Why Buyers, Sellers, and Agents Are Flocking to Redfin

By many measures, Redfin (RDFN -4.17%) stands apart from other real estate brokerages. It charges lower commissions, sells homes quicker, and provides its agents benefits that are not available to them elsewhere.

On this clip from Industry Focus: Energy, Motley Fool analyst Tim Beyers and Industry Focus host Nick Sciple break down Redfin's value proposition to each of the important stakeholders in the homebuying process.

To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. A full transcript follows the video.

This video was recorded on May 23, 2019.

Nick Sciple: Right, you talk about, when we list out these numbers, oh, you're paying 1% or 1.5% Redfin vs. 3% to a traditional buyer's agent or seller's agent. That might not sound like that much money, but when you're talking about a home purchase transaction, this tends to be the largest transaction the average American -- or person, even, in general -- goes through in their lifetime. So, that 1% or 2% really can translate to thousands or tens of thousands of dollars. It's really a significant amount of money. That 1% or 2% difference can really make a huge difference in the amount of money you take home as a seller, or your effective selling price as a buyer when you have to account for that in the selling price.

As you mentioned, Redfin, according to data they put out, sells their listings quicker, sells them at a higher average price. From the buyer's point of view, or the person participating in the real estate transaction's point of view, there are a lot of things that make sense from a value point of view. But there also is some appeal for agents as well. There's two sides of this transaction. Agents have to choose to go to work for Redfin. The compensation structure for a Redfin agent, you're salaried with a bonus and benefits, you usually get stock options. You compare that to a traditional broker, where you're an independent contractor paid wholly on commission, you're paying for your own health insurance, those sorts of things. You look at some data as well, Redfin agents earn more on average than the typical broker, at least with the data that I've seen. According to the Bureau of Labor Statistics, the average real estate agent makes around $46,000. Redfin reports that their median agent salary, including stock-based comp but not including benefits like healthcare -- and everybody knows how significant healthcare costs can be as part of your expenses -- makes $90,000. So, you're looking at Redfin agents making twice what the average is for a traditional broker. The folks who are on a very high end of the real estate brokerage market, of course, will be making more than that. If you're selling super high-end homes in L.A. and making the traditional 6% commission, you're making more. But for the average broker, this really makes a lot of sense. And when you have something that makes sense both for the customer and for the person providing the service, the broker, it just really makes a ton of sense.

Anything around that broker side of the transaction, Tim, that appeals to you as an investor?

Tim Beyers: Yeah, and there are some other things that I think are competitive advantages that I see that I really like as an investor. One of them is, a traditional broker, because they're a contractor, they will either recruit or have an office where they pay people to do things like set up the yard sign, clean up the front yard, maybe hire contractors, and that's all on their book. They do that themselves. They're also doing all the scheduling themselves, unless they've hired a personal assistant to do that. This is all money that you carry on your book. When you're a Redfin agent, that support system is built into the company that you work for. You're not hiring that out. You're just getting those services and bringing them to bear. I've heard, through folks who've dealt with Redfin agents, that this is something that they really like, because they focus on the sale, they focus on the customer, more of their time is focused on the customer, whether it's the buy or the sale.

Another thing I really like about this is that with the equity and salary plus bonus, they're very much aligned with the customer. There is no incentive to generate the highest possible price. Now, granted, Redfin does want to sell at a higher price. It's good for them to sell at a higher price. There are bonuses. Those bonuses are based on sale price. But overall, as an advocate, a traditional realtor is completely incentivized to get you into the highest transaction they possibly can. Their commission depends on that. And that's just not true for a Redfin agent. So I think it's easier for them to be more of an advocate for the buyer or seller.

Certainly, I really like that not only is the average pay package a little bit higher, but the incentives are aligned. Nick, we both work in the financial services industry. This is a problem that the financial services industry has, too. If you've listened to Industry Focus for a while, if you've been with us at The Motley Fool, you've probably heard us say, use a fee-based financial planner because their interests are more likely to be aligned with yours. I think of Redfin agents in the same way. They're like the fee-based planners of the real estate industry. I like that a lot!

Sciple: Right. When you have an industry -- and maybe we'll talk about this later on the show -- like real estate brokerage that really hasn't undergone a lot of change over the past several decades, you have a company like Redfin that is leveraging technology, putting an incentive structure in place that makes sense, both from the person going through, like I said, the real estate transaction's point of view, and from the point of view of the broker, there's just a lot to like there. We'll talk about the industry a little bit. You put this in an industry with an addressable market -- Redfin estimates that there were $80 billion in real estate transactions in 2018. Redfin is a company around $1.5 billion today; $487 million in revenue in 2018, going into an $80 billion addressable market. Lots of opportunities to continue to grow over time. What can you say about Redfin's market opportunity relative to where they stand today?

Beyers: Well, it's huge, and it's all relationship-driven, much like the rest of the real estate industry. So if you start with Redfin, and a Redfin agent, one of the great advantages -- and this is something that we don't talk about a lot. There are other national real estate brands, but those brands basically are holding companies that have local contracted agents. That agent is like a Coldwell Banker agent. They don't work for Coldwell Banker, they work for themselves. They rent, basically, the right to use the Coldwell Banker name, or, Century 21, or REMAX, which just recently ended up striking a deal with Redfin and then pulling out of it. But the difference is that Redfin's network, which is going nationwide, those are all employees. If you start in L.A., and you say you're going to move to Seattle for a job, you could theoretically sell your home in L.A., move up to Seattle, let Redfin take care of the sale in L.A. while you focus on settling in Seattle. All of that will be handled entirely within the Redfin family. And it could be that you sell it with Redfin Now, which is their instant buyer program; traditionally, by finding the right home using their website, and then getting the broker to do the work for you of getting the title set up and getting the mortgage set up and working with those mortgage arms. Redfin can handle all of that. Because they handle so much of the transaction, the upfront fees in the transaction itself can be lower, because they're just taking a greater part of the overall transaction itself. This is another way that they're aligned with the buyer or the seller -- they make more money when the buyer and seller either save more money or make more money. That's huge! They're not making it on a giant commission, they're making it on getting you into the right mortgage, and then they're making a little extra on getting you a good title that makes sense for the property that you're buying, and so forth. So, by offering you more services, and shrinking the time it takes for you to move from point A to point B, and making that a smoother experience, they earn more. That's a great model, because it means that the more satisfied the customer, the more that they like the moving experience, the more they're going to come back to Redfin. You don't really get that with another type of broker. It's usually, "I'm going to stay in my regional area. I'm going to have my regional broker. They're going to show me around and then I'll move to the house down the street." That's usually the way it is. Redfin's thinking much bigger than that.

Sciple: Yeah, and you're seeing some of this in the numbers. Redfin has reported that their repeat business is growing at a 35% rate relative to their online customers they're bringing in, only growing at a 20% rate. That means these customers that Redfin is bringing in, they're keeping them around. whether it's moving from state to state, like you were mentioning, Tim, or whether it's just, next time they go to buy or sell a home, Redfin is the first place they think of.

Again, another important thing to note, we talked about how little they've penetrated their addressable market. They're still less than 1% market share of total home values sold. I mentioned $80 billion in real estate commissions in 2018. That's just the real estate commissions part of the business. They're expanding their core business with the real estate brokerage, as Tim said, into mortgages, into title insurance, expanding their operation. As their business continues to grow, they can move into more and more of these verticals. They have these classic network effects, both through their online listings, as well as, like we mentioned, those relationships that the brokers have with folks in each one of those communities, the relationships they build with their existing customers. This is a company that, really, as it scales, feels like it can become a snowball rolling downhill, and just pick up more and more as things go along.