[VIP] Redfin, Q1/2020: Scared Money and The Big Squeeze

According to its own creation mythology, Redfin was born in the dark as it was founded just before the Bubble burst. If any company knows how to navigate panic, turmoil, and a terrible housing market, it would be Redfin. They like to call themselves “the rabid squirrel.” The whole self-identity of Redfin is of a small group of smart but fanatical people devoted and dedicated to transforming real estate as we know it.

The image above, after all, was the banner at Redfin’s IPO. The tagline is “Real Estate Redefined.”

That was then.

Today? I don’t know this Redfin. And though there were signs and hints starting last year, I could never have imagined that Redfin would act so… scared. And this 2020-version of Redfin is in serious trouble. It’s running scared, being far too conservative, and as a result, it will get caught in a squeeze between the traditional incumbents and a new breed of technology-enabled competitors. It didn’t have to be this way, and yet, here we are.

Redfin had a fantastic Q4/2019 and looked poised to replace Realogy as the dominant brokerage standing astride the industry. That was the trend I saw at the end of 2019. Q1 numbers were really solid, because Q1 was a record-breaking quarter and Redfin came through in smashing fashion, continuing the positive momentum from the second half of 2019.

So why the negativity?

The most important takeaway from Redfin’s most recent set of actions and statements is that Glenn Kelman and his team turn out to be as conservative and as terrified as any Boomer-filled executive suite of a traditional incumbent brokerage. They’re trying super hard to be resilient to the disruption and somehow return to the status quo ante; there isn’t a hint of trying to be antifragile and improve through the crisis.

And most importantly, somewhere along the way, Redfin lost focus of its North Star. It used to be the consumer. Today? I don’t know.

It was a dispiriting call, and that’s unfortunate, because I was and remain one of Redfin’s biggest fans. But there really is no other way to interpret what we heard. I take so little joy in writing this, because of how much I admire Glenn Kelman personally and professionally, and how much emotional investment I had in Redfin over the years as the pioneer, the disruptor, the rabid squirrel. I have some good friends in that company, and I yield to no one in my admiration of Redfin.

Or rather, I yield to no one in my admiration of what Redfin was: the rabid squirrel, born in the dark. And that isn’t Redfin in 2020. Because I have to call it like I see it. It’s the reason why you come here to Notorious.

So, with much regret, let’s get into it.

The Numbers

Let’s start with the numbers, as we always do. As mentioned, Q1 was a very strong quarter numbers-wise, because until the lockdowns hit, it was a record-breaking housing market:

I mean… it’s hard to have better results than this.

  • Revenues up 73% YOY, including the core brokerage revenues being up 26%
  • Gross profits in the core Service business up an eye-popping 200%!
  • Even the perennial head-scratcher of RedfinNow improved: only losing $231K vs. $1.6 million a year ago.
  • Gross margin in real estate more than doubled, from 6% in Q1 of 2019 to a decent 14% in Q1 of 2020.
  • Almost all agent productivity numbers were up: Transactions, Volume, Revenue, and Gross Profit per lead agent
  • All traffic-related productivity numbers were up, and way up in some cases, which is even more impressive since Redfin grew its website traffic to over 35.5 million monthly uniques, a 14% increase YOY.

By all measures, this was an absolutely fantastic quarter for Redfin. They simply blew the doors off.

In just about every way, Redfin continued the very strong Q4/2019 results into Q1.

This would normally be a reason for celebration, for hope, and for faith in Redfin’s destiny.

Granted, that destiny turned out to be something different than what I had imagined prior to Q4 of last year, as I wrote in that analysis:

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.

But still, with results like these, there’s no reason to think that Redfin could not become the colossus of the brokerage industry as Realogy once was (and still is, thanks to the power of inertia).

Based on the numbers alone, I would be prepared to be extremely bullish on Redfin.

But then, the earnings call happened. I am forced to revise just about every opinion of Redfin I have held for over a decade.

The Earnings Call

First of all, let me note that it could simply be my imagination, but I don’t think I have ever heard Glenn Kelman sound so… down. The man is irrepressible, a bundle of energy and excitement, and just sounds so damn happy all the time. Not on this call. Sure, there were elements of that classic Kelman energy and positivity; but on the whole, I couldn’t help but think he sounded positively funereal, at least by Kelman standards.

You really have to listen to the recording; the transcript does not convey the melancholy tone of the whole thing.

Second… well, where do we start? Let’s start with what was the biggest “Did he just say that?” moment: RedfinNow

Redfin Is Realogy, With an In-House Flipping Operation

When Kelman said during the Q4 call that “Redfin is comfortable ceding growth to competitors if we can’t win the home at a price that can be profitable for us,” that was enough for me to drop Redfin from the ranks of real iBuyers:

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?

In this earnings call, Kelman really spells it out. This excerpt is long, but I just couldn’t find a way to summarize it without losing much of the color. So what I’m going to do is “fisk” it — go point by point and raise my issue with what he revealed.

From the prepared remarks, after discussing the low 1% listing fee (or 1.5% if seller doesn’t then use Redfin to buy), Kelman says:

We made the decision to increase prices on our standing listing service out of financial prudence. But we’re still acquisitive about listing share. This is why we give homeowners choices beyond full service at a low fee. Our choices include an instant offer from RedfinNow or Concierge Service to prepare their home to sell for top dollar. With both RedfinNow and Concierge Service, Redfin takes responsibility for rapidly renovating and staging a home to sell.

With RedfinNow, we own the home when it sells and reap the returns from our repairs. With Concierge Service, the original owner bears more risk but reaps the returns, and she still doesn’t have to lift a finger. As we’ve said before, both services will be options that people consider when selling their home. But when an instant offer is low enough to account for the full cost of owning a home, of maintaining it well vacant but also of having to sell it in a downturn, our bet is that two or three times as many people will choose Concierge Service. This is why RedfinNow only makes sense as one of several choices presented to each listing customer. RedfinNow challenge will be to buy homes at higher-margin and lower risk than our competitors. We were the first major institutional buyer to stop buying homes, honoring our pledge to act quickly in defense of our balance sheet. [Emphasis added]

Entirely missing from this — and from the rest of the earnings call, for that matter — is any discussion of consumer convenience. Kelman equates RedfinNow to Concierge Service because the owner “doesn’t have to lift a finger.” Except that completely ignores the three key values of market maker iBuyers: speed, certainty and convenience.

iBuying was never about making money; it was about eliminating the enormous pain that was the modern sales process. Opendoor and later Zillow (and once upon a time, Redfin) understood that if you eliminate consumer pain, you can find a way to make money, whether through service fees or ancillary businesses or whatever.

Of course two to three times more people will choose Concierge, or even a no-Concierge traditional sale, when the instant offer is a lowball typical of the flippers and investors. Is this news?

In a bizarre twist, Kelman echos what Ryan Schneider said in Realogy’s Q1 earnings call:

In particular, we talked with you about how we are only focused on profitable growth even at the expense of market share. That choice should fit us during this crisis, especially compared to those who have been making unprofitable choices, those trying unprofitable new business models or those trying to disrupt the industry with new capital-intensive but unprofitable ideas.

We’ll come back to this, but let’s continue.

After paying for the homes and paying third parties to buy, finance, hold, renovate and sell these homes, we still expect to make nearly $1 million. It’s only the cost of RedfinNow’s employees that will result in a gross profit loss. What we learned from these results is that RedfinNow performed better in a downturn than some had feared. Everything else was stuff we already knew in our bones that we had to do. Now it’s just scratched into the walls of our home offices. First, lower our instant offers to compensate us for occasionally having to sell our portfolio at a 3% to 5% discount in a downturn, but also to make more money on instant offers now. Second, squint harder at projected economies of scale and other rationales for expanding a business that doesn’t make enough money on each house. Scale will pay for managers and a renovation team, but it doesn’t do much for the most important profit lever, pricing discipline. Third, avoid long holding times, so we can decide whether an offer is profitable within three to four months of making it. This also makes our money work harder and limits risk. Fourth, unify our sales force to keep our costs lower than our competitors and to present a complete set of options to every customer. With these lessons in mind, today, we reopened RedfinNow for purchases in Austin, Denver and the inland Empire East of L.A. We’ll limit RedfinNow using $20 million of our own money, which leaves $9 million for May purchases.

So let me get this straight.

Redfin learned that RedfinNow performed better in a downturn than was feared… so its response is to turn RedfinNow into WeBuyUglyHouses?

  • Lower the offer, to make sure you can’t lose money
  • Don’t expand the business
  • Avoid long holding times, to limit risk
  • “Unify the sales force”
  • Don’t use credit; put all houses on Redfin’s own books… but only $20 million, which is chump change in the market maker game

This is not a modification, an adjustment to the new reality. This is full scale retreat and abandonment. Conceptually, I can’t distinguish between what Redfin did here and what Realogy did when Schneider said they were “pausing” RealSure because “we kind of went into COVID here.”

Counting the pre-pandemic purchases we still haven’t sold and the ones we’ll buy starting today, we expect to own fewer than 100 homes through the second quarter, mostly financed using our line of credit. If I may, we’ll know whether homeowners will pay a premium for liquidity in an uncertain market, accepting lower RedfinNow offers than before. By July, we should have nearly all of our May purchases back on the market for at least two weeks. At which point we can project which offers are likely to be profitable. We’ll report on those projections on our second quarter earnings call. By the time we reopen RedfinNow for purchases more broadly, we’ll present instant offers to customers through our brokerage sales force. To support the sales force, our RedfinNow employees will prepare offers and answer questions from a fortress of analytical solitude. The issue with RedfinNow hasn’t been customer interest as we have never put anything on our website that homeowners responded to more eagerly than a cash offer. The issue has been just how we respond to that interest. Our agents are the ones best qualified to present an instant offer alongside other options that are better for most homeowners. Unifying our sales force will take the rest of 2020, but should let us sell more houses than competitors more narrowly focused on instant offers.

You all as VIP readers know the analysis I have done and continue to do on just what the iBuyer premium is. Depending on the data, the quarter, and the market, that premium is either nonexistent or really, really small. What premium for liquidity is Kelman talking about?

Later in the call, during Q&A, he actually gets into more detail:

But we just have to acknowledge the fundamental inefficiency of three different parties owning a house when you’re trying to transfer it from one party to the next. There’s a middle man that is going to cost you money, and the idea that it’s cheaper to sell a home when it’s vacant just ignores the fact that getting the grass cut, paying the homeowners dues is easier for somebody when they’re also getting shelter for the property. For us, it’s just burning a hole in our pocket. So I think we can solve that liquidity problem, but it’s always going to be a premium service that the original owner of the home is going to have to pay for.

The idea that it’s going to somehow be the same cost as a brokered sale, to me, that seems unlikely. And that’s why we’re just presenting it as the most expensive option that we have. It certainly solves liquidity problem like that, but you pay for it. You’re not going to get quite as much out of your house. And for some people, that’s a good trade off. But we just want them to know what their choices are, when they make that choice, and we’re the only company that can provide all those choices.

Let me wipe the tears from my eyes, as I try to unpack this, because these words could have come from Ryan Schneider, Adam Contos, Ron Peltier, Hoby Hanna, and any of the CEOs of the traditional incumbents… and I never expected to hear them from Glenn Kelman, the original rabid squirrel and disruptor of the industry. It’s tragic, really.

Yes, the middle man is going to cost you money; that’s how market makers work. But whether that liquidity is worth it or not depends entirely on transaction costs sans said middle man, no? To put it bluntly, when the traditional brokered sale costs 6%, and the middle man charges 7%, that is a premium, of course, but is the speed, certainty, and convenience worth $3,000 on a $300K house?

The answer has to be yes: Kelman himself said they had never put anything on the website that generates greater consumer interest. And yet….

Let’s continue, while I pour out a 40 for my lost disruptor homie.

Our rationale is that having one sales force for all our home selling services makes it easier for everyone at our company to have one goal: to sell as many houses as possible while owning as few as possible. Any consumer who doesn’t want to go through the hassle of preparing a home to be sold is likely to be drawn to an instant offer, but many selling mid-priced or expensive homes will also want to consider our Concierge Service. It’s available today in San Francisco, Seattle, Southern California and Washington, D.C. For a listing fee of 2% or 2.5% depending on the market, we advise a homeowner on how to make her listings shine and make sure all the work gets done, either through contractors or our own renovation superintendents. The homeowner pays the bills, often using the money from the home sale. Customers have loved this service both for its convenience but also because the homes look so good. The jaw dropping before and after photos of the homes we fixed up illustrate a fundamental truth of how to sell homes for more money. It’s not just through an agent’s personal salesmanship or even through Redfin’s digital marketing but by making the home show better to a potential buyer.

If liquidity is a premium service that the original owner is going to have to pay for, what exactly is Concierge Service? Is that not a premium service that the original owner is going to have to pay for? Why is that such a better financial decision, accompanied as it will be with all of the uncertainty, all of the inconvenience, and all of the time-consuming process of the traditional no-Concierge brokered sale?

But not only does the owner have to pay for the actual renovation work (“The homeowner pays the bills, often using the money from the home sale”) but the owner has to pay Redfin a premium to manage the renovation? Are we so sure that Redfin will be cheaper for the homeowner than just hiring a local contractor to manage the renovation work? Or hiring a short-term assistant for $15/hr? An additional 1.5% could be $15K on a million dollar home, after all.

What in the world is going on here?

Our challenge has been operational, building the software programs, contractor relationships and field organizations to deliver a wide range of minor renovations on demand so that we can get most homes ready for the market in one or two weeks. Until this pandemic hit, the home services team we’ve been assembling since 2018 prioritized RedfinNow ahead of Concierge Service. The Concierge Service is now our first priority, and we expect to expand Concierge Service from 10 to 14 markets by the start of 2021. [Emphasis added]

And there it is: the death knell of Redfin as an actual iBuyer.

Bottomline is that with these announcements, Redfin is revealed as being like any other traditional incumbent brokerage or franchise. Its convergence towards the traditional is complete. Because everything that Kelman said above can and is and will be said by all of the traditional brokerages.

There is now no difference between Redfin and traditional brokerages, at least from a service offering and consumer standpoint, other than (a) Redfin has a big website, and (b) Redfin is cheaper. It’s a discount brokerage with a big web audience.

Is that enough to drive dominance? No. Is it enough to drive success?


What is Redfin’s North Star Now?

What is truly troubling about the entire section, indeed about the entire earnings call, is the overwhelming impression that Redfin had lost its way. It has lost its North Star.

It used to be very clear: the consumer was Redfin’s North Star. Everything it did, whether popular or not, whether successful or not, was directly connected to Redfin’s clear and obsessive focus on the consumer. Redfin was the first real estate company to really embrace NetPromoter Score and to tie agent compensation to consumer satisfaction. It was the first major company to jump on the iBuyer train as soon as Opendoor pioneered the category, not because it saw dollar signs everywhere, but because it saw the consumer benefit of speed, certainty, and liquidity.

But now? Nary a mention of what’s best for the consumer. Instead, it’s all profitability, revenue, making lower offers, shorter holding periods, higher margins. It’s “sell as many houses as possible while holding as few as possible.”

It’s not just the RedfinNow section, which I quoted at length. It’s the entire earnings call. There was no sense that Glenn Kelman or Chris Nielsen cared all that much about the consumer, about consumer benefit, about consumer pain, about consumer needs and wants.

The consumer used to be Redfin’s North Star. What is its North Star now?


Egads, I should hope not, because even the honky tonk badonkadonk results from Q1 is lacking one important thing: net income. It’s one thing to lose $60 million when you’re focused on redefining real estate and looking out for what’s best for the consumer. It’s a whole other thing to lose $60 million when you’re focused on financial responsibility and profitability.

The Big Squeeze

Which leads us into the serious strategic challenge for Redfin waiting around the corner: the Big Squeeze.

On innovation, Redfin is going to get pressured by the actual technology companies who aren’t running scared, namely Zillow but throw Opendoor into the mix as well.

On the other side, Redfin is still tiny. If it’s going to go heads-up against the incumbents like Realogy and RE/MAX, it has no competitive advantage that anybody can point to.

Between the two, Redfin is going to get crushed. I can’t see how Redfin avoids that fate.

On Technology and Innovation

The strategy appears to be that Redfin is still far more innovative than the dinosaurs of traditional brokerage.

There are lots of unknowns ahead of us. Changes in consumer behavior that would have taken a decade happened almost overnight. Even when this pandemic ends, the process of buying and selling a home will be far more virtual than Redfin could have hoped for in February. Investors rightly assume that the technology we’ve spent a decade building gives us a massive competitive advantage in this new world. But our biggest competitive advantage isn’t what we did in the past. It’s how fast we’re reacting now. When the world is changing this fast, what is most valuable is our own ability to change. The company you want to stake in isn’t a big fat incumbent. It’s the crazy little mammal, crawling out of the crater of the asteroid strike. Redfin was the first major Seattle company to decide to close its offices on March 3.

We were first to encourage our customers to tour homes via video chat also on March 3. We were first to call the market publicly citing a significant drop in demand on March 4. We were the first to cancel all open houses nationwide to protect public health on March 16. On March 27, we were the first to provide a map of real-time updates on the rules for real estate commerce across 50-plus markets, changing field policy in redfin.com’s consumer guidance from day to day and often hour to hour. We were the first to upgrade our website to promote Matterport 3-dimensional scans of homes on April 2. From February to April, new listings with these scans had increased fourfold. And we were the first to offer self-service tours to homes listed by our brokerage but owned by our customers on April 23. Being able to open the door of a vacant listing on your own with just an iPhone is crucial for buyers who are wary of being in a home with an agent or anyone else outside their family. There are many other firsts from the past few months that we don’t have time to discuss here. What’s most important is that this company came together when a culture could have fallen apart and ran faster when so many parts of the world came grinding to a halt.

Redfin’s investment in technology and its capabilities in technology remain competitive advantages… at least, compared to the traditional powerhouses.

The problem is that their technology advantage is about to disappear. I’ll only cite two examples, as they are the most obvious, but there are hundreds of entrepreneurs out there working their asses off to bring technology to the industry… kind of like a crazy little mammal….

Opendoor Will Contend

First, as I noted in my post about Opendoor’s convergence to brokerage, there is now no doubt in my mind that Opendoor will be a real competitor to Redfin’s overall value proposition.

Being able to open the door of a vacant listing? Opendoor pioneered that technology and introduced it first, before anybody else did. Once Opendoor gets into the actual brokerage business, is there any doubt that it too will offer the same convenience to its listing clients?

Map of real-time updates? Give Opendoor and its legions of data scientists a few weeks. That advantage is not sustainable.

Matterport 3-D scans? Using a third part technology and hosting it on your website is a competitive advantage, said no one ever. Not only will Opendoor have that capability and right soon, but there are individual agents who own a Matterport camera and make 3D scans of all of their listings. What’s the competitive advantage for Redfin?

The only two things that Opendoor is lacking to compete head-on against Redfin are (a) a big website with lots of traffic, and (b) 1,826 Lead Agents. We’ll get to the big website thing, but I noted in that post that Opendoor’s brokerage leaders have decades of experience in recruiting agents and are well-respected. Do you see a problem with Opendoor going on a hiring spree to offer full-scale brokerage services? Because I don’t.

But what does Opendoor have that Redfin does not have?

  1. An actual iBuyer model (unless Opendoor changes that out of fear) where the “liquidity premium” is nowhere near what the traditional industry (and Redfin, as of Q1) thinks it is;
  2. Home Reserve, the bridge-loan iBuyer product;
  3. The political baggage that Redfin has from its years as the disruptor.

Opendoor will contend, and make Redfin’s life miserable as it tries to position itself as somehow different from Realogy and KW and RE/MAX. And Opendoor is far from being alone in the mix of tech-enabled brokerages that operate like super teams.

As for the big website with lots of traffic… is there some law that prevents Opendoor from, oh, I don’t know… buying leads?

Which brings us to…

Zillow Will Enter the Game

A far bigger problem for Redfin’s “we haz technologies!” game is that Zillow will enter that game in the near future. As I pointed out in the Zillow analysis,

  • Zillow has already been working on the conversion problem.
  • They have already been working on mechanizing and professionalizing and applying technology to the sales and nurture funnels.
  • COVID comes along and wipes out some of the barriers to technological progress.
  • Some of Zillow’s best partners (i.e., agents) are becoming more dependent on Zillow, because there are fewer choices for the old ways to generate relationships and commissions.
  • Brokerages, which had never truly invested in technology, are still operating as if it’s the 60s or 70s. COVID smashes that.
  • Green lights are flashing.
  • Zillow is fully aware of how today’s needs become tomorrow’s expectations, and have the money, the engineering talent, and the will to do something about that. The rest of the industry lacks at least one or more of those three things.

Kelman floated the idea during the call that Redfin might start offering “some of our tools to partner agents.” That would have been a very interesting play a year ago… but do we really think that Zillow won’t start releasing all manner of technology and tools to its partners (agents) who are becoming more and more dependent on Zillow? Do we really believe that Zillow with its technology and development budget of $135 million in Q1 (almost seven times what Redfin spent) is going to have a difficult time figuring out how to provide agent productivity tools?

Whatever technology innovations Redfin has over the dinosaurs is about to get wiped out when Zillow goes around handing those same innovations (or better!) to its partner agents and to traditional brokerages who want to play nice with Zillow.

For example, Kelman says at one point, “Most real estate agents don’t have an application that they can use to let buyers into the property, and they don’t have the capability to install those locks at scale.” How much would you like to bet that by the end of the year, every Zillow Premier Agent will have that application, huge volume purchasing discounts with some lock partner that Zillow will pick, and… it turns out, installing those locks really isn’t all that difficult. A local handyman could do it in an hour.

What now?

On the Power of Incumbency

On the other side of the Big Squeeze stand all of those dinosaurs that Kelman thinks he has an advantage over.

Thing is, being the crazy little mammal instead of a big fat incumbent is a competitive advantage, but only if the little mammal does in fact act crazy. If the little mammal does what every big fat incumbent is doing, then what’s the advantage?

In Q1, Redfin did 10,751 real estate transactions. That’s an impressive number for a little mammal. But Realogy did 62,541. HomeServices likely did about the same amount. Startup eXp Realty did 37,882. Now throw KW and RE/MAX and Howard Hanna and whoever else you want to name.

And every single one of those companies has orders of magnitude more boots on the ground. When Kelman says, “Our agents are the ones best qualified to present an instant offer alongside other options that are better for most homeowners” but those options are exactly the same options that every traditional broker’s agents can also present… then we have to talk about the fact that Redfin has 1,826 agents whereas little ole eXp has 28,449 and big fat incumbent Realogy has over 52,000 and big fat incumbent Keller Williams is boasting 169,655 agents at the end of Q1.

Is there some reason why those agents will have a difficult time telling homeowners, “You don’t want that iBuying nonsense, unless you’re really pressed for time; let me list it for you and sell it for the most money possible?” Because I can’t think of one.

The 1.5% listing fee is an advantage, to be sure, but… Realogy’s average commission rate in Q1 was 2.41%. We’re not talking miles apart here. Now throw Concierge Services into the mix, and suddenly, we’re staring at 2.5% for Redfin… and 2.5% for just about every other brokerage and agent out there… including the pioneer of the pre-listing renovation service: Compass. All of those brokerages charging 2.5% listing fee can offer pre-sale renovation as well.

In my post about Opendoor, I noted that it too was converging towards brokerage, and cited a large brokerage in the Atlanta area, BHG Metrobrokers. That’s a franchisee, not even a big national company like Compass or eXp. You ought to go check out their page on selling. On it, you find this:

If BHG Metrobrokers can offer exactly the same thing that Redfin is offering through a third-party partner, at the exact same price that Redfin charges (2.5%), tell me again what the competitive advantage is?

And if a sizable local franchisee can offer it, why couldn’t every other reasonably sized local brokerage offer the exact same thing?

And if local brokerages can offer it, why wouldn’t the large national franchises offer the same thing sooner or later?

Every single one of those have competitive advantages over Redfin: lots more agents, with stronger and longer relationships with consumers, and the power of inertia. Redfin has a big website.

Combine the Two: The Big Squeeze

So we get to the Big Squeeze, when the two sides recognize the mutual benefit of working together.

To put it very simply, what is Redfin’s future if (let’s say) RE/MAX partners with Zillow? Now we’re talking about some 84,191 agents across North America armed with the latest and best conversion and productivity tools that Zillow can provide, as well as the lead flow that utterly neutralizes Redfin’s sole advantage over the dinosaurs.

The innovation advantage, poof. Cost advantage, poof (in Concierge Services anyhow, and that appears to be Redfin’s big bet right now). Website traffic advantage, poof (since Zillow owns the online real estate vertical). What’s left?

Consistent consumer experience delivered by W2 agents who have to do what managers tell them is about it. And that is well on its way to being equalized by the rise of super agent teams who are operated like a real company.

Plus… there is this from the Q4 analysis:

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]

Redfin agents are starting to look a whole lot like Coldwell Banker agents, no?

But Redfin has no competency on recruiting thousands and thousands of agents. Every incumbent does, and even Opendoor has managers who have decades of experience in the recruiting and retention game. Does Redfin? Not to my knowledge.

That’s the Big Squeeze. The innovators neutralize all of Redfin’s advantages in technology and innovation. But Redfin doesn’t have the market share, the agent headcount, or the size that the big fat incumbents have once its technology advantage is neutralized and it has no viable way to get any of those.

Scared Money Don’t Make No Money

As brutal as I have been for oh, 5,000 words or so, let me assure you that I take no joy whatsoever in writing this. I have nothing but admiration for what Redfin was for its long history, the innovations that it brought to market and the innovations that it tried to bring to market. They have been a rabid squirrel for a decade, and there is so much to love about the company.

But Q1 tells me that Redfin has taken the exact wrong approach to COVID. It needed to embrace the “crazy” part of the “crazy little mammal” rather than the “little” part of that phrasing. Because if Redfin isn’t bold, isn’t taking crazy chances, and isn’t doing things that no one else would, then it’s just kinda small: 1,826 agents and 10,751 transactions.

Glenn Kelman has always been frugal, but he was never conservative. He took risks. Well-calculated risks, but risks nonetheless.

With COVID, Redfin has chosen to take not a single risk. They are abandoning (spin it if you want, but what Redfin is doing is abandonment) the one offering that generated more consumer interest than anything else they’ve done in their history. They are retrenching, battening down the hatches, and talking about “defending the balance sheet” at the exact time when they should have been throwing the dice on big bets, getting aggressive, and taking advantage of the big fat incumbents retrenching, battening down the hatches, and defending their balance sheets.

It’s too bad. Redfin had a once-in-a-lifetime opportunity to take advantage of everybody else’s fear, get crazy, and throw down. Instead, it is running scared. And as the philosopher and economist Young Jeezy said, scared money don’t make no money.

The price Redfin will pay — and it might not be next quarter or even next year, but it will be due sooner rather than later — is to get caught in The Big Squeeze.


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Rob Hahn

Managing Partner of 7DS Associates, and the grand poobah of this here blog. Once called "a revolutionary in a really nice suit", people often wonder what I do for a living because I have the temerity to not talk about my clients and my work for clients. Suffice to say that I do strategy work for some of the largest organizations and companies in real estate, as well as some of the smallest startups and agent teams, but usually only on projects that interest me with big implications for reforming this wonderful, crazy, lovable yet frustrating real estate industry of ours.

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