Real estate tech company Redfin (RDFN 6.30%) is often compared to rival Zillow (Z 2.01%) (ZG 2.03%), but there are significant differences in the way the two companies operate.
In this Nov. 12 discussion on Motley Fool Live during the recording of the Industry Focus podcast, Motley Fool analyst Tim Beyers and Industry Focus host Nick Sciple talk about the more conservative philosophy driving Redfin's growth strategy and how that might pay off for investors over time.
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Tim Beyers: Let's talk about Redfin Now. So, Redfin Now is that instant buying business. So, basically Redfin Now is an instant buying or iBuying is, Redfin or another comes in -- you could think of it as a more advanced way to do house flipping. Redfin will come in, they will make an offer on your home, they're going to take a 7% fee on this one, if I have my numbers right, I think it's 7%. And so, you're going to give up some pricing power, but what you get in exchange is liquidity. You can close, I think it's as within two weeks in some cases, you can actually get out of your home, you're going to get a cash offer, and Redfin will take that home, they'll put it on their books, they will improve it, and then they'll turn it back out onto the market. And to the degree that they can turn that sale very quickly, they can turn that into cash, and they can be very profitable with this.
Zillow has bet much bigger on it, Redfin is thinking about it a little bit differently. I mean, they've really shut down, like you pointed out, Nick, they really shut this down. And Glenn Kelman thinks about this differently than Zillow does. I want to point this out because I think it is important, and it talks about, it sort of illustrates how Redfin is conservative and Zillow is very aggressive. I think Zillow is a very aggressive player, Redfin is a very conservative player.
Here's how Glenn Kelman thinks about it, instant buying is an option on one potential real estate transaction, and so the job of a Redfin agent is almost like a consultant to say, OK, what's the best option for you? Well, your home is maybe 20 years old and you haven't done enough work on it yet, maybe what you want from us is the concierge program. So, instead of doing a 1% listing fee, why don't you pay us another 1% to 1.5% and we're going to bring in a whole bunch of construction help and we're going to work together and make all these improvements on your home. And then you're going to pay for that in terms of the fee that you pay us on the other end when we sell your home, because we're going to dramatically increase the value of your home with these improvements we're going to make.
And that's one way to do it, another way is to just go with the straight 1% listing fee, and another way is to say like, you know what, just sell us your home outright. And so, Redfin is making it so, like the way that Glenn Kelman, sort of, positions Redfin is like, look, we want to help you with the transaction that fits you, not try to impose upon you an instant buying offer. And I think that's different, and it's ultimately, I think, better for the customer.
Nick Sciple: Yeah, that's the thing that Glenn Kelman has talked about, this idea that iBuying is an offer that they want to present to customers as kind of a menu, but it's not necessarily going to be appropriate for most customers who want to bring home the most amount of money on the sale of their house. But the one thing they've also talked about is that by giving those iBuying offers, those Redfin Now cash offers, they're able to use that as an acquisition tool for the brokerage, they can present that Redfin Now offer side-by-side with the value proposition they can give on the broker side. And say, hey, Mr. Customer, these are options available to you, you know what works best for your needs. And that has helped them as an acquisition tool on the brokerage side of the business.
So, one thing we hear a lot with these iBuyers is this idea that over time they will, you know, maybe could replace brokers as a whole and become the new way we purchase homes. It sounds like you're a little bit skeptical of that taking place, Tim.
Beyers: It's not that I'm skeptical of it, it's that I feel like Redfin is, because they are a naturally conservative company, they're just going to be more deliberate about it. And this is one of the things I really like about Redfin, they are a test and then deploy type company. They are not the move fast and break things company, they are the test and deploy company.
So, when they first came out with Redfin Now, they started testing it in some markets, and then they set a limit, they said, here's how much balance sheet cash we can use. And I believe the limit they set was $25 million. And so, once they ran through a portion of that and they saw that they were actually making profitable transactions on Redfin Now, they said, OK, let's increase it a little bit more, and a little bit more, and a little bit more. And that's how they do it.
And so, when I look at how Redfin is expanding, I think you're going to see a lot of test, refine, deploy. I think you're going to see that in mortgage, I think you'll see it in title, and I think you'll see it in instant buying. I actually believe Redfin will get more aggressive with instant buying in the next three years, but it won't be at once, it'll be in a really measured staged way.
Sciple: Yeah. And I think that's an important thing to point out with Redfin as a business, given the conservatism of the management, they were founded or in the early days of their company had to navigate the 2008-2009 financial crisis. They're a technology-enabled company, but their growth is somewhat going to be incremental over time. This is one of those companies that, you know, 10 years from now it's going to be a lot bigger, but it's going to be more of an incremental growth based on housing demand and the ability to hire agents and stand up these other business lines and acquire more customers, but over time, you know, the parts are bigger than the whole.
Beyers: Yeah. And I would say, businesses grow a couple of ways, when we talk about some businesses, they grow really fast on the topline, right? They have a ridiculous amount of revenue growth, and that sort of filters down through the income statement, on to the balance sheet, into the cash flow statement. I think Redfin will see some measured growth, I think it'll be high double-digits, like, high-teens growth, maybe between 13% and 17% annualized for those 10 years. But I won't be surprised at all, Nick, because of the way and the efficiency with how Redfin is run, if that net profit will actually run higher than that. So, you'll see, like, revenue growth 15%, but net profit growth 25%. Cash flow growing 22% or 23%. Because what they're doing, as they scale and they get more of the transaction, they end up capturing more of the profit dollars. And so, they get more from every dollar of sales that they ultimately realize. I think that's the kind of story Redfin is right now. And I think it's going to continue to be that way.
Sciple: Absolutely. They have these advantages in customer acquisition and efficiency on the brokerage side which can help them improve on pricing, which over time gives them a significant advantage, I think, in the market which we have talked about so far.