Business Breakdowns
· Kaz Nejatian
[00:00:00] S1: First, it was my wife who wanted to sell all of our possessions to take Opendoor private — or at least she was the one who encouraged me to think about it. There are two things that have actually held in my mind, and I try to be thoughtful about this. The first is the company is structurally in much better shape than I thought it would be. The underlying models, the underlying databases, the underlying processes are just in much better shape than I expected they would be. The company had started this doom loop of going down and down and down, but it does feel a lot like in Raiders of the Lost Ark, when it's the guy guarding the cup. There's a bunch of people here who were still guarding the cup, and that had kept it in really decent shape. The underlying model is honestly in very good shape. We've invested a lot in it, but I'm very impressed. Second, I significantly underestimated the attach opportunity. I have done this whole attached services thing my whole career, and I did not expect our first crack at this to go so well. Those are two upsides. Generally, very impressed. The main downside — just to be self-reflective — is I was honestly shocked by how the company was being run by outside consultants for so long. It feels like the people who were making decisions for the company had almost no stake in the outcome of those decisions. So the OpEx was honestly stupid — and not just stupid, but spent on the wrong things. I think that was actually offensive.
· Matt Reustle
[00:00:00] S0: Based on the OpEx metrics today versus when you stepped in, you've done something about that, so it's been reflected in your actions. I want to go back to your point on attachment, and even just higher level. When I first came across Opendoor, I had a very simple view that it was essentially a real estate asset manager based around tech. That is overly simplified, but you clearly distinguish it as a software platform. How do you think about the capital intensity and the underwriting skill set required to run the business when you're clearly aiding all that with the technology? How do you think about that aspect of it, which many traditional investors — the East Coast types — can get hung up on?
· Kaz Nejatian
[00:00:00] S1: I think the underlying assumptions about the business are fundamentally wrong. And by the way, those assumptions were held by some people inside the building for a while. It's not like people in New York were wrong; people in San Francisco were also wrong. Saying Opendoor is an asset manager that happens to have software is like saying Amazon in its early days was a warehouser of books that just happened to have software. Did Amazon warehouse books? Sure. But was it a warehouser of books? No. That's not where the leverage comes from. The very real difference between being a prop desk and a market maker — if you're a prop desk and you hold assets for profit, you do one set of things. If you're a market maker and your fundamental job is to not hold assets for profit, you do a different set of things. Opendoor is a market maker, not a prop desk, at a core asset level. So do we have to be very good at underwriting? Damn right we do. We have the best underwriting engine in the business — there's nothing close to it. And I say this as an honest-to-goodness nerd. But there is a very real difference about where that underwriting engine is pointed towards. If you look at a company like Citadel, Citadel gathers a crap ton of data — a crap ton of data. Why do they do it? The end matters as much as the means.
· Matt Reustle
[00:00:00] S0: 100%. I'm coming to appreciate that many people got caught up with “trust the process” — you're really “trust the outcome,” and “trust the endpoint.” You're putting that into vogue, which I can appreciate. On that point, that's a really great way to distinguish market maker versus prop desk — it gets into this concept around spread versus velocity. What does it mean in practice to really focus on velocity? Is it focusing on markets where there's higher turnover of homes? Is it focusing on capturing less spread, therefore we can sell faster? If you were to stack rank the really important drivers of that focus on velocity, what would those be?
· Kaz Nejatian
[00:00:00] S1: Look, if you think about it, Opendoor has an embedded advantage compared to every other buyer and seller of real estate in our cost of capital. We're just bigger. We're relatively big. We have a great capital markets team. But that has not been adequately used by the company. The best reason why you want to always be in a flow market — at the end of the day, card counters at a blackjack table play every hand. The reason they play every hand is to get more information. The information is the point. When we buy lots of homes and sell them very quickly, we get very live feedback about actual market conditions. Not just about the clearance price, also about the renovation process, also about the demand that impacts every other demand. We pick up data in a way that no one else does. And by the way, we're ahead of the market. Even if you were scraping all the data you could from MLSs, you'd be 90 to 120 days behind us, because we're picking it up live. We have access to data in a way that very few people do. When you are a market maker at a stock exchange — everyone sees the up and down. We have a 90 to 120 day advantage on the market. It's a very real thing, but you can't use that advantage if you decide you want to have very high margins on every single trade. Let's say you want high spreads in buying an asset. So I come to you — you think your home is worth $400,000, I agree it's worth $400,000. If I offer you $300,000 for it, you will tell me to take a hike. The only scenario under which you will not tell me to take a hike is if you know things I do not know. I am paying for a negative feedback loop. I'm not actually getting $100,000 of spread, because there isn't that much arb in real estate. But if I am able to have very tight spreads, you can say look, if I list my home, I have to pay realtor fees, taxes, holding costs, I have the risk of the home falling through, I have 90 to 120 day hold periods — there's a cost to me. If I can add those up and come to you saying, look, I will do it for you faster, cheaper, more certain — you'll say yes to me as a rational human being. And I still have significant room for margin.
· Kaz Nejatian, Matt Reustle
If I can compress that — if I can buy from you at a better deal with more certainty than you would sell into the market, and sell to the next person at a better deal with more certainty than you would buying from market — I'm just increasing my information advantage. And as we've shown, we also have significant attach opportunities. We own a title and escrow business which is growing very quickly. We have a mortgage product, which is just excellent. The things you need to do to underwrite a home to acquire it, underwrite a home for a mortgage, and underwrite a home for insurance are all identical to each other. In a traditional market maker world, like in the stock market, the attach opportunities aren't as significant. Whereas in this world, the attach opportunities are significant. So as long as I can move fast, the business works. [00:00:00] S0: If I were ever going to sell my house, why would I pick Opendoor? Because I could do it faster, I could get the offer quickly, the likelihood of closing — I know not every contract you go into actually closes. But that's focused on speed and almost removing the inconveniences associated with real estate sales, of which there are many. Would you say that's an accurate depiction, or am I shrinking the customer base too widely when you think about who the ideal partners are?