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

Opendoor is going through a rough patch. According to an analysis by a market research firm, 42% of the homes it sold in August made a profit. The numbers are worse in places like Phoenix, Arizona, where cookie-cutter houses have attracted iBuyers. In August, three out of four homes sold by Opendoor lost money.

The company blames its current troubles on a rapid change in the residential real estate market. It is a change that is hitting Opendoor and its competitors hard right now, and it could be coming for millions of homeowners in the future.

Like the housing market on steroids, IBuyers feel small changes in house prices, both up and down, as they try to squeeze profits out of tiny margins. House sellers are offered a below-market average deal in exchange for completing sales quickly. The properties are flipped and the profit is banked. The theory is correct.

Dod Fraser, Opendoor's chief capital officer, disagrees with the numbers. In August, Opendoor made a loss on just 20 percent of sales. Fraser wouldn't give an official number because the company is in a closed period. The firm's statistics don't include Opendoor's service fees because they have been offset by resale costs, according to the company's spokesman.

IBuyers are vulnerable to swings in the market. It can become an almighty rumble for iBuyers if what amounts to an undetected tremor for individual buyers becomes an almighty rumble. Opendoor may not be smart enough to stop overbidding on houses that are dropping in value, but it is smart enough to see into the future.

Opendoor was more positive a few months ago. Ian Wong, chief technology officer and founder of Opendoor, said that his company was less exposed to broader issues in the housing market because it didn't rely as much on automated valuation models. iBuyers face an uphill battle in the US housing market.

Mike DelPrete, an iBuying market analyst and scholar in residence at the University of Colorado Boulder, says that Opendoor is one of the best indicators of the housing market. While economists try to divine where the market is going from lagging indicators, iBuyers can tell what the market sentiment is right now.

The average number of tours per house sale and how many people are touring a home on any given day are things IBuyers know. They know the number of offers each home gets. iBuyers view is different because of this and scores of other data points. The scale of Opendoor gives it a better idea of where the market is going. The company uses both third-party data and its own analyses to look at 120 unique home features.