What was true about real estate 11 years ago is true today — virtually the entire industry remains unaffected by technology. This is why in 2003, after he and other PayPal employees left eBay, Keith Rabois began thinking of ways revolutionize the home selling process with technology. After a few dry ideas, he asked this question:
“What if we actually bought the homes? Is that, like, actually possible?,” Rabois asked.
Imagine if you could sell your house like you sell your car, receiving a guaranteed offer in a matter of minutes instead of months. What if you could purchase a home without the fear of being stuck with it forever? That’s exactly the future of home selling that Rabois wants to accomplish with Opendoor, a new real estate startup that will will buy your home over the web instantly and let you close in three days.
Rabois, who has been recruiting for Opendoor for years, is joined by co-founders Ian Wong, JD Ross, and Eric Wu. The team just officially closed a $9.95 million funding round and they are gearing up to launch the product in select markets this summer.
Opendoor is introducing liquidity into a market that, historically, hasn’t had much — and the potential is huge.
Disrupting the market
For most American homeowners, their home is their largest asset. It is also the most difficult to sell. Rabois said that homeowners need a way to get out from under their house and not feel trapped by it.
“Imagine if you could just walk away from your home whenever you felt like it?,” Rabois said.
If you go the traditional route, it typically costs 6-9% to sell your home, and it takes 80 – 100 days to sell in most markets. It’s a complicated process that encourages to strangers wander through your home. Despite the friction and cost of selling a home, millions of Americans do it each year. Opendoor wants to eliminate the friction, offering convenience as their main value proposition.
“There’s definitely a market for people for people who just don’t want to deal with going on the market, getting listed, having open houses, they just want to be done with it,” said Brendon DeSimone, US real estate expert and the author of Next Generation Real Estate.
Opendoor values the homes sight unseen. Users enter their address, validate their identity, confirm some information that Opendoor already has about your home from public records, and then Opendoor sends an offer. If you accept the offer, you fill out a few forms and choose a move out date. So, users who want to delay their move for any reason can do so. Then, according to the site, it takes about three days to close the sale.
DeSimone said that an automated price based on comparables could give Opendoor a price that is way off. He also mentioned that while he think the opportunity is there, he believes it will be very difficult to automate a real estate transaction.
“Every home and every situation is so different. That’s why it’s going to be really hard to automate this into a one size fits all approach,” DeSimone said.
The company makes revenue by buying and selling the homes. So, users are offered a specific percentage less than the determined value of the home, in exchange for a guaranteed sale and the simplicity of the process. According to Rabois, this is something that “will make sense for some people and not for others.” Users are essentially paying a convenience fee.
The key to success for Opendoor is being able to offer a price that is low enough for the company to make money, while offering a price that is high enough to entice the homeowner to not feel like they are losing out. According to DeSimone, users will have to walk away with what they would netted from working with a real estate agent for Opendoor to have a shot at major success.
“Some people just won’t get it,” DeSimone said. “They won’t understand it, they’ll feel like they’re leaving money on the table. They won’t be certain, they’ll want to list their homes themselves.”
Many people, especially current or former homeowners, understand how complicated it can be to sell their homes. The challenge that Opendoor faces is making people fully aware of the pain it causes to sell a home, and proving the value of a guaranteed sale through their site.
“The product is designed for a typical American homeowner, not a Bay Area technology founder’s custom home. I think we’ll easily be able to serve 80% of the market,” Rabois said.
In the beginning, the company will be targeting primary residential real estate. The product is designed for the median American home price, which hovers right around $250,000. It is launching in several major metro markets this summer and expanding from there. Rabois said that Opendoor will be targeting different regions of the US in order to try and validate the product among the different characteristics of those regions and markets.
Khosla Ventures, where Rabois is a partner, obviously led the round. However, they were joined by an all-star cast of Silicon Valley investors. Here are the most prominent of the almost 30 investors that participated in Opendoor’s first round:
- Aaron Levie, Box
- Max Levchin, Affirm
- David Sacks, Yammer
- Jeremy Stoppelman, Yelp
- Sam Altman, Y Combinator
- Alexis Ohanian, Reddit
- Om Malik, True Ventures
- Elad Gil
- Gideon Yu
- Michael Arrington, Crunchfund
- Dave Morin, Path
- Naval Ravikant, AngelList
Khosla’s fund has plenty of money to invest, so why are there so many people involved in this round? According to Rabois, they weren’t necessarily looking for money, but they were looking for people with strategic abilities to help with the project. And, one of the best way to get involved with something in Silicon Valley is to invest in it.
According to Rabois, the team didn’t solicit any investments. The above list is people who reached out to Rabois about the project after hearing about it through the grapevine. It’s also a comfort thing as Rabois has worked very closely with most of these people before, and he said he is “ecstatic about being able to work with all of these people again.”
Finding the right time
Rabois was working for fellow PayPal alum Peter Thiel at the time he came up with the idea for Opendoor, who originally challenged him to figure out a way to upend the industry. Thiel was adamant that there was an opportunity to be explored in Real Estate and that opportunity rested in technology. Keep in mind this was all before Zillow or Trulia.
Rabois first came up with a project that was similar to Zillow, an online database for available real estate. Thiel wasn’t excited about the initial product, so Rabois went back to the drawing board, looking for something that could attract users without much marketing. This was the point at which he and a colleague began looking at the concept of purchasing the homes.
Rabois and his team began vetting the idea. They hired lawyers and other experts to help them think it through and build out the concept. They then built a beta site to test assumptions and make sure that they could do it with capital efficiency. Rabois explains why it took them 11 years to move forward.
“One of the biggest reasons we didn’t proceed was Peter [Thiel] was willing to invest about five million dollars in the company, maybe up to 10. But, there was nobody else out there to invest money in a consumer startup like this,” Rabois said. “And, this is the kind of business that you just absolute minimum need ten million dollars in capital to validate whether it can be done.”
The team needed to prove statistical significance in model, which is something they couldn’t do with a small amount of capital. So, Rabois decided not to pursue the idea. The team wasn’t there and there weren’t enough options for financing. But, he kept it in the back of his mind, trying a few more times to get it started, but getting pulled into other projects along the way.
Finally, the time was right. Rabois had the right team and the right investors so he decided to pull it off the shelf and get it started. Rabois said the team is made up of 10 people, and the company was started in early Q2 2014.
“It’s incredibly exciting. I describe it often as my one professional regret that I didn’t launch this in 2003,” Rabois said.
The term “disruptive” has become a meaningless, catch-all descriptive for new companies in the Valley. But, if Opendoor can pull off what it’s setting out to accomplish, this could be one of the most disruptive things to come out of Silicon Valley this decade.
But, much of the success or failure of Opendoor will hinge on what percentage they take of the sale. If they take less than the 5-7% that most realtors take, it could be a no-brainer. If they are taking a 10-15% discount then it could be a tougher sell. The game is in the margins.