Tech-focused real estate companies, including Redfin (NASDAQ:RDFN) and Zillow (NASDAQ:ZG)(NASDAQ:Z) have been rapidly expanding their iBuying businesses. In other words, they aim to buy houses directly from homeowners, make some cosmetic repairs, and then resell the house at a profit. And they want to do it thousands of times each quarter.
The problem is that nobody has figured out how to do this profitably at any sort of scale yet. In this Dec. 1 Fool Live video clip, two experts from our Millionacres real estate brand, Matt Frankel, CFP, and Deidre Woollard discuss why both of these real estate giants are laser-focused on figuring this business out.
Matthew Frankel: They are all in, and it's like all or nothing. They're really rolling the dice on this and assuming that they're going to be able to figure out how to do it profitably. There were 6 million homes sold in the U.S. last year, so they don't need a giant profit margin or a giant market share to make a lot of money doing this, which is why they are all in on iBuying. A thousand-dollar profit margin and a 1% market share of the U.S. home-selling market would be billions of dollars in profit. They're not really focused on the rental market. Maybe they should be a little bit more. But for the time being, they really don't seem to be focused, because Zillow has deep pockets. They could acquire any of those rental apartment sites that they want to. Whether the deal will be blocked is another issue.
Deidre Woollard: Well, yeah. Well, it's interesting that they haven't really done much with that. I think that there's a chance for them to do more with that. But Redfin only has 1% of the market right now, and they've made a whole business out of that.
Frankel: Yeah. I mean, Redfin has nothing to worry about from CoStar (NASDAQ:CSGP). They're completely different area of real estate. They're disrupting the brokerage market, which, is an area that I've said for years, is begging to be disrupted. The 6% sales commission that when you're selling the house is still the industry standard, they are really undercutting that by a lot. Americans spend over $100 billion a year on real estate conditions, title insurance, origination fees. They're trying to take all that. It's like Jeff Bezos at Amazon (NASDAQ:AMZN) once said that your margin is my opportunity. That's Redfin mentality when it comes to the brokerage business. Redfin is a really interesting company that's also getting all in on high volume, by the way.
Woollard: But they're more cautiously all in, I would say.
Frankel: Yeah, you're right. The reason they're being cautious is because their core business is not mature yet. You said they only have about a 1% market share of a product that essentially sells itself. They're charging half the commission of the competition. They are really still focused on building that out. Like I said, their home-selling market is $2 trillion in volume. That is true on the high buying side and on the brokerage side -- they are still trying to build out the brokerage side. They're not like Zillow where their core business is really matured. They see limited growth potential ahead. They're not quite as all in. But there's very little overlap between what Redfin does and what CoStar does. Out of the two, I'd definitely say Redfin has a lot of less to worry about.
Woollard: True. Although Redfin their traffic has gone up in recent months. They are very aware of the fact that their website and their are app-adds thing has become more important as a revenue driver than it was in the past. But yeah, their primary business is still brokerage, and as you said, they still haven't covered the whole country yet. They roll out market by market and they've been pretty cautious about that. They've rolled out iBuying more cautiously than Zillow or Opendoor (NYSE:IPOB) because I mean, they only have about 13 markets. Zillow and Opendoor each now have 24 to 25 each. They've been much more aggressive on that.
Frankel: Yeah. Redfin is in, I think 13 markets at the end of third quarter. They're tip-toeing. One of these days, I actually want to just get a price that you can offer on my house just to see what it would be compared to what I can get on the open market.