3 Growth Stocks Transforming the Real Estate Business

The real estate market is hot right now with low interest rates driving strong demand and inventory shortages crippling supply. It's the perfect storm for soaring prices and first-time home buyers are having a tough time breaking into the market.

Real estate technology companies have been big beneficiaries of this environment as more consumers are turning to digital platforms to buy and sell homes. The real estate business is historically labor intensive and expensive for both the buyer and the seller, and these companies present new ways to transact far more efficiently. 

These three high-growth companies buy and sell thousands of homes each year, creating value for their customers and big opportunities for investors.

Image source: Getty Images

Offerpad

Offerpad Solutions (OPAD -0.67%) is the most recent entrant into the revolutionary real estate direct-buying business where companies purchase homes directly from sellers with the intention of reselling them for a profit.

Founded in 2015, Offerpad began trading in early September, and the company is growing rapidly with a notable acceleration over the last 12 months. 

Data source: Company filings. 2021 revenue estimate based on the midpoint of managements guidance range. CAGR = compound annual growth rate.

The company sold 4,281 homes in 2020 and looks set to crush that figure this year, with management guiding for as many as 6,000. But the amount of money it makes per home sold is an even bigger improvement investors should pay attention to. In the second quarter, Offerpad grew that figure to $31,500, up from just $1,400 in the same period last year.

Favorable market conditions (rising house prices) helped Offerpad deliver that growth, but it's clear the company is quickly achieving scale -- the point where it sells enough homes that fixed business costs become less impactful.

Offerpad has now exceeded its full-year 2021 contribution profit estimates within the first six months of the year. To spur further growth, the company purchased a record-high 2,025 homes in the second quarter, so there will likely be continued strength going forward.

Redfin

While Redfin (RDFN 0.77%) has a strong direct-buying business like Offerpad, it has also found success by applying technology to improve the traditional real estate sales process. Where small agencies charge high fees and handle a small number of listings, Redfin has employed an army of thousands to sell houses the old way but with a significantly lower listing fee of 1%.

This hyper-scaled business model has saved consumers over $1 billion in listing fees since Redfin's inception, and the company's share of overall houses sold in the U.S. continues to grow. 

Data source: Company filings. 

On the direct-buying side, Redfin has sold 583 homes on a trailing-12-month basis, which is far less than its main competitors. But the 292 homes it sold in the second quarter represents an 80% year-over-year increase, which points to its growing volume.

The combined segments have driven powerful revenue growth for the company, proving that a hybrid real estate sales model that involves traditional practices can still deliver great results. Based on the consensus analyst estimates for full-year 2021 revenue of $1.78 billion, Redfin will have recorded compound annual growth of more than 50% since 2018.

But Redfin's second-quarter revealed its growth is accelerating. It saw a 121% year-over-year increase in revenue and 174% increase in gross profit. The company's best years are still ahead of it as consumers continue to turn to the company for their real estate needs in growing numbers. 

Image source: Getty Images.

Zillow

Zillow Group (Z 1.00%) (ZG 1.15%) is the dominant player in the direct-buying business, but that's not its only strength. With a market capitalization of over $24 billion, it's almost five times larger than Redfin.

It achieved this scale by building a suite of nine real estate-related brands, which include software-as-a-service (SaaS) broker services platform Premier Agent, Zillow Closing Services for title and escrow services, and Zillow Home Loans, an in-house mortgage lender.

The combined businesses are expected to generate over $6.5 billion in revenue this year.

Data source: Company filings. *Estimate from Yahoo! Finance. CAGR = compound annual growth rate.

The only segment of the real estate industry Zillow doesn't operate in is the traditional sales business. But it does help consumers list their own homes on its website and conduct their own open houses. Plus, through Premier Agent, it helps independent agents build networks that in turn can bring in buyers to snap up Zillow's various listings. These strategic moves ensure Zillow captures revenue from all aspects of the laborious and expensive traditional sales process without having to actually operate within it.

Direct buying is the company's largest segment, making up almost 60% of total revenue. It leverages artificial intelligence to constantly track the real estate market across the U.S., allowing it to offer willing sellers a "Zestimate" through its website within days of a request for an offer. 

Zillow sold 2,086 homes in the second quarter alone. With volume like that, and a plethora of other successful real estate businesses, this stock could really deliver for your portfolio over the long term.