Upon studying the housing market, I found many of the key examples of market failure being exhibited in a way that leaves the industry ripe for disruption and for an entrepreneur to create a new kind of platform as a marketplace that solves for the central issues. As Alvin E. Roth explains in his 2015 book, Who gets What – and Why?, “markets with failures need market designers to step in and to create a new process by which the market can succeed, “…market designers are like firefighters who come to the rescue when a market has failed and try to redesign a marketplace, or design a new one, that will restore order.”
Opendoor is a San Francisco based housing platform established in 2014. The marketplace is a self-described, “online home-selling service aimed at streamlining the sales process down to a few days.” Opendoor’s key customer value proposition for the sellers is that if the seller’s home is accepted, an offer can be given and the home can be purchased within 48 hours, without there needing to be a buyer in place. The value proposition for the buyer is that Opendoor has a well assessed and ready to sell portfolio of properties from which the buyer can choose from. As Bloomberg explains, “Opendoor tries to simplify home transactions by having sellers fill out an online form and using algorithms and market data to put together an offer within 48 hours. If the homeowner accepts, the firm sends an inspector, who confirms or adjusts the offer. Opendoor then buys the home, makes repairs and puts the property back on the market.” However, for this ease of use, Opendoor adds an extra fee of 1% – 1.5%, on top of the 6% broker fee that is usually charged, and so the seller will need to decide if this additional fee is worth it, especially in the current market where there is a relatively limited supply of available listings nationwide and so finding a buyer has become easier as, for a buyer, one’s options are more limited. As Ralph McLaughlin the Chief Economist at Trulia explains, “Their success hinges on the ability to make the fee low enough to entice sellers, but high enough so that they can cover the risk of not being able to sell the house”
Opendoor mitigates the issue of information asymmetry in its markeplace by acting as the buyer for every home that comes into the platform and the seller for every home that goes out of the platform. The company is incentivised to find out the true value of the homes it is buying as it is taking on the inventory risk, with no guaranteed buyer, and therefore a micalculation in the value of a home is detrimental to the property’s resale value and the company’s ability to be able to sell it. Similarly, Opendoor’s business model only works if they are able to instil a sense of trust and credibility with the potentially buyers on the platform and the most effective way to do that is to have radical transparency surrounding the homes and the details of them.
The housing market is what is called a matching market, meaning that an individual seller has to wait for an offer to be made to her personally and that seller must accept the individual’s offer for a transaction to occur. This leads to one of the most common market failures, congestion, or synchronicity. Transactions within the market can only occur when there is a direct match between the buyer and seller and as there is no consistency to when a person might want to buy a home, “sellers may elect to keep their property on the market for months, waiting for buyers who preferences precisely match the property’s attributes and should be willing to pay higher prices.” As well, in matching markets, most players act in a sequential evaluation manner, meaning that they will only give one offer to buy a home at a time, increasing the rate of congestion in the marketplace.
Opendoor’s platform serves as an innovative solution to this problem. The Opendoor model turns the matching market into a commodity market by having Opendoor assume the role of the buyer in a commodity market for each seller, thereby mitigating the congestion created in the market due to synchronicity. Any seller may sell her house at any time, providing that she accepts the offer from Opendoor and is willing to pay the additional 1% – 1.5% fee, and any buyer has a ready portfolio of properties to choose from where, as long as she is willing to pay the sale price, there will be no waiting for another buyer.
Having raised $320M of venture funding since its founding, Opendoor is well poised to execute on the loft goals it has to transform the current housing market in the US into a marketplace based on efficiency, convenience and ease of use.
Who gets What – and Why?, by Alvin E. Roth, Houghton Mifflin Harcourt, 2015, Page 11
Who gets What – and Why?, by Alvin E. Roth, Houghton Mifflin Harcourt, 2015, Page 8
Making Markets, by Thomas R. Eisenmann and Scott Duke Kominers, Harvard Business School Publishing, 2018, Page 4