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What Redfin's Latest Earnings Can Tell Us About the Real Estate Market

Feb 17, 2020 by Deidre Woollard
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When looking at residential real estate, Zillow (NASDAQ:Z) (NASDAQ: ZG) and Redfin (NASDAQ: RDFN) often can provide valuable clues to the overall health of the real estate market.

Last week, Redfin announced its fourth-quarter 2019 earnings. Redfin posted a net loss, but the fourth-quarter net loss was better than the company had forecast in its last earnings calls.

Revenue was up 88% year over year, and net losses were down from $12.2 million to $7.8 million in the fourth quarter of 2019. Redfin's primary business is as a real estate brokerage, and it saw revenues increase by 31% year over year. As of the fourth quarter, it has a 0.94% share of all existing home sales.

iBuying is still expanding, but margins are crucial

Redfin, like Zillow, has heavily invested in iBuying -- the practice of purchasing homes before they hit the open market and then refurbishing them before putting them up for resale. Redfin Now, Redfin's iBuying business, saw revenues increase from $22 million in the fourth quarter of 2018 to $99 million in the fourth quarter of 2019. Redfin Now saw margins decline from negative 4.3% in the fourth quarter of 2018 to negative 1.3% last quarter. Redfin Now is active in 13 markets.

Redfin partners with another iBuyer, OpenDoor, in cities where it does not have an active iBuying program. The two companies recently announced that they are expanding this partnership from two cities to an additional nine cities.

For Redfin, part of the focus of iBuying going forward is less about overall volume and more about improving its margins on each home. One of the company's core missions is to get better at pricing each home as well as learning how to bring down the renovation costs.

Standardizing commission rates

Redfin has been testing out a 1% listing fee in higher-priced markets. However, it is now making an effort to standardize fees across all markets. As of December, it charges a 1% fee for sellers who are also buying a home with Redfin and a 1.5% fee for all others.

While this could be seen as a sign that Redfin has reached a threshold for how low commission rates can go, it's also worth noting that standard fees across the industry still range from 2% to 3% per transaction side. Redfin is still the discount option in most markets, which puts other brokerages on the defensive to justify their higher rates.

Redfin did note that its homebuyer success rate has declined for five years. It defines homebuyer success as how many buyers who tour a home with Redfin actually buy a home through a Redfin agent. In the earnings call, CEO Glenn Kelman mentioned that this is partly because Redfin's technology makes it easy to use the push-button feature to request a home tour, meaning that some of the more casual visitors are easily incentivized to tour a home even if they aren't quite ready to buy. In order to bring up that number, Redfin is testing out using call centers staffed by agents to qualify potential buyers looking to schedule a tour.

Kelman also stated that the company does not plan to increase the number of customers per agent but instead, by qualifying customers better and improving the service, it will increase the number of customers each agent is able to close. While there is an inherent risk in raising prices in some markets, Kelman indicated that he feels confident that the site and reputation of the brand are strong enough to warrant the increase.

Buying without an agent is an area of expansion

The other area that Redfin is testing is making it possible for some buyers to make direct offers without an agent. Redfin Direct is now available on Redfin listings in:

  • Virginia.
  • Massachusetts.
  • Texas.
  • California.

Nearly 30% of Redfin listings can now be purchased this way.

Fine-tuning valuation

On the call, Kelman stated that the company continues to refine the Redfin Estimate and that it has the "lowest published error rate of any major site." This puts it in direct competition with Zillow's Zestimate feature. Redfin uses this estimate not just as a competitive advantage but also as the framework for the offers it makes through Redfin Now.

Different products for different markets

While currently, the issue in most local markets is the lack of inventory, that is likely not a situation that will continue indefinitely. The same can also be said of low interest rates that are increasing interest in homebuying. These are two of the reasons that Redfin is focusing on a variety of different products, from the traditional brokerage offering to iBuying and mortgage options.

Redfin is in the same position as many traditional real estate brokerages, struggling with low inventory and seeking ways to incentivize home sellers to list while making it easier for buyers to purchase. Early signs are pointing to a relatively strong spring buying season, which could provide good data on how Redfin's commission pricing shifts are received by the marketplace.

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Deidre Woollard has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Redfin and Zillow Group (A shares). The Motley Fool has a disclosure policy.