It’s tough to deliver such a fantastic quarter as Redfin did in Q4 of 2019, and for the full year of 2019. I mean, they just beat ass all over the place. Revenues, profits, traffic, productivity — Redfin just about killed it across the board.
The one exception comes from its iBuyer business, RedfinNow. And I’m starting to think that Redfin actually isn’t in the iBuyer business at all. Maybe that matters, maybe it doesn’t.
But the true takeaway from the full year 2019 and Q4/2019 results, and the earnings call that just happened, is something that truly surprised me.
It seems that Redfin is converging… but not towards Zillow and Opendoor and Flyhomes and the new breed of game changers. Redfin is converging towards Realogy, HomeServices of America, Keller Williams, Re/MAX and the rest of the traditional incumbents. I didn’t see that coming, and yet, here it is.
We’ll discuss all of that below.
The Numbers
Let’s start with the numbers, as we always do. First, the full year 2019 results:
These are some solid numbers to be posting for the full year 2019 results. The revenue is inflated, for sure, from RedfinNow numbers, but Redfin helpfully releases a lot of information so we can evaluate the core brokerage business. And those numbers look very, very healthy indeed.
Full year brokerage revenues (not counting the Partner referral program) are up 22% to $496.5 million — in dollar terms, they added $90 million in revenues from 2018 to 2019. That’s impressive by any measure for any brokerage, but it’s particularly impressive since Redfin is a discount brokerage charging 1% for most of 2019 in most markets for most listings, then switching to 1.5%. More on this later.
Gross profits from the core brokerage operations are also up 22% from $123.1 million to $150.4 million. Now, Redfin says its gross margins from Brokerage Services in 2019 was 28.7%, that includes the very high margin referral business with its Partner Agents. The core brokerage gross margins were 24.8% and while it’s never apples to apples comparison between Redfin’s Gross Profit number as a brokerage’s Company Dollar number, it’s close enough for government (and bloggery) work. That makes Redfin a 75/25 split company, if we want to compare.
Although the company as a whole posted a pretty sizable loss of $80 million, almost double the $42 million in losses for 2018, I’m thinking a lot of that had to do with the RedfinNow properties division. I imagine that at 25% gross profit out of core brokerage, Redfin’s brokerage operation was quite profitable. If the typical North American traditional makes 3% net profit on 15% Company Dollar, maybe Redfin’s core brokerage operations had 5-6% net profit margins. That’s really, really strong.
And Redfin did that all through organic growth. No tuck-in acquisitions or mergers with other brokerage companies. Just growing its business by getting more clients.
Speaking of growth… the Redfin website? We’re now up to 33.5 million monthly uniques, a 23% YOY growth. It’s just a matter of time before Redfin catches, then passes, Realtor.com as the #2 portal in real estate. And it’s a brokerage.
What about Q4/2019? Here are those numbers:
Since fully year 2019 was so strong, it isn’t surprising that Q4 was also very strong. What was a touch surprising was just how strong Q4 was. Q4 is normally the slow season in real estate, as is Q1, until the spring market rolls around. But Redfin’s 2019 Q4 numbers are basically the same as Redfin’s 2018 Q2 numbers, the spring market.
That’s impressive as hell, and all in under a year.
The only thing I really want to call out for quarterly results is agent productivity numbers. Very, very impressive by Redfin here.
In Q4 of 2018, Redfin had 1,419 Lead Agents who did 9,822 transactions; in Q4 of 19, Redfin had 1,526 Lead Agents who did 13,122 transactions. So transactions went up by almost a third, but agent count only went up by 7.5%. Furthermore, Redfin started the year with 1,503 Lead Agents at the end of Q1, ballooned up to over 1,600 Lead Agents in Q2. Redfin’s been shedding agents throughout 2019, but productivity has not suffered.
The average Lead Agent at Redfin did 8.6 transactions in Q4 (the slow season, remember) compared to 6.9 a year ago. Accordingly, Gross Profit per Lead Agent in Q4 was a very nice $27,507 compared to a mere $19,610 in Q4 of 18.
Really, really nice work by Redfin. Really very strong results.
Having said all that, there are a few issues we need to explore.
Raising Prices
First, the big headline from the earnings call is that Redfin raised its listing fee from 1% to 1.5% across the board in late 2018… and saw no real negatives from the move.
Redfin had been experimenting with 1.5% listing fee in seven markets for a year to see if they wanted to do this everywhere. The answer being yes, they went ahead and did it. I’m sure Glenn Kelman and gang were nervous that consumers would abandon them in droves when Redfin raised its price by 50%. Well, no need to be nervous. Here’s Glenn Kelman:
In the past customers and markets with high home prices paid Redfin a 1% listing fee. In other markets, we charged 1.5%. Starting last December, in every market listing customers who choose to buy a home with us pay a 1% listing fee, but otherwise pay 1.5% of the home price….
The test thesis was that even at the higher 1.5% fee, no other broker could offer the full set of Redfin services, and then our listing share would keep growing.
This thesis was largely borne out. In the test markets we kept growing, but more slowly. Listening demand in the test markets grew several points slower than in comparable markets that still offered a 1% fee.
Later he clarifies that the seven markets with the higher 1.5% listing fee grew throughout 2019; they just didn’t grow as fast as those with 1% listing fees.
But Redfin is in a profit-taking mode, it seems, rather than a market share mode. So the higher price will stay, and improve Redfin’s gross margins. That in turns boosted analyst opinions of Redfin, and I believe Redfin’s shares are up big in today’s trading.
I have some thoughts.
But first…
What It Means to Be a Redfin Agent Has Changed
Glenn just kind of mentioned this during the earnings call, and none of the analysts picked up on it and asked about it. Because they’re Wall Street guys, not real estate guys. But this seems tres important to me:
We also hope to see first half improvements in homebuyer success rates, but these will be the result of changes to our field organization that we started planning last summer. We use our annual kickoff event on January 10 to inaugurate a new culture of sales performance. We still emphasize that a Redfin agent should always put the customers’ interest ahead of a sale. But we’ve made it clear to our agents that earning our customers business and finding a way for the customer to win still require energetic salesmanship. Our field organization’s response so far has been an enthusiastic roar, giving us reason to believe we can execute better than ever in 2020. [Emphasis added]
Now, this began last year after the Q3 earnings call, and I wrote about that in my Redfin writeup:
So, in other words, Redfin agents used to just work the leads that Redfin’s website generated. They were in the fulfillment role, on purpose and by design. Because Redfin wanted the relationship to be between the consumer and Redfin, not between the consumer and an individual agent. Down that path lies 1099 independent contractors, traditional brokerage, and margin compression.
But now, Redfin agents now have to convert web leads at some level acceptable to Redfin, or get fired, and Redfin will not only reward some of the top agents, but will encourage Redfin agents to build a book of business. That’s a pretty major shift.
Convert leads at a satisfactory level, and build a book of business, including sending holiday cards and stopping by to say hi, and… generate referrals and repeat business and all the rest…. That sounds a whole lot like what every traditional brokerage in America wants its agents to do: build a sphere of influence, or a geographic farm, or a base of referrals and repeat business….
That’s not quite the same thing as say Keller Williams or Realogy, but it’s no longer in a different universe either. It’s at least in the same ballpark as traditional sphere-and-farm lead generation deal that traditional brokers and agents have been doing for decades.
Well, now we have Glenn talking about using Redfin’s annual kickoff event to instill a “culture of sales performance” at Redfin and talking about “energetic salesmanship.” The later in the call we get this:
We’d said before that about 20% of our agents are being affected by those standards, but you shouldn’t think that 20% of them are going to get fired or resign ahead of being fired because most of them are really trying to figure out a way to improve their performance and they do. So, involuntary attrition will be up, but it’s only going to be a few points.
I hereby designate “involuntary attrition” as the euphemism of the year.
Finally, there is an intriguing piece of data from the numbers that possibly relate to this shift.
Real estate brokerage revenue is up 22% YOY. But Real Estate Services cost of revenue is up 21% YOY. The difference is actually 150bps. Maybe there’s nothing to this, but to me, this looks a whole lot like cost of revenues scaling up at exactly the same rate as revenues, which feels a whole lot like an agent split.
Now, obviously, Redfin’s agents are W2 employees with a salary and benefits and so on and Redfin controls them directly. But if bonus payments, incentives, etc. which are all part of the “culture of sales performance” are at play here, then we have Redfin moving closer and closer towards the traditional incumbents that they have so long been seeking to replace.
Frankly, I have no idea how one builds a culture of sales performance without rewarding the producers. I don’t know if that’s possible given human nature.
I am really starting to believe that Redfin is converging not towards Zillow and Opendoor but towards Realogy and HomeServices. They’re not quite the same, of course, but they’re in the same ballpark now. Once upon a time, Redfin played basketball while Realogy played football; now, Redfin is playing rugby.
More Signs of Convergence: RedfinNow
Longtime readers know that I have been agitating for a while now for Redfin to release its unit economics numbers for its iBuyer business, RedfinNow. We didn’t get that.
What we got, however, is a lot of color around how Glenn and his team thinks about iBuyers. And what they think is quite different from what Zillow and Opendoor think, and consciously so. In fact, what Redfin thinks about iBuyer could have come straight from the lips of Ryan Schneider at Realogy, Adam Contos at RE/MAX, or Gary Keller at Keller Williams.
Here’s Glenn during prepared remarks:
We already discussed on our last call the October launch of RedfinNow in a 13th Market, Las Vegas. We don’t expect to add many more until at least the second half of 2020. We’ll use that time to get better at pricing, renovating and selling homes, a process that already started in October, when we shifted the authority to make an offer from the field to a central set of portfolio managers. This will let us be more programmatic about our investment decisions. Our increasing price discipline has led to a decline on offer win rate through the third and fourth quarters of 2019. Homeowners don’t always tell us about competing offers, so we don’t know how often we get outbid by another institutional buyer. But among the people who contact us about a RedfinNow offer more end up selling to RedfinNow than to a competitor. Sometimes this is because we beat out another buyer. Sometimes it’s because another institutional buyer hasn’t bid.
What makes RedfinNow’s year-over-year fourth quarter revenue growth of 359% remarkable is that we improved margins even as our competitors began what could be a destructive price war. The purchase activity of all institutional buyers slowed in the second half. But for the full year, the other major buyers seem to have made more aggressive offers, likely narrowing their average gain on a sale. Redfin is comfortable ceding growth to competitors if we can’t win the home at a price that can be profitable for us. As we’ve emphasized before, our discipline comes from a belief that different economic conditions will favor different ways for consumers to sell their home, making RedfinNow a more appealing choice one quarter and a brokered sale better the next. [Emphasis added]
Based on these two paragraphs, I’m prepared to drop Redfin from the ranks of iBuyers. Redfin is not an iBuyer or a market maker anymore than Keller Williams is. In fact, the evidence is piling up that Redfin is using RedfinNow as just a listing lead generation tool that once in a while lands on a can’t-lose flip deal, which it will jump on like any other flipper.
I’m 110% sure that Realogy, RE/MAX, KW and others would do the same. I mean, if you can pick up a property on the cheap, and “win the home at a price that can be profitable,” who wouldn’t do that?
And then finally, I get kind of, sort of confirmation on something I’ve been harping on for a while with RedfinNow. Here’s what I wrote in the Q2 report:
Because as Glenn says, Redfin has 14 years of history of “selling homes better than anyone else.” Fine, but Properties gross margin was minus 2.5%, down 140 bps YOY, “primarily due to an increase in personnel costs.” Well, it isn’t as if Zillow isn’t hiring like mad too for its Zillow Offers business. In Q1, I thought it was significant that Zillow Homes posted gross margins of 4.7% while Redfin Properties posted gross margins of minus 7.6%. Let’s see what it posts in Q2, and what kind of increase in personnel costs it has to report.
In my judgment, Redfin can lose to Zillow in website traffic, lead routing, referral business, even mortgage and title. It simply cannot lose to Zillow in buying and selling homes, not with its 14 years of history and boots on the ground and local data and local knowledge. It just can’t.
Well, here’s Glenn in this Q4 earnings call:
Hi Jason, I’ll comment on RedfinNow and Chris will comment on gross margin. We do not have cohorts that we are publicly discussing for RedfinNow. I don’t think it’s just a matter of time. We have to get better at pricing properties and that’s exactly what we’ve done over the past two years. It gives us confidence that we can continue to do so. You make money on almost every property you buy, but when you miss, it really costs you. So the misses just have to get fewer and farther between. I think there’s also just some question of how we can get our renovation costs down so that we can renovate the home more quickly and more cheaply and we’re confident about that too. So I don’t think it’s really a question of maturity as much as it is a question of just improving our craft. [Emphasis added]
That’s quite a far cry from the triumphal announcement language from the old days (in 2018) when Redfin was making a longterm commitment to RedfinNow. From the Q2/2018 earnings call:
In committing to Redfin now long-term, we eyed our competitors wearily as many are well run, some are willing to take risks we aren’t and seeming all of them are well funded. But we decided we can win, because we believe nobody is better at selling homes than we are. We believe that nobody in real estate is better at combining local service and technology.
Newer entrants don’t have the online audience we do, and pure websites don’t have as much operational expertise. We believe few companies have our spending discipline. This audience field experience and penny-pinching should let us acquire and sell homes at a lower cost, which will let us offer homeowners more money. For the person selling her home to Redfin Now that money is almost all that matters, and a war on price is the one we feel best prepared to win.
Turns out, Redfin still hasn’t quite figured out how to price homes to purchase, nor have they quite nailed down how to do renovations and maintenance faster and cheaper. For that matter, that vaunted local service and field experience doesn’t matter much, since Redfin moved purchasing decisions to headquarters. And of course, that whole thing about “a war on price is the one we feel best prepared to win?” Forget all that noise. Today, it’s more about “Redfin is comfortable ceding growth to competitors if we can’t win the home at a price that can be profitable for us.”
That would be eminently smart and wise if the price-war-engaging competitors like Opendoor and Zillow were losing their ass on every single transaction. That Redfin can’t and won’t engage in a “price war” for iBuyer could be very astute if those companies are posting massive negative gross profits.
Alas for Redfin, all of the evidence available thus far is that Opendoor and Zillow are making somewhere between 7-10% gross margins. All that while engaging in a price war. While RedfinNow is posting gross margins of minus 1.9%. (Yes, yes, I know all about how the companies calculate margins differently; I’ve written about that before.)
Instead, Glenn talks about referring iBuyer leads to their partner, Opendoor, when they can’t figure out how to make money on a deal. Why, that’s… exactly what Keller Williams would do with its partner Offerpad, and what Realogy would do with its partner, HomePartners of America.
Convergence, thy name is Redfin.
Some Interesting Details
Finally, there are some intriguing details in the earnings call that are… well, intriguing.
Lead Qualification
I honestly did not realize that Redfin didn’t do a whole lot of lead qualification before setting up an appointment with its highly paid Lead Agents. Here’s Glenn:
We’ve also begun to use our call centers, staffed by locally licensed agents to qualify by phone some people who register for a tour. We only call the people who through their online behavior seem less likely to have understood what they signed up for. One group seems to appreciate a call explaining our service and the other never answers the phone and likely would have been a no-show for the tour. Their tour is canceled. Early results from this experiment suggests that in-person qualification can also increase customers’ likelihood to buy a home. These experiments will take until May to roll-out companywide. By the second quarter we expect to have made our first broad significant improvement in the quality of the home buying customers our agents meet.
It honestly never occurred to me that Redfin, filled with W2 employee agents, all manner of technology that is the envy of the brokerage world, and some of the smartest people in real estate running a publicly-traded brokerage never actually qualified its website leads. Thousands of agent teams across the country have been doing this for a decade, but Redfin just started making phone calls to qualify people who request a tour?
Well, it’s true: assume makes an ass out of u and me. Mostly me. That’s the bad news.
The good news, however, is that Glenn is almost certainly correct when he says that this effort will lead to far higher quality in buyers that Redfin’s Lead Agents will meet, which will raise the conversion rates, and which in turn will have a very positive impact on revenues and gross profits (depending on exactly how these Lead Agents are now compensated under the new Culture of Sales Performance Redfin).
Ancillary Businesses: Mortgage and Title — More Convergence
Finally, the most exciting news for Redfin’s investors, apart from the brokerage operations blowing the doors off of expectations, was how strong Redfin’s mortgage, title and escrow operations have performed in 2019:
At the start of 2019, Redfin Mortgage was available 45% of our home buying customers. Redfin agents at this time last year, were mostly wary of recommending Redfin Mortgage instead of longtime lending partners. But 2019 was the year that Redfin Mortgage largely won our agents’ trust. We now know that a sale is 20% more likely to close on time if our home buying customers borrow their money from Redfin Mortgage and close the transaction with our title company, Title Forward. The upgrades to our own lender software keep reducing the cost of originating a loan. And in the fourth quarter, we also improved our process for selling loans, both through direct sales to Fannie Mae and in other ways. This increased revenue per loan by hundreds of dollars.
Mortgage, Title and “other services” contributed $4 million in revenues in Q4, an increase of 67% YOY. That’s super strong growth.
Then later in the call, Glenn says that Redfin will start to offer Redfin Mortgage to consumers who don’t use Redfin as a brokerage and compete on price. Then he says:
Sure. So I think that’s probably the biggest story of 2019. Those businesses were eating it a year ago. Attach rates were really low. Gross margins were terrible, and we really had a crisis of faith about them a year ago. And now they are the mouse that roared.
So Mortgage has done very well, hitting our attach rate goals, competing effectively on price, and then title has really broken into the black in a serious way, where we were running that business barely making any money, and now it’s making significant money.
In a way, it’s news that Redfin has discovered the healing powers of mortgage, title and escrow on the bottomline of brokerage companies. Every broker since about 1980 has known about the importance of ancillary businesses. Realogy is built pretty much on the idea of the Value Circle which includes mortgage and title. HomeServices of America is nominally a brokerage company, but I’m willing to bet that most of its profitability comes from its very serious mortgage, title, escrow and insurance affiliates. And the story is the same at local and regional levels. Howard Hanna? Check. Weichert? Check. Large local brokerages like Coldwell Banker Bain, or BHG Gary Greene? Check, check, check.
Redfin making big money in mortgage and title is just about the least disruptive thing to those traditional guys; they already compete against one another and the big players like Wells Fargo. They know how to compete against Redfin too on ancillary businesses.
But what it is is yet another sign of convergence.
The Surprising Convergence
I have to admit, I need more time to process this development.
For years, I’ve thought that Redfin, Zillow and Opendoor would converge towards one another. I thought of Redfin as a disruptor that operated a technology company that happened to make money from brokerage commissions rather than ad sales. I thought for sure when Redfin jumped on the iBuyer thing pioneered by Opendoor earlier than just about everybody else, including Zillow, that it was sign of convergence towards a new technology-powered future. I have always thought that Redfin saw Zillow and Realtor.com as its true competitor, not the traditional brokerages.
I can’t think that anymore.
Everything coming out of Redfin today, just about every phrase out of Glenn Kelman’s mouth during the earnings call, says that Redfin is converging all right, but it’s converging towards Realogy and HomeServices of America, not towards Zillow and Opendoor.
The Redfin story is remarkably similar, in a way, to the Compass story. Both have a lot of capital, both have huge expenditures on technology, both want to position themselves as a proptech company deserving proptech type valuations… but fundamentally, they’re brokerages with agents who want to make money on ancillary businesses, dabble with iBuyer as a lead-generation vehicle as well as a “We got that too!” objection handler, and want to build a culture of sales performance and take market share.
Even the fiscally sound obsession with profitability, including the decision to raise listing fees to 1.5% from 1%, which sacrifices growth for profit is precisely the kind of thing that traditional companies like Realogy — boy, is Ryan Schneider big on bragging about profitability — would do. It’s definitely not something that the pedal-to-the-metal guys like Opendoor and Zillow would do. Seeing as how Redfin is still at sub-1% market share, that decision strikes me as fundamentally conservative, and fundamentally indicative of a convergence away from startup-tech-disruptor world and towards corporate-agents-establishment world.
Sure, there are major differences, and the fact that Redfin continues to operate a W2 brokerage, with its website at the center of its lead generation efforts, means that Redfin is still playing a different game than the traditional guys. But it’s rubgy and football. It’s tennis and racquetball.
And from the other side, we have traditional brokerages like Realogy, RE/MAX, Keller Williams and others talking up their technology investments, the platforms for agent productivity they’re all building, and all of the partnerships they’re doing to dabble in things like iBuyer. Redfin spent $70 million on technology in 2019. If Keller Williams spent $100 million on technology in 2019, what’s the difference between the two again?
They’re converging, and converging fast.
So my questions from Q3 report are now answered. I wondered then; I no longer wonder now. I have to think more on whether I like that or not.
Conclusion
Let’s leave it there for now. Zillow and Realogy’s earnings reports might have more bearing on what we heard from Redfin.
The bottomline is this: Redfin killed it in Q4 and in 2019 as a whole. I mean, margin improvements across the board, revenue growth across the board, doing all kinds of smart and savvy things across the board — including, possibly, the step-back from risky ventures like iBuyer.
I see why investors are bidding up Redfin shares. Glenn and team had just a fantastic year.
Having said that… it now seems to me that Redfin is becoming a kind of Realogy 2.0 — a “full service real estate company” with a brokerage based on a culture of salesmanship, all of the traditional ancillary services like mortgage and title, but with a far better website.
That’s not a bad thing, per se. Let’s not forget that there was a time when Realogy stood astride the residential real estate industry like a colossus. Perhaps Redfin will do the same one day.
But… the incumbents know how to fight that war. They’ve been fighting it for decades. They know how to compete against a fellow full service real estate company, even if they call themselves a “company with the broadest product portfolio in our industry.” And the disruptors don’t much care about the traditional incumbents, because they’re playing a totally different game in a totally different way.
We’ll see how 2020 turns out. I’ll be watching carefully for the next set of results and revelations.
-rsh
