There's a revolution happening in the residential real estate market. Tech-enabled companies such as Redfin (RDFN 3.53%) and Zillow (Z 2.60%) (ZG 2.79%) are using their internet platforms to change the way people shop for homes. Notably, Redfin is helping people get better prices and pay less in agent commissions. In some metropolitan areas, Redfin will even offer to directly buy your house. The company is still in the relatively early stages of its long-term growth plan and is unprofitable, but there's a good chance it will be successful in transforming the housing market.
Online brokerage
Redfin was founded in 2004 as an online real estate broker and went public in 2017. Today, the company operates one of the most popular websites for home shopping, redfin.com, which receives over 36 million monthly average visitors.
The company makes money by charging brokerage commissions on home sale transactions. It charges 1% to 1.5% to a seller to list a home compared to the standard 3% charged by traditional real-estate agents. The lower commissions translate into real savings for customers. Strengthening Redfin's value proposition is data showing that homeowners who list on its website sell their homes faster and for more money.
| Redfin Metrics | 2014 | 2015 | 2016 | 2017 | 2018 |
|---|---|---|---|---|---|
| Revenue growth | 37% | 49% | 43% | 38% | 32% |
| Brokerage market share | 0.33% | 0.44% | 0.54% | 0.67% | 0.81% |
Data source: Redfin investor presentation.
Lower commissions and better results are part of why Redfin has seen its market share of brokerage transactions in the residential real estate market steadily rise. From 2014 to 2018, the company's market share has nearly tripled, rising from 0.33% to 0.81%. The other contributing factors to the company's success in growing its business most likely relate to the convenience of shopping online and its offering new ways to sell homes.
New ways to sell your home
Redfin started out as an online brokerage platform, but lately, the company has been innovating by offering alternatives to the traditional process of listing a home.
One example of Redfin's innovation is its Concierge listing service, where it charges sellers an extra 1% in commissions in exchange for assisting in the process of renovating, cleaning, and staging a home for sale. For now, Redfin Concierge is only available for homes listed at $500,000 or higher.
Another innovation is directly providing ancillary services including mortgage financing, title insurance, and escrow. Redfin is offering these additional services at competitive prices and is also making the closing process easier by bundling the services so buyers and sellers don't have to coordinate with as many parties.
Image source: Getty Images.
Finally, and perhaps most notably, Redfin is getting directly into buying and selling homes in select markets with its RedfinNow service. To get a deal, a homeowner requests an offer on Redfin's website; Redfin makes an appraisal and sends an in-person inspector to confirm the details. The customer then chooses whether or not to accept the immediate offer. If the customer accepts the offer, Redfin turns around and resells the property on its website.
RedfinNow hopes to make money by charging a 7% brokerage fee and offering a slightly discounted price in exchange for the immediate liquidity -- saving a lot of the time and effort required to sell a home. However, as of this past quarter, RedfinNow hasn't proven to be a profitable venture. RedfinNow is only in eight markets today, but it wants to eventually be a nationwide program.
Redfin is building a complete online real estate shopping experience where you can buy and finance home purchases from the convenience of your home. The company is running losses in its business as it invests to bring this complete solution to consumers.
Implications for the housing market
The residential housing market is changing quickly, and Redfin is working to accelerate the change. Redfin isn't moving as fast as Zillow into the iBuyer business, mostly due to resource constraints, but it has found other ways to innovate with its concierge listing service and mortgage and title insurance packages.
Given the innovation underway, it is hard to paint a clear picture of what the housing market will look like in 10 years. Will most people buy a house on a website? Maybe, but it's also possible the iBuying experiment won't work. So far, the major iBuying companies still haven't figured out a way to make home flipping at scale profitable.
As is typically the case with technological disruption, the consumer is a clear winner. Buying or selling a home has never been easier, and the trend will probably continue in the consumer's favor.
