Opendoor’s iBuyer Model Is a Canary in the Economic Coal Mine

And right now, Opendoor’s behavior, driven by the data it sees, augurs bad tidings ahead. “Right now, they’re trying to sell as much of their inventory as fast as humanly possible,” DelPrete says. One possible narrative is that based on the data Opendoor sees, the company believes things might get even worse. “They’re reading the tea leaves,” he says. “They just have better tea leaves than you and I do.” Fraser doesn’t dispute that: “We are able to react to changing conditions very efficiently and very quickly because of those signals we have in our business,” he says.

But the data Opendoor has access to may only tell half the story. iBuyers accounted for 1.3 percent of all US home sales in 2021, an all-time high, but some regions are more popular than others. “Their model is such that they can really be successful only in some parts of the market,” says Amit Seru, professor of finance at Stanford Graduate School of Business. iBuyers operate in areas where the housing stock is relatively new and uniform, so they’re overrepresented in cities like Phoenix and Las Vegas but ignore states such as Missouri and parts of Texas, where older houses dominate. 

Fraser disputes the idea that Opendoor doesn’t have insight into the broader market. Its “buy-box coverage,” where it makes offers on homes in markets it operates in, stands at 65 percent. “This is a mainstream product, not a niche product,” he says.

While prices in Phoenix increased during the pandemic from $445,000 in August 2021 to $549,300 in August 2022, the amount of time properties spent on the market before sale rose 30 percent in the same time period, indicating that buyers were thinking harder about their purchases—a problem for iBuyers, who rely on quick sales.

Analysts forecast softness in the market in September, and that became a reality, as Opendoor sold large numbers of properties at a loss. Seru does think that the struggle iBuyers face now is indicative in some way of economic headwinds, because of the way that iBuyers work. When times are good, they win big. And when times get tough, they’re among the first to struggle.

An iBuyer’s gross profit on any transaction is in the range of 5 percent, according to Tomasz Piskorski of Columbia Business School, who is also a member of the National Bureau of Economic Research. When that margin gets squeezed, iBuyers are among the first to drop out because their business model is predicated on selling the homes they buy quickly at a profit. “Opendoor now knows that if they buy this home—and remember, it comes at a discount—that they may end up being stuck with it for many months,” says Piskorski.

DelPrete makes an analogy between iBuyers like Opendoor and short-term stock traders. For decades, people bought shares in a company with the goal of holding onto them for years and earning steady returns on their investment. People did the same with property: moving into a home, living in it for decades, then selling to trade up or downsize as needed, banking the often considerable profits as they went. iBuyers have accelerated that process, flipping homes in months, rather than years, and eking out tighter margins. “It’s a fragile business model that doesn’t work well when there’s uncertainty in prices,” says Piskorski.