Earnings Call Transcript - OPEN Q3 2022

Elise Wang, Vice President of Investor Relations

Thank you, and good afternoon. Details of our results and additional management commentary are available in our earnings release and shareholder letter, which can be found on the Investor Relations section of our website at investor.opendoor.com. Please note that this call will be simultaneously webcast on the Investor Relations section of the company's corporate website. Before we start, I would like to remind you that the following discussion contains forward-looking statements within the meaning of the Federal Securities Laws. All statements, other than statements of historical facts, are statements that could be deemed forward-looking, including, but not limited to, statements regarding Opendoor's financial condition, anticipated financial performance, business strategy and plans, market opportunity and expansion, and management objectives for future operations. These statements are neither promises nor guarantees, and undue reliance should not be placed on them. Such forward-looking statements involve risks and uncertainties that may cause actual results to differ materially from those discussed here. Additional information that could cause actual results to differ from forward-looking statements can be found in the Risk Factors section of Opendoor's most recent Annual Report on Form 10-K for the year ended December 31, 2021, as updated by the periodic reports filed after that 10-K. Any forward-looking statements made in this conference call, including responses to your questions, are based on management's reasonable current expectations and assumptions as of today, and Opendoor assumes no obligation to update or revise them, whether as a result of new developments or otherwise, except as required by law. The following discussion contains references to certain non-GAAP financial measures. The company believes these non-GAAP financial measures are useful to investors as supplemental operational measurements to evaluate the company's financial performance. For a reconciliation of each of these non-GAAP financial measures to the most directly comparable GAAP metric, please see our website at investor.opendoor.com. I will now turn the call over to Eric Wu, Co-Founder, Chairman and Chief Executive Officer of Opendoor.

Eric Wu, CEO

Good afternoon. On the call with me is Carrie Wheeler, our Chief Financial Officer; and Andrew Low Ah Kee, our President. Let's start by hearing from one of our customers, Cornie Dent, who bought her Dream Home through Opendoor Exclusives. While navigating the current market uncertainty is at the forefront of our day-to-day, Cornie's story is a reminder of the impact of our work and the opportunity ahead for us to reshape the real estate transaction. Navigating a once-in-a-40-year market transition has not been easy. This moment has required us to both operate with discipline to improve the health of our inventory and move with urgency against new product initiatives. To that end, we are aligning around two core product offerings that we believe will drive our growth and profitability in this next chapter. One is our first-party product that Opendoor is known for, where we purchase homes directly from the seller and resell the home to a buyer. This is the product that attracts hundreds of thousands of sellers and powers our engine. The second is our new marketplace exclusives, which is our third-party product, where we connect a seller with one of our buyers and facilitate the transaction. This product has the potential to enable all sellers and buyers to leverage our platform. Together, these two products help deliver on our vision of enabling a seamless digital transaction, replacing the inefficiencies of a traditional listing process. Starting with our first-party product, we are focused on four key areas to navigate this market transition and thrive as the market recovers. First, we are focused on improving the health of our inventory by accelerating the resale of homes we made offers on during Q2. While this will come at the expense of margin losses in the short term, we expect it will enable us to put these losses behind us as expeditiously as possible and proceed with a fresh, lower-risk, and better-performing book of inventory. As such, we have accelerated our clearance rate versus the market to more than double that of a quarter ago and are on track to have sold or be in resale contract on approximately 65% of these homes by year-end. Second, we are focused on growing new acquisitions at spreads that we expect will enable positive contribution margins. For homes we made offers on in Q3, we expect those homes to perform within our contribution margin target of 4% to 6%. We feel confident these cohorts are meeting our expectations based on how they're performing today. Third, we are executing on operational and platform changes that we expect will increase our resale velocity and reduce inventory hold times. One example amongst dozens includes reducing the time needed to do repairs and prepare the home for listing from an average of 23 days in Q1 to 15 days in Q3. Lastly, we are reducing our cost structure to ensure we continue to adapt to the market environment and right-size our overall cost structure. This includes our announced reduction of 550 employees or 18% of our workforce across all business functions. While this was an incredibly difficult decision, it was made to ensure that we forge ahead with a sustainable cost structure that will enable us to accomplish our long-term mission. Ultimately, we believe the combination of having a product customers need, the ability to increase spreads to deliver on future contribution margins and a strong balance sheet enable us to safely and successfully navigate this market transition. With regards to our second priority, our marketplace, it's important to remind us that since we started the company, our stated goal and vision was to build a digital-first platform to buy and sell a home. Our belief is that platforms are earned and not built. So our path to earning our platform was to make it easy to sell a home by buying it directly, leveraging the supply to build a better buying experience and then launch a marketplace to connect supply and demand, with Opendoor as a central transaction layer. Years ago, we began laying the foundation for our marketplace, starting with institutional buyers who could easily adhere to our customer experience standards. In fact, this year, these institutional buyers purchased more than 10% of our homes directly, including over 1,800 homes where we secured a contract to resell before we close with our sellers. Next, we aim to aggregate retail buyers and enable them to buy directly from our platform. Earlier this year, we built pathways with exclusive listings and an e-commerce-like experience to buy an Opendoor home directly from us, pre-market and completely streamlined. Today, 20% of our homes listed on our exclusive platform are under contract within two weeks, demonstrating the strong momentum we're driving with our direct buyer base. This results in a unique opportunity to instantly match hundreds of thousands of our sellers with our growing retail and institutional buyer base, all leveraging our platform to seamlessly transact. Today, we are launching that vision under the brand umbrella exclusives. With years of experience as one of the largest buyers and sellers of homes, our sellers can now connect directly with our buyers to transact without the hassle and complexity of a traditional listing. This benefits both buyers and sellers alike. For home buyers, they will be the first to see unique homes before they hit the market. Each one of our homes comes with a buy-now price, enabling customers to bid without negotiations or bidding wars. We back this up with an appraisal match guarantee of up to $50,000, which provides peace of mind around pricing as the buyer pays the price if it's lower. For our home sellers, we are working to make the experience just as easy as selling to Opendoor. In addition to an Opendoor offer, we seek to bring homeowners additional offers without the need for repairs, extensive home prep for months of open houses or listings. Like an Opendoor offer, these offers require no commitment from the seller and come with the control and flexibility of an early closing. I believe this is a critical part of our next chapter, and we feel uniquely positioned to launch a managed marketplace that can benefit every single home seller and home buyer. In summary, we continue to operate our first-party business with the requisite discipline to improve our inventory health and acquire new inventory in line with our contribution margin targets. Alongside, we will accelerate the trajectory of our third-party product, leveraging our audience and capabilities built over the past eight years. I will now turn the call over to Carrie to discuss our financial performance.

Carrie Wheeler, CFO

Thanks, Eric. Last quarter, we outlined key actions we were taking to navigate the current market transition. Our third quarter results reflect the ongoing impact of those actions as risk management and overall inventory health priorities are driving expedient inventory sell-through, reducing acquisition pace and widening acquisition spreads. In addition to these measures, we are actively reducing our overall cost structure as we adapt to the market environment. We've made solid progress so far and are confident we'll weather this market downturn and emerge even stronger. Before I discuss our Q3 financial results and Q4 guidance, it's important to level set that based on our outlook for Q4, we expect to generate over $530 million in contribution profit for the full year, or 3.5% contribution margins, which is just shy of our annual target margin range of 4% to 6%, notwithstanding, the sharp housing market reset. Turning now to our Q3 financial results. We significantly exceeded the high end of our revenue guidance, reflecting our decision to accelerate our pace of resales and further de-risk our balance sheet. We sold about 2,400 more homes in the midpoint of what we've guided to, ahead of the seasonally slow fourth quarter. As a reminder, we refer to those homes priced before the housing market reset or offers made between March and June of this year as the Q2 offer cohort. As of the end of Q3, we had sold through or were in resale contract on over 40% of the Q2 offer cohort. We expect to be approximately 65% of the way through by year-end. A number of our key actions have been to proactively slow down our pace of acquisitions via substantially higher spreads and lower marketing spend in light of our risk management priorities. This resulted in a 73% sequential decline in Q3 acquisition contracts and a 41% sequential decline in closed acquisitions. Those homes are currently performing well. Over time, we expect them to deliver margins in line with our targets. As expected, our accelerated pace of resale came at the expense of unit margins, which resulted in lower-than-expected adjusted EBITDA for the quarter. Adjusted operating expenses totaled approximately $190 million for the quarter, consistent with our guidance. Turning to our balance sheet. We're fortunate to have a substantial capital position by design to weather periods of market volatility. As of the end of the third quarter, we had $11.8 billion of borrowing capacity, of which $8.6 billion or over 70% was committed. We have deliberately focused our capital structure on having committed lending capacity with staggered rolling maturities. Despite market uncertainty, we continue to extend our existing lending facilities, which we believe speaks to the resilience of this capital structure. We also recently closed two new financing facilities with our existing lenders, totaling over $700 million in borrowing capacity. These facilities will be used for financing homes remaining in the Q2 offer cohort and will give us flexibility to optimize how and when we sell these homes while allowing us to maintain more consistent performance in our other financing facilities. In addition, we ended the third quarter with $1.5 billion in unrestricted cash and securities and $1.5 billion of equity invested in our homes. Looking ahead, we expect macro volatility to persist through year-end and into 2023, with the path of inflation and the size, frequency, and duration of Fed rate hikes continuing to dictate the outlook for housing. As a result, we will continue to operate our first-party product offering with a risk-off bias. We expect our Q4 revenue to be between $2.3 billion and $2.5 billion. Although, similar to this quarter, we will continue to be opportunistic and accelerate our inventory sell-through based on market conditions. We expect our contribution margins to reflect our resale mix of longer-dated, lower-margin homes as well as typical seasonal softness in the fourth quarter, while newly acquired homes are expected to perform in line with our contribution margin targets. Our newer book of inventory will be in sufficient scale to offset the negative margin profile of the Q2 offer cohort, given our current acquisition volume pacing. We anticipate contribution profit will bottom in Q4 as we sunset more of the Q2 cohort and expect to have a higher proportion of fresh inventory for resale in future quarters. Total adjusted operating expenses are expected to be approximately $145 million for Q4. As Eric noted, we are aggressively reducing costs across our operations and marketing commensurate with our volume expectations. Inclusive of the workforce reduction we announced yesterday, we estimate that we have reduced our run rate adjusted operating expenses by approximately $110 million on an annualized basis relative to this year's peak levels. Having to say goodbye to teammates is incredibly difficult, but these actions are necessary to right-size our cost structure and are reflective of our commitment to returning the business to operating free cash flow positive and building a profitable generational company.

Elise Wang, Vice President of Investor Relations

Operator, before we take the first question, I also wanted to introduce Daniel Morillo, our Chief Investment Officer, who is also on the call with us today. In light of the current macro environment, we thought it would be helpful. But Daniel, to address any macro or pricing related questions that you have. Operator, on that note, we can take the first question.

Operator, Operator

Thank you. Our first question comes from the line of Nick Jones with JMP Securities. Your line is now open.

Nick Jones, Analyst

Great. Thanks for taking the question. Two, if I could sneak into. First one, I guess, is more kind of macro-focused. There's been some headlines indicating there might be some pretty steep home price declines into 2023. So I guess when you think about the inventory you're acquiring now, that can offset some of the 2Q inventory. What gives you confidence that you're maybe not exposed to additional risk? Are there certain markets that just aren't seeing the same declines or as rates keep going up and spreads widening, is that still just an inherent risk that we need to be cognizant of?

Carrie Wheeler, CFO

Hey, Nick, it's Carrie. I'll start, the answer to that question. I'll probably tag Danny for the second half and talk a little bit about macro outlook. For the homes that we have been offering on acquiring, say, from July going forward, those homes are being offered at high spreads relative to the environment we're operating in for all the reasons you just said, we're operating at peak uncertainty right now with an expectation of continued home price depreciation. But as we are selling through those homes, they're performing very well, and we expect them to continue to be in line with our target margins as we sell through the full cohort. So we feel good about the new book of inventory that we're building into right now, and we're pricing appropriately for the macro environment. Dan, do you want to comment on looking forward?

Daniel Morillo, Chief Investment Officer

Yes. Yes, Carrie. I guess the additional thing that I would say is, as Eric mentioned in the intro, we continue to carry a risk-off bias. And that means that we are being conservative in our expectations of the future macro environment. And so as we think about what we're pricing for, for offers we're making today, we are incorporating an expectation that the current trend, which, as you know, is negative, not only will continue but will potentially worsen. So essentially, what I'm saying here is that the forecast that we are having in mind as we plan for our business in the next quarter and the next year is incorporating the current trends and actually being reasonably conservative considering the potential downside of those outcomes. Right? And so in that sense, we feel pretty comfortable that we have responded to what essentially has been continued surprises, I would say, surprises on rate size and then a number of other items.

Nick Jones, Analyst

Got it. And maybe a separate question. As some of the single-family rental companies have kind of stopped buying. And I know Eric made a comment about kind of 10% of buyers being institutional over time. How is that, in fact, impacting the business? And do we sort of need to see that come back as a sign of things improving? Thanks.

Andrew Low Ah Kee, President

Hey, Nick, it's Andrew. Institutional buyers, as Eric mentioned, range from 10% to 20% of our business. And so it's a small minority overall. Certainly, we're in a lot of conversations with those folks. And there are reasons why they're adjusting their strategies as a market maker. We're in the business of providing liquidity into the market, and we're constantly buying and selling.

Operator, Operator

Thank you. Our next question comes from the line of James McCanless with Wedbush. Your line is now open.

James McCanless, Analyst

Congratulations on being a net seller of homes this quarter. Do you expect that trend to continue in the fourth quarter? Additionally, I think you touched on this earlier when discussing the likelihood of worsening market conditions. If you're holding 35% of this Q2 cohort, why not take a more aggressive approach in selling that inventory if you believe conditions are going to decline? It seems that valuations won't improve over time if we anticipate a downturn in 2023.

Carrie Wheeler, CFO

Hi, it's Carrie. I'll take the first part of that question. We are currently choosing to operate with a cautious approach. We are incorporating high spreads into our offers, which is reducing volumes. You're correct that we expect this trend to continue through the fourth quarter. This means we will sell more homes than we acquire in Q4, which is a risk management decision we believe is suitable considering the overall macro environment. Regarding your second question about why we aren't selling faster on the Q2 cohort, I want to highlight that we have made progress in selling homes. Our primary goal following Q2 has been to efficiently monetize the difficult Q2 cohort. By the end of the year, we should be around two-thirds through that process, and we aim to complete it in the first half of next year. As for whether we can speed things up, that involves optimizing for the best overall outcome over time. Dan, would you like to add some comments about the pace of resale?

Daniel Morillo, Chief Investment Officer

Yeah. I guess what I would add in here is that the way we think about the resale phase is essentially a trade-off between what we are observing in the market and obviously our expectations overall, right? So the price action that you would have to take in order to accelerate those resells, right? And what you saw this last quarter that we were just reporting is that we had much larger revenue than expected. I mean, that's because we took the opportunity to do exactly that, right? So I would expect, as Carrie said in the intro comments, that we would do that again as far as there’s an opportunity to see that trade-off be beneficial. But to be clear, in general, we would, in fact, expect to operate faster than we would have, right? So the market slows down, the market slowed down a lot, we would expect to slow down less than the market, precisely because we're looking to accumulate that trade-off, right? And we're incorporating that into our expectations, right, inclusive of those additional potential negatives.

James McCanless, Analyst

Great. And then, I guess just on these two facilities for the 35% cohort, what's the time frame on those facilities? And any rate information you can give us?

Carrie Wheeler, CFO

Yeah. I mean, we put those two new facilities in place really to address the Q2 offer cohort we had. We knew that they would be structurally lower margins. So this is a way to have more flexibility about the pace of resale and optimize for overall outcomes. At the same time, we're managing for performance in our core facilities. It came at a slightly higher rate than our core facilities. I'm sure we break that out, but it was appropriate just given the short duration facility.

Operator, Operator

Thank you. Our next question comes from the line of Jason Helfstein with Oppenheimer. Your line is now open.

Jason Helfstein, Analyst

Thanks. Two questions. The first, on 3P, to the extent you hit your goal of 30% of transactions by the end of next year in 3P, do you think of this as additive to what you would have done with 1P or a substitute? Just, obviously, we need to come up with our own modeling, and this has pretty significant kind of margin benefits. So, just how are you thinking about that? And then I just have a follow-up after that.

Eric Wu, CEO

Thanks Jason. It's Eric here. I view it as a substitute in the short-term, extremely additive long-term. What I can tell you is that based on early tests, sellers are very excited to opt into the program. And that is above and beyond the pool of sellers that would have accepted an Opendoor offer. So it can be additive long-term. The target that we're putting out there that we're confident in hitting is based on traction we already see with the two products we've had in market, which is roughly 10% to REITs on the conservative side and roughly 20% direct to consumers on the exclusive listing side. And so that's what gets us to a number that we feel confident we can execute against. There is upside to that if it's additive.

Jason Helfstein, Analyst

Okay, that's helpful. And then just as a clarification on the inventory adjustment in the quarter. So, was that basically a revaluation of the entire second quarter cohort kind of based on today? And so depending on market conditions, like we could be another write-off in subsequent quarters, or is it like connect to home sold? Just how do we think about that $400 million, $500 million number?

Carrie Wheeler, CFO

Yes, I'll address that. First, let's clarify what the valuation adjustment involves. It’s not a revaluation of our portfolio. According to GAAP, we need to evaluate our assets each quarter, marking them to the lower of cost or market and recognizing losses. This adjustment is strictly downward, with no consideration for any anticipated gains. It’s akin to assessing a stock portfolio only by its losses while ignoring potential gains. So, this isn't a revaluation; it's simply a non-cash charge to acknowledge expected losses. Second, this represents a projection. Amid peak uncertainty, we're taking a conservative outlook on how we expect these homes to sell in the future. We're incorporating further downside risks while acknowledging ongoing home price depreciation, reduced transaction volumes, and overall market challenges. In essence, we're acknowledging those losses now, resetting our expectations, and adjusting our inventory accordingly. Regarding the second quarter cohort, we have a couple of components to consider. First, we have several homes under contract that we decided to close on, which constitutes about a third of the adjustment. We didn't own these homes previously and didn't adjust their value until now. The rest of the adjustment reflects the decline in our forecasts for the housing market. We believe this approach is conservative. While we will eventually sell these homes and realize losses over time, we also anticipate that the new homes we're introducing will perform well and provide offsetting gains and profits. This is the basis for the valuation adjustment.

Jason Helfstein, Analyst

Thank you.

Operator, Operator

Thank you. Our next question comes from the line of Ryan Tomasello with KBW. Your line is now open.

Ryan Tomasello, Analyst

Hi. Thanks for taking the questions. Can you walk us through how the restricted cash balance works in relation to your facilities and specifically, the drivers of the increase from last quarter? I know you mentioned in the Shareholder Letter that you expect to release some of the $1.8 billion of restricted cash as you liquidate, I think, about $350 million of the unlevered homes. But I guess that still implies a pretty sizable remaining balance. So just wondering if we should expect any more of that to be released in coming quarters?

Carrie Wheeler, CFO

Yeah. I mean, there's two components to what you're talking about there. One was on the restricted cash balance. Yes, it was very inflated this quarter. We had a lot of cash that was trapped in the system. It's all secured by debt, and that's temporary because we just weren't creating new acquisition volumes. We weren't financing them to. That's a function of just not having the volumes there. That will come down in Q4. That's number one. I think you also alluded to, I think, Ryan, the $350 million we talked about in terms of the unlevered homes that we have equity invested in. Is that correct?

Ryan Tomasello, Analyst

Yes.

Carrie Wheeler, CFO

That is going to be financed. It's in that process right now. That will come back to unrestricted cash for us in this quarter.

Operator, Operator

Thank you. Our next question comes from the line of Dae Lee with JPMorgan. Your line is now open.

Dae Lee, Analyst

Thank you for taking the question. To start, will your contribution profit per home sold be lower than what you experienced in Q2? If so, do you anticipate that Q4 will be the lowest point compared to your Q2 results? As you move into Q1, do you expect a shift towards your newer homes, leading to improved profits compared to what you saw in Q3?

Carrie Wheeler, CFO

We do expect Q4 to be the trough for two reasons which you just called out. One is we're selling more of the Q2 offer cohort, you said two-thirds of the way through by the end of the year. At the same time, as we're doing that, we're not offsetting that by design with much at all in the way of new acquisitions because we're risk off. We're choosing to operate with high spreads. The market is uncertain. We're gaining the amount of new volumes in the system. As we sunset the Q2 cohort, we would expect to start to ramp up our mix of new acquisition volumes into the coming year. I can't give you a specific number for the first quarter. But obviously, that resale mix is going to change as we shift from the old book to the new book.

Dae Lee, Analyst

And then as a follow-up, and this is more of a macro question. You talked about assuming conditions get worse from here. So looking ahead, what do you need to see for demand to come back? Is it more of people's perception changing to the new reality, or do you need to see home prices come down further before, I guess, demand starts to recover?

Daniel Morillo, Chief Investment Officer

Yes, this is Daniel. Thanks for your question. I think the thing you want to think about is that a lot of what we're observing now is mostly driven by the decline in volumes, right? So as rates unexpectedly rose quite significantly, that resulted in essentially a decline in transactions, right, because the marginal buyer and seller generally finds the reset in that rate to be too onerous. So volumes come down, and that results in slowing down the clearance, price pressure, etc., right? And that’s about to change in the rate. The thing that we're looking for is stabilization in that rate outlook because we would expect that stabilization, even if it is at a high level, would result in stabilization of volumes and different price pressures, etc. And so what we're looking for here is not so much rates to come down or, for that matter, prices to get to any particular level, but simply for those volumes to get to sort of steady state given the high rate. And in that context, we would expect price pressures to stabilize and somewhat normalize. For us, clearance to be more manageable in terms of our projections of what you have to do to buy and sell that inventory, right? So it's that stabilization that reduces uncertainty far more than what exactly the level is of either rates or prices.

Dae Lee, Analyst

Great. Thank you.

Carrie Wheeler, CFO

I just want to emphasize that we have a product that people continue to love. Customers are still showing up and converting at very high rates, despite the high spreads. In response to your question about when buyers will return, we are still selling homes and customers are still purchasing from us. We anticipate that our volumes will continue to grow over time. This situation is more about a temporary disruption in the market that we are managing, along with our decision to limit the volumes we are taking in. Ultimately, the product continues to perform well, even in this uncertain environment with high spreads.

Operator, Operator

Thank you. Our next question comes from Curtis Nagle at Bank of America. Your line is now open.

Curtis Nagle, Analyst

Good afternoon, and thank you for the questions. My first question is about the conversion rates for the homes you are now purchasing or offering at higher spreads. How do the current conversion rates compare to those from late last year? It seems challenging given that home prices have decreased recently and financing costs have increased significantly. I would like to know more about the conversion rates for these new homes that you are acquiring. What are the current conversion rates?

Eric Wu, CEO

Hey, Curtis, it's Eric. What I'd say is that we're observing conversion rates somewhere between 10% to 15% of true sellers, which is obviously lower than the north of 30 we've seen historically, but that is at spread levels we've never had in the market. To restate it, we're at peak uncertainty in this moment, which results in us having to take a risk-off stance, which means that we have the highest spreads in company history. We're still seeing somewhere between 10% and 15% of sellers saying yes, and loving the experience and delivering a north of 70 NPS experience. The inputs for that really are as follows. One is, there are a set of customers that really value the convenience of not having open houses and visitors and some combination of to have kids or pets or the impact of COVID and the like. And so, they're more price insensitive and really just this is coming. And as it turns out, there's also a set of customers that just really like the speed and certainty aspect of it. Over the course of eight years, they've built up quite a bit of equity, and they're valuing their time or convenience versus maximizing their equity in a backdrop of massive uncertainty. The combination actually has surprised us on the upside that we're able to convert a meaningful amount of our customers with spread levels that we've never tested historically.

Curtis Nagle, Analyst

Got it. Okay. And just as a follow-up, why didn't you roll out the 3P business sooner? I would imagine the margins have to be much better, and there's less capital risk, right? Is it a matter of not having the reach of the platform, or why now instead of a year or two ago?

Eric Wu, CEO

Well, I'd say two things. Launching a managed marketplace has been our plan since we founded the company. If you look at our Series A deck, we stated our platform would be used to connect buyers and sellers, of which Opendoor would be one of many buyers. Our stated ambition is, and it remains the stated ambition, to enable every single home buyer and seller to be a participant and earn them as a customer. Transparently, I wanted to launch this in Q1 of 2020. We knew we had a deep and large funnel of sellers. We're unique in that. But we needed to build the demand side to ensure that we can successfully launch the marketplace. Just having supply is not sufficient, obviously. We've made significant investments on the demand side, one, starting with our work with institutional investors, which has been a four-plus year endeavor for us building APIs and pathways to power those transactions against selling somewhere between 10% and 20% of those homes to institutional investors. Another example of this is that we have secured over 5,000 resell contracts from REITs before even closing with the seller. Logically, you would say, okay, we can make it possible to have those pathways connect directly as opposed to us closing twice on the home. A second investment was made more than 12 months ago, which was the key piece for us: we needed to build a product that attracted demand. We invested in exclusive listings, again, the ability to buy from us directly with a very simple experience and features that aren't offered by the current marketplace. We've demonstrated that we can sell 20% of our homes directly to buyers on opendoor.com. If you measure that in 14 days, if you measure vis-à-vis the market, say, MLS is representing the market, our 20% maps to something like 36% or 40% in the market. We're not actually from a velocity standpoint, that too far behind what would be full distribution. That gives us confidence that there's product market fit and buyers love our product. Yes, the assumption is that would we have liked to launch this two years ago? The answer is yes. I would have loved to launch this in Q1 2020, which was the original plan, but we had to solve the consumer demand side before launching it. We have good evidence that we can solve this now.

Curtis Nagle, Analyst

Okay. Thanks. Appreciate it.

Operator, Operator

Thank you. Our next question comes from the line of Justin Patterson with KeyBanc. Your line is now open.

Justin Patterson, Analyst

Good afternoon. Thanks for taking the questions. Two, if I can. First, for Eric, I wanted to circle back on Jason's question. As marketplaces scale, it becomes less of a substitute, more additive to the overall business. How do you think about reinvesting back into growth or letting it drop through the margin? And then Dan, I appreciate your comments on watching for signs of stabilization. I realize this is more of a philosophical question. But when you see those signs emerge, how are you thinking about the speed in which you flip from risk off to risk on? Thank you.

Eric Wu, CEO

Yeah. So, I'll take the first question, which is as we think about this as being additive, how do we think about the trade-off of growth versus margin? What I can say is that marketplaces live or die based on the liquidity of both sides. Once you reach, let's say, a velocity that gives you a lot of defensibility and lots of opportunity for margin extraction to increase your margins, they tend to be built over a multi-year, multi-step process. In the short term, we would prioritize liquidity or growth of both sides without making substantial investments. In the long term, we will prioritize margin expansion, and that actually increases the expected value of the business unit and business line holistically. To put it more succinctly, right now, we're focused on growth of both sellers and buyers within local marketplaces. The benefit of having the first-party business alongside with that is that we believe we can do this with positive unit economics without having to go negative. We can expand those margins over time as we get denser and denser within our cities.

Daniel Morillo, Chief Investment Officer

Yes. Thanks for the question. It's actually a good question. I think the thing that I would highlight there is, now we're not so much looking to sort of leave the tea leaves on the macro itself, right, like what did the Fed do or say and what policy and its features, etc. Instead, we are very focused on building a series of indicators in our platform that give us what we believe is the best sort of set of diagnostics about what's happening in the market compared to pretty much anybody out there, right? We have literally real-time metrics for the full, I'm going to call it, funnel of behavior on both the buyer and the seller side. So how does the rating change result in changes in mortgage ops from there to applications, from there to the actual behavior on the buying and selling side, like views of properties in the market, visits, how those visits are scheduled, how many people show up at those visits. Do they make offers or not? What sort of offers do they make? We have a pretty good mechanism to react. Like I said, it’s pretty much real-time to how what we're observing on the macro side is really translating on the behavior side, right? From our point of view, what we're looking for is a sort of saddling of the stabilization in the macro that starts to happen. Picking up tomorrow, we would want to observe that, that actually results in stabilization of the behavior that we observe real-time in the market, right? On the back of that, we would have pretty good confidence in taking action across the spectrum of all the actions that we take, right? Everything from what our spread is to retail strategy, pricing strategy, negotiation strategy, etc.

Justin Patterson, Analyst

Thank you.

Operator, Operator

Thank you. Our last question comes from the line of Justin Ages with Berenberg. Your line is now open.

Justin Ages, Analyst

Hi. Thanks for taking my question. Just wondering, if I could get a little more color on what is driving that reduction in renovations and the time taken on renovations and whether that's going to be the new normal going forward, or that's just from a current push? Thanks.

Andrew Low Ah Kee, President

It's Andrew. Andrew here, Justin. The teams, in the current environment, are focused on turning our homes as quickly as we can. That push, that focus and that emphasis is showing up in a number of our operating metrics. You called out the renovation day improvement from 23 down to 15. That's really driven by improvements in the productivity of the team. Credit to our teams out in the fields who are finding new ways to reorganize the way they do work to drive those days down. That's a big push. Equally important, we talked about our buyer cancellation rate improving 20% against a backdrop where the market actually deteriorated. All of those things contribute to us turning our homes and our book more quickly, and that's a focus and a press. Thanks to the teams who are all over doing it.

Justin Ages, Analyst

Great. Thanks for that. And next, I was wondering if we could have a little more detail on geographic diversity on where you're seeing relative home price appreciation strength versus weakness? I think you gave some color last quarter, so just following on that. Thank you.

Daniel Morillo, Chief Investment Officer

Yes, I'm happy to do that. This is Daniel. We are broadly observing a pattern similar to what we noticed previously, not just in high price appreciation but across various volume metrics. Markets that experienced more volatility and higher price increases during hot periods, like Phoenix and Austin, have generally performed worse than other markets. This isn't surprising since these markets had more room for adjustment. In contrast, smaller and less expensive markets, primarily in the Midwest and East, have fared somewhat better. Places like Nashville and Orlando, for instance, have shown stronger performance. This is also not unexpected. A key point to note is that much of the price appreciation during the hot market stemmed from buyers making over-list offers and experiencing bidding wars. As the market cools, these situations are much less likely to occur, which leads to a more equalized market behavior across different regions. It's also crucial to mention that while we're discussing these relative performances, the overall market is facing negative trends, including volume declines and increasing price pressures. What we're highlighting are just the variations within this broader context.

Justin Ages, Analyst

I appreciate the answers. Thank you.

Operator, Operator

Thank you. Our last question comes from the line of Ryan McKeveny with Zelman. Your line is now open.

Ryan McKeveny, Analyst

Hey, thank you very much. One more on the 3P marketplace. So the letter mentions 5% service fees. Obviously, that helps us think about the revenue side. Assuming that, without being the principal, the margins should be pretty high. But I guess if you can help us think about what you anticipate the cost structure or margin profile potentially looking at within the 3P marketplace as that scales up?

Eric Wu, CEO

Ryan, it's Eric. We're not giving guidance on the cost structure yet. I think the assumption that this should drop to our bottom line and demonstrate really positive unit economics is correct. What we are guiding to is, again, the goal of north of 30% in the short term by the end of 2023. I would also say, to the question earlier, that I fundamentally believe this could be very accretive as well, which increases our TAM over time in that we're able to service our customers independent of buy box constraints and operational constraints. We're able to actually service all sellers in all different home types. But from a breakdown on the unit economics, we're not disclosing at this time.

Ryan McKeveny, Analyst

Got it. That's very helpful. And Eric, maybe one more on kind of the opportunities to expand this. I guess, geographically, it's fair to assume your current footprint, effectively where you're also acting as 1P, would be kind of the roadmap with the 3P marketplace, or could we envision something 10 years down the road where there's markets where you're just the 3P player, or do you expect to always be a 1P player to some degree within the markets where this is available?

Eric Wu, CEO

What I can tell you is in the short term, it's really important to focus on density and liquidity. The goal is to get a sizable portion of sellers and buyers come to Opendoor at the same time and providing a solution that works for both of them and then expanding that playbook to all of our 50-plus markets. I would say, also in the short term, both the first-party business, the second-party business are essential and complementary in nature. The ability to get an offer in minutes from Opendoor attracts the hundreds of thousands of serious sellers. The ability to buy from us in a different way attracts the hundreds of thousands of buyers. This model is additive to the first-party model today. In 10 years, if we are able to build our brand in a way that people trust the platform, and we have services that enable a seamless transaction in a market where we're not actually operating a first-party business, that's within the realm of possibility, but not on the short-term roadmap.

Ryan McKeveny, Analyst

Got it. Thank you very much.

Operator, Operator

This concludes today's conference call. Thank you for your participation. You may now disconnect.