The Rise of the Fat Start-Up


For much of the past decade, tech investors have been enamored of software companies that could grow very quickly for little money — like Instagram, which raised less than $60 million before it was bought by Facebook for $1 billion. Even Uber, which has raised billions of dollars for expansion, has attracted investors on the promise of eventual low operational costs, as it neither owns nor actually employs its drivers. (They are considered independent contractors.)

But modern capital markets have since unlocked far grander opportunities for tech entrepreneurs. They are blessed with essentially unlimited access to money, and ideas that once seemed too expensive, too risky or just too crazy are now getting off the ground. These start-ups are fat — with capital, with industry-altering ambition and, to their critics, often more than a little hubris.

Consider how Elon Musk, the chief executive of Tesla and SpaceX, is building electric cars, a gigantic automated factory, solar roofs, rockets and, as a hobby, a tunneling company. There are start-ups trying to create superspeedy Hyperloop transportation and others working on flying vehicles.

Opendoor fits that mold. Its plan is precarious: The company faces rising competition, high operating costs and — because we are talking about the market that caused the global financial crisis — the possibility of an unforeseen blowup. But if it works, Opendoor could be transformative; by making buying and selling houses as easy as buying and selling cars, it might thoroughly alter the American economy and change how we think of homeownership.

“Real estate is a $25 trillion asset class — people spend more on housing than food, transit, health care and education,” said Eric Wu, a founder and the chief executive of Opendoor. “We think we can make it work much better than it does now.”

So far, Opendoor is growing quickly. In broad strokes, the service works exactly like Mr. Rabois’s original vision. If you want to sell a home in Opendoor’s price range, you go to the site, type in your address, answer a few questions and then wait for an email.

The company has data scientists who have developed a sophisticated system for modeling home prices. Opendoor focuses on the middle of the market, and will neither buy distressed homes nor luxury homes, for which pricing dynamics aren’t predictable. If your house meets its criteria, it will send you an offer meant to reflect the best estimate of your home’s value.

Photo

Eric Wu, a founder and the chief executive of Opendoor, at the company’s headquarters in San Francisco.

Credit
Christie Hemm Klok for The New York Times

The offer comes with costs. If you use a traditional real estate agent, you pay a commission of around 5 percent to 6 percent of the sales price (the commission is split between the buyer’s agent and the seller’s agent). Opendoor charges an average commission of around 7.5 percent (it pays a portion of it to real estate agents).

For the extra fee, you get certainty: Opendoor will close on the sale of your house in three days, clearing the way for you to relocate, buy a new house or, who knows, leave the country in case of political instability. It will also let you lease back your house if you need extra time, a convenient feature if, say, your new house needs some work.

A surprising number of people are saying yes to Opendoor’s offer. Mr. Wu said that about 30 percent of people who request an offer decide to take it. Opendoor declined to provide revenue or growth numbers, but because housing sales data is public, outside analysts have been able to track the company’s progress. Once it buys your house, the company makes necessary repairs, and then puts it up for sale. On average, it sells the house within about 90 days.

A year ago, according to an analysis by Mike DelPrete, an independent real estate tech adviser, Opendoor was selling about 50 houses a month in Phoenix, which at the time was its only market. Sales have steadily increased since; in February, Opendoor sold more than 300 houses total in Dallas, Las Vegas and Phoenix. It plans to begin service in its next market, Atlanta, within a few weeks.

The company has been streamlining other parts of the real estate process. The houses it sells are fitted with internet-enabled cameras, sensors and door locks, allowing potential buyers to unlock the home with Opendoor’s app and come and go as they please. (I tested this on a visit to Phoenix in December; it was quite handy.) It also started a mortgage brokerage operation, so buyers can speed up their access to capital — a potential precursor to offering home financing on its own.

Opendoor faces huge hurdles, including competition. Two other start-ups, Offerpad and Knock, are already offering similar services. And this week Zillow, the real estate portal, began a pilot program that relies on Offerpad to make instant bids for homes in Las Vegas and Orlando.

Opendoor is aiming to stay ahead by offering a more customer-friendly service and by rapidly expanding. Mr. Wu argues that as the company grows, Opendoor will be able to unlock more efficiencies in its business, allowing it to reduce its commission much further — even approaching parity with the traditional sales process.

But Opendoor’s costs are also high, calling that goal into question. An analysis by Mr. DelPrete and another real estate analyst, Sib Mahapatra, estimated that because of the high costs of owning and maintaining each house for about three months, Opendoor makes only about $8,000 in profit on an average home it sells in Phoenix. It also relies heavily on appreciation; on average, it sells each house for about 5.5 percent more than it paid for it.

“There is obviously substantial appeal for this product,” Mr. Mahapatra said. “But my question would be, ‘Is there a way that other players in this space might reproduce this seamlessness, but be less expensive?’”

Finally, there’s the nightmare scenario: a real estate crash. Part of the reason Opendoor is expanding to new markets is to avoid the vicissitudes of the business. Opendoor’s biggest liability is all the houses it owns; if some kind of disaster were to befall Phoenix and home sales cratered there, Opendoor would find itself holding hundreds of houses it couldn’t sell. By operating in several markets, Mr. Wu said, the company could insulate itself from local crashes.

What if there’s a nationwide correction? Mr. Wu said his team has run simulations on previous crashes, including in 2008, and has found one of two scenarios: On the one hand, the business might slow down for a few years, then pick up as the market does. Or it might even do better, because sellers would decide to pay a higher premium to get a certain offer.

“There’s a possibility that we might thrive in times of volatility,” Mr. Wu said.

Sound crazy? Yeah, well, we’re talking about a website that will buy your house, sight unseen. Everything about it is crazy. But that’s the tech business these days, and who knows — it could work.

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