Yesterday Opendoor.com finally launched their product in Phoenix. If you’re a regular reader of Architect This City, you might remember that back in July of this year I wrote about how they had just raised $10M of funding to make selling your home as easy as a few clicks.
Well, since then, I’ve been following them like a hawk. I had all the founders on Twitter notification (so I got notified every time they tweeted) and I was eagerly anticipating their launch.
Now that they’ve launched, we have a much better idea of how their business model is going to work. I say “better idea” only because there’s still portions of it that are a question mark for me.
In any event, Opendoor basically provides instant liquidity to homeowners. You go on, tell them about your home, and they then make you an offer to buy, which looks like this and lasts for 3 days. The offer they make you is calculated using comparable sales and adjustments based on your home’s unique characteristics.
Upon accepting their offer, they then schedule a home inspection (at their cost) to confirm your home’s condition. Once this is done, you just select your move out date and Opendoor handles the rest. The fee for all this is 5.5%, which the company claims is less than the 6% that realtors typically charge (this would be high for Toronto).
Roger Martin – who is the former dean of the Rotman School of Management and one of my favorite business thinkers – recently published a post on the Harvard Business Review blog called: The Dark Side of Efficient Markets.
In it, he makes an interesting distinction between what he calls use-driven markets and expectations-driven markets, the latter of which is assumed to be the more efficient one:
In the natural evolution of markets, as markets become more efficient, they turn from being use-driven to expectations-driven — like equities, real estate, or derivatives based on both.
The example he starts off with is that of corn. In its simplest form, this market is about farmers growing corn, taking it to a local market, and then selling it to real humans who will then go home and eat it for dinner. Simple. And this is what he means by a use-driven market.
But as markets grow and evolve, you have middle agents or market makers that insert themselves between buyers and sellers, suppliers and consumers. They help create greater marketplace liquidity and generally help buyers and sellers find each other and transact.
However, as this happens, Roger argues that the game eventually shifts from being use-driven to expectations-driven. Now people buy, not necessarily to consume, but to invest, resell, and generally speculate on future values. In other words, they stop buying the corn to eat it. And instead buy it (or sell it) because of what they think it might be worth at some point in the future.
Yesterday Opendoor.com finally launched their product in Phoenix. If you’re a regular reader of Architect This City, you might remember that back in July of this year I wrote about how they had just raised $10M of funding to make selling your home as easy as a few clicks.
Well, since then, I’ve been following them like a hawk. I had all the founders on Twitter notification (so I got notified every time they tweeted) and I was eagerly anticipating their launch.
Now that they’ve launched, we have a much better idea of how their business model is going to work. I say “better idea” only because there’s still portions of it that are a question mark for me.
In any event, Opendoor basically provides instant liquidity to homeowners. You go on, tell them about your home, and they then make you an offer to buy, which looks like this and lasts for 3 days. The offer they make you is calculated using comparable sales and adjustments based on your home’s unique characteristics.
Upon accepting their offer, they then schedule a home inspection (at their cost) to confirm your home’s condition. Once this is done, you just select your move out date and Opendoor handles the rest. The fee for all this is 5.5%, which the company claims is less than the 6% that realtors typically charge (this would be high for Toronto).
Roger Martin – who is the former dean of the Rotman School of Management and one of my favorite business thinkers – recently published a post on the Harvard Business Review blog called: The Dark Side of Efficient Markets.
In it, he makes an interesting distinction between what he calls use-driven markets and expectations-driven markets, the latter of which is assumed to be the more efficient one:
In the natural evolution of markets, as markets become more efficient, they turn from being use-driven to expectations-driven — like equities, real estate, or derivatives based on both.
The example he starts off with is that of corn. In its simplest form, this market is about farmers growing corn, taking it to a local market, and then selling it to real humans who will then go home and eat it for dinner. Simple. And this is what he means by a use-driven market.
But as markets grow and evolve, you have middle agents or market makers that insert themselves between buyers and sellers, suppliers and consumers. They help create greater marketplace liquidity and generally help buyers and sellers find each other and transact.
However, as this happens, Roger argues that the game eventually shifts from being use-driven to expectations-driven. Now people buy, not necessarily to consume, but to invest, resell, and generally speculate on future values. In other words, they stop buying the corn to eat it. And instead buy it (or sell it) because of what they think it might be worth at some point in the future.
Brandon Donnelly
Daily insights for city builders. Published since 2013 by Toronto-based real estate developer Brandon Donnelly.
I am currently in Hunstville, Ontario (Muskoka region) and I have about 15 minutes before I need to head out for dinner. So this is not going to be a long post.
I did, however, want to share with you a new real estate app that I learned about today called SQFT. (Thanks Evgeny.) They were just featured in TechCrunch and their mission is to make it easier and cheaper for people to buy and sell homes using just their smartphone. They’re calling themselves the first DIY real estate portal in America.
As a homeowner, you create the listing yourself and then it gets syndicated out to hundreds of other websites (including the big players like MLS, Zillow, and Trulia).
You’re still technically working with “independently operated licensed real estate agents”, but the app itself handles setting up the showings and even the offer negotiations. Their hope is that they can reduce real estate commissions to < 2%.
This is a space that I’ve been following closely for a number of years now and seems to be really heating up. Opendoor.com is another online real estate platform that I’ve written about a few times. And in my view, they are the furthest out front.
My realtor friends don’t like it when I say this, but I think we’re going to see a lot of changes in this space in the near future.
After buying your home, Opendoor plans to turn around and resell it.
What this reminds me of is a “bought deal.” In the world of investment banking, a bought deal is when the bank itself agrees to buy the entire offering of a particular security, as opposed to going out to the market and trying to raise the money. The advantage to the company (offering the securities) is that there’s no financing risk. They know they’re going to get their money. But it usually means the company gets a lower price.
So what I wonder, is if this is what’s going to happen here. Since Opendoor is effectively taking on the selling risk, does that mean their offers will be lower? Or are all their costs built into that 5.5% and that’s truly their core business model? I’m sure some of this will surface in the coming weeks.
I do, however, think they are smart to be focusing on the supply-side of the marketplace and offering virtually perfect liquidity to homeowners. Real estate is a unique asset in that it’s difficult to bring supply to the market. And so if control the supply-side, I think you have a pretty good shot at controlling the market as a whole.
Now, his argument is that even though this latter stage is considered to be more “efficient”, there’s a dark side to it: increased price volatility. When people are buying, not because they need something, but because of future expectations, it can lead to big price swings. And that’s because the market is now being driven by fear and greed, as opposed to utility. Interesting.
But I want to talk about something a bit different today. I agree with him, but I want to look at it from a different angle.
What I’m instead curious about after reading his article are the following:
Are these non-use-driven markets really that “efficient”?
Is this a natural market evolution only because we had no other choice and no other distribution options?
And how does the internet change this natural evolution?
Efficient markets are supposed to be based on perfect information. Buyers and sellers know the same things, prices accurately reflect intrinsic value, and all that other good stuff. But while this may be more true in some markets – such as perhaps the stock market – I would argue that it’s far from the truth in others.
The real estate market in my view is actually an imperfect market. There’s lots of missing information and there’s overall poor transparency. And I’m sure this also leads to big distortions in the market. So I find it difficult to classify the real estate market as an efficient one – though it may still have a dark side.
I also don’t think you can talk about markets, today, without talking about the internet. One of the most interesting things for me is how it’s completely rewriting distribution between buyers and sellers, producers and consumer.
In the old days, we needed middle actors because it wasn’t cost effective to distribute on your own. If I wanted to write about cities every day, I would have had to get picked up by some newspaper or publication. But today (for better or for worse), I and anybody else can self-publish for basically no cost. The same goes for videos on YouTube, short-term spaces on Airbnb, and so on.
Now, I’m not exactly sure how the changes taking place in marketplaces will ultimately play out in the financial markets, but I do think there’s room for our markets – the simple act of people buying and selling stuff – to get a lot more “efficient”. And as that happens, maybe the dark side won’t be as dark anymore.
I am currently in Hunstville, Ontario (Muskoka region) and I have about 15 minutes before I need to head out for dinner. So this is not going to be a long post.
I did, however, want to share with you a new real estate app that I learned about today called SQFT. (Thanks Evgeny.) They were just featured in TechCrunch and their mission is to make it easier and cheaper for people to buy and sell homes using just their smartphone. They’re calling themselves the first DIY real estate portal in America.
As a homeowner, you create the listing yourself and then it gets syndicated out to hundreds of other websites (including the big players like MLS, Zillow, and Trulia).
You’re still technically working with “independently operated licensed real estate agents”, but the app itself handles setting up the showings and even the offer negotiations. Their hope is that they can reduce real estate commissions to < 2%.
This is a space that I’ve been following closely for a number of years now and seems to be really heating up. Opendoor.com is another online real estate platform that I’ve written about a few times. And in my view, they are the furthest out front.
My realtor friends don’t like it when I say this, but I think we’re going to see a lot of changes in this space in the near future.
After buying your home, Opendoor plans to turn around and resell it.
What this reminds me of is a “bought deal.” In the world of investment banking, a bought deal is when the bank itself agrees to buy the entire offering of a particular security, as opposed to going out to the market and trying to raise the money. The advantage to the company (offering the securities) is that there’s no financing risk. They know they’re going to get their money. But it usually means the company gets a lower price.
So what I wonder, is if this is what’s going to happen here. Since Opendoor is effectively taking on the selling risk, does that mean their offers will be lower? Or are all their costs built into that 5.5% and that’s truly their core business model? I’m sure some of this will surface in the coming weeks.
I do, however, think they are smart to be focusing on the supply-side of the marketplace and offering virtually perfect liquidity to homeowners. Real estate is a unique asset in that it’s difficult to bring supply to the market. And so if control the supply-side, I think you have a pretty good shot at controlling the market as a whole.
Now, his argument is that even though this latter stage is considered to be more “efficient”, there’s a dark side to it: increased price volatility. When people are buying, not because they need something, but because of future expectations, it can lead to big price swings. And that’s because the market is now being driven by fear and greed, as opposed to utility. Interesting.
But I want to talk about something a bit different today. I agree with him, but I want to look at it from a different angle.
What I’m instead curious about after reading his article are the following:
Are these non-use-driven markets really that “efficient”?
Is this a natural market evolution only because we had no other choice and no other distribution options?
And how does the internet change this natural evolution?
Efficient markets are supposed to be based on perfect information. Buyers and sellers know the same things, prices accurately reflect intrinsic value, and all that other good stuff. But while this may be more true in some markets – such as perhaps the stock market – I would argue that it’s far from the truth in others.
The real estate market in my view is actually an imperfect market. There’s lots of missing information and there’s overall poor transparency. And I’m sure this also leads to big distortions in the market. So I find it difficult to classify the real estate market as an efficient one – though it may still have a dark side.
I also don’t think you can talk about markets, today, without talking about the internet. One of the most interesting things for me is how it’s completely rewriting distribution between buyers and sellers, producers and consumer.
In the old days, we needed middle actors because it wasn’t cost effective to distribute on your own. If I wanted to write about cities every day, I would have had to get picked up by some newspaper or publication. But today (for better or for worse), I and anybody else can self-publish for basically no cost. The same goes for videos on YouTube, short-term spaces on Airbnb, and so on.
Now, I’m not exactly sure how the changes taking place in marketplaces will ultimately play out in the financial markets, but I do think there’s room for our markets – the simple act of people buying and selling stuff – to get a lot more “efficient”. And as that happens, maybe the dark side won’t be as dark anymore.
