The Federal Trade Commissionfined Opendoor Labs Inc. $62 million this week, accusing the iBuyer giant of cheating sellers and being dishonest about its offers.
What really happened behind the scenes? And what can real estate agents do to help their clients protect themselves, however they decide to sell their homes?
OPENDOOR’S EMPTY PROMISES
Opendoor’s biggest promise—the one that got sellers to sign up with dollar signs in their eyes—was that consumers would make more money by selling their homes to its iBuyer instead of the traditional sales on the open market.
That promise rested on three others: Opendoor would offer market value for consumer’s homesConsumers would pay lower costs than with traditional home salesConsumers would make more money than with traditional home sales
As the FTC complaint points out, Opendoor promised to use its “cutting edge technology” to save consumers money with market-value offers and reduced transaction costs.
The reality was pretty much the opposite: offers were below market value—by design—and costs were significantly higher than what consumers paid through traditional sales.
As a result, the vast majority of those who sold their homes to Opendoor lost thousands of dollarscompared to what they would have gained in net proceeds from selling on the open market.
Opendoor promised to revolutionize the real estate market but built its business using old-fashioned deception about how much consumers could earn from selling their homes on the platform. There is nothing innovative about cheating consumers.Samuel LevineDirector of the FTC’s Bureau of Consumer Protection
THE REALITY OF WORKING WITH OPENDOOR
The FTC complaint went into exhaustive detail on the reality of working with Opendoor as a seller—exposing each of Opendoor’s promises and misleading claims.
Evidence from the FTC complaint revealed the following: Opendoor consistently offered less than market value for seller’s homesOpendoor’s costs were higher than what sellers paid in traditional salesOpendoor demanded repairs that were not required with traditional salesOpendoor overstated the cost of traditional sales (to make themselves look better)Opendoor adjusted its offers to offset estimates for potential repairs—and kept the difference as revenue–without disclosing that to the seller.
AUTOMATED VALUE ESTIMATES AND MANUAL ADJUSTMENTS
Opendoor used an automated system to determine expected market values for homes. In many cases, Opendoor employees manually adjusted those values—reducing them by a predetermined percentage—before presenting them to sellers as “market value offers.”
Starting no later than 2019, Opendoor instituted a company policy to reduce its manually-adjusted offers to a specific percentage below Opendoor’s assessed market value.
In short, Opendoor higher-ups knew those offers did not represent market value, but presented them as if they were.
And as long as consumers didn’t look too closely or compare those offers with someone else’s, they got away with it. Until they didn’t.
BUYING LOW AND SELLING HIGH—AND LYING ABOUT IT
Opendoor claimed that, “unlike a home flipper,” its business model isn’t based on buying low and selling high. According to the company’s marketing copy, it makes money by charging a fee for its service. Sounds pretty transparent, right?
A closer look at Opendoor’s offers reveals that selling homes for more than its (below market value) offer price is a significant part of its revenue.
So, buying low and selling high is exactly what Opendoor was doing.
OPENDOOR DEMANDED EXTRA REPAIRS
The FTC complaint included Opendoor’s own internal study of sellers who withdrew after receiving Opendoor’s repair demands. Those studies showed that people who then sold their homes on the open market did so without having to make the repairs Opendoor demanded.
So, after advertising that consumers would save money by selling their homes to Opendoor, the company charged sellers for repairs that weren’t even necessary.
And then the sellers (understandably) said, “I’m out,” and ended up selling their homes without said repairs—likely at a price closer to market value.
OPENDOOR COSTS VS. TRADITIONAL SALES
According to the FTC complaint, Opendoor overstated the cost of traditional sales to make it look as though it was saving consumers money.
The company made a habit of misrepresenting the amounts sellers should expect to pay for some of the costs involved in traditional home sales with real estate agents—all to make Opendoor look like a less expensive and more consumer-friendly alternative.
In fact, most sellers working with Opendoor ended up paying more than what consumers typically pay when working with a traditional realtor.
ADJUSTING FOR REPAIR COSTS
Around August 2018, Opendoor started adjusting its offers (i.e., reducing them) to offset anticipated repair costs.
Except no one bothered mentioning this to sellers–or even hinting that the offers were below market value (which they were). If actual repairs were less than the amount withheld from the offer, Opendoor kept the difference as revenue.
Even before Opendoor implemented this policy, it reduced certain offers to offset potential repairs, which meant sellers were getting sub-market offers. At the same time, Opendoor hid the assessed repair costs from them.
OPENDOOR’S STATEMENT ON THE FTC SETTLEMENT
Opendoor issued its own statementin response to the FTC complaint, disagreeing with the allegations but agreeing to the settlement so it can “resolve the matter and focus on helping consumers….”
According to its statement, “allegations raised by the FTC are related to activity that occurred between 2017 and 2019 and target marketing messages the company modified years ago.”
So… cheating customers way back in the 20-teens is so not an issue anymore, especially since Opendoor has updated its marketing copy since then.