. This stage can be uncomfortable for the seller, as feedback on the house may be mixed—some positive, some negative.

4. Buyers begin submitting offers. While most buyers are pre-approved for a mortgage, that doesn’t guarantee final approval. As part of their offers, they may include contingencies — such as requesting repairs or asking for seller concessions (money back to the buyer) to address issues at closing. Buyers typically provide an earnest money deposit, which is applied toward the purchase price at closing. If a buyer backs out for an invalid reason, the seller usually keeps the deposit as compensation.

5. Once the seller accepts an offer, the buyer proceeds through the mortgage approval process. If approved, the transaction moves to closing. At closing, the seller signs a large stack of documents confirming the sale. From the sale price, the seller pays a commission to the real estate agents involved — usually totaling 4–6% — along with various taxes and closing-related fees.

6. It’s important to note that a buyer can still fail to get mortgage approval, and the seller might not find out for up to two months. When that happens, the seller must re-list the home, find a new buyer, and repeat the process.

Opendoor was founded to improve this process. Their process is as follows.

1. The seller goes to Opendoor and provides information about their home. At that point, Opendoor will ask whether the seller would like an agent to come out and provide an evaluation.

2. The seller schedules a visit from an agent, who values the home. Opendoor then makes a cash offer. Typically, they’ll close within 14 days, though the seller can choose a more extended timeframe if needed. Because Opendoor is an institutional buyer, the seller can be confident that, on the closing date, the transaction will proceed smoothly.

3. The seller attends closing, signs the documents, and moves on.

The value add of Opendoor is that they’re faster and less stressful, but they do pay a lower price for your home so that they can make their margin. If you’re trying to optimize for the most profit, you go through a realtor. If you’re optimizing for speed and lower stress, you’d go through OpenDoor.

Opendoor also offers additional services, which are the following:

Mortgage lending (Opendoor Home Loans), title and escrow services (OS National), Opendoor Exclusives, partner agent listings, moving assistance, trade-in program.

As of yet, none of these things are meaningful in terms of revenue or earnings, and in turn, the business is currently operating at a loss. To best explain why they are running at a loss and will continue to do so, it’s essential to understand how home flipping works.

How house flipping works

You find a house that needs work, you fix it up, and you sell it on for a profit. Typically, the average house flipper does not want to be in for more than 80% of the after-repair value (ARV). That’s because when you go beyond 80%, you start taking on substantial risk. The best way to explain this is to show you with numbers.

1. Buy a house with an ARV of $400k. You pay 300k for the house, and then you estimate repairs, interest, taxes, insurance, etc, to be $60k for the whole renovation

2. Turns out that this house had an unexpected expense. You knew there was a termite problem, but it was worse than you expected. To remedy, it costs you an extra $10K, you’re all in for $370k.

3. You list the house for $400,000. It sits on the market for a month. You incur an additional $1,000 in operating costs for every month due to interest, utilities, taxes, insurance, etc. After all, you do own the home. You realize you’re going to have to drop it by 5% to get it to sell

4. You drop it to $380k. You’re a real estate agent, so you list it yourself, but you have to split the other 2.5% commission with another agent, which is $9,500. Since you had to hold the property for a month longer than you expected, you’ve now lost -$500.

Every time I’ve renovated a home, I’ve run into something unexpected — it’s simply the nature of the business. Some problems don’t reveal themselves until you start opening up walls. Others appear out of nowhere while you own the property — like a broken HVAC or a failed water heater. That’s why flippers need a generous margin for error.

Now, let’s look at Opendoor’s business model to understand why it’s struggling.

For Opendoor, I will use their real numbers. In 2024 Opendoor spent $413m on sales and marketing. Let’s assume this number includes commissions, taxes, etc., that are paid when selling the home. We’re going to divide that number by roughly the number of homes they bought and sold in 2024 —15,000 — to get the average spent per home.

$413m / 15,000 = $29,500 spent on sales and marketing for each home.

Note: Marketing is a very real expense, and this is how most house flippers find homes to purchase at a discount. They wouldn’t be able to acquire or sell homes without these costs.

1. We’re Opendoor. We find a home with an ARV of $400,000, and because we pay 80% of the ARV, we’re all in for $360,000 off the bat.

2. We spend $30,000 per home to acquire and sell. We’ll be all in for at least $390K by the end of the process.

3. We haven’t done a single repair yet, by the way. None of this math includes insurance, title, escrow, interest, utilities, lawn maintenance or margin for error. We put in new floors, new paint, a new kitchen, and new appliances. The full set of renovations takes 2 months. We run $20,000 plus in additional expenses (very generous).

4. We lose a lot of money because our basic math doesn’t even work. We end up all in for $410k. We lose $10K on this extremely generous example, assuming we sell for $400k and everything runs on time.

This is unironically Opendoors’ business model right now. And these are their real numbers. Opendoor loses about $25,000 per home it currently purchases. Let’s pretend they had to spend zero dollars on marketing. Given that we know they lose $25,000 per home, and they spend roughly $30,000 on marketing. That means they would be making about $5,000 profit per home. In our above example, they would still be paying $400,000 to make $5,000, or a 1.25% return. That’s a huge capital investment for such a small return. What kind of multiples do you think a business would get that has such a razor-thin profit margin? The net income margin for the best home builders is 15%. 15x the hypothetical margin posted above. These businesses typically trade at 8-10x earnings. Opendoor, in the absolute best-case scenario, would likely trade at similar valuations. That means the company would have to deliver $500M in earnings today to justify its valuation. Assuming they could make $5,000 per home, they’d have to flip 100,000 homes to deliver those earnings. Even the chance that Opendoor could upsell insurance, mortgage origination, and title insurance, which would maybe at most deliver another $10,000 in earnings for a total of $15,000. They would still need to flip more than 30,000 homes a year just to generate $500 million in earnings. At that scale, the margin for error is razor-thin — profits of $15,000 per home could just as easily turn into losses of $15,000 per home. So if this business model truly works, let me ask you this:

You have national homebuilders, national real estate brokerages, and REITs that own commercial properties in every major city — yet there are no national home flippers or wholesalers. Why?

Is there a path where Opendoor can succeed?

Yes, they need to drop home flipping entirely. The leading marketplace for selling homes is the MLS, the Multiple Listing Service, which all realtors use. Suppose Opendoor could build a competitor to this and incentivize people by allowing them to sell their home with a lower commission than they pay a realtor. In that case, it’d be very compelling from an investment perspective. Opendoor would access the large real estate market without taking on the risk. It would also allow them to trade at tech multiples, which they are unlikely to achieve under their current business model. As long as they continue to buy homes, though, they’re simply accelerating their path towards bankruptcy. Building a competitive service to MLS is possible, but it’s incredibly challenging given how deeply embedded MLS is in the real estate industry. As a result, it seems unlikely that Opendoor will ultimately succeed. Only time will tell. With that in mind, I want to turn to what I see as the company’s most significant current concern: its new CEO.

The new CEO has no idea what he’s doing.

As part of this research, I came across this interview with the new CEO, Kaz Nejatian. I’ve taken the best quotes from the interview and included the timestamps for people who would like to dig further.

“The underwriting of homes and cars is similarish” - 28:40

No, they are not similar at all. There are approximately 10 automakers in the U.S., and each sells cars by make and model. Many of these cars are multi-generational, spanning back decades. If you buy a Honda Civic, you know what you’re getting. It makes selling and buying these assets and pricing them much easier because the margin for error is lower, given the many direct comparables. A Honda Civic in New York City is the same as a Honda Civic in Arkansas. A house in New York City is not the same as a house in Arkansas. You have tens of thousands of home builders, each with different designs, materials, and geographic areas, resulting in a huge variance in homes across the United States. This massive variance and the hyper-localized nature of real estate are why flippers very rarely expand beyond their own geographical footprint. Yes, you can use AI here. And yes, it will help. But you’re still dealing with a more complex asset class, and AI is not a silver bullet to every problem. Kaz is underestimating the complexity of real estate.

“The rate at which interest rates increased was deeply irresponsible for the country. Companies shouldn’t take credit or blame for macro. What happened in the U.S. with interest rates will likely never happen again because it was so obviously stupid.” (paraphrased) - 37:33

Inflation hit 9.1% when the Fed started hiking interest rates aggressively, the most significant increase in 40 years. The last time the Fed hiked interest rates as fast as they did in 2022 was 40 years ago, when inflation was running rampant, peaking at 14% in the late 70s/early 80s. One-off economic events will happen again. If Opendoor is not prepared, it risks running another billion-dollar loss, which at this point would likely bankrupt the company. Why would anyone want to own a company that is this fragile? Calling an economic event “stupid” and assuming it won’t happen again is dangerous.

“Opendoor abandoned the original mission and derisked the company a lot. I think if Opendoor is an old-fashioned, incremental, house flipper, that’s not that meaningful or big of a business. ” (paraphrased) - 41:06

They derisked the business after a $1B loss in 2022. At that run rate, they were going to go bankrupt in the next year or two. There wasn’t a choice. Besides that, the CEO just said the quiet part out loud. The flipping business doesn’t work, and it’s not meaningful. Unfortunately, the tangential services aren’t meaningful either. If Opendoor doesn’t have a meaningful business today, then what exactly is the investment thesis here?

“There isn’t a 5-year plan here because it just doesn’t work out that well”. Kaz then starts rambling about chess. 49:33

The one thing that’s become abundantly clear is that there is no plan by anybody at Opendoor. Sure, a 5-year plan may not be realistic, but there isn’t even a 1-year plan. The company has tried everything to make the business work. ​How do you fix a business when the underlying economics don’t work and the company has tried everything? I think the next earnings call will be important, and I personally would expect a very clear plan. By then, he would have had enough time to come up with something for an immediate focus for the next year. Although I think it’s unlikely he will have a plan.

“Due to bad advice, the company tried to only buy homes for a while that were mispriced. “We will only buy homes that are mispriced by 20%.”” - 50:43

This is the worst take in the entire interview. Buying mispriced homes is the reality of running a flipping business. That’s how it works. There is no profit to be made if you buy homes at fair value and then you put money into them. Comments like this, along with the previous ones, are why losses are likely to increase. The new CEO does not understand how this business model works. If they bought homes at a fair price, then how do they sell them for a profit?

When it comes to the software company, I believe Kaz is very capable. However, now that he is responsible for the operations of a tech-enabled real estate company, I have serious concerns.

“Lower Interest Rates will Turn things around for Opendoor”

Unfortunately, this is unlikely to be the case. The downside of being a house flipper is that you are involved on both sides of the transaction—buying and selling. In a market where it’s easier to sell, it is then harder to buy. In a market where it’s easier to buy, it’s harder to sell. This is why there’s really no such thing as an ideal market for house flipping. You’re either:

1. Having a hard time finding deals and selling them

2. Having an easy time finding deals, but having a harder time moving them on and selling

Opendoor might see a brief boost in profitability at some points next year, but by the end of the year, it will become clear that the benefit is only short-term. Opendoor will then have a harder time buying homes at a discount, so they’ll either increase marketing spend or buy homes from OR, and the results will likely be the same.

Conclusion

Open Door is extremely overpriced today, and I believe the company will eventually enter bankruptcy. If you asked me how they avoid bankruptcy, they need to start by no longer buying and selling homes. Either that or they need to find a way to acquire homes without spending so much on marketing. If they cut their marketing to zero, it might improve profitability. Not really enough to justify the amount they invest per flip, but sufficient to keep the business running as they pivot to better long-term options. An ideal scenario is that they avoid the risk of owning the homes while still generating revenue in other ways. The previous CEO (Eric Wu) has already tried everything. He left because he realized the business model was unlikely to succeed. This is further emphasized by the previous founders all selling their entire ownership stakes and leaving entirely. People are right that selling can be for many reasons, but you only sell out of a business for one reason: you believe there are better opportunities in the market. As always, only time will tell.