Shop with an app, watch movies with an app. Why not sell your home with an app, too?

Brian Westerman, a 38-year-old app developer for the live events industry, took a pay cut last year as music shows and other events came to a standstill during the pandemic.

Then in October, tenants at his rental property, a four-bedroom, three-bath, 2,400-square-foot home in Mount Juliet, Tennessee, decided to move out, and for months, he had no luck renting it.

Facing financial uncertainty, Westerman decided to put the house on the market in January.

One thing he was confident about was the price his 2005-built investment property would fetch.

Shop with an app, watch movies with an app. Why not sell your home with an app, too?
Shop with an app, watch movies with an app. Why not sell your home with an app, too?

“It’s kind of a cookie-cutter neighborhood and three houses with my exact floor plan sold in the last six months,” Westerman says. “So it was very easy to get the comps,” or price comparisons between the houses.

Hoping for a quick sale, he decided to give Opendoor Technologies, a real estate tech company that makes instant offers on homes, a try.

Brian Westerman sold his home in Mount Juliet, Tenn., to Opendoor.
Brian Westerman sold his home in Mount Juliet, Tenn., to Opendoor.
Brian Westerman sold his home in Mount Juliet, Tenn., to Opendoor.
Brian Westerman sold his home in Mount Juliet, Tenn., to Opendoor.

The instant offer

He entered some basic information about his house online, uploaded a few photos and conducted a video tour with an Opendoor associate. An inspector checked out the exterior a day later.

Within less than 48 hours, he had an offer from Opendoor.

The $335,000 proposed by the company, which bills itself as a “digital one-stop-shop,” was in line with what he had expected after factoring in some repairs. He closed on his house two weeks later.

“I didn’t have to hire a realtor, do repairs, or get ready for showings,” says Westerman, who’s bought three homes and sold two in the past.

Two weeks after that, Opendoor listed the house for $355,000. It sold for $348,000 last month.

“They made some money, but they also put in new carpeting and painted the house cheaper than I could have,” he says. “There was also some roof repair that had to be done.”

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Disrupting real estate

Founded in 2014, San Francisco-based Opendoor has been viewed as a disruptive force in the $1.6 trillion U.S. residential real estate market, creating a new category of house hunter called an iBuyer or instant buyer.

The company, which prices homes using an algorithm, has also inspired competitors like Zillow, Offerpad and Redfin to offer similar services.

While iBuyers still only account for under 1% of all real estate transactions in the country, it is expanding nationally at a fast clip.

Open Door currently operates in 30 markets, including  Atlanta, Dallas and Orlando, Fla.
Open Door currently operates in 30 markets, including Atlanta, Dallas and Orlando, Fla.

Opendoor, which went public in a deal where it was valued at $4.8 billion – is the leader of the pack. With 50% of the iBuyer market share and close to twice the transactions of its closest competitors, the company has bought and sold, or just sold, more than 90,000 homes online since 2014.

For home sellers, Opendoor promises to eliminate the hassle of preparing a home for sale and the uncertainty around how long a property might sit on the market. In other words, you don’t have to worry about picking up the kids’ toys, fixing the peeling paint, neutralizing cooking odors, or making yourself scarce every time there’s a showing.

As part of the transaction, the company charges a service fee. In years past, it has been as high as 14% of the home price in some markets, but now the company is offering a 5% fee for most transactions. The company attributed the decrease in fees to becoming more operationally efficient. In a traditional sale, a 5% to 6% agent’s commission is common. If it’s a strong seller’s market, those numbers can go even lower.

In the initial years, Opendoor’s business model was based on the service fee and the profit they made by selling homes they’d acquired. In 2019, the company also started offering adjacent services such as escrow and title services and home loans.

Mike DelPrete
Mike DelPrete

The average price point for the homes the company buys and sells is tightly clustered around $260,000, says Mike DelPrete, an industry analyst and real estate scholar-in-residence at the University of Colorado Boulder.

“Their target home is what I call a turnkey home. These are houses that are in pretty good shape, where they can go in and do that new coat of paint, new carpet, and then sell it again,” says DelPrete, adding that their business model “revolves around buying and selling as many homes as possible.”

Indeed, the company plans to double its reach from 21 iBuyer markets at the beginning of this year to 42 by the end of 2021. Currently, they are in 30 markets, including Atlanta, Dallas, Orlando, Florida, Phoenix and Raleigh, North Carolina.

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Here to stay

In 2020, the two largest iBuyers, Opendoor and Zillow, lost a total of $607 million buying and selling houses. That’s a loss of about $40,000 on each home bought and resold, says DelPrete.

Like other iBuyers, Opendoor suspended homebuying in March as the pandemic upended the market. In its first earnings call as a public company in March, Opendoor reported a 45% drop in revenue to $2.6 million compared with $4.7 million for 2019, due to a pause in homebuying in the early months of the pandemic. It sold 9,913 homes in 2020 compared with 18,799 in 2019.

While the pandemic severely hurt their business model with iBuyers’ market share plummeting by more than 60% from 2019 to 2020, experts believe instant buyers are here to stay.

“Technology has really revolutionized how people watch TV and movies at home. It’s changed how people order groceries, and it's starting to change other aspects of society, so it’s going to change houses too,” DelPrete says.

No regrets

Dennise Cacho, a human resources benefits counselor from Dallas, Georgia,watched over the last five years as homes in her subdivision rose in value. So in February, she decided to test the market for her four-bedroom, 3.5-bath home, which she bought for $200,000 in 2015. A local realtor gave her an estimate of $270,000.

Then she decided to see what Opendoor would offer after seeing the online company’s signs pop up all over her neighborhood. She got an estimate for $289,000.

Dennise Cacho, 43, with Cesar Ardila and children Andrés Ardila, 13, and Karyme Ardila, 17 in their rental home. Cacho, a human resources benefits counselor, from Dallas, Ga., sold her last home with Opendoor.
Dennise Cacho, 43, with Cesar Ardila and children Andrés Ardila, 13, and Karyme Ardila, 17 in their rental home. Cacho, a human resources benefits counselor, from Dallas, Ga., sold her last home with Opendoor.

“I had always wanted to move into a neighborhood with a bigger yard and more privacy,” Cacho, 43, says. She was also worried about home prices going up and wanted to get out before a crash.

Given that it was a hot market, Opendoor offered to lower her service fee to 3.5% and waive the closing fee.

One month later, Opendoor sold it for $313,570.

She has no regrets.

The last time she’d sold her house, a relator had charged her more than 6%.

“Yes, they offered us less than what they sold for. But at the end of the day, it would have cost the same amount between the realtor, the closing costs and repairs,” she says. “They did all that in a very quick, very fast process. And we didn’t have to go through all the trouble.”

Dennise Cacho, 43, a human resources benefits counselor, from Dallas, Ga., sold her last home with Opendoor, a real estate tech company that makes instant offers on homes.
Dennise Cacho, 43, a human resources benefits counselor, from Dallas, Ga., sold her last home with Opendoor, a real estate tech company that makes instant offers on homes.

Lawrence Yun, chief economist for the National Association of Realtors, says real estate is a fiercely competitive industry that welcomes new ways of doing business. However, he fears customers might be leaving money on the table.

“It is definitely convenient, but the way iBuyers try to make money is by purchasing at a very low price,” he says. “So from a consumer's perspective, just watch out. Don't sell it too cheap.”

Despite a rough 2020, the company did have some good financial news. It reported a narrower net loss of $286.8 million last year compared with a loss of $339.2 million in 2019. The company attributed the improved result to scaling its market footprint and creating greater efficiency in its systems. Last April, the company laid off 35% of its staff amid shelter-in-place orders as people stopped buying and selling homes.

The fact that iBuyers still have a very small market share indicates that they are not resonating with customers, Yun says.

“Customers have spoken clearly so far. It’s just slick marketing to attract buyers to sell something else, things like mortgages,” he says. “But like with any business, I'm glad there’s innovation, new business models being tried out.”

In response to Yun's comment, Opendoor pointed to an investor relations presentation that showed that among high-intent sellers, 44% had chosen to sell to the company when its fee was at 6%. It claimed that was proof that their product was resonating.

According to DelPrete, who analyzed 20,000 iBuyer transactions conducted in 2018 and 2019 and benchmarked that against automated valuation models of the homes, iBuyers were offering around 98.5% of fair market value.

Homeowner at 19

Eric Wu, the founder of Opendoor, was 19 years old when he bought his first home using funds from his college scholarship for a down payment.

The four-bedroom,1,500-square-foot single-family home, priced at $110,000, was located near the University of Arizona in Tucson where he was a student. He also rented out unused rooms in the house.

His mother, a Taiwanese immigrant, who raised Wu and his two sisters as a single parent, saw renting as a waste of money.

“That viewpoint stuck with me and I purchased my first home in 2002 while in college to avoid paying rent,” he says.

But the experience left him disenchanted with the process.

“I still recall the emotional rollercoaster of buying my first home, encountering what felt like a million different issues with the transaction,” he says.

Eric Wu, CEO of Opendoor.  Founded in 2014, San Francisco-based Opendoor has been credited with disrupting the $1.6 trillion residential real estate market in the U.S. by creating a whole new iBuyer or instant buyer category.
Eric Wu, CEO of Opendoor. Founded in 2014, San Francisco-based Opendoor has been credited with disrupting the $1.6 trillion residential real estate market in the U.S. by creating a whole new iBuyer or instant buyer category.

That initial exposure sparked his interest in building something better.

He said Opendoor was the culmination of 10 years of studying “customer pain points and iterating through solutions,” from his first startup in 2005, an online rental marketplace called RentWiki, to his second startup, Movity.com, which was bought by Trulia.com, a real estate search portal, in 2011.

“After I left Trulia in 2013, it was clear to me that every other major category was moving to a digital-first experience. You could hail a ride, order food, and buy anything online in a few taps,” he said. “I believed buying and selling a home could and should be that simple.”

Wu bet that people would sell their largest asset online, directly to a technology company.

Last year, the company launched a program to capitalize on the fact that two-thirds of sellers are also buyers. The company buys and "reserves" the home a customer might be interested in with an all-cash offer while they wait for their current home to sell.

“Oftentimes you want to put a cash offer down on your next home because that removes the financing contingency. And sellers are more likely to choose that over a financed offer,” he says. “So instead of people feeling like they need to go sell their home first, then buy the home, we're enabling them to buy the home with our cash and then reserve that home for them.”

That was the case with Mike Aviles, who had to sell his home in New York before he could purchase a home in North Carolina. With pandemic-related closing delays in New York last August, he said he was close to losing the home he had his heart set on.

“I qualified for their buyback program,” says Aviles, who works in operations for FedEx. “I was in jeopardy of losing about $9,000 that I had in escrow because my house in New York wasn't going to close on time to meet the deadline here.”

'A paradigm shift'

Jeff Taylor, the managing partner of Mphasis Digital Risk, a technology and risk firm that consults with mortgage lenders, says buying and selling a home with a data-driven approach on an app is a paradigm shift.

“If I looked three to five years out, iBuying especially as they refine their models, will be a growing trend," he said. "The company has to be razor-sharp with their data and what they're willing to bid because once they put a bid and if they're significantly wrong, that could be a big mistake.”

From the customer’s perspective, especially in a hot housing market, it might be worth putting in the extra effort to fix up the house yourself to maximize revenues from a sale.

“There's nothing wrong with getting a bid from an iBuyer,” says Taylor. “And having it kind of in your back pocket but testing the market to also see what you could get otherwise, would be a good idea right now as this is a seller’s market.”

Westerman, of Mount Juliet, Tennessee, says for him to make the profit Opendoor made on his house would not have been easy.

"If they're flipping 10 houses a week, they've got a carpet guy and a roof guy that they're doing bulk deals with, whereas I'm hitting Google, trying to find somebody and get them out for an inspection and hope it's a good deal," he said. "For me to make that extra 13 grand, it was not worth it, but for them, it was because that's their business."

Swapna Venugopal Ramaswamy is the Housing and Economy reporter for USA TODAY. Follow her at @SwapnaVenugopal on Twitter.

This article originally appeared on USA TODAY: Homes near me: Homeowners turn to iBuyers like Opendoor to sell houses