Would-be homebuyers and real estate junkies have an upcoming IPO all their own. Redfin, the property search service, is scheduled to go public in the next few days. By listing its shares, Redfin is moving into a neighborhood that already has a prominent resident, Zillow (NASDAQ:Z)(NASDAQ:ZG). Here's a look at Redfin's performance and a brief glance at how the company compares with Zillow. 

Buy your next home online

Redfin is an online real estate brokerage that's become a known player in its business through an emphasis on technology. The company claims it invented map-based real estate search, a tool that has become one of the defining features of its core website. Its listings are fairly comprehensive, as it's plugged into the database of all local multiple listing services in its 84 markets around the country.

This combination of automated services and extensive listings allows Redfin to shave its brokerage commission fees. The company levies a commission of 1% to 1.5% on the homes sold through its service, compared with the 5% to 6% it says traditional brokerages charge.

In addition to having its own army of brokers, Redfin has also established partnerships with more than 3,100 outside brokers. For purchases effected through these partnerships, Redfin takes a piece of the agent's commission as a referral fee. These sales are the exception rather than the rule, however -- in Q1, an estimated 74% of the transactions made through Redfin were closed by its in-house agents.

A man and woman smile at their child in arms, next to a "sold" sign in front of a house.

IMAGE SOURCE: GETTY IMAGES

Redfin is usually in the conversation when it comes to online real estate services. Potential homebuyers are obviously drawn to its portal; in Q1 of this year the site's monthly average visitors tally increased a robust 44% on a year-over-year basis to over 20 million.

Although Redfin has seen lively top-line growth, it consistently posts bottom-line deficits. Last year it booked revenue of $267 million, a 43% improvement over 2015 and more than double 2014's $125.4 million. It also narrowed its net loss from 2015 to 2016 but was still well in the red -- $22.5 million last year, versus $30.3 million in the previous frame.

For Q1, revenue was 44% higher, but there was $28.1 million of crimson ink on the bottom line, against Q1 2016's $24.3 million.

This Fool's take

Like Zillow, Redfin essentially offers a bread-and-butter online real estate search and buy service. It does this quite well, thanks to a site that is intuitive -- I would even say fun -- to use and packed with homes to buy.

I also like Redfin's revenue mix, which skews heavily toward its higher-margin, in-house brokerage activities, as opposed to partnerships. That's a contrast to Zillow's concentration on its Premier Agent service, a form of partnership in which the outside broker pays fees to have services listed on the site.

I'm also encouraged that Redfin will use its IPO proceeds for purposes including "technology and development and marketing activities, general and administrative matters, and capital expenditures." In other words, the areas that will help it grow its business.

On the negative side, Redfin's "lead agents" are employees of the company. That means they receive salaries, which considerably pumps up expenses. The difference between this method and Zillow's Premier Agent-dependent model is striking -- Redfin's costs of revenue have been running close to 90% of the top line lately, while Zillow's most recent quarterly figure was a mere 8%.

The difference helped Zillow flip to an adjusted net profit in its Q1. It also provided more room to invest in crucial areas -- Zillow spending on technology and development was about 30% of revenue in said quarter. Redfin came in at 16%.

That said, both companies operate in a real estate market that's vibrant and frothy these days. A rising tide can lift all boats, and if Redfin deploys its IPO proceeds smartly and efficiently, it stands a chance of doing a Zillowish flip into profitability. With that effective and powerful web portal and a lively presence on the market, it has a good foundation for success.

In spite of its loss-making ways and the presence of a strong competitor, then, I think there will be upside potential for Redfin's stock.

The details

Redfin is scheduled to start trading July 28 on the Nasdaq, under the ticker symbol RDFN. The IPO price should land between $12 and $14 per share.

The underwriting syndicate for the IPO is led by Goldman Sachs and Allen & Company. It also includes Bank of America Merrill Lynch and Royal Bank of Canada's RBC Capital Markets.

Eric Volkman has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Zillow Group (A shares) and Zillow Group (C shares). The Motley Fool has a disclosure policy.