Guest Article: Opendoor and the NAR Settlement

This guest article is written by Jeffrey Ye, an early Opendoor alumnus who was part of the founding team of the Finance and Pricing departments from 2016 to 2018. If you are also an Opendoor alumnus and would like to contribute content to this community, please reach out to us at [email protected].

---

NAR Settlement Overview

As many of Datadoor’s followers know, the Q1 2024 NAR Settlement represents a tectonic shift in how Real Estate Agents are compensated in the US. Specifically, buyer agents must now separately negotiate compensation with buyers; and sellers can no longer list expected buyer agent commissions on MLS. Overall, this is expected to put heavy pressure on buyer agent commissions as home buyers, now having to bear the cost of their agent, will be much more motivated to shop around and drive prices lower through competition. 

Impact to Opendoor

Currently, a huge portion of Opendoor’s “spread” or fee which it charges sellers consists of the cost of having to pay the buyer’s agent upon resale. Similar to a typical transaction where the home seller pays 2-3% to the buyer’s agent, Opendoor includes this cost in its spread to sellers which it then eventually pays to the buyer agent. 

 Because this cost is such a significant portion of Opendoor’s spread and hence overall margin, it is very positive news that management is seeing the writing on the wall and already experimenting with significantly lower buyer broker commissions in several markets. (Per some Datadoor data, we see in some markets that they are already experimenting with ~1.5% buyer fees)

Assuming that there’s minimal reduction in buyer demand from offering a lower buyer’s commission, these savings should then flow directly to the bottom line. In a business where basis points are precious, a sudden bump of 100-150bps would be huge for the business. Management could either flow this directly to the bottom line which would significantly accelerate their profitability goal OR allow some / most of it to flow into lower spreads for sellers.

Based on the True Seller conversion curve from their November 2023 Investor presentation, a roughly 150 basis point reduction in spreads (from 5.5% to 4% on the curve below) moves the conversion rate from about 25% to 30%. This is a ~20% increase in acquisition volumes all else equal.

Bottom Line

If Opendoor flows 100-150 basis point savings from lower buyer commissions into lowering spreads, that represents a 10-20% growth tailwind in the near term. This could be a strong catalyst to the upside over the next few quarters.

A big caveat is that this conversion tailwind may only hold true in the short term because sellers right now are anchored to paying 5-6% in fees. In the long-term, as overall seller fees readjust from the 5-6% level to maybe closer to 3-4%, the Opendoor seller conversion curve may shift back down such that this growth
tailwind abates.

That is why I believe Opendoor is moving so aggressively in reducing their commissions right now; there could be at least a few quarters (to maybe even a 1-2 years) where they see huge benefits to their growth and bottom line by essentially “skating to where the puck is going” with lower spreads. 

Additionally, Opendoor believes that lower fees will drive increased transaction volumes across the board. If sellers can net more because fees are lower, then basic economics would suggest home supply will increase as more sellers are willing to list. This rising tide will certainly benefit Opendoor in terms of reducing customer acquisition costs and driving increased acquisition volume. However, I would say this is much more of a long-term tailwind likely to play out over years.  

Management Commentary on NAR Settlement

Now let’s turn to management commentary to see how the company is thinking about the NAR settlement internally. In general, I find it telling that Carrie’s comments have gone from neutral to more optimistic over the last several months.

When first asked about the settlement at the Morgan Stanley Tech Conference Talk in late-Feb 2024, she is clearly cautious and remained relatively neutral on the impact.

Matt Cost:

Right. Talk about the NAR, a major topic in the industry right now. I guess we've seen quite a few headlines, a lot of speculation, a number of different legal cases playing out. But can you just remind us of your view at Opendoor of what is at stake here? What could change? And what impact, if any, it could have on?

Carrie Wheeler:

It's either a pass-through, so it's the worst case, it's neutral to us and maybe there's some benefit over time. I think the more important point for us is like everything we do is like to bring total transparency to the customer…. But it's not a cost. It's not a threat to us in any way. It may be a benefit.

However, by May, at the Q1 2024 Earnings call, you can start to see some more optimism around how the settlement might affect the business as Carrie addresses the settlement in the opening comments:

Carrie Wheeler:

In the near term, we expect the settlement to have a neutral to positive impact on our business… over the long-term, we believe the settlement will drive lower transaction costs and if commissions do decline, Opendoor may be able to pass these cost savings back to consumers in the form of lower spreads which means more cash for our sellers and more customers saying yes will generate in the same margin.

This aligns closely with the analysis above and shows that the company is starting to see what the settlement could mean for growth.

Finally, at the most recent JP Morgan tech conference a few weeks later, she is now unequivocally clear that they believe the settlement is good for Opendoor. 

Dae Lee:

Okay. We have 10 seconds. So I'm just going to ask a short answer question. NAR, good for you or bad for you.

Carrie Wheeler:

Good for us. I mean it's about putting power in the hand of the buyer, decide how they engage their agent and what they pay. At a high level, we think it will decrease commissions, that is net good for the consumer. What it means for us is today, we don't make any money off the buyer broker commission, to be clear, it's a cost to us. So those costs come down, means our spread comes down, cost of delivery comes down, conversion goes up.

We make the same margin, but we can convert more customers. It should create more transactions in the system, right? Lower friction, lower fees… net-net, good time frame, TBD, we'll see how it all rolls out, but net positive for us.

 

Final Thoughts

It seems like Opendoor is starting to realize that they might have stumbled upon a unique and unexpected tailwind to their business. I for one will be looking for this impact to begin hitting the financials in the coming quarters mostly through lower customer acquisition costs either accelerating acquisition volumes or flowing down to move up the expected break-even ANI date. Stay tuned. 

 

Addendum: A slightly more cautionary note

NAR Settlement is potentially the first domino of a larger trend of fee compression in the industry. Related to this, in the most recent Q1 2024 earnings call, Ryan Tomasella asked a very insightful question around whether lower fees overall in the industry puts pressure on Opendoor’s business model. 

Ryan’s Question:

Maybe just to entertain for a moment a more extreme scenario with respect to the NAR settlement and industry structure, clearly the consensus, at least from most folks you talk with, expect commission rates to decline. … is there a clearing rate in terms of commission rates in all in transaction costs, where the Opendoor model perhaps needs to pivot in terms of the value proposition that it's providing relative to the benchmark rate that is prevailing commissions?

Carrie’s Response:

Well, I guess a couple of things. One is, we provide something that you can't get in a traditional transaction. So we provide utmost certainty… and today, we charge a premium to the traditional listing for that through our spreads…. I think in the event that there is more fee compression… we will adjust with the market, and I don't worry a lot about our ability to continue to have an incredible value prop

Personally, I thought Carrie’s response was good but not great. They are now positioning themselves as a “premium” product to combat any potential long-term fee compression. They believe consumers are willing to pay a bit extra for convenience and simplicity (versus pre-ZIRP where Opendoor was espoused as the complete real-estate platform of the future)

Overall, I believe this shift to “realism” is actually a good thing as it brings clarity to the value proposition and gives Opendoor some pricing power. I like Carrie’s practical take on things and their relatively measured approach in running the business; however, the NAR settlement definitely creates more uncertainty on long-term pricing trends and ultimately, we will need to see how Opendoor will respond and survive in this new world.