Redfin: All Things Real Estate

Profile

Redfin operates as a real estate brokerage company in the United States and Canada. The company provides an assortment of products and services to make the process of buying and selling a home faster, better and less expensive.

Before we delve into the details, I’d like to address the most common question: How is Redfin any different from Zillow? Simply put, Redfin is trying to build a one-stop shop for all things real estate brokerage while Zillow’s focal point is acquiring leads and selling them to external realtors. I discuss how Redfin seperates itself from competitors at length throughout this deep-dive.

Products

• Redfin Brokerage: List your home on Redfin and they’ll collect 1.5% of the sale
• Redfin Concierge: The company will fix up your home (fresh paint, landscaping, staging, etc) and list it on Redfin.com for a 2.5% commission
• RedfinNow: The company instantly buys your home in cash at fair value + a one-time fee depending on the considition of the home (4-12%). This service is typically referred to as iBuying.
• RentPath: In April 2021, Redfin acquired RentPath for $608 million. RentPath operates leading property rental sites: ApartmentGuide.com, Rent.com, and Rentals.com
• Redfin Mortgage & Title: In their mission to becoming a one-stop shop for all things real estate brokerage, Redfin has launched ancillary services that are gaining traction

Growth

Before the introduction of Google Maps (and Microsoft’s Bing Maps), Redfin’s founders came up with the idea to display home sale listings on an online map. To do so, Redfin aggregated satellite data with real estate databases to build the first version of the software American home buyers know so well today. With a lofty goal to upend the status quo of traditional real estate brokerage, Redfin received consistent funding from venture capital firms due to their long term vision and steady execution.

Redfin went public on July 28, 2017 raising $138 million on the day, which marked the beginning of over $1 billion in valuation. Today, nearly four years since their IPO, Redfin’s market capitalization (the value financial markets place on publicly traded companies) stands at $7 billion. While the company is not “cheap”, I’ll explain why Redfin has notable upside potential from here on out.

Disrupt

Rather than building off the same realtor-centric business model that most real estate firms have opted into, Redfin seeks to turn the industry upside down by putting people over profits. From a bird’s eye view, it’s as if the traditional real estate broker model is founded off withholding information from consumers in order to collect 3% commission on each side of the transaction.

Instead, Redfin prefers a customer-centric business model. The company empowers their users by giving them access to extensive real estate market data, connecting them to a vast marketplace, pairing them up with a Redfin agent when they’re ready, and saving them money by collecting between 1 - 1.5% on each transaction.

Redfin is able to reduce commissions for their users by deploying what’s called a full-stack approach. Simply put, a full stack approach addresses the complete value chain, end-to-end. In Redfin’s case this means pulling the strings on nearly every step of the home-buying and selling experience from lead generation to closing. This allows Redfin to manage the entire customer experience instead of providing a partial solution that relies on licensing to, or integrating with, other businesses. It means a business like Redfin can reduce costs for their users while ensuring reliable customer-service. This is the essence of Redfin’s value proposition: best in class software and great customer service at a considerable discount to the traditional model.

In order to maintain reliable customer service, Redfin’s real-estate agents are a foundational pillar to their business model. Their agents are not compensated based on commissions, they’re salaried employees. This allows agents to enjoy consistent compensation and benefits while guaranteeing savings for home-buyers and sellers through low commission costs.

In short, Redfin puts people first. That goes for both their employees and their customers.

Another way Redfin separates itself from legacy real estate brokers is through lead generation, an integral part of the real estate brokerage business model. For reference, Zillow's entire business is centered on generating leads and selling them to legacy real estate brokers. Redfin generates their leads directly through their website as opposed to buying leads from third parties. This goes back to the full-stack approach. By generating their leads first hand, Redfin maintains higher margins and has unfiltered access to all their user data. With an average of 43 million monthly visitors (2020) on Redfin, the company collects extensive data that is paramount to their success. When agents don’t have to focus on lead generation, their productivity inherently increases. On average in 2020, Redfin agents closed 3x more sales than the national average for all brokerages even though they’re salaried employees. Furthermore, their data gathering improves customer experience through artificial intelligence that gets smarter by the minute. The company’s software knows what you’re looking for in your next home and dynamically adjusts recommendations to cater to your preferences. Similarly, they dynamically score the quality of each lead based on the user’s search habits which means connecting the user with an agent at the opportune time to increase their likelihood of a sale.

As part of their mission to becoming a one-stop shop for all things real estate brokerage, Redfin's expansion into ancillary products and services is essential. For example, when a buyer purchases the seller’s home, a title company steps in as the intermediary to go over legal documents and ultimately finalize the title transfer between the two parties. In Redfin’s case, they’re trying to keep that process in-house through their Title Forward division. Launched in 2012, Title Forward now operates in 13 states (+ District of Columbia) and serves as the #1 title company for Redfin deals in many of those locations. Similarly, mortgage originators are a key facet to the home buying experience. Instead of using third parties, Redfin launched its own mortgage origination division in 2017 to speed up the mortgage process, ensure quality service, and increase the company’s profitability. Redfin Mortgage now operates in 20 states (+District of Columbia) and serves as the #1 lender for Redfin homebuyers in most of those locations. Similar to how the team has executed to this day, I expect Redfin to make an entrance into as many ancillary services as they deem worthwhile to fulfill the full-stack model (home inspections, escrow, maybe even home insurance).

As mentioned in the Products section on this article, Redfin recently acquired RentPath for $608 million in cash. The rental market has been tough to crack but RentPath will leap Redfin's rental offering forward. In 2020 alone, Rentpath’s web traffic increased 26% year-over-year (to 16 million monthly visitors) and earned $194 million in revenue. As a result of the acquisition, Redfin will host RentPath's inventory on their platform and vice versa, vastly increasing both web traffic and inventory. I discuss the lack of U.S. home supply further in this deep-dive.

RedfinNow was mentioned earlier. So what is it? RedfinNow is the company's iBuyer program. Essentially, if your home meets the specifications, you'll be able to sell it instantly, as-is, to Redfin without lifting more than a finger. This is marketed to people who prefer convenience as opposed to maximum return. I think the standard Redfin brokerage process is convenient enough, but there's obviously a market for this service. For reference, OpenDoor's business is only iBuying. RedfinNow separates itself from iBuying competitors because they purchase homes as-is, which makes the process as easy as possible. RedfinNow doesn't generate any operating profit so I'm not all that excited about it yet. I'll re-evaluate this product division in the coming quarters though.

Financials

Much like most companies we cover on Fundamentals First, Redfin is growing shockingly fast.

We can also keep track of Redfin's market share gains by comparing Redfin's annual U.S. home sales with NAR's Existing Home Sales data. Considering the volume of home sales in the U.S., The results are nothing short of impressive.

Valuation

Today, Redfin currently trades at 7.8x their trailing twelve month revenues, commonly referred to as price-to-sales. As longterm investors, it's important to forecast financial trajectory so I've done that for Redfin below (2021-2025).

The model's 2021 and 2022 revenue forecasts are the average of multiple reputable Redfin analyst's estimates. The forecasted revenues from 2023-2025 are assumptions based on historical growth figures despite the fact that Redfin's revenue growth has been accelerating over time, which could make the model conservative if the status quo were to persist.

If Redfin were to actualize $3.5 billion sales in 2025, using today's price-to-sales multiple, the company's market capitalization would be $27.3 billion in 2025, representing 290% upside from today's price per share. That said, I prefer conservative estimates, so I predict Redfin's stock to trade at 5x price-to-sales in 2025, representing 150% upside from today's share price. Over 5 years, this would reflect an annual return of ~30%.

U.S. Housing Market

Redfin is tied to the hip to the U.S. housing market for obvious reasons. So, let's discuss the current state of the housing market. On average, home prices have been on the rise since 2012. Today, stay at home orders this past year have led us to place more value on our homes than ever before. This fundamental shift in culture, coupled with a brief pause in homebuilding, has led to increased demand and decreased supply. According to S&P's CoreLogic national home price index, U.S. home prices rose 12% year-over-year in February 2021, up from 11.2% in January 2021.

The main reason home prices are on the rise is because the volume of homes for sale in the U.S. is relatively low. The graph below depicts the annual number of U.S. housing units for sale.

With the U.S. economy fully re-opening this year, new home projects are finally getting completed and new developments are emerging in full-force. In fact, a record 25% of single-family homes for sale in Q1 2021 were new constructions (up from 20% in Q1 2020). Considering current monetary and fiscal policy (massive stimulus packages and low interest rates), we should see a housing supply boom in the coming years.

If you're worried about home ownership falling in the U.S., data indicates home ownership bottomed out in 2016 and has been on the rise since (displayed below).

It's also important to consider that the federal reserve is in favor maintaining low interest rates in an effort to stimulate the economy and boost home-ownership in the U.S.

Potential Risks

Investing in high growth companies that trade at multiple times their forward revenue is inherently risky. If the housing market slows, the economy turns, or Redfin simply doesn't execute as they used to, their price-to-sales multiple (7.8x) will contract and investor's returns will diminish (or even yield negative returns).

Furthermore, Redfin has doubled down on risk with their up-and-coming iBuying program, RedfinNow. Making cash offers for seller's homes all over the country without prior inspection of the properties is risky, but that's the only way they can compete in the space. If you're a seller and want your home sold instantly, you might reach out to three companies (Zillow, Redfin, and OpenDoor) and compare offers. Imagine if Redfin took 8 days to send you an offer while Zillow and OpenDoor sent their offers within 6 hours? You probably wouldn't consider Redfin's offer because you're trying to sell your home instantly (convenience > top-dollar). So, in order to compete, Redfin has to take on more risk. It's much too early to tell how profitable the iBuying business will be (currently not profitable) or who will come out on top, but some companies will get burned. If you take on too much risk by buying up as many properties as you can with high-ball offers in order to gain market share, you'll be left with a lot of debt, too much inventory, and little demand if an economic downturn transpired. Redfin has careful capital allocators but if they get too greedy, their house of cards could crumble.

Why Redfin?

Short term, Redfin is well positioned to benefit from gusty tailwinds. Home prices are at all time highs, demand is soaring, and interest rates are very low. Redfin facilitates the process of buying and selling homes by pairing software, people, and financial services to provide best in class service, end-to-end.

Why spend every weekend on house tours when specific components of the house immediately remove it from your consideration set? You could have done 10 3-D house tours on a Wednesday evening instead of spending your Saturday looking at two homes with a salesman following you at every step. When the time is right, and you've narrowed down your search, a Redfin agent will take you to your favorite homes without trying to sell you on every mynute detail because they're salaried employees instead of commision-based salespeople. When you've landed on your dream home and are ready to close, you'll be happy to hand over 1.5% to Redfin for making the process so fast, easy, and painless as opposed to 3% to someone who made you feel like they were trying to sell you any house they could.

Companies that put people ahead of profits tend to succeed. That's why Redfin has a 54% higher customer repeat rate than the industry average (2020). It's why Redfin grows its market share every year. When you do right by your customers and employees, you're more likely to succeed. From everything I've analyzed to make this deep-dive for you, I assure you that Redfin does it right.

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