Redfin (NASDAQ: RDFN) has definitely shaken up the real estate industry in the past few years. In this video clip from “The Rank” on Motley Fool Live, recorded on June 6, Fool.com contributors Matt Frankel and Jason Hall discuss several of the company’s intriguing programs that are making it quite attractive to investors.
Matt Frankel: This is Redfin ticker symbol R-D-F-N. Redfin is a real estate disruptor. Now, that word gets thrown around a lot these days and the traditional brokerage space needs disrupting. They really do. The process of selling a house is clunky at best. I’ve done it twice in the past year. I got rid of two investment properties and it’s even in a fast real estate market like we’re in now, it’s a clunky process.
But the direction and pretty much every area of finance other than real estate has been toward lower fees. When you think of stock trading commissions were $9.99 and $6.99 then zero. Your overdraft fees are slowly going away. Fees everywhere in finance are going down, except for in real estate. Even the disruptors are still charging the traditional 6% sales commission when you sell a house.
Redfin is the only disruptor that seems to be interested at all in competing on price. The selling half of the commission, which is half goes to the buyer’s agent, half goes to the seller’s agent. The selling commission is traditionally 3% percent, with Redfin, it’s 1-1.5%.
They are doing a great job of competing, of leveraging technology to make their agents more efficient and it’s really paying off. They have well over 1% of the U.S. real estate market which doesn’t sound like a giant market share but there’s about $6 trillion dollars worth of real estate sold every year in the United States so 1% is a pretty good market.
They’re also trying to be an all-in-one solution. They have a mortgage operation which has been small until very recently, but they recently acquired Bay Equity Home Loans, a major player in the mortgage space, and it made their mortgage operation instantly 10 times what it used to be. Literally 10 times.
They’ve title insurance and settlement services. They have an iBuying division called RedfinNow that’s it’s smaller than an Opendoor (NASDAQ: OPEN) or Offerpad (NYSE: OPAD) but it’s meant more as a complement to their brokerage services, not as a replacement so it makes sense that it’s small. Their attitude is here’s what, we’ll pay you in cash. You don’t like our cash offer, list your property with one of our Redfin agents and try to get more on the open market that way.
It’s more of an ecosystem play than an independent iBuyer. They’re also just tiptoeing into the rental space, which not only opens up them up to rental listings and things like that. It gets younger people into their ecosystem now who will eventually become homeowners and if someone already has a pre-existing relationship with Redfin through RentPath, which it acquired through bankruptcy last year, and owns properties like Apartment Guide and rent.com. Big rental platforms.
If people already have a relationship through that, that could be a stepping stone to eventually use Redfin’s brokerage services to buy or sell a house. So really smart move to expand their ecosystem. They’re losing money mostly because of the iBuying right now but they’re losing money right now, plenty of runway and this is a huge market that is just begging to be disrupted.
Anyone who has sold a house in the past few years can tell you that it’s begging to be disrupted. There’s so much that needs to change in real estate. Any other thoughts on Redfin before we move on?
Jason Hall: I was going to not talk about it because I was going to try to buy it tomorrow. I ranked this higher than anybody. I ranked it No. 1 but I want to give the bear thesis because I think it’s really important that we talked about that you need to understand the bear thesis and I think I understand it really well because it’s one of the things that’s kept me from buying Redfin.
Number 1, I think there’s the risk that it has to be frenemies with the existing hierarchy and residential real estate and I think that’s a challenge at some point to its ability to continue scaling up. I don’t think that’s a risk now, but I think that is a long-term risk. I think there is also some of the risk of continuing to try to grow up, that scale up that iBuying business.
If they want to just let it be, take it as it comes, maybe that’s fine but I think the winners in that space are going to be the pure plays and it’s going to be harder and harder the bigger the Redfin becomes as a platform doing all the other things and disrupting the other ways that it’s doing to also be an iBuyer. But it’s so cheap right now. It’s just incredibly cheap. I think the risk-reward is really good.
The other aspect of it is if we see a protracted downturn in residential real estate, that would be really bad for Redfin. This is one of those cyclical industries that it could be. I just don’t see that happening and I think the price more than makes up for that risk right now.
Jason Hall has positions in Opendoor Technologies Inc. Matthew Frankel, CFP® has positions in Offerpad Solutions Inc and Redfin. The Motley Fool has positions in and recommends Offerpad Solutions Inc, Opendoor Technologies Inc., and Redfin. The Motley Fool recommends the following options: long May 2022 $22 calls on Redfin, short May 2022 $26 calls on Redfin, and short May 2022 $28 calls on Redfin. The Motley Fool has a disclosure policy.