When will Opendoor close its doors?

[Chris Martin]

The homebuyer/flipper company Opendoor Technologies (OPEN) is starting to look like a zombie company.

Last quarter, they produced negative gross margins (-12.6%) and lost $928 million in operations. Their market cap (number of shares times stock price) is $1.08 billion as of market close Friday.  Their balance sheet is in tatters. DOOR assets consist of $6.1B in inventory and $3.25B in liquid assets (cash, restricted cash, marketable securities) BUT $3.37B in the current portion of non-recourse asset-backed debt. Their total debt load (including convertible notes) is $8B. Details are available for investors to see via their latest 10-Q. 

Their stock price is off 95% since they made a weekly high closing price of $34.59 on 2/8/21. Yesterday, the stock closed at $1.71 per share. On November 2, they laid off 18% of their workforce, per page 33 of their 10-Q. The low OPEN market cap makes me think that new equity financing is out of the question. Their borrowing capacity (page 16) seems like it is adequate but only if they can avoid a couple quarters of losses like they have just experienced. We are in the slower, seasonally impacted, transaction impaired, phase of the market. Couple that with bloated inventory and two quarters of losses is feasible. 

The Management’s Discussion and Analysis of Financial Condition starts on page 32 of the 10-Q. Under Current Housing Environment OPEN management says several things that I consider 'red' or 'yellow' flags. OPEN management statements are 'quoted in italics', my comments are in bold:

'While we had anticipated a slowdown in the housing market from peak levels, the speed of adjustment realized earlier this year was much faster than expected and sharper than typical seasonal trends.' - really? The Fed telegraphed rate hikes well in advance, and the impending impact was well known in the industry. At least you admit you failed to see it. Mgmt, you missed. Why are you not fired?
'...we have continued to adjust down listed prices on our inventory to stay in-line with the market and drive resale clearance.'  - it appears decay in gross margins will continue into the future

'...we have recorded inventory valuation adjustments of $573 million ... during the three ... months ended September 30, 2022' - It seems this impairment will impact future quarters when the sales are realized. Perhaps $1B losses are possible in 2023Q1 and Q2
'We have also proactively reduced our acquisition pace via higher spreads embedded in our offers' - Coupled with a slowdown in the market, the question becomes if your anticipated 'higher spread' will actually materialize. My hunch is that your inventory problem will only continue for the foreseeable future and gross margins will remain distressed.   

There are more. They go on to talk about inventory management and say homes "on the market" for greater than 120 days... represented 21% of our portfolio, compared to 15% for the broader market... In other words, OPEN is underperforming the market. I'm not really surprised. I prefer to use 90-day intervals for quick turns when in hot markets because DOM is compressed. I guess 120-day is reasonable given the market is in correction. 

Upshot #1
So... I turned to my local data sets (county downloads) to see what, if anything, I can glean from the local market. My last SD (Snapshot Date) was 11/2/22. At that time OPEN owned 274 properties in WC (Wake County, NC) which includes Raleigh. Here's what is alarming: Their house inventory at SD held greater than 90 days is 60% of their WC holdings. Here's a quick look at their inventory age (dates are 2022:)

Date  Number of Properties
Before August 165
Aug 59
Sept 31
Oct 19

As OPEN says on page 35 they "significantly reduced our offer pace and subsequent closings of new home acquisitions in light of our risk management objective" and it shows in the overall Raleigh market. They are buying less, but they are still buying. Most likely, the recent closings represent contractual obligations from (potentially) many months ago. In November, OPEN bought 25 houses per public record. Sidebar: they bought two houses on 12/2, the day they laid off 18% of the workforce.

I took a quick look at some of their inventory. I couldn't automate this analysis, so I picked some properties and ran numbers by hand. That's why there are only a few semi-random picks (if I saw a street name I knew, then I picked it.) Post edit: The table is not ideal - "P Date" = Purchase Date; stamps = Tax Stamps Paid; PP = Purchase Price; NFS = Not Yet For Sale;  SPrice = Sale Price

P Date stamps PP Listed? SPrice Cut? Amt?
7/21 854 427,000 Pending 391,000 11/10 13,000 541 TEXANNA WAY Holly Springs
7/15 772 361,000 NFS 361,000 ? ? 604 SUNSET DR Fuquay
6/30 711 355,500 ForSale 321,000 11/17 6,000 1317 GREENBRANCH Raleigh
6/22 543 271,500 ForSale 247,000 10/20 6,000 5269 WINDY HILL Raleigh
5/31 727 363,500 SOLD!! 346,000 810 LAURENS WAY Knightdale
5/17 928 464,000 Pending 413,000 11/17 15,000 7228 OAK VILLAGE Fuquay
3/28 637 318,500 SOLD!! 300,000 11/30 1348 BROMPTON Garner

Buying a property for $318,500 and selling it for $300,000 is not a sustainable business model. 

Upshot #2
OPEN may be open (no pun intended) to moving inventory. By that, I mean lowering price so a real investor can buy it. This may be an opportunity going forward. Time is on the side of the buyer. For me personally, I'd be exploring this space as a potential LT investment. Please post if you see this as a potential opportunity. 

Upshot #3
OPEN may present opportunity for equities traders via PUT contracts. There were some profitable options chains last week and I am watching for trading opportunities. 

[Ryan Moyle]

Such a great, well thought-out post Chris. I work in the Raleigh market and haven't been able to figure out how Opendoor is still hanging on, not to mention still actively buying houses. I've had 2 situations with OpenDoor recently.

1. Beginning of September, I represented a client buying a house from Opendoor in the Margots Pond subdivision of Wake Forest. Opendoor had purchased the property for 570k. The original buyers before Opendoor had only purchased it for 535k, 4-5 months beforehand. With Opendoor having a 5% fee when they buy from you, it pretty much allowed the original owner to break even. Opendoor did zero updates, if anything the house looked cleaner when they bought it vs when they listed it. They originally listed for 612k in May, my buyers closed on it for 545k in early September. It's important to note that although Opendoor was only losing money on the deal, or their investors were, they were fairly smooth to work with.

2. I made an offer on a house in Durham that Opendoor had also offered on. Needed a complete cosmetic rehab, HVAC, roof, kitchen and baths updated, flooring, paint. Seller had smoked in the house for 5-10 years as well. Completely fixed up/flipped, the house was worth maybe 315-330k. We were trying to buy at around 80% of ARV minus repairs. I believe I came in somewhere around 200-210k. Opendoor offered like 285k. It seemed like they were buying the property at ARV minus repairs, potentially just focusing on appreciation. This closed out less than 5 weeks ago, right around Halloween. I'm sure they charged the seller that 5% service fee as well.

This second situation was very surprising to me. I follow the MLS everyday in the Triangle area and am constantly looking for deals, I see the price drops on Opendoor properties every week. Most of those price drops are now below what they paid for it, some significantly below what they paid. At the time they made that offer, their stock was at an all time low. How could they logically be making that offer? I wasn't surprised we got outbid, it was just the amount we got outbid by. It reminded me of that scene in War Dogs when Jonah Hill gets outbid. There's little to no profit on the flip, especially paying out a buyer's agent commission. I would love to know what equations and criteria they use to buy their deals. Not that it affects me, but hopefully on that one they have a different exit strategy in mind.

I understand that throughout parts of 2020-2021, early 2022. You could buy deals and after 5 months they might appreciate 10% just sitting, or more. Then inventory was so low, you had buyers offering even higher amounts just so they could win the bidding wars. But that is not the current market in late 2022. Like you said that, buying a property for $318,500 and selling it for $300,000 is not a sustainable business model. It seems to me they're still doing it. The only thing you can additionally account for is that 5% service fee they charge, but they still turn around and pay a 2.4% buyer's agent commission on most of their deals. I tend to just study their situation deal by deal, but they're obviously losing money as a whole too. 

With Redfin done buying, Zillow done for now too. Opendoor just did layoffs, changed a handful of their leaderships roles. I can't see Opendoor continuing on too much longer.