Opendoor (OPEN 3.98%) is looking to “reinvent life’s most important transaction.” To Opendoor that transaction is buying and/or selling a home, which is most certainly a very large and important event in most people’s lives. The business model is interesting, but there’s a potentially fatal flaw. Here’s the big issue to watch if you are looking at or own Opendoor.
What does Opendoor do?
The key to Opendoor’s plan is that it makes it easy to sell a home. It gives sellers a cash offer and can do that transaction quickly. That offer, however, is going to be less than what the home could be sold for if it were fixed up and sold the traditional way. This is where Opendoor is attempting to build in its profit.
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Once Opendoor buys a home it does all of the normal things, the hard work if you will. It fixes up the house to make it presentable and then it sells it at a price that is more in line with the market. Operating at scale in the 50 markets the company serves gives Opendoor an edge with regard to fixing up properties and having a handle on the proper pricing. Basically, it has a good idea of what buyers want and it has the contacts and staff needed to get repairs done quickly.
The company is still fine-tuning its business model, which has yet to turn sustainably profitable. For example, it is currently shifting its buying and selling approach so that it buys more properties in the “off season” (quarters four and one) and sells more in the “selling season” (quarters two and three). It’s still a young company and what it is trying to do, while not unique (small local players have done this for years), it’s being scaled up dramatically. So that Opendoor’s income statement has red ink on it isn’t really shocking right now.
OPEN EPS Diluted (Quarterly) data by YCharts
Opendoor’s balance sheet is the big risk
The income statement is important, of course, but the biggest concern that investors should probably have is the balance sheet. That’s where all of the heavy lifting is taking place for Opendoor. And given the shift in the company’s buying and selling approach, the balance sheet will be doing even more heavy lifting than it was before.
Essentially, Opendoor is using debt to buy a house. That house is an asset that lives on its balance sheet. The money that has gone to that house can’t be put into another house until the first house is sold. The longer a house sits on Opendoor’s balance sheet, the worse the outcome for Opendoor because debt costs money in the form of the associated interest expenses and there is an opportunity cost every day that goes by without that house being sold.
The big questions that investors need to ask are 1. What happens if Opendoor can’t sell the house? And 2. What if the house has to be drastically marked down to sell it? This is not an idle issue, the company ended 2023 with 18% of its home inventory having been on the market for more than 120 days. That number dropped to 15% in the first quarter of 2024 and 14% in the second quarter. It then shot up to 23% in the third quarter and ended the year at a seemingly high 46%.
Nearly half of Opendoor’s inventory is “old” as it starts 2025. Some of that is likely related to the shift in the buying approach. However, the longer homes sit unsold, the worse the outcome for Opendoor and its shareholders. Interest expenses have to be paid and the company may have to forgo buying homes that would be easier to turn over. There will always be some misses in the mix, given the highly unique nature of every home. But using debt to buy what are really illiquid assets at scale could end up being the fatal flaw in Opendoor’s business model.
There is a material risk here
Debt can be a powerful tool, fostering growth and expansion if it is used wisely. Debt can also be a dangerous weapon that a company unwittingly hurts itself with when used unwisely. Given that Opendoor isn’t yet sustainably profitable, investors should tread with caution as it takes on debt to buy homes that don’t appear to be selling very well. That could change, but until it does this is a high-risk investment that only the most aggressive investors should probably be looking at.