By Aarthi Swaminathan
The average refund is expected to be $1,024, according to the FTC's refund tracker.
Nearly 55,000 home sellers who sold their homes to Opendoor Technologies Inc. (OPEN) will receive checks after the real estate company settled a lawsuit alleging it misled people into selling their homes for less than they could have gotten. on the open market.
The Federal Trade Commission announced Wednesday that it would send nearly $62 million in refunds to about 55,000 sellers who were "misled by advertising and marketing claims" made by Opendoor.
The average refund is expected to be $1,024, according to the FTC's refund tracker.
Over the past decade, Opendoor had become one of the most prominent instant buying companies, or iBuyers: real estate companies that buy homes directly from owners, rather than acting as middlemen in the open market between sellers and other buyers.
Opendoor had "claimed to use cutting-edge technology to save consumers money," the FTC said, by presenting market value offers and "reducing transaction costs compared to the traditional home sales process."
But that turned out to be misleading, the FTC said, because home sellers were tricked into thinking they could make more money selling with Opendoor than selling on the open market.
"In reality, most people who sold to Opendoor made thousands of dollars less than they would by selling their homes through the traditional process," the agency said.
When asked for comment, Opendoor pointed to a statement from August 2022 in which it said it disagreed with the FTC's allegations but had decided to settle the lawsuit filed by the agency. Opendoor agreed to pay monetary compensation and pay a fine for deceptive practices.
The FTC filed the lawsuit against the Tempe, Arizona-based company in 2022, alleging that Opendoor misled home sellers into believing they could make more money by selling their home to the company than by selling it to a buyer in the market. Open market.
In fact, the FTC said, "many paid more in costs than sellers typically pay."
Companies like Opendoor make money by buying homes at a discount and selling them quickly, Tomasz Piskorski, a professor at Columbia Business School who has studied the business model, told MarketWatch.
"They have to buy houses at a certain discount relative to the average market value... You can't break even with this business model if you can't buy at a discount," he explained.
On average, iBuyers like Opendoor buy homes at a 3.6% discount relative to the amount a homeowner could get by selling their home through the traditional process, he said, based on his analysis. So a homeowner selling a $400,000 home would sell his home for $14,000 less if he sold it to an iBuyer instead of a typical home buyer.
Why would owners be interested in such an offer? "In a way, companies offer an economic premium," Piskorski explained. People can sell their homes more quickly, but "it comes at a price: That convenience comes at the cost of selling the home at a discount," he added.
Some of the biggest real estate companies have already exited the iBuyer business, including Redfin (RDFN) in 2022 and Zillow (Z) in 2021.
"It's a difficult business to break even, because the margins are high," Piskorski said. "iBuyers' biggest concern is buying a house that is overpriced. So to protect themselves, they buy discounted houses. And they need to sell the house quickly."
-Aarthi Swaminathan
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04-03-24 1617ET
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