Nearly seven million homes are sold in the United States each year, and their combined 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 -2.65%) tries to change that. The company pursues an end-to-end service that makes moving a pleasure, rather than something that makes you pull your hair out.
Bold ambition offers great rewards for investors, but there are some serious business questions you need to know. Roll up your sleeves and let’s dive in.
Building a one-stop shop
Redfin isn’t 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 continued to evolve. The core business uses in-house agents to facilitate home transactions and charges sellers a 1.5% or 1% listing fee when you buy and sell through Redfin. The typical fee paid by sellers is 5% to 6%, saving Redfin users thousands of dollars.
In recent years, Redfin has expanded its business model, handling mortgages, property rights and escrow transactions, and even offering iBuying, where Redfin buys and resells your home directly.
I bought a house; it takes a village. There are agents, bankers, lawyers, inspectors and more who get something along the way – ever hear of too many cooks stirring the pot? No wonder an estimated 36% of adults cry when selling their home.
Redfin’s solution sounds great in theory. Consumers have a streamlined process for buying or selling a home and save money in the process. But it’s not that easy.
Question: Can Redfin’s model be profitable?
Redfin has been in business for years, but it’s still not a profitable company. Both net income and free cash flow are in the red, meaning Redfin is burning cash.
The company’s most recent quarter, Q1 2022, showed Redfin’s revenue from its brokerage services was $168 million, but cost of sales was $154 million. That’s only a 13% gross profit margin, which isn’t enough to offset investments in the company like technology and marketing. Redfin’s operating losses for the first quarter of 2022 were $85 million.
Redfin’s business extends well beyond the brokerage segment. Still, one might wonder how profitable broking can be with human agents who charge competitive salaries and benefits and can only handle a limited number of transactions. More agents are needed as Redfin handles more transactions.
Question: Is iBuying friend or foe?
In addition, iBuying pushed its way into the conversation. Zilov 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 create its offerings and charges a fee ranging from 5% to 13%.
Redfin is still an iBuying underdog compared to the market leader Open door, which has $11.3 billion in liquidity for iBuying compared to $400 million for Redfin. But Redfin’s end-to-end vision doesn’t focus on the iBuying model; Investors should think of iBuying as the icing on Redfin’s cake, rather than the cake itself.
However, iBuying still has a big impact on Redfin’s finances. iBuying’s revenue for the first quarter of 2022 was $380 million, or 63% of total revenue. The real estate gross margin was just 5%, and that was in a searing home market.
The iBuying business will likely always be a low-margin business, requiring Redfin to price its homes competitively and make its money off the associated service fees. The challenge for Redfin will be to balance this with its brokerage services, which carry higher profit margins.
Redfin has a market cap of just $1 billion after the stock fell from highs of nearly $100 to just $10 during this bear market. The massive real estate market is a huge opportunity, and its long-term success could make Redfin a huge investment.
Success is certainly not guaranteed, however, and it seems the company needs to figure out its “identity” in a way that will chart a path to profitability. CEO Glenn Kelman said during the company’s first-quarter 2022 earnings call that the company will report operating profit this year and bottom line profit in 2024. Time will tell, but investors could consider Redfin a “moonshot” stock at its current stage.