Photo Credit: Andy Arthur/Flickr.com

According to a recent report published by online real estate firm Zillow, the new year 2017 is expected to set a new stage of the post-recession housing recovery with deceleration expected in home price growth. However, Zillow expects more millennials to become homeowners, thus driving home ownership rates in 2017. Billion Dollar Unicorn club member Opendoor Labs is helping to simplify the process of home ownership in the country.

Opendoor Labs’s Offerings

Opendoor Labs was founded in 2014 by JD Ross, Keith Rabois, Ian Wong, and Eric Wu. But the idea behind Opendoor’s offering came to the founders more than a decade ago. Back in 2003, Keith Rabois was working at Peter Thiel’s investment firm Clarium Capital when he came up with an idea similar to Zillow’s and presented it to Thiel. Thiel wasn’t too impressed with the idea and sent Rabois back. Despite the snub, Rabois did not lose hope and worked on reinventing his idea. He then thought of the possibility of creating a more liquid real estate asset for homeowners by following the principles of auto sales based on Kelley Blue Book valuation. Rabois soon sought funding for this project called Homerun. He was unable to raise the required funds and had to let go of the idea as he continued his professional growth at Square. For the next ten years, Rabois may have worked at other jobs, but he never gave up on Homerun. He kept finding people who would appreciate his idea and be willing to invest in it.

Rabois found his partner in Eric Wu, who had amassed a portfolio of homes while completing his graduation at the University of Arizona. Wu had leveraged the process of buying homes and earning rental income to pay for food and housing while in college. He realized his passion toward real estate and set up a few real estate-based startups including Rent Advisor, a rental-apartment review company and Movity, a data-visualization company that gathered information on neighborhoods and presented them to homeowners and renters in easy-to-understand scores.

Wu and Rabois had met each other in 2010 when Wu was trying to gather funds for Movity. During the interactions that followed, Rabois agreed to invest in Movity, but kept on pushing Wu to invest in his idea as well. Almost two years later, Wu relented. He sold Movity to Trulia and decided to work on Rabois’ idea. Since then, there has been no looking back for Opendoor.

Opendoor focuses on properties built after 1960 and in the price range of $125,000 – $500,000. It uses its proprietary algorithm to determine the optimal price for the potential sellers who approach it through an online form. Once a seller accepts the proposed price, Opendoor sends its inspectors and prepares to close the deal for cash. After the close, Opendoor flips the house by making the required fixes on the house and puts it back in the market for sale at a higher mark-up. It currently operates in Phoenix, Dallas-Fort Worth and plans to expand to ten cities this year. It has bought up to $60 million worth of homes so far and has transacted in more than 4,000 homes. It is also upgrading its services by offering features such as a 30-day money back guarantee to buyers.

Opendoor’s business model relies heavily on its algorithm that has been developed by its third co-founder – Ian Wong, a Stanford Ph.D. dropout who was also Square’s first data scientist. Wong designed a valuation model that considers thousands of variables, including the home’s square footage, number of bedrooms, its proximity to various attractions and services, curb appeal, and interior condition. The model adapts itself based on changing data sets and their inter-relationships.

Opendoor Labs’s Financials

Like other real estate firms, Opendoor charges a 6% commission as service fee for the transaction. On top of that it charges a premium based on the riskiness of the sale. Analysts expect that it earns an average of 8% as fee on transactions completed. Opendoor does not disclose financials, but it expects to turn profitable by 2018 when it would be operational in almost 30 cities.

Opendoor has been venture funded so far with $320 million raised from investors including Aaron Levie, Access Industries, Bobby Yazdani, Caffeinated Capital, CrunchFund, Felicis Ventures, Fifth Wall, Garry Tan, GGV Capital, Khosla Ventures, Lakestar, New Enterprise Associates, Norwest Venture Partners, Om Malik, Sherpa Capital, Signatures Capital, Slow Ventures, Solon Mack Capita, SV Angel, SVB Capital, Thrive Capital, and True Ventures. In November 2016, Opendoor raised $210 million in a round led by Norwest Venture Partners that valued it at $1.1 billion.

Opendoor’s business idea has made the process of buying and selling a house much simpler as it continues to disrupt the real estate brokerage market. But experts wonder how reliable its pricing model truly is. According to Robert Shiller, the Nobel Prize-winning Yale economist who helped create the Case-Shiller housing-price index, there are several more variables in the real world that cause a pricing prediction to be significantly off-base. Opendoor believes that the premium it charges on the sale will be able to cover for those misses. We shall wait and see.