For any company trying to profit from related services, and there are many of them, mortgages remain a challenge. This is not a panacea for profitability.
A key component of iBuyers’ long-term profitability is their ability to connect related services such as mortgages and title insurance. The Opendoor mortgage attachment rate in Arizona has recently changed dramatically – from about 2 percent in the past 18 months to 9 percent in April and a record 12 percent in May.
While the improvement is significant, there are a few points worth clarifying:
- Although the percentage is high, the original numbers are low. May’s figures equate to roughly 19 deals in which Opendoor sold a home and incorporated its Opendoor Home Loans product.
- Investment rates and the number of loans in other markets remain low (about 2% in Texas). In May, there were five Opendoor home loan transactions outside Arizona.
- In context, the 12 percent mortgage lending rate is an improvement, but still well below the industry average and energy buyers…
The cost of gaining market share
Opendour is making impressive progress in Arizona, but what drives him? It looks like it all comes down to financial incentives: Opendoor is offering an additional 2 percent discount to buyers using Opendoor home loans.
At the time of writing, this promotion appears to be active in the Phoenix and Atlanta markets.
Opendour suggested the following table potential buyers (and their agents) showing savings when using Opendoor home loans.
The problem with these rebates is that Opendoor spends all of its margin to gain market share. In its investor presentation, Opendoor states that there is a $ 5,000 target margin on mortgages that disappears instantly on a 2% return.
The growing percentage of mortgage borrowings by Opendur in Arizona appears to be the result of significant financial incentives or a “let’s put money into the problem” strategy.
There are two sides to Opendour’s throw-the-money strategy. On the one hand, Opendoor has virtually unlimited access to capital and leverages this competitive advantage through competing where he can win…
On the other hand, investing money in a problem is a relatively simple and crude approach to gain traction and demonstrate revenue growth – but at what cost? How valuable is a service if you have to pay people to use it?
Losing money on an underlying iBuyer transaction in hopes of making money on a mortgage (which also results in a loss of money) does not counterbalance. The two loss leaders are making no profit. For any company trying to profit from related services, and there are many of them, mortgage remains difficult; it is not a panacea for profitability.