My Advice to Opendoor in 2019? Beat Zillow

Opendoor is between a rock and a hard place, so it would seem.

Mike DelPrete points out several of the hardships of a business model like Opendoor, including an undifferentiated product, resource intensive, and no repeat customers. We might throw in minuscule margins and exposure to housing market volatility.

Not only that, but Opendoor is stuck competing against people on all sides. Behemoths like Zillow and Redfin have introduced their own iBuyers, but both A) have the luxury of making money doing something else, and B) giant lead generating infrastructure that makes their customer acquisition costs for a new program nearly $0.

And then local upstarts like Amne and Perch are able to replicate Opendoor’s model fairly easily. There is nothing proprietary about what Opendoor does at this point that would keep new market entrants from cannibalizing their customers.

These are three slightly different but related problems. And ultimately, it has to do with lead generation and monetization – the core of any business. The following are my ideas on how Opendoor can cement its place in the iBuyer space and begin the road to profitability and its future montetization opportunities.

Incumbent Lead Generation

The Problem

Opendoor gets leads by spending a lot of money on digital marketing. Almost all of their leads are from paid advertising. That means they have a customer acquisition cost probably in the $100s if not $1000s per customer.

Their most dangerous competitors are those who already have those leads coming in for practically $0. Specifically, the portals like Zillow and Realtor.com.

The portals have spent a decade earning Google love, and now have an immense amount of “free” consumer traffic and brand recognition. Their iBuyer product is an easy way to “upsell” existing customers with almost no additional customer acquisition costs. It’s a brilliant way for Zillow to make more money without growing traffic (because their traffic can’t grow much more than it already is).

That means (and I’ll go into this more in the next problems) that Zillow has far better margins per customer and will therefore always have an important financial edge over someone like Opendoor.

The Solution

Beat Zillow.

That’s right. They need to do what everyone else in real estate has been trying to do for a decade. Succeed where Redfin and Move Inc have spent millions on achieving but yet to do.

Like Realtors, Opendoor has to make a choice. Are they going to rent their leads from third parties like Google, or are they going to earn their leads with SEO and digital tools that attract customers? For the time being, they have to do the former while they grow. But I believe Opendoor should be enacting a plan to defeat Zillow at its own game – and become a portal.

There are a few ways to possibly go direct to customers and around Zillow. Maybe partner with homeowner association management companies, for example.

But the most interesting to me is beating Zillow at its own game and becoming a portal/publisher.

How could Opendoor possibly do that? I talked about it some on my last post about the future of real estate, local SEO, and content marketing. I specifically talk about what I perceive to be Zillow’s weaknesses regarding hyperlocal content and how to exploit them.

Opendoor should start by initiating a lucrative affiliate program for sites that send them seller leads. The result will be like hiring a mercenary army of hyperlocal content creators that you only have to pay when they deliver the goods, and at a fixed, predictable cost.

Eventually, Opendoor could buy the most prolific and successful affiliates, and suddenly have a strong website or group of websites that generate their own organic leads.

Alternatively, they could look at existing publishers that already have a strong content game, like Vox Media’s Curbed.

Undermonetization of Leads

The Problem

Rob Hahn has persuasively hypothesized that Zillow has a huge advantage in the iBuyer space. It’s conceivable that Zillow could afford to lose money buying homes, but still make money overall.

They would do that by selling seller leads to agents. Maybe 9/10 of the leads they get decide that selling to an iBuyer is not the right decision. But Zillow could then sell those 9 leads for $100-$200 a lead. Maybe more? Or a referral system like OpCity could mean that those leads are worth $1000s each when they close. At those kinds of numbers, you don’t even have to break even to make money doing what you already do: selling leads.

Opendoor can’t afford to lose money buying and selling homes. That is their entire business. How are their offers going to compete with Zillow’s offers when Zillow doesn’t even have to be profitable? Zillow will just offer sellers more than Opendoor, and sell leads for homeowners for whom that still doesn’t work.

This, of course, assumes that Zillow would generate more leads than it would actually buy homes, and if its offers are too high, the 1:10 ratio might fall. But presumably Zillow can either strike a profitable balance, and outcompete Opendoor any time it chooses.

The Solution

Opendoor needs to sell leads to agents.

They’ve already started on this route, working with co-listing agents. The next step is to monetize the leads further. Many of these leads they could sell to agents just like Zillow does.

Opendoor doesn’t even have to set up their own lead selling service to do it. They could instead partner with OpCity and Realtor.com to resell these leads for them.

I think the partnership with agents should be taken to the next level, as it would also help address the third problem…

Easy Competition

The Problem

Buying homes profitably at scale is not easy. But it’s also not proprietary. Most competent companies with a lot of money can, within a limited geography, do what Opendoor does. And indeed, the iBuyer market is flourishing with new startups and competitors like Offerpad, Amne, Knock, Perch, and the incumbent intruders mentioned before like Redfin Now, Zillow Instant Offers, and KW.

Opendoors biggest advantage over all of these at the moment is that they are simply farther along in the process. They are better funded than Offerpad and the other upstarts, and they are in more markets than the institutional guys. It is a operations intensive business and will take everyone time to catch up. But, over time, Opendoor’s first mover advantage will shrink away.

The Solution

Opendoor should white label its services to the major brokerages and Move.com.

Why should Realogy compete with Opendoor when they can join forces?

That would allow Opendoor to dramatically eliminate several major sources of potential competition, while simultaneously putting their market expansion into hyperdrive.

Realtor.com could start their own service – call it whatever they want – but it’s actually Opendoor behind the scenes running the operation. Opendoor is now not just a B2C but a B2B company.

The upside for Opendoor (and downside to Realogy and co) is that if the iBuyer model successfully takes root in the American consciousness and makes more than just a sliver of transactions, Opendoor doesn’t have a competitor but a collaborator for that business.

Partnering with the brokerages can also help drive consumer adoption and trust. Imagine Coldwell Banker and Berkshire Hathaway and independent brokerages showing up at listing presentations, presenting both the listing scenario and an iBuyer offer. The brokerages are paid a referral for sellers who sell to the iBuyer, and keep the listings for those that don’t.

Conclusion

Am I crazy? Maybe? Tell me in the comments.

I’m not a connected big-time anybody. No doubt Opendoor and other iBuyers are far beyond these casual musings of mine. But these are just my layman observations as I try to predict the changing landscape of real estate. It will be interesting to check back in on this post in a few years and reflect on how right or wrong I was.

Opendoor has challenges, but also reasons for hope. Rob Hahn at the Notorious ROB paints a far rosier future for the iBuyers generally, and Opendoor in particular. In their podcast, Rob and W&R Studios exec Greg Robertson muse about the numerous monetization strategies Opendoor might have in the future. And nobody denies that, so far, Opendoor has executed well – the biggest challenge of any enterprise.

It’s certainly a fun time to be in real estate and I look forward to seeing what 2019 brings for Opendoor and our industry more broadly!