Nearly seven million homes are sold each year in the United States, and their cumulative value makes residential real estate a multi-trillion dollar market. However, the actual process of buying and selling homes is virtually unchanged from decades ago.
Real estate technology company Redfin Corporation (RDFN -3.56%) try to change that. The company pursues an end-to-end service that makes moving a delight instead of something that makes you want to pull your hair out.
Bold ambitions offer big rewards for investors, but there are some serious questions about the company you need to know. Roll up your sleeves and dive in.
Build a one-stop shop
Redfin is not new to the real estate landscape; the company was founded in 2002 and has been listed on the stock exchange since 2017. But Redfin has never stopped evolving. Its core business uses in-house agents to facilitate door-to-door transactions, charging sellers a 1.5% listing fee, or 1% if you buy and sell through Redfin. Typical fees paid by sellers are 5% to 6%, so Redfin users save thousands of dollars.
Over the past few years, Redfin has grown its business model, setting itself up to handle mortgages, titles, and escrow, and even offering iBuying, where Redfin will buy your home directly and resell it.
I bought a house; it takes a village. There are agents, bankers, lawyers, inspectors, etc. It’s no wonder that about 36% of adults cry during the process of selling a home.
Redfin’s solution sounds good in theory. Consumers have a streamlined process for buying or selling a home, saving them money while they’re at it. But it is not that simple.
Question: Can Redfin’s model be profitable?
Redfin has been in business for years, but it’s still not a profitable business. Net profit (net income) and free cash flow are in the red, which means Redfin is burning money.
The company’s latest quarter, Q1 2022, showed Redfin’s revenue from its brokerage services was $168 million, but the cost of revenue was $154 million. That’s only a gross profit margin of 13%, which isn’t enough to offset business investments like technology and marketing. Redfin’s operating losses were $85 million in the first quarter of 2022.
Redfin’s business goes far beyond the brokerage segment. Still, it’s perhaps fair to wonder how profitable brokerage can be with human agents who demand competitive salaries and benefits and can only handle a limited number of transactions. More agents will be needed as Redfin performs more transaction volume.
Question: Is iBuying friend or foe?
Moreover, iBuying has made its way into the conversation. Zillow tried to dive into the iBuying segment but failed, while Redfin seems to be taking a slower approach. It uses a balanced combination of human input and technology to prepare its offerings and charges fees ranging from 5% to 13%.
Redfin is still an iBuying underdog compared to the market leader open door, which has $11.3 billion in cash for iBuying, compared to $400 million for Redfin. But Redfin’s end-to-end vision isn’t centered around the iBuying model; investors should view iBuying as the icing on Redfin’s cake and not the cake itself.
However, iBuying still heavily affects Redfin’s finances. iBuying’s revenue was $380 million in Q1 2022, or 63% of total revenue. Gross profit margin on properties was only 5% in a hot domestic market.
The iBuying business will likely always be a low-margin business, where Redfin will have to price its homes competitively and make money from the service fees attached to them. Redfin’s challenge will be to compensate for this with its brokerage services, which generate higher profit margins.
Redfin has a market capitalization of just $1 billion after the stock plummeted from nearly $100 to just $10 during this bear market. The massive real estate market is a huge opportunity, and long-term success could make Redfin a terrific investment.
However, its success is certainly not guaranteed, and it seems that the company must determine its “identity” in a way that shows a path to profitability. CEO Glenn Kelman said on the first quarter 2022 earnings call that the company will post operating profit this year and net profit in 2024. Time will tell, but investors may view Redfin as a “moonshot” action at its current stage.