One of the biggest obstacles to scaling an iBuying business is capital. After all, it costs lots of money to be able to buy thousands of homes and hold them on a balance sheet until they sell.
This is one area where Opendoor (NASDAQ: OPEN) is outpacing its peers. We recently learned that Opendoor has increased its access to capital by billions of dollars. Here's a rundown of the specifics and why investors should pay attention.
Opendoor has deep(er) pockets
Opendoor recently added a $3 billion mezzanine debt facility, according to an SEC filing, which brings the company's total borrowing capacity to $9 billion.
To put into perspective what this means in iBuying terms, consider that the median existing home selling price in the United States is $356,700 as of August 2021. So, $9 billion gives Opendoor the ability to add more than 25,000 homes to its balance sheet.
It's also worth noting that Opendoor had more than $1.5 billion in cash on its balance sheet at the end of the second quarter and priced an $850 million convertible senior notes offering in August. Opendoor typically uses a combination of (mostly) senior debt and mezzanine debt to fund its home purchases.
Based on the company's traditional usage of debt (senior debt to cover 80% to 90% of a purchase), the mezzanine facility should allow the company to buy 40,000 additional homes, but it would need to access more senior debt to do that. Even so, the 25,000 homes its current credit facilities would support is more than the entire iBuying industry bought in the second quarter.
What does this mean for Opendoor?
According to a report by Zillow (NASDAQ: Z) (NASDAQ: ZG) that analyzed the four largest players in the iBuying industry -- Zillow, Opendoor, Offerpad (NASDAQ: OPAD), and Redfin (NASDAQ: RDFN) -- the second quarter was the best one yet for the iBuying business. iBuying accounted for more than 1% of U.S. home sales for the first time ever, and homeowners sold more than 15,000 homes to iBuyers during the quarter.
Well, Opendoor reported that it purchased just under 8,500 homes all by itself in the second quarter, more than the other three combined. At the end of the quarter, the company had $2.7 billion worth of inventory on its balance sheet. Adding billions in purchasing power dramatically increases the amount of inventory Opendoor can buy, which could help the company expand its lead.
There's room for several winners, but…
To be sure, although there are four major competitors in the iBuying space, that doesn't necessarily mean that just one company will win the race. There is plenty of room for more than one (or all four) of the major players to multiply their business several times over. Opendoor's capacity to buy another 25,000 homes might sound massive (and it is), but keep in mind that more than 2 million homes are sold in the U.S. annually.
And while Opendoor has the deepest pockets in the industry at the moment, the other companies have competitive advantages of their own. Zillow's home search website gets nearly 230 million unique users every month, creating a massive customer base to pitch iBuying to. Redfin's brokerage services create a funnel of business as well, as many people choose to list their homes on the open market first before deciding on the iBuyer route. And Offerpad has an efficiency edge, actually turning a net profit in the second quarter.
Scaling an iBuying business requires lots of capital, and Opendoor has done the best job of removing this obstacle (so far). However, we'll see in the coming quarters if seller demand is strong enough to allow Opendoor to put its newfound billions to work.