Redfin -- My Experience

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I’m currently in the process of selling my house. After this transaction we will have bought, sold, and bought using traditional real-estate agents + zillow and now sold using Redfin.

Through my experience, I am EXTREMELY impressed with Redfin’s data driven approach. They bring the resources (salaried agents, awesome photos + 3D tours, open houses, data driven listing approach, etc) that Zillow is lacking.

They used web traffic and open house data to pin point the perfect time (1pm on a Friday) to list our house and knew the best time based off of momentum for the open house was the following day from 12-2pm. We had an offer w/in 2 days which is part driven by the current market, but also because of Redfin’s incredible approach. Here’s our listing so you can see the quality of photos yourself: https://www.redfin.com/WA/Lacey/4966-Switchback-Loop-SE-9851…

Additionally, we are saving 1-1.5% in commissions which is $3-$5k for our sale; a sizable amount.

So what does this mean for Redfin as an investment? Let me start by saying I’m long (a relatively small position) and I think they are going to re-imagine the real estate industry. The reason I’m keeping my position small now is because of macro fears for the short term prospects of housing with rising interest rates. However, I think a downturn in the housing market will allow Redfin to take large steps ahead of the competition, build it’s moat, and come out stronger than competitors.

In my opinion, Redfin could potentially benefit from a down turn. More people will turn to Redfin to sell because of their lower fees which will give cash-strapped sellers a chance to get out from their liability with as little damage as possible.

Now for the financials from 4Q’17:

Revenue yoy: +$95.8mm / +43%
Gross profit: $29.2mm / +36% from 4Q’16
Gross Margin 30% / -2% from 4Q’16
Real Estate Gross PRofit $29.7mm / +36% from 4Q’16
Real Estate Gross Margin 33% - same as 4Q’16
Operating Expenses $31.5mm / +18% from 4Q’16
Operating Expenses were 33% of revenue / -7% from 4Q’16

Net loss $1.8mm compared to loss of $5.3mm in 4Q’16

And some highlights I’d like to point out:

  1. They have only a fraction of market share: “Reached market share of 0.71% of U.S. existing home sales by value in the fourth quarter of 2017, consistent with the third quarter of 2017 and an increase of 0.15 percentage points from the fourth quarter of 2016. The year-over-year gains were an acceleration from 0.14 percentage points for the third quarter of 2017, 0.11 points for the second quarter, and 0.10 points for the first quarter.”

  2. Their web traffic is increasing greatly; their moat: “Continued to drive strong traffic growth, with visitors to our website and mobile application increasing by 33% over the fourth quarter of 2016, and 40% for the full year. Redfin continues to be the fastest-growing top-10 U.S. real estate website.”

  3. They are growing to new markets and are exploring a lending option to ultimately lead to an all digital closing: “Expanded Redfin Mortgage from Texas to Illinois and Washington D.C., offering conforming mortgages and jumbo loans to Redfin homebuyers, with a 30-day closing guarantee. We believe integrating a lending operation with Redfin’s existing brokerage and title businesses can ultimately lead to an entirely digital closing, which can be faster and less expensive than the traditional process.”

  4. With scale they can lower their listening fees: “Introduced the Redfin 1% listing fee to 18 additional markets, now reaching approximately 80% of Redfin customers across 25 markets total. The Redfin 1% listing fee saves customers $7,000 to $10,000 on a $500,000 home, compared to the typical listing fee of 2.5 to 3% with a traditional agent. The fee is subject to a minimum commission of $3,000 to $5,500, depending on the market, and does not include the buyer’s agent commission, which is typically paid by the seller. We plan to offset the lower listing fee by reducing the Redfin refund for buyers in markets where it’s offered.”

  5. With a growing platform, they can begin to offer more, higher margin services that also makes their customers lives easier: “Began experimenting with concierge-style home-selling service in Los Angeles and Washington D.C., in which Redfin coordinates, supervises and pays for services such as deep cleaning, staging and other cosmetic improvements, for an introductory 2% listing fee. Redfin Concierge Service is complementary to the in-person service and custom online marketing of Redfin’s current 1% listing service, and is available for homes priced at $500,000 or higher. Our goal is to use Redfin’s cost advantage to appeal to customers who are more focused on convenience than price, by offering a level of service that we believe no brokerage has consistently offered before.”

  6. They are empowering their agents and making their lives easier. I experienced this myself with my agent who has been in the business for 20+ years and joined Redfin 2-3 years ago… HE RAVES about it! “Expanded offer-writing software to Redfin agents in Maryland, in addition to Washington, D.C. and Virginia. Each new market where we launch Fast Offers requires an inordinate amount of customization based on dozens of different forms, local customs around earnest-money amounts, and other deal terms. Adding additional markets will take years, but in time we believe this software will let us move faster than any other broker, at lower cost, and with comprehensive data about what it takes to win in each neighborhood.”

“Upgraded our software for Redfin agents, with a new calendar that shows an agent what’s going on with each of her customers today, whether that’s a home tour, a negotiating deadline or a closing. Other software released in the fourth quarter has also made it easier for Redfin Agents to see which customers most need attention, based on the customer’s online search activity and agent interactions. We developed this software using the React JavaScript library pioneered by Facebook for high performance and easy porting from desktop browsers to native mobile applications. We know of no other brokerage taking such an aggressive approach to mobile software for ensuring that on-the-go agents deliver the right service to each customer.”

  1. Now for that money saving part which will protect them in a down-turn: “Saved Redfin homebuyers and sellers $29 million in the fourth quarter and $121 million in 2017, compared to a 2.5% commission typically charged by traditional agents.”

  2. All of this leads to in credible customer experience and satisfaction. Proven by my experience, but more importantly by the all important NPS: “Earned a Net Promoter Score, a measure of customer satisfaction, that is 52% higher than competing brokerages’, as measured in a Redfin-commissioned November 2017 survey of people who bought or sold a home in the previous 12 months. This was the fifth consecutive survey in which Redfin’s customer satisfaction was higher than our competitors’.”

  3. They are focusing on diversity and inclusion which is becoming more and more important for long-term performance…and it’s just the right thing to do: “Grew the Redfin technology team from 30% women in 2016 to 32% in 2017. This percentage of women in technology roles is significantly higher than other major technology companies’ self-reported data. The area where Redfin needs to make more progress and where we are focusing now is increasing the percentage of black and Hispanic professionals. We continue to believe that diversity is a major recruiting and retention advantage in an intensely competitive talent market.”

I need to dive deeper into their financials and continue monitoring, but I will look to add to my smallish position as they continue to pass the sniff-test.

What are your thoughts? Shoot holes in this please!

  • Austin

Shopify (SHOP) Ticker Guide

For information on all of my current holdings view my profile here: http://my.fool.com/profile/CMFAleeb/info.aspx

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Austin,

Thanks for sharing your thoughts and experience. Redfin is a company I have been following since it came public. I agree it is a wonderful company and potentially the future of the house buying process. The only reason I have not bought shares yet is because I can’t get behind the valuation given the companies low margins and being at potentially the top of the housing cycle. Aside from that I like everything about the company.

Thanks for sharing!

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Maraj,

I agree with the potential to be at the top of the housing market, but that’s impossible to guess.

However, I don’t understand the comment about low margins.

Their margins are around 30% which seems pretty good to me given their expenses associated with breaking into new markets. Expenses are growing way slower than revenue and they are getting into higher margin lines of business.

All of that means it will be a higher margin business in the future, especially as they scale, at least in my opinion.

Thanks!

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I really like their app. I use it exclusively and feel it is much easier on the eyes than the Zillow app but I have not initiated a position. Great write up CMFAleeb! Good luck with the sale.

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Their margins are around 30% which seems pretty good to me given their expenses associated with breaking into new markets. Expenses are growing way slower than revenue and they are getting into higher margin lines of business.

Your right good or bad margins can be a relative term based on the industry. I guess when I said low margins I was comparing them to Zillow and other online companies that seem to push 50% to 80% gross margins these days. In comparison 30% can be quite low though Redfin offers a lot more hands on services then most pure software companies. Your right they very well might expand going forward especially as they take market share.

When I first started researching this company I was very impressed by the CEO and the way he talked on the conference call. He seemed to know the company and the market very well. He also seemed very aware of shareholders need to make a return and seemed to express a desire to be shareholder friendly.

I just checked and currently within my software I have my buy price set right around $15 a share assuming 30% margins and a 30ish% growth rate. If the margins go up which very well could happen I would adjust the calculation upwards a bit. I am just being hyper sensitive regarding valuation right now given our current macro environment. Though chart wise it does seem to be putting in a strong base right at or below $20 so that range may be a good buy point.

Thanks again for your write-up. It was very well organized and I could find very few disputes with your argument. I hope to dive in and review the company earnings a bit more before the next release so thanks for bringing it to our attention.

Best,
Maraj

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I’ve been house hunting and my realtor sends me properties and reports via MLS.com and the MLS.com user experience and technology is so bad that I actually port all the properties my realtor sends me over to my Redfin app/site. Combined with Redfin’s discounted commissions, if I weren’t in contract with my realtor, I would definitely look at a Redfin agent as an option for buying a house.

Scott Nagel, their President of Real Estate Operations (http://investors.redfin.com/corporate-governance/management) is an old colleague. We worked for a startup years ago for about 5 years — he’s a really smart guy and class act. Gives me a vote of confidence regarding their management team.

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Revenue yoy: +$95.8mm / +43%
Gross profit: $29.2mm / +36% from 4Q’16
Gross Margin 30% / -2% from 4Q’16
Real Estate Gross PRofit $29.7mm / +36% from 4Q’16
Real Estate Gross Margin 33% - same as 4Q’16
Operating Expenses $31.5mm / +18% from 4Q’16
Operating Expenses were 33% of revenue / -7% from 4Q’16

Net loss $1.8mm compared to loss of $5.3mm in 4Q’16

Austin:

Have you done a compare and contrast with Zillow’s financials, growth prospects, business strategy?

Did you ask actual traditional agents what the asking price should be? You had an offer in 2 days, raising at least some question whether you priced it optimally.

The reduced commission would be peanuts compared to selling at a lower price IMO…whereas, they just want to move the merchandise.

Thanks for sharing your story…I am already in Zillow that has done well while redfin has traded sidewise the past year…with such a growth rate in revenue…why does the market show them no respect?

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I once used Redfin and had a very good experience. After my first agent (in LA area) bungled by overpricing the house I brought in Redfin and they ultimately got the job done well for less money.

My challenge as an investor is this. When I bought my next house, which I also sold, I used a local agent who is very well respected in our area. He gave me a break on the % but it was still higher than I would have paid with Redfin. He has been a top guy in the area for good reason. He has expert knowledge, great relationships with many agents and racked us up several offers almost immediately. One offer was 10K over asking. But he was not a fan of Redfin who is taking money off his table. If you were an agent and there were two houses on sale for your buyer, you’d be incentivized to steer them away from the Redfin house. For buyers this means you are paying less but also likely to get fewer offers. This, of course, may change over time if Redfind is triumphant. However, that would also mean their main competitive advantage - price - is mitigated. What’s the moat?

For me, I think this space is so overcrowded and so many people use personal references I am not certain it is a market ripe for disruption. I also think - and I’ll probably be excoriated for saying this - that good real estate agents work much harder than people realize. And with much more aggravation. Our agents worked hard to get our house ready, lent us furniture, spent on a marketing campaign, and fielded endless calls, questions, etc. I can’t count how many times they came and went, getting home ready, doing showings, etc.

Just my humble 2 cents, but I see a very solid, well run company in a brutal space.

BD

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that good real estate agents work much harder than people realize.

I think this is true and that good agents have a good feel for what works in more complicated markets. I used to live in Point Richmond, CA which has a mix of tiny ancient houses on small lots and some smashing designer homes with Bay views and the like which went for well over $1M. Services like Zillow have a really hard time with places like this, particularly since there were distinctions like Bay side or not and hill vs flats which impacted price significantly even for the same essential house. Plus, it was a place with relatively low turnover so 6 month comps could easily not yield 3 houses even vaguely like the one for sale.

Which said, I don’t think that the percentage of agents which are good is very high. I have certainly seen some incredible bungles of massively overpriced homes that didn’t sell and significantly underpriced homes which sold quickly, but for much less than they should have.

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BD great post and wonderful points.

One thing I would like to clarify is that the comission for buying agents is the same. Specifically for the reason you pointed out. If it was lower for buying agents, no one would want their clients to buy Redfin listed houses.

The savings is on the listing side.

The future I see is as Redfin scales, they can leverage their platform of agents, website, tech, and streamlined processes to take many of the unnecessary expenses out of real estate transactions. As they grow, I see a world where Redfin agents can represent both sides of the transaction and cut commissions from 5 or 6% to 2 or 3% which would be massive savings.

To the question of optimally listing our house. I agree, we were probably a little low, but because of their process and the competing offers, we accepted 8k or about 2.5% over asking price.

I did meet with other non Redfin agents and was not impressed with the effort or lack thereof they put into preparing for our initial meeting. It was almost as if they took the approach that their network would do all the work for them.

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Is that top of the housing market in terms prices? Surely prices don’t really affect Redfin wouldn’t it be # of transactions. When US housing market rolls over is it prices or volumes that drop? Anyhow my understanding of the US market was that there really hasn’t been a boom bust over there besides the 2000-2008. For the 50 years prior there was just a gradual incline of price rises without much bubbling or volatility. (Then what do I know I’ve only lived in UK and Singapore).
A

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Sorry in advance for an off-topic post. I think it is relevant to Redfin, though.

Redfin is on my Watch List.

Colorado had some nasty flooding in September 2013. It made national news, but I’m not sure you’d remember unless you lived through it…

My wife and I had to move because the lowest level of our house was destroyed. Sadly, it had been recently renovated, but we wound up doing OK.

To find a new home, I was comfortable working with a realtor who wasn’t terribly experienced, but was a friend of my wife. We found a new home, love it, and are still there. If we overpaid, it was only by a little, which is OK in my book in the months after major flooding.

We re-renovated the damaged home. Our contractors were as heartbroken about the trashed renovation as we were, and placed us near the top of their priority list. With that incredible blessing, our home was among the earliest ready for market the following spring.

When it came to selling the damaged home, I insisted on working with someone who is a specialist in the neighborhood. The specialist recommended a selling price that was almost 50% above what my wife’s friend suggested. But the specialist was very articulate and compelling in the data he presented that convinced me (and us) that the higher price was legitimate, and not just a fish hook to get the listing. I suggested taking the price down a percent or two, so it would show up in more people’s searches. With little inventory on the market, we got our asking price within days and had a back-up offer. We gave full disclosure on the damages and the renovation.

Take-aways:

  • When you work with contractors for renovation, choose a company with a great reputation for customer service, not the lowest bid. We loved the original renovation. The second renovation more than paid for itself due to the home’s sale price, which was partially an artifact of the contractor prioritizing us.

  • Assuming you have a decent eye for property, it is probably OK to penny-pinch when you buy a home. Frankly, though, unless you have a great sense of what your home is worth, I would NOT penny-pinch on the sale of my home. A great realtor is worth the money. Of course, if you don’t have access to a great realtor, cheaper is better. Furthermore, it is time-tested wisdom that one shouldn’t choose one’s realtor based solely on the highest target selling price, and I agree. I chose the high-price realtor because I was convinced that the reasons behind his price were legitimate and not just blowing smoke. Selling real estate is an important transaction. Please treat it as such and don’t be penny-wise and dollar-foolish.

  • In my opinion, Redfin CAN (and perhaps should) put the majority of realtors out of business. There are too many that aren’t particularly skilled, and that is low-hanging fruit. I see THAT as Redfin’s near-term opportunity, and I DO see promise there.

  • Longer-term, I’m not convinced that there is a defensible moat. On the low-end, I’m not sure a lower-cost “me too” couldn’t take share. On the high-end, I firmly believe that there are times when the specialist realtor is worth every dime paid for his or her premium services. I’m not sure that’s always the case, but experience tells me that it is sometimes.

  • If Jeff Bezos is right that “your margin is my opportunity”, I’m pretty sure that there is a lot of opportunity immediately in front of Redfin.

Despite being somewhat off-topic, I hope this post was helpful.

Thanks and best wishes,
TMFDatabaseBob (RDFN is on my Watch List)
See my holdings here: http://my.fool.com/profile/TMFDatabasebob/info.aspx
Peace on Earth

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