Although the expression has been in use since at least the early 20th century, it was Robert A. Heinlein’s 1966 science-fiction novel The Moon Is a Harsh Mistress that brought “there ain’t no such thing as a free lunch” to popular attention. The idea, which in many ways is fundamental to modern economic theory, was then further immortalized in a book by Mr. Monetary Policy himself, Milton Friedman.
The concept is simple enough. To achieve profit, something must be given. You do not get something from nothing. By extension, you should also not expect to get a lot in exchange for a little unless the cost is born by someone else.
Unlike other economic principles, the free lunch is intuitive, and so it makes sense that many are skeptical when they encounter any profit opportunity which does not demand unusual effort, talent, or resource.
At first glance, the lure of real estate investment arouses similar suspicions. If you spend too much time tuning in to popularizers in podcasting and online blogs and forums, you will hear that real estate is easy to learn, mostly passive, and so lucrative that it can set you financially free, never again having to exchange labor for salary.
So, what gives? Is the whole industry steeped in a false promise of the proverbial free lunch? Or worse, is the profit from real estate investment a free lunch for the investor whose true cost is born by an unwitting society at large?
OpenDoor capital seems to believe the latter.
Opendoor is among the most prominent of iBuying institutions, the rise of which is a much talked about trend in real estate. In recent years, large organizations like OpenDoor, Zillow, Offerpad, and Redfin have advertised a direct purchase alternative to listing properties on the market. Though the dominance of these and other, more traditional institutional buyers in the marketplace is often exaggerated (in 2021 only 13% of residential houses were purchased by institutional investors, with most of those being smaller LLCs and only 1.3% of those being iBuyers), institutional buyers have been very active and richly rewarded. Opendoor is no exception. Founded in 2014, it has enjoyed increasing year over year profit ever since, which culminated in an eye-catching $8 billion in revenue and $730 million in profit in 2021.
Now, there is nothing wrong with profit, of course. In the modern economy, reward follows value creation, and so the presence of reward alone is no proof of foul play. What’s more, one can spot the value proposition of iBuying fairly easily: home sellers are provided a fast, convenient, and fair alternative to the often stressful process of listing their home with a real estate agent.
The problem is the company took a shortcut. Despite operating at scale as one of the first tech movers in an asset class with plenty of yield to go around, the company could not, apparently, resist squeezing more profit off the top by performing their service disingenuously.
Earlier this year, the Federal Trade Commission fined Opendoor $62 million for misleading their customers. Their marketing materials claimed customers would save money in transaction fees and that all offers were fair market value. After reviewing the evidence, it was clear to the FTC that many homeowners did not save on fees and could have made more money selling on the market with a real estate agent.
This was no slip of the hand by Opendoor. It was a slip of the mask.
Everyone in the industry knows that the surest way to maximize return on the sale of a home is to list with a real estate agent. This is particularly true in a seller’s market with low supply and high demand. As such, it is clear that Opendoor misled its customers knowingly, which reveals a lack of not just moral scruple, but also of backbone.
The thing is it was perfectly feasible for them to make money without lying about their service. It would have just been harder. For evidence, one need look no farther than the business of direct buying at large. As honest direct buyers can attest, people are willing to sell their homes without a real estate agent for various reasons. They could need to move quickly, for example, have low tolerance for a lengthy sales process, prefer cash offers or, most commonly, own a home that needs a lot of repairs that would require some elbow grease to bring to market.
As honest direct buyers can also attest, however, doing steady business the right way demands a refined and empathetic organization. Real estate investment is so profitable because it still revolves around people. That means the assets changing hands are most often those of long-term home owners; average Americans not familiar with the industry and whose homes carry emotional significance.
The difficulty of operating systematically in real estate given this human, emotional element to the transactions is precisely the reason the market has not been smoothed of inefficiencies like other asset classes. For any company trying to take advantage of the opportunity, there are one of two paths available: work hard, or cheat.
Knowing that homeowners are often not in a position to assess market value or calculate all the fees, Opendoor took precisely that disreputable, latter route by lying to their customers. In so doing, they shirked the extra work and placed the cost of their profit firmly onto the heads of the people they were purporting to service. This is a reprehensible, cowardly thing to do.
For shame, and for good that some of the clients they grifted will likely receive some compensation from the FTC ruling. We can only hope that this becomes a clear message to other big institution operating in the space: do it right, or take a hike. There is no place for that kind of chicanery in modern business.
Lots of lunch is out there yet to be enjoyed in real estate. It’s just that, as always, none of it is free.
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