Opendoor CEO On What BROKE America’s Housing Market

0:28Hello, everyone. We've got a very special treat for you today. course, he was going to become the CEO of Opendoor. I really enjoy this conversation. And I think it's pretty important because I went and I looked on public. And if you look at all of the different housing market leaders, you can see that they've only performed about 7 % over the last year. It's underperforming the S &P at 17%. Opendoor is up over 300%. And so Opendoor is bucking the trend. They are drastically outperforming their industry peers and also the S &P 500. And so this is one of the most widely held stocks in America. Kaz is doing a fantastic job, and I thought there's no better way to understand what's happening with Opendoor or why this company is on such a mission than to sit down and talk to the CEO.

1:07So here's my conversation with Kaz.

1:20Before we get into this conversation with Kaz, please subscribe on YouTube. My goal is to get to 1 million subscribers. We've got about 42 ,000 today, but with your help, we'll reach our goal. Hit the subscribe button and let's get into this conversation with Kaz. All right, Kaz, I thought a great place to start the conversation. You have a company, which is one of the most widely held stocks in all of America. So Americans are very interested in what happens at Opendoor. You've got this mission of tilting the world towards home ownership, which I think is something that people, when they hear that, they just immediately are like, I want that guy to win.

1:50I want that company to win. Can you describe a little bit why you left an amazing job, an amazing opportunity, and went to Opendoor, and why this is such a calling for you? Look, I think Americans are drawn to Opendoor because Opendoor's mission is a deeply American mission. When Tocqueville came to America 200 years ago and wrote Democracy in America, he said that a main difference between America and Europe and the reason America had avoided the road to surf them was because Americans owned the ground they lived on. Right? It's actually not a theoretical thing. Jefferson literally said the most important people to the state are the small landowners.

2:33When you own your home, you own a share in the future of your community. Owners stay. They fix things. They take care of their neighborhoods. Renters leave. There's a very large difference of people and how they react to problems. Right? Mm-hmm. Owning a home is a little bit like being married to a community. It makes a difference in how you feel about it. And the data is just undeniable. Look, I think the most important thing we can do is this. Kids that grow up in a home that their parents own have better life outcomes. Fascinating. And this matters. It matters to future world because we are trending the wrong way.

3:19For the first time in American history, young people are buying their first home on average after they turn 40. That means they're setting down roots later. They get to create multi-generational wealth later. Wealth transfer in America primarily happens through homeownership. They're actually, we're having a real struggle. And I think this is partially because we have fewer homes than we need. And that's real. We should build more homes. But it's also partially because the friction in homeownership has gone up while the friction in everything else has gone down. It's much easier to buy a mattress than it used to be 20 years ago.

4:02But it's more expensive to buy a home than it used to be 20 years ago. Just the transactional costs have gone up. Why? Look, I think if you think about how you buy anything today. You buy shoes. You used to go to a cobbler. You didn't have your size. you have to go around, you have to spend a bunch of time. Today you want shoes, you go to Allbirds and you buy your shoes. You don't like them, you return them, right? That's not true for homeownership. The way the industry has shaped, partially because of how capital works in mortgages, partially because of laws like RESPA, partially because of how decentralized it is and how local the market is.

4:37Homes are not like every other asset class. Their markets are highly local, so the edge really matters. The transaction costs have gone up. When you buy a home, just to give you a sense, we calculate that of a transaction, up to 10 % of it are transaction costs. Wow. If we just get rid of that 10 % and go back to what the transaction costs would have been in 1990, it's the equivalent of creating 5 million new homes in America. And there's no plan to create 5 million new homes anywhere, right? It's just not possible. So that cost has gone up, partially because the last space is basically untouched by tech.

5:16And partially because the way since the financial crisis, homeownership has skewed in America. How much of people buying homes after 40, you know, can all these demographic or kind of industry trends are because of economic reasons, like just straight cost or economic friction versus consumer behavior changes? Hey, I actually want to be more mobile. I want to be, you know, kind of a little bit more transient. How do you think about the difference? So let me ask you a second question first. There is nothing that says homeownership should make you unable to move. That's actually Open Door's core feature.

5:54I was talking to someone in Minnesota. I like doing customer service calls. I was talking to one of our customers in Minnesota and he said, Hey, I have a job in Dallas. I want to move. If I list my home in Minnesota right now, it'll take me 180 days to sell it, which means I can't buy a place in Dallas. My family has to stay in a hotel. I can't afford down payment. And Opendoor says, great, we'll give you an offer in 48 hours. We'll close in 14 days, move to Dallas. So I think there's actually a very real thing because the days on market has become so long, people are less willing to make a commitment.

6:28It's become much harder. But it's almost like by adding liquidity to the market, people should want to transact more. Correct. I mean, that's a real thing that happens in literally every market, Right. When you added liquidity to car market, people bought more cars. It's a very real thing. So but but but a lot of it is the first thing, which is, look, I think if you go back to not that long ago, go back to 1990, the average American would have had to spend four times their annual salary to buy a home. It is now almost six. The cost of housing, because of the friction, has gone disproportionately high while mortgage rates have calmed down.

7:05Like mortgage rates are lower than they used to be. They're not as low as they were like a few years ago, and they should go back there because interest rates are artificially high right now. But mortgage rates were lower than they were in 1990 or 1980. But the prices of houses were much lower as a percentage of your homeownership. The second thing also, if you think of cars, cars transact much more quickly than homes do, much more efficiently. and a car is only on average about 10x less expensive than a home for an average family right an average family buys a car that's about 10x cheaper than a home they buy average and people you say about cars it'll be impossible to have cars transact cleanly it'll be impossible to have them done quickly until carvana came around right so these are uh just because the asset size is large doesn't mean friction needs to be high in fact the fact that asset high size is high means friction should be lower because market should clear more easily like the mortgage industry is a highly sophisticated one these assets can clear quickly mortgages can sell in a day there's no reason a house can't now uh most of open doors critics will argue i buying doesn't work it's a broken model everyone else has failed.

8:28They've seen competitors pull out of the market. It doesn't matter how good you are as an operator. It doesn't matter how good of a team that you assemble. Just bad business model doesn't work. What's your response? I mean, they're just wrong. They're just wrong about the math. Look, I think there's two things that need to be said. One, if you ignore the era of poor management decisions, Opendoor was unicomic positive on its core iBuying model for most of its life. Like just objectively true. But you also need to think about what the business model should be. Look, I think, and I said on our earnings call, the job of Opendoor, our mission is to tilt the world towards homeowners and people working hard to become homeowners.

9:19But that's our job. And if someone shows up to you and says, hey, I want to transact with you once and never again, the odds are you would call that person a carny. Right? It's a good business models aren't built that way, right? You want a business model built on mutual trust over a very long period of time. And luckily for Opendoor, a home is literally the basis for that for most people. So open door business model is, yes, we want to be the best place you can buy a house or sell a house. We want to give you fair offers and sell homes at a fair price and have very thin margin doing that compared to what everyone else has.

10:06And we're going to be profitable off just that. But we also have opportunity to attach things to home, mortgage, warranty, insurance. And I've said we're going to launch our mortgage products. i actually announced it a couple weeks ago that we're going to build the first ai native mortgage product what does that mean in america it means you're going to be able to buy a house and get a mortgage without talking to a human being without having to send us a bunch of forms via email without faxing us things we'll be able to buy a home and get a mortgage on it the way you buy a car and get a lease on it from tesla you know what's interesting is um uh i've been an investor and figure technologies for a long time.

10:47And one of the things that they really opened my eyes to was this idea of for HELOCs, you could basically come in. I think if I remember correctly, they would tell you within like five hours, you know, if you were going to get the, or I'm sorry, within five minutes, whether you were gonna get the HELOC or not, and they would fund it within like five days. And so because they had some part of their business associated with blockchain, people were like, how does the blockchain do that? And then when you would go and you actually understand the product, it's like, no, you just use things like Plaid to look in a bank account and understand how much money somebody makes and where they were, you know, all these different data points that to me feel like a much more modern underwriting.

11:23What you're talking about is not just kind of the plumbing or infrastructure of the underwriting. You're actually talking about the interface for people to talk with the, you know, mortgage lender is all going to be kind of AI driven. Look, when I was at Shopify, we built a small business, unsecured small business lending product that a small business could come click a button and get funded the next day it didn't exist we built it um and product well how do you underwrite it how do you get credit scores i'm like why do i need a credit score to unwrite a small business i have payment data like i don't it just sounds insane like i think traditional underwriting is just deeply flawed and deeply broken.

12:04And when you go into like a mortgage factory today, it is not that different than how it would have been run honestly 20 years ago. It's basically the same structure, same people, same processes. This is why the average mortgage costs over$10 ,000 to produce. That doesn't have to be that way. Let me give you an insane, a very large part of our cost structured open door is a number of days that the house sits on our balance sheet before we can sell it to you. You said you want to buy a house. You've gone to one of our homes in Dallas, Texas, you want to buy it. You've done the online checkout. We have to wait a month or two sometimes for the mortgage to get funded.

12:53Well, if we run our own mortgage business, that month can go down to eight days or two could go down eight days. That's a lot of waste in the system that we're paying for. And you don't get a house you want. Imagine you want to buy an open house. We can buy your house, give you a mortgage. An entire thing can be done in days rather than months. So to understand Open Door, I think one of the things that I've gotten, as you know, as you and I have talked, I've got an understanding of is explain what you did at Shopify in terms of looking at the relationship between the company and the merchant and then the financial services and the products that you built around that relationship.

13:31Because I think that although they're different businesses, the model is somewhat similar here. I think they're very similar. The model is very similar. Look, I've always been more fascinated by the first derivative of the business model rather than the core business model. I think it's actually the most interesting companies in the history of the world are built in the first derivative. Let me give you example you need the union railroad pennsylvania railroad people like hey they lay down rails they make money from freight no they make money from selling the land around the stations to towns and businesses right first derivative business model mcdonald's mcdonald's with coke or land um even Even better, Google with ads, like I search, the first derivative of the search is ad interest.

14:20The first derivative business model is almost always the more interesting one for large businesses. Apple, App Store. Like, this is a very real thing, right? So the question is what, when I got to Shopify, Shopify had a business that was mostly SaaS, great business, just generally great business. but the first of that business model is transactions that occur on Shopify stores and work they create so if you're in a small business and you sell something you need someone to unwrite that transaction payments you need someone to fund it for you you need someone to pay the taxes you need someone to calculate your shipping rates all that stuff now all this stuff typically gets done by third parties right so you own a small business you have an accountant you'd have a tax guy you have a shipping guy you have all these other people that you're feeding and our thesis at shopify was that that sucks it sucks that in order to sell shoes i need to know an accountant a loan guy a tax guy a shipping guy and i have to pay all these people like as well on my path it's terrible it's bad experience for everyone and they don't know my business so they gave me generic advice and i have to overpay them because they're third parties so our logic was hey like can we solve those problems and the answer was it turned out to be financially incredibly fruitful for shopify today 75 of shopify's revenue comes from services not software and what just explain a little bit in terms of like what those services are and kind of what the bigger ones have been Yeah.

16:01So when I got there, we had payments. We launched capital across the world, ShopPay, tax, Shopify balance, which is an embedded banking service in Shopify, shipping, international duties. All the things that you think would go with buying and selling stuff on the internet. It's almost like a concentric circle. You say, okay, here's the merchant. Here are all the things that they need to be able to do. And as you guys just kind of ate into that stack. Well, as we build trust, right? Because people want to buy things from someone they trust, right? If you were mentioning Shopify, you have to think about who to use for tax, whereas you already trusted Shopify because Shopify gave you a great software.

16:43Like, okay, I'll just use Shopify for tax. That's what's going to happen to Open Door 2, by the way, because there's a reason why if you look at the builders, like a company like Lenar, great company, 70-80 % of people who buy a home from Lenore get a mortgage from Lenore. And how much of that is distribution like moat versus trust or does it matter? It's actually three things. One is distribution, obviously, because CAC is expensive and we've already paid for CAC. The second is a trust on a core product. Lots of companies tried payments and tax and capital because Shopify did and none of it worked because their core product was untrustworthy.

17:25And they didn't have CAS. People are like, I appreciate it. Thanks, man. Thanks. Let's say this is a very real thing. At Shopify, we succeed in anything no one else succeeded. But a third thing that is real is most of these things end up being about underwriting risk. And we already have to underwrite the risk on the house because we have to buy it. Turns out we know something about the transaction. So we can underwrite the risk for the mortgage. We can underwrite risk for insurance. We can underwrite risk for warranty. Imagine if you have to underwrite a risk for warranty of a house without knowing the fridge that is in the house, without knowing the HVAC that's in the house.

18:02We put it there. We know what's in there. And we can have underwriting across thousands of homes, which makes us lower risk. So I think it's three things. So let me go through them. It's distribution, which is real. That's totally real. Like Facebook Messenger is big for a reason. Distribution matters. second is the trust to core product and at open door we need to do an excellent job such as the buying experience from home or selling to open door are just excellent so we generate trust and the third is but underwriting the transaction now what i find interesting is um open door really has uh four or five different audiences right obviously you've got buyers you've got sellers You've got what I'll just call the industry of professionals.

18:50You've got the media, who obviously is very interested in what you all are doing. And then you've got this massive base of retail shareholders. And I find it fascinating that your retail shareholders can be the buyers and the sellers. Your buyers and sellers can be the shareholders. The media is almost kind of observing how these groups are interacting with each other and then reporting on it. And so you all communicate in a very different way than most public companies. Yeah. My understanding is that pretty much the company, you know, X account is maybe just out there. Yeah. But really, you're the one communicating to the market via your X account.

19:28That is like the main distribution channel for all communication. How does that play into building trust with buyer, seller, shareholders, media, etc.? Look, there's two things about this. One, I think Open Door as a company should be held accountable for what it does, not just what it says, but also what it does. And the best way to hold yourself accountable is to not create layers between yourself and the people holding you to account. It'd be very weird if you were working at a job and your manager wanted to give you some feedback and the feedback arrived from someone who talked to someone who talked to your manager.

20:06That would just be weird. right our job is to build an excellent product and get along in our mission and want to be we want to be held accountable we release our numbers every week most companies dread releasing their numbers every quarter we release ours every single week you have a dashboard dashboard accountable.opendoor.com um because we want and it says literally keep us accountable zero excuses we will screw up we'll make mistakes but we're not afraid to say we will make mistakes but we want to be helped so one of them is that hey um and i think the accountability also helps us learn more quickly like the fact that we screw up some offers sometimes and people tell us but tell me about them allows me to fix things i caught a bug yesterday because someone said hey this offer didn't write my goal i caught a bug in the code base so it's a two-way thing you we ask for your trust in exchange we will be held accountable and also what i see and i see this across some of our businesses that we have, I see open door, but very few companies, there are people who will tweet at you, Morgan, various people on the team and say, this is broken.

21:14This sucks. This UI is confusing, whatever. You guys respond very quickly. And sometimes same day, there's a fix that is out there. And I think that that kind of rapid, not just, hey, we hear you, but the rapid action and fix, again, establishes more trust. And to me is actually one of the signs of the company and the management is operating at a different level than maybe somebody who, you know, what is Twitter, right? You know, there's people there, they're talking. We care deeply about our work. We take our work seriously. We don't take ourselves seriously. Like, I think it's very important to be able to say, hey, it sucks.

21:53I agree. This is what I tell my team. no one at Opendoor owns the product. The company owns the product. Therefore, when the product is bad, it's not your fault. It's the company's fault, but you work here. Go fix it. So no one should be offended. No one at Opendoor is offended when someone tells us, hey, your website sucks. We agree. It's terrible. Watch us make it better. This is the worst version it will be. I promise we'll make it better. We are deeply troubled by everything that is wrong with the business. This mentality that you have or the approach is very unique. And before you and I ever met or talked, I asked a couple of you, I said, hey, what's kind of the story with Kaz?

22:38And one of the words that came up a couple of times was principled. And when I hear that, I'm always like, does that really mean principled? Or is that like some sort of concocted image that somebody has done? And you told me a story at some point that I think really highlights your approach to life. Can you talk about the startup that you sold to Square and then you quit the day after the deal closed? Yeah, we built a startup the hard way. And it was genuinely difficult. It was genuinely difficult. And my wife and I put basically everything we had into the company for the first little while payroll went on our credit cards.

23:21Like we put just everything we had into it. And in 2016, we sold the company. But before you sold it, earlier in the year, in 2016, you had a pretty big offer. Yeah, we had an offer from a big company to sell the company. It would have made me very rich. Like hundreds of millions of dollars. It was a lot of money. It was a lot of money for us. For a guy who grew up objectively poor, it would have made us... Kaz would have been fine. And I remember going home to my wife. And I said, great news, sweetheart. We got an offer to sell the company to this company. I'll call it company Y. And my wife said, that's great news.

24:04I just don't know what to tell you. I said, what do you mean? She said, my husband doesn't work at Y. She just didn't want, like, she just didn't respect the company's mission. And she was like, nope, we're going to do it ourselves. Like, we're in this together. We're going to do it ourselves. And keep in mind, at this point, we were genuinely struggling to make rent. Like it was like not easy. Like we made rent, but it was like close. There were a couple months, but it was close. And she said, straight up, no, we're not selling. So a few months later, we end up finding a company. I wanted to acquire the company and I thought it was a good company and we weren't going to sell.

24:42And we sold the company. and the deal was I would get essentially paid out in our shoes over my service at the company that acquired us. Like pretty much 100 % earn out. Yeah, yeah. And we sold the company and I quit the day I had the deal closed. Didn't sign my employment offer, just left. Which for people who don't understand what you're saying, you worked on a company for years, you had an offer for hundreds of millions of dollars, you don't take it, you end up selling for whatever the price would have been. the day the deal closes the next day or whatever you quit which means that all of those years of work you basically willingly gave away walked away from everything and got zero dollars yeah i just didn't think i didn't want to spend my life resting investing there's a thing in silicon valley where you sell your company and you just like spend four years becoming rich and i thought that would be um deeply boring um and we didn't have money we generally didn't like was a very like god bless my wife for you know keeping the family afloat because i didn't know what we would do but i knew it wasn't going to be that like i just knew it wasn't going to be that look i optimize my life every week i take score of my life uh and i look at my career and i say uh did was it hard was it valuable was it fun every week was my week explain more about that process i i find that if i score myself every week i don't allow myself to drift and be bad at my job and my job is important to me like because i'm on this world my wife and i when we got married we agreed that we would leave a dent on the world she's a journalist she does great work i'd leave it into the world through code because i'm a nerd um so every week i judge myself was a week hard was it valuable was it fun and if i ever go two weeks in a row where the answer those questions is not all yes i changed something like i'm like nope gotta change something like what's an example where you got two weeks of uh to change so i'll give you a great example um i end up after selling the company and not going to work there i haven't told the story before i'll say it i'll tell the story um i ended up working at facebook which accompanied by deeply admire and i remember i had a meeting it was relatively heated uh and i i swear i'm working the average person i'm trying really hard not to right now and at facebook people don't start that much it's a very polite company i learned that lesson when i worked there yeah uh and i was like banging my fist on a table in this meeting and dropping F-bombs left, right, and center.

27:29And I came out at a meeting, and this senior leader of the company took me over. I said, Kaz, you'll never be an executive at Facebook because you don't have an executive voice. And I had this out-of-body experience where I literally remember watching myself have this conversation. And I said, what the fuck is that? And then she said, God bless her, she said, exactly, and walked away. yeah I don't even know who the person is but I can already guess there's only one or two people who would say that yeah and like I came home that night I talked to my wife but I said hey gotta go do something else that wasn't fun that's been two weeks in a row where the work has not been fun um because I think if you do your job for money you have a job if you do it for impact you have a career like it matters the difference matters actually like i don't i don't begrudge people have jobs lots of people have jobs that's totally fine a job is a perfectly good thing to have i've just never had one but i have a career and i manage it very carefully when um when you took the job at open door um one obviously all the retail shareholders were very excited because of your track record what you did at shopify etc um to me though the most interesting thing was uh uh your pay package yeah and the structure of it um essentially is this exact same idea of I'm gonna go bet on myself yeah but I should be held accountable if I don't produce value then I shouldn't get paid talk a little bit as to um you know whatever you can in terms of like negotiating that having that conversation with the board and thinking about it with your wife I mean it wasn't much of a negotiation because what happens if you're a public company CEO you get these consultants whose job it is to get you paid a lot of money without it looking like a lot of money like that's the job of pay consultants like these like consultants is like how do i get paid get exactly paid a lot of money in the least offensive way which is what ends up essentially um creating most public companies where executives get rich being really terrible at their jobs that's like basically what happens in most public companies which is why like great American public companies decline so rapidly GE it's a real thing it happens in the world right and I just didn't want that like I want my kids to be proud of their dad's career I don't think my kids, I have four kids I don't think they care how much money I make but they want, I think they care my six year old knows what Open Door does and is incredibly be proud and i wanted that so my conversation was hey look i should get paid zero dollars and zero cent unless like well it's actually not legally possible so i get paid a dollar i get paid a dollar a year um why are you so greedy i know it's actually you know the crazy things i learned i have to pay for benefits so i actually pay open door money to work there uh which i think is just I think it's actually deeply appropriate.

30:34But if I, I pay a dollar unless I create value for shareholders. If I create value for shareholders, then I get paid and it's a generous package, but it's worth zero dollars, well, one dollar, if I don't create value. Do you think every public company CEO should do this? 100%, yes. It is, we have far, actually let me be more um clear for companies where the job of the ceo is important and not a pure manager if you're pure magic and i'm not knocking pure managers there are companies where yeah systems are in place yeah like a ham sandwich could run the company right that's famous like those companies should have good management packages some of the companies do have ham sandwiches yeah yeah but if a company if a job is to create something that doesn't exist then you want people who are optimized for that creation working right rather than time spent I think that generally it's like a companies where executives can have private cars and like nice houses and private chefs and all these perks without creating any shareholder value are just so bad for capitalism and capitalism is important like it's generally important look um rockefeller never drew a salary i don't think carnegie did either actually i know jp morgan didn't they got paid as shareholders and they created some of the most enduring companies in the history of the world.

32:17And that matters. You know, it's funny is, um, I took inspiration from your structure, Elon structure with our public company. And, um, the part that stood out to me most was the reaction from the institutional investors. They were incredibly enthusiastic about this idea of incentivize people to create value. And it felt like, it's novel. Yeah. But more importantly, it did feel like, okay, now you're on the same side of the table as them. And that is very rewarding, I think, for the people who are wagering capital, even if it's not their money, you know, managed capital, whatever. They just want to feel like management is going to fight for them.

32:58The only people who don't like it, the only people who do not like these packages are lawyers because they're very easy to negotiate. Because a dollar, you can't negotiate, they start it. So lawyers get paid fewer dollars lawyers to give you advice and so lawyers are like this is risky and I'm like what is the risk I understand I have a risk yeah but like what is the legal risk here like I get paid nothing I paid a company money unless I create value and the shareholders are better off and I think that's like um almost you want to step further than this I think this is the part that people don't realize um and the only reason I know is because I was told at some point that I wasn't allowed to do something and i went and i looked for examples and you were the only person i found you get a one dollar salary but you also bought shares i bought shares yeah right and so it is in a weird way uh i believe the only equity that you own you bought in the market just like anybody else could right 100 and by the way i think that's also important i bought shares like everyone else like on the public market like everyone else at the market price um and i would have bought shares earlier In fact, my wife tried to buy shares earlier, but we couldn't because the laws ban us from buying shares outside.

34:09My wife would have fully put it into Opendoor if she could. Talk about your wife a little bit, because for people that don't know, and I don't know if she would describe herself this way, but she's a journalist. And I've heard her described as like the Canadian Megyn Kelly. Yeah. Which she may say she's better than Megyn Kelly. I don't know. But it's pretty great. Yeah. They're both great. uh your like dent in the universe and hers it seems like together is like a one plus one equals three yeah I mean it's what we it's what we optimize our life for it look she she had a steady job at a big um one of bigger uh media companies in uh Canada and just one day just rage quit and said I want to be able to say the family yeah I want to be able to say what's on my brain.

34:57I don't want to have to be censored. I don't want to have to lie for a living. Mm hmm. So she quit and started a company. She has now the single largest independent newsroom in Canada. She has 21 full time journalists working for her and is, I think, the third highest sub stack in the world and global politics. Wow. And she started from our basement with nothing. She bought a laptop and started. What is it called so people can. Juno news. Juno news like J U N O. The Juno news. It's it's it's Canadian political commentary and news. It's where I get my news about Canada. It's they do. I saw Mark Carney and President Xi were a real buddy buddy.