Roughly nine months ago, after its Q1 results, I beat the hell out of Redfin. I admit it. Much of that was motivated by how disappointed I was with Redfin’s decisions then. I wrote in that post that I was and remain one of Redfin’s biggest fans so its decisions then were truly heartbreaking.
Nine months later, it’s a bit easier to get back to admiring Redfin, not only because Redfin posted monster numbers. I knew they would, because Q3 showed that rising tides were lifting all boats. Q4 was going to be a continuation of the same, so I figured Redfin was going to kill it. And kill it they did.
But in addition, it feels as if Redfin has returned to form, and remembered that the consumer is its North Star. So that’s good news. Redfin’s problems are of its own making, and they are “problems” only in the sense that they are the flipside of Redfin’s strengths: employee agents who are focused on customer service.
Given its giant announcement — the acquisition of RentPath — there are some futuristic thinking to do, and I’ll touch on that here. But since Glenn Kelman said they won’t be integrating rentals until sometime in late 2022, it will be just a touch.
Let’s get into it.
Interesting Numbers
As you know, I don’t bother posting all of the numbers because you all can see it reported everywhere. But there are a few things that aren’t posted everywhere worth looking at.
What I find interesting here is that Transactions per Lead Agent is down slightly, as are Transactions and Total Revenue per 1,000 Unique Monthly Visitors. The implication is that while Redfin generated a ton of traffic to the website (up 44% YOY), hired like crazy to meet the demand, and as we’ll see, choked off demand in a variety of ways because they couldn’t handle all the business, the actual brokerage operations were flat to slightly down.
Yet, profitability went through the roof: 48% YOY gain in Gross Profit Per Lead Agent, and 40% YOY gain in Gross Profit per 1,000 Uniques. In their Segment results, Gross Profit for Real Estate Services was up 93% YOY.
The strong implication to me is that most of the profits might be coming from Redfin’s Partner Agents program, rather than from its core brokerage operations.
That’s not a bad thing per se; it’s just an interesting thing. If that’s true, then Redfin’s profitability is more dependent on its “portal” business (selling leads to other agents) than on its “brokerage” business where its own agents help buyers and sellers do transactions.
The earnings call kind of suggests as much. Here’s Glenn Kelman during prepared remarks:
As of December 31st, the number of lead agents we employed increased 36% year-over-year and the number of partner agents in our network increased by 83%. Lead agents are employees who represent customers through the entire sale. Partner agents work for other brokerages and pay us a referral fee for each customer introduction from Redfin.com.
Partner agent count almost doubled… and Redfin’s transactions and revenue per 1,000 Unique Monthly Visitors both went down in Q4… but its gross profit went up by 40%. I think that’s suggestive.
RedfinNow Remains a Lead Generation Vehicle
Back in Q1 of last year, one of my harshest criticisms of Redfin was on its treatment of RedfinNow. I wrote then:
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.”
Here we are, almost a year later, and judging by Zillow’s results with its iBuying service in 2020, RedfinNow should have had a banner Q4. It did not.
RedfinNow posted 60% lower revenues, and 42% lower gross profits YOY in Q4. They did this while focusing on making money on every deal. In contrast, Zillow (who also paused iBuying during COVID) posted 50% lower revenues with fewer homes to sell, but a 38% improvement in pre-tax profitability. On a per-home basis, Zillow posted an increase of 3% in revenue, and an astonishing 400% increase in pre-tax profitability.
So why keep doing it? Because it leads to listings:
Home sales advisors are in the same bonus for any Redfin listing regardless of whether the listing was first bought by RedfinNow or still owned by the original customer. This is one reason that the likelihood that RedfinNow inquiry will lead in one form or another to a Redfin listing increased year-over-year by 12% in the fourth quarter.
It’s smart business perhaps, but it isn’t iBuying. It’s the same lead generation effort that Realogy is doing with RealSure, and other brokerages are doing with their “iBuying” programs which aren’t real market making activities like Opendoor and Zillow’s programs.
Read my previous posts on Redfin for more detail, because strategically, nothing has changed since Q1 of 2020.
At Some Point, Redfin Has to Decide
After 2020, I think Redfin has an identity crisis on its hands. I have said over the past couple of years that Redfin looks like it wants to be the new Realogy, rather than the new Zillow. I have pointed out the danger for Redfin of doing that:
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.
I may have been a bit too… pessimistic with that last sentence. Redfin isn’t going to get crushed; there are ways for Redfin to avoid the Big Squeeze. But it will require Redfin to decide who it wants to be when it grows up. I think Glenn Kelman knows that, because of this:
Well, first of all, let’s talk about how to model Redfin, whether it’s based on agent productivity or gross profit per transaction. I think we’re in some larval stage between one model and the other, because we’re still rolling out components to this complete solution, mortgage covers about 75% of the United States, but RedfinNow, our title business, our concierge service for renovating homes that we sell are all covering less of the United States. So this is still principally a brokerage business and making sure that we’re able to hire good agents, deliver great service to customers and still make a margin, is the first way to look at this business, it’s just that every quarter we are getting more and more contribution from our mortgage business, from our title business, from our iBuying business, from these ancillary businesses.
I agree that Redfin is in some larval stage between one model and the other. The one model is/was one where Redfin operates a portal that monetizes through a variety of means: brokerage commissions, partner agent referrals, mortgage, title, renovations, and iBuying. The other model is one where Redfin operates a brokerage business, making sure it hires good agents, deliver great service to customers, and tap into “integrated economics.”
I think the issue frankly comes down to motivation, what Stephen King writes as, “You have forgotten the face of your father.”
Redfin did not set out, in my view, to operate a real estate portal, or a brokerage business. I don’t believe that. I think Redfin set out to change the world, to fix what they saw as being broken in real estate. They decided that a combination of a web portal with a low-cost brokerage was the way to change the world.
Zillow and Opendoor also set out to change the world, to fix what they saw as being broken.
Along the way, all three companies have had to evolve and change as the realities of staying in business forced them to. Zillow spent a decade as a portal selling leads to real estate agents. Opendoor got far more heavily involved in brokerage. And Redfin saw itself more and more as “principally a brokerage business.”
Both Zillow and Opendoor, however, I think remember the faces of their fathers. They both remain wedded to the vision of changing the world, of fixing what’s broken. Redfin… might? Might not? I don’t know anymore.
I think that’s the essential issue: does Redfin still want to change the world? Or does it just want to be a brokerage that hires good agents, delivers great service to customers, and still make margin?
Redfin posted 40% gross margins on its real estate services business in Q4. Those are agent teams numbers, because Redfin is a giant agent team. Is that who Redfin wants to be?
Redfin posted -4.8% gross margins on its Properties business in Q4. Those are terrible numbers, but then, market making is going to change the world in a way that using “iBuying” as lead-gen will not. Is that no longer who Redfin wants to be?
The RentPath acquisition, which none of the analysts asked about, might be the turning point/decision point for Redfin, even though Redfin doesn’t plan to incorporate RentPath into Redfin until late 2022.
Thinking About RentPath
The way I see it, Redfin acquired RentPath — spending more money than it has ever spent — for one of two reasons.
One, Redfin felt they needed rentals to continue as a portal, since aggregation is a necessary precondition for an internet company to change the world; or
Two, Redfin felt they needed rentals to be a better brokerage providing services to customers.
There is no right answer. Redfin can have done the acquisition with either goal in mind, or some mix of both. But a mix of both keeps Redfin in its current half-way larval stage.
Incorporating rentals into the mix could be an attempt to change the world. I’m not entirely sure how, but maybe it’s something along the lines of serving a customer truly for life, from the first crappy student housing rental to the first condo in the big city to the family home in the suburbs to the nursing home. Maybe it’s a sign that Redfin is not focused on making commission income, but on how to solve the problem of housing for everybody.
Or, incorporating rentals into the mix could be an attempt to be more profitable as a brokerage, to pick up additional referral income from partner agents who might work rentals, and generating future buyer leads for its employee agents, and creating opportunities for its customers who buy investment properties. Who knows? That doesn’t change the world, but it could make Redfin a very profitable business that is principally a brokerage with all kinds of ecosystem economics from rentals to mortgage to title and renovations.
It’s just that the two cannot exist comfortably in one company, in one person. You can always try to change the world while making money, or try to make money while changing the world… but there has to be a first priority and a second priority.
I think Redfin has to make a choice at some point. Maybe not today, but at some point and I think fairly soon.
There is a part of me that thinks that the RentPath acquisition points towards the former — that Redfin remains committed to changing the world as its first priority. Because $600 million could have bought Redfin a far bigger brokerage operation. I’d bet that many of the top 20 brokerages in the RealTrends 500 could have been acquired for $600 million, and possibly multiple brokerages in the top 20 for that amount of money. So the fact that Redfin went to RentPath instead suggests that maybe something else is at work.
Pure speculation, of course, but one that I hope is correct… as I would love to see Redfin get back to its rabid squirrel ways of wanting to disrupt everything to change the world for the better.
-rsh
