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High-tech discount brokerage Redfin isn’t interested in growing any faster than it is already, at least not according to a recent speech given by its CEO Glenn Kelman to a group of real estate journalists gathered in Austin last week.
Redfin has the least agent turnover of any of its peers in the United States, Kelman said, and part of keeping it that way is a measured approach to expansion. Kelman said Redfin can afford to grow its revenue about only 30 percent every year.
“And that’s exactly what we’ve done every single year,” Kelman said.
Part of the need for measured development is that it takes considerable time for Redfin to train its agents — who are much more productive than traditional agents — in how to use its tech tools and service systems. But he described the brokerage’s creeping footprint as “incredibly well defended.”
“The basic defense is that our customers are very, very happy,” Kelman explained.
Kelman delivered the remarks at the during his keynote address on Friday, June 28 at the annual conference of the National Association of Real Estate Editors (NAREE), a longstanding trade organization made up of writers and editors who cover residential and commercial real estate in the U.S., of which Inman is a member.
Later in his speech, Kelman commented on the trend of swelling investment in real estate tech companies.
In the past, investment capital targeted firms like listing portals that sold referrals to agents. But today’s venture funding is lighting rockets under startups that are providing alternatives to traditional brokerage services. The more new, more ambitious goal of these firms is to “give the consumer a better deal.”
There’s a “broad consensus on Wall Street that real estate is going to change,” he said.
These firms are “spending like crazy” in a race for dominance, he said. The clearest example of this competition is the iBuyer craze, wherein investors are flocking to companies — public and private — that offer online, fast-cash “instant” offers to buy homes directly from prospective sellers (usually in exchange for fees).
iBuyers, particularly Opendoor and Zillow Offers, have each raised more than $1 billion in equity and billions of dollars in debt to use technology to buy and resell homes, touting a quick and certain sale to sellers.
Another case study in runaway growth is Compass. The brokerage was valued at $4 billion in its most recent funding round, and it has acquired dozens of other brokerages in the last two years.
IBuyers account for roughly seven to eight percent of purchases in Phoenix, Arizona, ground zero of the iBuyer competition, according to Kelman.
But he claims that the vast majority of sellers who receive offers from iBuyers still opt to sell their homes on the open market — implying that these homeowners are often underwhelmed by the bids and perceived costs of iBuyers.
This is why, he argues, that Redfin’s “integrated approach” of offering both its core discount brokerage offering and an iBuyer option (Redfin’s is called Redfin Now) is the winning strategy.
“Everyone wants to see what’s in the envelope,” the cash offer from an iBuyer, he said. But they also want to know what they could sell their home for on the open market, he said.
That being said, Redfin’s latest quarterly earnings report from spring 2019 shows significant annual growth in its revenue generated from its properties division (which presumably includes its iBuyer Redfin Now), up to $21 million, nearly seven times greater revenue generated from the division during the same period last year. Meanwhile, its brokerage revenue, still its dominant generator, increased by a smaller margin, up from about $70 million in 2018 to $81 million in 2019. Redfin saw an overall quarterly loss in part due to the expenses associated with its properties division.
Kelman believes clear victors will emerge from the real estate tech arms race in the next couple years. Mergers and acquisitions are inevitable, he argues. That’s because real estate websites want to insert themselves into the transaction, while services that facilitate transactions need popular websites.
He also sees stormy weather ahead for buyers’ agents.
Amid a major legal challenge to commission sharing in the form of a class-action lawsuit against the National Association of Realtors (NAR) and some of the largest brokerages in the U.S. (though notably not Redfin), Kelman said he anticipates some websites will eventually publish the compensation offered to buyers’ brokers by listing brokers (traditionally, agents on both sides of a deal split a commission worth 5 or 6 percent of the home’s sale price down the middle, though some alternate arrangements are sometimes made).
He said Redfin’s new online service that guides buyers through making offers on Redfin listings without representation, called Redfin Direct, has been “incredibly controversial.”
But “in lots of other countries in the world, there are no buyers’ agents,” Kelman noted.
He also worried about the future of the MLS.
“Not only are MLSs getting sued, but you have more and more agents pocketing listings,” and marketing them off of the MLS, Kelman said.
Lots of journalists make MLSs out to be the “big bad wolf,” he said. But he thinks that view misses the mark.
“If the MLS collapses, I think real estate becomes much less competitive and the consumer is not well served,” he said.
Consumers would go to only a handful of websites — one of which would be Redfin, he said — rather than thousands, for real estate information.
That’s presuming there’d be no central repositories of listing information from which to distribute listings to thousands of other broker, agent and brokerage websites.
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