Redfin CEO Glenn Kelman doesn’t believe that iBuying is going away, but he does believe that his brokerage needs to be smart in how it incorporates iBuying into its larger suite of real estate services.
“Since the sustainability of this business has gotten so much attention this week, you may wonder if Redfin’s hopes to compete as an iBuyer depend on being smarter, luckier, grittier, or just more cautious,” Kelman said during the company’s third quarter earnings call on Thursday. “The answer is that Redfin isn’t an iBuying company at all; it’s part of what we do, but it’s not who we are. The way we define ourselves is as the company that offers homeowners the most complete set of options for selling one home and moving to another, where iBuying is one of those options.”
Redfin’s Properties division, which includes its iBuying platform RedfinNow, tallied $238.4 million of revenue in the third quarter, up from $19 million last year. It also made about $20,000 in profit overall. Redfin reported that it sold 388 homes through RedfinNow in the third quarter, up from 37 in Q3 2020, when it stopped buying due to the pandemic.
Much of the news this week has been focused on the demise of Zillow Offers and Kelman stressed in the call that Redfin was taking a cautious approach to purchasing homes.
“In March 2021, we began lowering RedfinNow offers, in anticipation of a summer deceleration in home-price increases,” Kelman said in the call. “In June, we based our RedfinNow offers on a calculation that the homes we bought would decline in value by the time we could get them on the market. We continued to reduce RedfinNow offers through early September. The sales closed in the third quarter have averaged 101.1% of the forecasted price. The sales RedfinNow has booked so far for the fourth quarter have averaged 100.0% of the forecasted price; the rate of those sales has been on pace with our expectations.”
Kelman told analysts and investors on the call that the idea that a machine learning algorithm “could get us into a pickle” is one that all the iBuyers have worried about. Kelman said that his company has two layers of human assessment before an offer is made on a home.
“We’ve tried to figure out the right balance between scale and caution, and Redfin is probably at the far end of caution,” he said. “There are going to be times when that bites us in the butt. I know being cautious is not always the right move. But in this business, that’s just going to be our approach because it’s so capital intensive.”
Where Redfin has been struggling with its iBuying operation – as was also the case with Zillow – is with renovations. The amount of time the Seattle company needed to prepare a home for sale increased from 28 days in the second quarter to 37 days in the third quarter.
“We’re expanding our renovations capacity quickly, and already pricing higher renovation costs into our offers,” Kelman said. “Where our capacity to renovate a home is limited, we’ll limit the number of homes we buy. Our first priority is, as always, to build a sustainable business.”
Despite their efforts, Kelman said that the company expects to see lower fourth-quarter property margins by about 35 basis points. However, the firm does expect to average a gross profit on each home it sells.
While RedfinNow performed better than expected, the firm’s mortgage lender and newly acquired rental site, RentPath, did not perform as well. Although Redfin Mortgage closed 24% more loans in the third quarter of 2021 compared to the year before, overall mortgage revenue fell 5% year-over-year. For its part, the RentPath acquisition contributed $17 million to the brokerage’s overall net loss of $18.9 million. Redfin plans to add rental listings from RentPath to the main site by March 2022, in an effort to boost the business.
Revenue overall checked in at $540 million during the third quarter.
Traffic on Redfin’s site and mobile application averaged at 49.1 million users per month during the third quarter, unchanged from a year prior and only slightly higher than the second quarter average.
Redfin’s operating costs also rose 163% year-over-year in the third quarter to $147 million, which is partially due to an extension of the firm’s direct marketing campaign through the fall, however Kelman stated that their direct marketing operation has lowered the cost of meeting a customer by nearly 20% over the past year.
The brokerage hopes that this will in turn result in a larger market share of existing home sales volume which dipped slightly in the third quarter from the second quarter to 1.16%. In addition, the firm plans on hiring more agents to accommodate more clients, as it has found that homebuyers highly value time spent with their agent. Due to this the firm plans on raising pay for lead agents.
“On their own, the changes we’re making to lower agent loads and increase pay would lower gross margins,” Kelman said in the call. “But we’ll fund these service improvements with a small reduction in our commission refund to homebuyers. Our data indicates that homebuyers value service over savings, and we expect the commission-refund reduction will completely offset the full-year impact on 2022 real-estate services gross margins.”
Despite a mixed bag of reports, Kelman ultimately concluded that he is optimistic about the future.
“We can’t wait to see what happens in the last quarter of 2021 and in 2022,” he said.