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1 Big Disruptor in a $2.5 Trillion Market

By Matthew Frankel, CFP® and Brian Withers - Updated Jun 22, 2021 at 3:17PM

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This company could become a leader in a market dominated by an outdated fee structure.

There are few industries that have more potential to be disrupted than real estate, and that's exactly why Redfin (RDFN -3.81%) is on the radar of some of our experts. In this Fool Live video, recorded on June 10, contributors Matt Frankel, CFP, and Brian Withers explain why this disruptive real estate company could have tons of room to grow. 

Brian Withers: Redfin is a technology-powered real estate broker, instant home-buyer, lender, title insurer, and renovations company. We're doing a show on real estate tech, I think Redfin belong. Let me cover a little bit about Redfin. Tremendous growth, and you can see down here on the bottom is real estate services and up here is property. You can see that they've recently got into the iBuying business. In 2020, this 210 versus 241, they pulled back on the iBuying business through 2020 in the coronavirus, not surprisingly. But look at this market share, just steadily up over time as it's becoming more embedded into the transactions that happen in real estate across the United States. What I like about Redfin more than the other iBuying services is to me, they partner with the seller. There's three different services by which you can sign up. You can list the home for a 1.5% fee. You can do the Redfin's concierge and fix up the home and be involved in that process to help get a better price for your home before you sell it. Or just do the buy it right now, get rid of it and be out of your home altogether. Depending on what service you pick, Redfin can do as little or as much as you want. What I love around Redfin is it's got a simple mission, to redefine real estate in the customer's favor. It leads with a tech focus, it's more of a partnership model, it definitely had a strong growth engine before the pandemic and it's founder-led. I don't like that there's not really an opportunity for repeat customers. We've bought seven homes and sold six over our 30-year time in homes and we probably do it way more than anybody else, and I've never used the same real estate agent ever. If Redfin is going to really be in this business, they got to figure out how to delight customers that first time so that they will come back time and time again. This is still a people-heavy business, they have agents that are employees, which is a really cool model that I like, but that requires them to scale up their culture and mission across the company with thousands of people who don't necessarily interface in an office and can be embedded in that culture that way. To me the iBuying model is not yet proven to be profitable, so this is a company buying basically real estate in local markets and as much as the numbers can show you, I think that's still a very much a local business where location determines value significantly. There's a lot of stuff I love but I really like subscription businesses where you can get repeat business over time, and I haven't seen Redfin have enough going for it that it's able to do that. What do you think about Redfin, Matt?

Matt Frankel: I love its core business. iBuying, I'm not totally sold on yet, I'll be honest. But in its core business, there has been a war on fees caused by technology in pretty much every area that you pay fees. When you think like how much you pay for stock trading commissions and has evaporated over the past decade or so. It went over $10 a trade to nothing. The same can be said for banking fees. There's all pressure on banks to drop fees because of the online banks and things like that. For the most part, home sellers are still paying 6% commissions to sell their homes. The standard commission is 3% to the buyer's agent, 3% to the seller's agent. In some markets, you can get a little wiggle room on that, but that's pretty much what it is. There are few areas of any type of business that are begging to be disrupted more than real-estate commissions. Technology has, no offense to my Realtor friends on here, sorry, Wade, if you're listening. It's becoming easier and more cost-effective for realtors to do their jobs in recent years. Technology has just made it easier. You can do virtual showings. The closing can happen mostly virtually. I just bought a vacation home in Florida and didn't leave the state of South Carolina to do it. It's become a little easier and it's made it so efficient real estate companies can do this for less, which is what Redfin's trying to do. That 1.5% sellers agent commission that Brian mentioned, that's half of the industry average. If you're selling a home for $400,000, that's a lot of savings. Redfin's product sells itself. I know every time I mentioned this, we see a bunch of comments in the chat from traditional realtors, who say, "Yeah, but Redfin's agents don't add as much value, they won't walk you through the process as much." That may be true, but a lot of people just want a quick home sale and they want it cheap. There's a big addressable market opportunity just in its core business.

Brian Withers has no position in any of the stocks mentioned. Matthew Frankel, CFP has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Redfin. The Motley Fool recommends the following options: short August 2021 $65 puts on Redfin. The Motley Fool has a disclosure policy.

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