[VIP] Redfin, Q1/2021: The Return of the Rabid Squirrel?

In my last analysis of Redfin, I wrote that Redfin has to decide who it wanted to be. It was stuck in a “larval stage between one model and another” as per Glenn Kelman’s wording:

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.”

After Q1 results, I think Redfin has decided to become a portal with a variety of monetization methods. But it has not fully committed to that path just yet. I figure those are the next difficult decisions for Redfin, but at least it is not (or should not be) suffering from an identity crisis. Perhaps the signal here is that the rabid squirrel is back, after getting punched in the face by COVID and its aftermath.

Let’s get into it.

Interesting Numbers

Redfin’s numbers are impressive, of course, since everybody’s topline numbers are impressive in such a hot housing market. From the press release:

• Revenue increased 40% year-over-year to $268 million during the first quarter.
• Gross profit was $42 million, an increase of 229% from $13 million in the first quarter of 2020.
• Real estate services gross profit was $40 million, an increase of 168% from $15 million in the first quarter of 2020. Real estate services gross margin was 24%, compared to 14% in the first quarter of 2020.
• Operating expenses were $77 million, an increase of 9% from $70 million in the first quarter of 2020. Operating expenses were 29% of revenue, down from 37% in the first quarter of 2020.
• Net loss was $36 million, compared to net loss of $60 million in the first quarter of 2020.

The Key Metrics I look at for Redfin were all gangbusters as well:

It’s black across the board: everything is up. Transactions per agent, volume, revenue, gross profit, everything. It’s just an impressive performance overall.

Plus, as Glenn Kelman pointed out in prepared remarks, RedfinNow turned a profit, mortgage and title went up by 120%, and Redfin gained market share.

But that’s not the real story. Not really. I expected Redfin to crush it, because you have to be an utter incompetent not to crush it when demand is through the roof, and home prices are up 14% YOY. The real story is that Redfin has decided who it wants to be. For now. Tentatively speaking.

Redfin Wants to Change the World

I wrote last quarter that the acquisition of RentPath for some $600 million suggested that Redfin wanted to be a portal, wanted to change the world, to compete against Zillow rather than becoming the new Realogy as many of its actions in the past couple of years suggested.

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.

Two signals from the earnings call make me believe this.

First, in response to a question from John Campbell of Stephens about his long term vision for RentPath, Glenn Kelman says this:

Well, our long-term vision is to make the consumer proposition better because that’s just the mission of Redfin, to redefine real estate in consumer’s favor. And so the idea that we can let somebody lease an apartment in thirty minutes flat where they can use their iPhone to get into the unit and tour it themselves or they can get a virtual tour, the idea that they can sign the lease digitally, that they can go through the whole process using some of the infrastructure that we’ve built for purchase transactions on a rental is really exciting to us.

And we just want to pair that with a real commitment to getting long-tail inventory because, of course, everybody is focused on the big property management companies that have these huge high rises in the center of every American City, but we also want to focus on the homes for rent, where we’ve got a customer who decides not to list their house after moving up, but instead rents it out.

That’s more like the Redfin I remember from back in the day: redefine real estate in consumer’s favor. We’ll delve into this a bit more below.

Second, right in the prepared remarks, Glenn says:

Over the next year, we hope to persuade more of our listing customers to learn from RedfinNow’s experience and pay a lower commission to the buyer’s agent. If individual homeowners follow iBuyer’s lead more broadly, lowering commissions industrywide, it would favor a brokerage like Redfin, which is already structured to thrive on a lower fee.

He expanded on that statement in the Q&A:

And one of the areas where we’re really excited to publish more information is just about commissions, because, of course, the iBuyers have been paying lower commissions for a long time, Redfin is one of them.

And most consumers who are listing their home don’t realize that the iBuyers are paying a much lower fee. But that secret is going to come out as we publish, front and center, the commissions that are paid on every house. You can see that 25% of the inventory in a place like Atlanta is paying a lower commission to the buyer’s agent, and that will give you permission when it’s time to list your home to do the same. Everyone assumes that the fee structure that iBuying is comparing itself to in the brokerage industry is static, if we are just going to stay put and be at 5% or 5.5% or whatever it is. Of course, Redfin is committed to changing that. We think that iBuying fees are going to come down, but the brokerage fees are going to come down too, and that the spread is probably going to be pretty static. [Emphasis added]

On the one hand, this is smart competition, since as Glenn says repeatedly, Redfin is built for a low-commission environment. On the other hand, it really goes back to the raison d’etre of Redfin itself: to make the transaction cheaper. Redfin wants to drive commissions lower. That’s… an amazing stance for a brokerage that makes all its money from commissions.

So it does feel like Glenn and Redfin are recommitting to the original vision and mission of Redfin. From the Redfin S-1 filed way back in the day, there’s a “Letter from the Team” that is worth reading:

We think of ourselves as idealists, who got into this business to make real estate better for consumers, not just ourselves. Our ideals are important when we want to earn customers’ trust: to take our advice about walking away from an easy sale on the wrong house or about paying more in a bidding war. At a time when our customers are hauling everything they own across the country to start a new family, a new job, a new life, what they most need us to be is completely on their side.

And this is our mission, in a sales-mad, baloney-gorged world, to be the truth-teller, the fee-squeezer, the game-changer. Our idealism may not benefit stockholders over months or quarters, but we believe that over years and decades it will deliver the best results.

Of course idealists often get punched in the nose by the real world. But we’re also fighters. A long time ago, when we were competing against giants in markets where homes had lost half their value, a journalist described us as rabid squirrels.

We embraced this identity. It gave us the pluck to go after big markets with an unreasonably small number of people and resources, a mentality that is essential to creating stockholder value. This tenacity has been a good complement to the almost fevered idealism on which Redfin was founded, letting us ignore present-day pain for long-term gain. Rabid squirrels don’t give up.

I don’t think we can go so far as to say that Redfin has fully recommitted to this vision, but there’s enough signal there to lead me to believe Redfin has remembered the face of its father. The biggest area where there is a lack of commitment is RedfinNow.

I have written thousands of words on RedfinNow and how disappointing it has been, so I won’t belabor the point further, except to note that it remains a bait-and-switch listing lead generation product. Chris Nielsen, CFO, says “But again, our primary objective is to get that offer in front of as many customers as we can so they can make the choice between sign to RedfinNow and that open market sale” and further elaborates, “But ours is not as a stand-alone business, but is giving customers that choice between an open market sale, and then for those who really value the convenience selling it to Redfin.”

That attitude stands in such stark contrast to Zillow, where Rich Barton lets slip that he’s not happy Zillow Offers is making so much money.

Important Signal for Agent Teams

There is one major area of discussion that everyone who owns and operates an agent team should pay close attention to. While Realogy and EXPI and Fathom are flag-bearers for brokerages, Redfin is the flag-bearer for agent teams, since it is for all intents and purposes a giant agent team.

This comes from Glenn Kelman’s prepared remarks:

Our challenge has been retaining newly hired agents. Most of our new agents start out serving buyers, not sellers. But with competition so intense to buy almost any home on the market, it’s hard for these agents to earn their first bonuses.

Among agents with less than 12 months of experience, Redfin’s annualized rate of attrition in the first quarter of 2021 was 53%. A year ago, this number was 26%. This is likely an industrywide trend, but that’s hardly consolation for Redfin or the people we’ve hired. In April 2021, we started paying a $1,500 retention bonus for newly hired agents, who guide customers to the point of bidding on homes regardless of whether those bids win. We expect this bonus and training programs are preparing agents to compete in this crazy market to bring attrition rates for new agents under 35%. And we’re pleased to see that even in such a competitive market, we’re retaining tenured agents as well as ever.

Among agents with at least one year of tenure, attrition was 15%, both last year and this year. [Emphasis added]

He expanded on that during the Q&A:

We’re thrilled with the progress we’ve made at hiring people. The recruiting team has worked so hard, and we have just brought people in hand over fist. The reason that market share is up is because we had so much demand coming through the site in the second half of 2020 that we could not serve for lack of agents. And now that we have those agents, we’ve been able to take share. I think there will be some headwinds on market share as we go into the latter half of the year just because inventory is so low. That is the constraint, not just on sales volume at Redfin, but sales volume in the industry. As far as attrition among newly hired agents, this also is an industrywide trend.

You just have more agents than houses right now in the industry. And as a result, all these people who have brought into the industry are really struggling to get their footing. We have tried to mitigate that, first of all, by connecting them with customers; and then second, by giving them better training and now a new bonus. So we expect new hire attrition to go down. It has always been higher among new hires than it has been among the broader agent population at Redfin. Some people just realize that real estate isn’t for them or that the way Redfin practices it isn’t for them. But we can do better. And so that’s just going to be our focus. We want to outpace the industry at retaining new talent in real estate.

If Redfin, which has all the leads it can handle, is having trouble keeping agents because they just can’t close any deals and therefore can’t make any money, then agent teams everywhere are facing the same problem. And unlike Redfin, agent teams aren’t typically paying a salary, providing benefits, and paying a cash bonus to agents who aren’t closing deals. I doubt that teams offer better training than Redfin can, or better technology platform than Redfin does.

So what does this mean for the team owner/team leader?

I think it means a few things.

1. Closings are going to be hard to come by. It’s just the market as it exists. Redfin’s experience suggests that newer agents are going to have a hard time closing deals, even if you hand them leads, because well, that’s exactly what Redfin does. Redfin is literally paying their agents bonuses just for getting a buyer to the offer stage, even though the buyer didn’t win… which means no commission income for anybody. Redfin can afford that; can you?
2. Recruiting newbies is probably not worth doing.
3. If you’re slow, you’re dead. I didn’t quote him, but Glenn has a long passage where he talks about how Redfin is emphasizing speed over everything else. If your team is not prioritizing near-instant responses and speed-speed-speed in submitting offers, communications, etc., then yeah, you’re probably losing that.
4. Investing in technology and leads is not likely to be worth it. That’s purely speculative, and heretical besides, but… if Redfin can’t get it done with the best technology in the industry, and so much lead volume that they’re sending them to Partner Agents… I have serious doubts about your investment in technology and leads really paying off. (Unless you’re leads are like Flex or Redfin Partner or other pay-upon-closing situations.)

More on RentPath

Let’s spend a few minutes on the RentPath commentary and why it might be significant.

First of all, commentary in the earnings call strongly suggests that RentPath will be a net negative for Redfin financially for a while. It might be 2024 before RentPath contributes positively. That’s not surprising since RentPath was in bankruptcy and was coming off of a failed marriage with CoStar (thanks to our government betters) when Redfin acquired it. It has no CEO, a bunch of its salespeople left, etc. etc. It’s a mess. Yet, Redfin paid $600 million for it.

Why? I think the hint is this sentence by Glenn Kelman: “This integration [RentPath listings on Redfin.com] will broaden Redfin.com’s authority as an all-purpose real estate destination, especially among consumers under 30.”

And in the longer passage above, Kelman talks about wanting to help renters and accidental landlords with technology, automation, better mobile apps and the like. Technology, automation, better apps, etc. are what just about every tech company in that space is working on, including CoStar and Zillow.

The implication to me then is that Redfin does want to compete against CoStar and Zillow as a portal/technology provider at least in the rental space. Given how much larger both of those guys are, this feels like rabid squirrel time all over again. It’s the underdog fighting against entrenched interests all over again.

The comment about consumers under 30 suggests that Redfin is well aware of the plight of younger people for whom the American Dream is something, to paraphrase George Carlin, you have to be asleep to believe. Perhaps Redfin is looking at housing as a whole, rather than just looking at the For Sale market, where it makes all of its money today.

I like that from Redfin. I think they are at their best when they are being idealistic and unrealistic. So I hope that Redfin is back to dreaming crazy dreams, fighting like mad, and going against goliaths.

I think there are a few things that Redfin can do to take further steps down this new path that they have chosen, so that they’re no longer in that larval in-between stage. At or near the top of the list has to be a merger with Opendoor, which I’ve been talking about for a couple of years now. But that doesn’t feel completely fanciful anymore. A rabid squirrel together with Project Homerun, backed by Social Capital, sounds exactly like the kind of Change the World venture that Redfin wants to be.

Let’s see what Q2 brings, but I’m hoping Redfin come wid di fire, tun it up higher and keep it burning.

-rsh

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