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Random Thoughts on Redfin Going Public

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I have been waiting, wanting, hoping for Redfin to go public for a few years now. For a bunch of reasons, mostly having to do with getting another company in real estate to have to report publicly about their operations and their numbers.

Well, my wish has been granted. Redfin just filed its S-1 to go public a couple of days ago.

I don’t have any strong opinions at the moment, besides wishing Glenn Kelman and crew lots of luck. But looking through Redfin’s S-1, I had a few random thoughts. I figured I’d share them with you all, taking a bit of a break from the internal machinations of NAR.

This is a game changer. The industry as we know it will never be the same after Redfin’s IPO. I’ll post on that later, but I wrote most of this before I started thinking harder, so I figure I might as well share this with you all while I work on the bigger piece.

$100 Million IPO? Valuation?

The first thought that struck me was that if Redfin manages to price correctly and raise $100 million from its IPO, they would dwarf what Zillow managed in its IPO in 2011: $69.2 million. And we’ve all seen what Zillow became after its IPO.

What will Redfin be after its IPO?

It’s difficult to compare apples and oranges (the two companies have totally different business models, after all) but if Zillow has $846 million in 2016 revenues, and Redfin has $267 million in 2016 revenues… that’s approximately a 3:1 ratio. Zillow’s current market cap is $9 billion. So that would make Redfin worth about $3 billion?

On the other hand, Redfin claims to be a brokerage company, so maybe the proper comp is Realogy? Well, Realogy’s market cap is about $4.5 billion on 2016 revenues of $5.8 billion. That’s right; its valuation is lower than its revenues… by $1.3 billion.

And Re/Max, a franchisor, has a market cap of about $1.7 billion on $176 million in 2016 revenues. It’s hard to think of Re/Max as a comp for Redfin though since they’re so different.

Guess we’ll see.

Comparing to Zillow…

One of the more interesting things is comparing Redfin and Zillow at the time when Zillow went public.

The big obvious one is revenues. Zillow had $30 million in revenues in 2010 when it filed to go public; Redfin has $267 million in revenues in 2016.

But two things I thought were most interesting was how much each company was spending on Sales & Marketing and on Technology.

Zillow in its S-1 said that they spent the following in 2010:

  • Sales & Marketing: $14.9 million
  • Technology & Development: $10.6 million

Redfin in its S-1 reports:

  • Marketing: $28.6 million
  • Technology & Development: $34.6 million

Redfin is way ahead of Zillow in terms of where the two companies were at the IPO filing.

Now, of course in 2017, Zillow dwarfs Redfin in every measure: revenue, technology spend, marketing spend, etc. In 2016, while Redfin $34.6 million on technology and $28.6 million on marketing, Zillow spent $273 million and $380 million, respectively.

But, let’s recall that in 2011, when Zillow was going public, the top dog in online real estate was Move, Inc., which operates Realtor.com. And Move was magnitudes larger than Zillow back then, similar to how Zillow is magnitudes larger than Redfin today.

For example, 2011 Move, Inc:

  • Revenues: $191.7 million (vs. $30 million for Zillow)
  • Sales and Marketing: $68.6 million (vs. $14.9 million for Zillow)
  • Technology & Development: $34.7 million (vs. $10.6 million for Zillow)

At the time of Zillow’s IPO, very few people thought Zillow was going to be the top dog in real estate within a couple of years. And yet, that’s exactly what happened.

Do some ratios though.

Move : Zillow

  • Revenues: 6.39
  • Sales & Marketing: 4.6
  • Technology & Development: 3.3

Zillow : Redfin

  • Revenues: 3.2
  • Sales & Marketing: 13.3
  • Technology & Development: 7.9

In other words, it’s going to be a lot more difficult for Redfin to catch Zillow than it was for Zillow to catch Move. The key spending ratios are dramatically higher for Zillow : Redfin.

This is not to say it can’t happen or won’t happen. It’s just to make an observation.

One difference is that Move didn’t increase its investment into technology as the upstart Zillow was breathing down its neck. Here’s Move, Inc.’s technology spending as Zillow was climbing up:

  • 2011: $34.7 million
  • 2010: $34.3 million
  • 2009: $27.8 million
  • 2008: $26.3 million
  • 2007: $34.6 million

Compare that to Zillow’s technology spend over the last few years:

  • 2016: $273.0 million
  • 2015: $198.6 million
  • 2014: $84.7 million
  • 2013: $48.5 million
  • 2012: $26.6 million

You find similar patterns in the marketing spend; Move actually decreased its marketing spend over the five years from 2007-2011. Zillow dramatically increased marketing from 2012-2016.

I have a feeling that Spencer & Crew aren’t going to sit back and watch Redfin go public, ramp up their marketing and technology, become a serious competitor and… do nothing or even worse, start decreasing their own investments as Move once did.

If anything, I could easily see an arms race between those two companies that will suck the oxygen out of the room for everybody else.

We’ll see.

Where’s #StopRedfin?

Finally, the S-1 really makes me think that Redfin should send a case of wine to Zillow or something for providing a smokescreen of distraction as Evil Personified in real estate. Because while the industry kept Jay Thompson busy and employed with all of the outrage and #Zaterade and Zillow Fever stuff… Redfin built up precisely that which the Zillow haters constantly harp on Zillow about.

For example, the Zestimate. Industry hates the Zestimate, right? Because no computer can be as accurate as a living agent. Well, Redfin has the Redfin Estimate, which the S-1 describes thusly:

Our access to detailed data about every MLS listing in markets we serve has helped us build what we believe is the most accurate automated home-valuation tool. According to a 2017 study we commissioned, among industry-leading websites that display valuations for active listings, 64% of the listings for which we provided a public valuation estimate sold within 3% of that estimate, compared to only 29% and 16% of the public estimates for the two other websites in the study.

Mum’s the word, though, huh? Zestimate = Satan’s spawn. Redfin Estimate, made far more accurate thanks to unrestricted access to MLS data = Enjoy the Silence.

How about the whole “Zillow is going to become a brokerage and disintermediate the agent!” Well, Redfin is a brokerage… and is actively trying to disintermediate (that is, put out of business) every agent who doesn’t work for Redfin. In that, Redfin is no different from any other brokerage, who all compete to gain market share at the expense of other brokerages and agents.

But I think about the outrage from the real estate interwebz because Zillow “crossed the line” into the brokerage world with Zillow Instant Offers and wonder why the chorus of crickets when it comes to Redfin.

Speaking of Zillow Instant Offers… that sucker triggered so many fragile, fear-driven agents that there’s a #StopZillow movement complete with website. Amazingly, in one of the announcements about Bob Goldberg’s being named as CEO, the comments are all full of “When are you gonna fight against Zillow!” type of stuff.

Meanwhile, Redfin is debuting Redfin Now. Which is exactly like Zillow Instant Offers, except that no other agents or brokerages can participate. Cool!

And the best part is, you know all that “Zillow is making billions exploiting OUR DATA!” stuff that’s like… everywhere? Well, read ’em and weep:

As a brokerage, Redfin has complete access to all the homes listed for sale in the local multiple listing services, or MLSs, in the markets we serve. MLSs are used by real estate agents to list properties and coordinate sales. Although websites that do not operate a brokerage often have access to these MLSs, the terms of their access vary widely. As a result, brokerage websites often get more listings from MLSs, or more detail about each listing, than other websites.

Access to this extensive data, paired with local knowledge, lets us give our customers what we believe to be the most comprehensive information on homes for sale.

Additionally, our streaming architecture is designed to recommend listings to our customers by mobile alert or email soon after these listings appear in the MLS. These advantages in loading listings data and quickly notifying consumers come not just at the listing debut in the MLS, but in recognizing when a price changes or a home sells. For over 80% of these listings, we can show the listing on our website and mobile application within five minutes of its debut in the MLS. According to a 2017 study we commissioned, we notify our customers about newly listed homes between three to 18 hours faster than other leading real estate websites.

Let’s not forget that Redfin was never seriously a listing brokerage, even with its 1% commission thing, for years. Most of its revenues came from, and still come from (~70% or so) representing buyers who come to the Redfin website to view listings of — you guessed it! — other brokerages.

Talk about making billions on the data of real estate agents and brokers… yet, no outrage.

But Rob, that’s okay, because Redfin is a brokerage and a Participant of the MLS and has all due rights to all of the data. Well, if you believe Redfin is a brokerage… I guess you also have to believe that OpenDoor is a brokerage. They both offer full cooperation and compensation, after all.

Redfin is not a brokerage, guys. Seriously. Check your premises.

Why do I say that?

Because there is no way in hell Redfin is going public at brokerage valuations. Nobody who matters thinks Redfin is a brokerage. Look at the coverage in the media — they all mention Zillow. They don’t mention Realogy and Re/Max and HomeServices of America. Goldman Sachs doesn’t agree to underwrite Redfin’s IPO, if they think Redfin is a real estate brokerage. The VC firms backing Redfin don’t allow Redfin to IPO at brokerage valuations.

The reason is simple: money money money!

  • Zillow’s market cap is $9 billion on revenues of $846 million.
  • Realogy’s market cap is $4.5 billion on 2016 revenues of $5.8 billion. Realogy’s valuation is below its annual revenues.

If Redfin is a brokerage, making $256 million in revenues and losing tens of millions every year… it’s worth zip. Zilch. Zero. Nada. If Redfin is a technology company that happens to make money from commissions… it’s worth $3 billion or so (or more!)

I’ll do a bigger post later on Redfin once I’ve thought through some more things and read the S-1 more, but boy, all y’all who are on the #StopZillow crusade are going to be awfully sad when the supercharged Redfin with IPO cash and stock-as-currency comes to eat you all for lunch and makes all of your worst nightmares come true.

Conclusion

I am writing the conclusion after my “let me think about this more” time so… let’s just say that this is a big deal. I can see everything changing in the relatively near future. Yep, big things poppin’ and little things steppin’. For now, enjoy the tidbits of thought above.

 

32 COMMENTS

  1. How is REdfin view not that it’s entering the mortgage business. What effect will have on the IPO?
    Thoughts? You didn’t mention that in your review. Which was great by the way. Really enjoyed it.

    • Oh, I’ll address it in a future post or two. But it’s an important part of the overall value proposition — a vertically integrated customer service experience.

  2. The brokerage world has never invested in technology tools or boost marketing because they were too busy making money off the backs of hard working agents. I am sorry to say this, but I am waiting for Redfin to crash and burn. I know all agents cry foul about Zillow but Redfin is the bigger monster for traditional brokerages and agents. They are solely responsible for taking away money from agents like us, who work so hard to generate an income and yet our expenses are so high. We pay our brokers, and monthly expenses for crappy technologies provided by our brokers, all our online businesses have been swallowed by Redfin and Zillow and no amount of money spent brings us results from our online spend. Our brokerages are hugely to blame for the rise of these kind of companies.

    • As an agent you are an independent agent, and are free to invest as much or as little you want to into technology. Neither company takes away money from you unless you let them. Unless of course you mean you can no longer sit at a desk and have to have people come in to get access to the homes on the market through the “book” In addition maybe you are at the wrong brokerage, mine provides training, websites, crm, leads, etc with a highly competitive split.

      Of course if you want to blame someone you should be blaming the NAR and the MLS’s. They are the ones that provide listing data to zillow, trulia, realtor.com etc, while we sit back and pay to provide that info to be syndicated. Syndication sites don’t bother me, they get our listings out to the masses for free, but I do think the MLS’s should have negotiated better on our behalves.

  3. Outstanding Data Sir =) Supports your analysis well.
    I can’t help but return, to my premise on the Zillow Instant Offer announcement, and the Industries reaction … Shut the hell up and get your Leadership (NAR) to compete! Where are they? What are they thinking? and more importantly, why when they have every fricken thing they need to kick Zillow’s (and now Redfins) ass in this race for the online Consumer, are they simply sitting on the sidelines watching the Industry slip away from them? I just don’t get it <>

    Good Read NROB

  4. Great post Rob, as usual. This gives me a lot to think about, because I do have mixed feelings about Redfin and the whole Zillow debacle. As a brokerage I think what Redfin is doing is commendable, but of course I understand why many other brokers, especially small ones like myself, are concerned. It is proof that times have definitely changed and in order to really stand out in this business you need to have a special niche or quality, and work even harder than before. I definitely don’t think this business is going to get any easier! There are still plenty of buyers and sellers who want to work with agents because they have so much to offer, not just a big corporate presence. Agents need to capitalize on this as best they can. The good thing is is that the industry will once again be weeded out and only those who are truly dedicated will stay the course, making it-hopefully-an industry of higher professional quality. Don’t laugh. I have hopes.

  5. You’re right in saying everything in real estate is going to change – but we all knew that when Opendoor raised 200M back in 2016. To date they’ve raised north of 300M and this doesn’t account for the aprox 700M in debt (could be less or more). These are astounding numbers when you consider Zillow raised about 90M. You can’t blame Zillow or Redfin for the disintermediation of real estate. I don’t know if you can blame, but you can 100% point fingers at organized real estate for labeling OpenDoor a “buy your ugly house” non-issue for the last 24 months. Can you blame Zillow and Redfin for adapting to stay competitive? Traditional brokerages will need to develop something truly defensible if they intend to stay relevant but I don’t see that happening.

    • Anon,

      What about “buy&selldirect”? The Company positions itself a level above Opendoor, Offerpad, Instant Offers, Redfin Now etc. B&SDirect offers consumer sellers the opportunity to reach all these new players at once forcing them to compete. This allows B&SDirect to become the ringmaster leaving these buyers as an interchangeable commodity (all the money is green).

      B&SDirect organizes an unorganized marketplace. Good luck to B&SDirect! 🙂

      P.S. I’m one of those guys labeling these “new” models as not so new…..we’ll see 🙂

      Thanks,
      Brian

  6. FWIW: Realogy’s market cap to revenue ratio is depressed by fact that they carry $5B in debt.

    • Realogy’s valuation is FAR more complex than a look at debt. – Ever since Realogy’s 2nd IPO (lets not forget that they went public twice), RLGY has been paying down it’s massive almost $6 Bil debt to less than half that today. All that is money that has had an opportunity cost in other places.
      In addition, RLGY has multiple diverse business: Title, Managed Operations (NRT), Franchising (RFG) and Relocation (Cartus). So when you compare RLGY valuation against that of what Redfin stands to produce, which business RLGY line are you comparing it to? The largest one would stem from NRT which are company-owned and operated brokerages… Yes, that is a very traditional piece of the pie but it continues to be the largest income stream. That’s where comparing Redfin possible valuation to RLGY does not stack up.

  7. While Redfin may not be the classic brokerage we know,Zillow is not really a media company.The fact that both have this B.S estimate, does not make neither of them qualified to do it and to show it to the public. Both Redfin and Zillow want to dance in two weddings at the same time. I am sure that none of them really yet to find their real identity. There is no doubt in my mind that the entire industry is acting like a circus.

    A circus is a place you enjoy but you do not take it seriously.Many in the industry are complaining on the Zestimate, but let’s be fair. A site like Redfin who is carrying a broker license, has its own estimate on each property. Re/Max who is carrying a broker license, has its own estimate. Realtor.com has its own estimate, Homes.com has its own estimate, Movoto has its own estimate, Compass has its own estimate and many other sites have their own estimates. We ran a test to see how the circus in our industry works. We took an address of one of our employee’s home and googled it. These estimates are for the same house.

    Here are the results:
    Zillow $920,227
    Redfin $946,102
    Realtor.com $850,144
    Compass $1,199,000
    Re/Max $772,280
    Homes.com $772,280
    Movoto $993,482

    Now, put yourselves in the consumer shoes, what would you think after seeing those numbers ? Which number is the correct number? Which site is the most reliable? Who from all those websites visited in person the subject property?

    This is what the consumer think of our industry,,, a circus of nonprofessionals who only care to open doors and to make 6% commission. The main problem is, that the agents are the face of the industry and they are losing their value in the eyes of the consumer. Not only the Zestimate should be eliminated, also the rest of them should! Money is the #1 motive for Redfin , Zillow and the rest is not really important. I really think that the word “Ethics” does not exist anymore in our industry so why we need NAR?

    • Hi Homeiz.com “This is what the consumer think of our industry,,, a circus of nonprofessionals who only care to open doors and to make 6% commission. The main problem is, that the agents are the face of the industry and they are losing their value in the eyes of the consumer. I really think that the word “Ethics” does not exist anymore in our industry so why we need NAR?” So right you are.
      Have you read the DANGER REPORT?
      I am a one-man band & only handle rural properties. I tend to think all this is overblown and not as threatening as many believe. That’s my opinion and I am not terribly concerned about the issue. I may be someday!

      • Hi Marvin Shelley,
        I hope all is well.
        No, I have not read the “Danger” report from NAR. I just googled it now and found it. I started reading some of it now. But I can tell you the if I am saying it is a circus, you can rest assure it is! I have many stories from consumer experiences dealing with real estate agents and most are not so lovely.The problem is that many brokers are recruiting for quantity and not for quality. Many have really nothing to offer their agents as far as technology. The key is to find a fresh way into the hearts and minds of your customers. I think that most of the online companies are aiming towards the millennials and the way they are used to do business. The old fashioned way soon to disappear completely.”I tend to think all this is overblown and not as threatening as many believe” This way of thinking is a natural way to defend ourselves,but it is not so true. The threat is real!

    • Hi James – I have never bought leads – not one. I list and only show my listings. If the licensing requirements were many times tougher than they are, we would be rid of the lazy, dishonest and incompetent riff raff who hold licenses.

  8. Redfin’s technology is an extremely powerful differentiator. It’s probably the best I have seen. I am envious. I truly think they need to tweak their business to optimize, but we’ll have to see. In the meantime, us little guys need to get better, smarter and closer to our clients to keep winning.

  9. I’m waiting for somebody to explain the technology advantage of Redfin. They sold my house (or really I did in 2016).

    They wanted to list it $75,000 less than we wanted. We were at 1.1. They wanted to list at 1,025,000 based on some ridiculous pricing model. Our home had a superb view and their pricing model failed to consider it.

    They had an uniformed assistant, who was clueless on local sales, handle the open houses. We had security cameras and saw the assistant was nothing more than a baby sitter for the house as people walked through the home and struggled with questions about pricing and local properties.

    For private showings, they wanted a lock box and we weren’t comfortable with it. So they didn’t send anybody for private showings, I handled it. The eventual buyer did not want to deal with the Redfin people. I worked directly with the buyer and got the house sold.

    The Redfin website did nothing to sell our home. They don’t even feature their own listings prominently on the site. They did not promote our property via email or the app. Nothing was done with the tech from the Redfin site.

    They didn’t bring any buyer agents to the home. They have buyer agent tours and brought their buyer agents to other houses in our area but not ours. They did not have any agents “review” the listing as they do when they view properties.

    I saved money on a commission %. But I had to do a lot of work. I had to make sure the house had flyers, take calls on private showings, show the house to local agents and buyers. What did Redfin do? They had a great photographer and did the Matterport tour. But the Redfin “tech” advantage? I didn’t see anything and they were way off on the pricing of our home. We listed at 1.1 and sold just under at 1,095,000. $70,000 above what they wanted to list.

    I wouldn’t recommend them to list a home.

    • Hi Margaret,
      Sorry to hear on your bad experience with Redfin. Do NOT believe everything you read on blogs. Some of them are on a payroll for those companies they write on. Redfin did not invent a new wheel. They are a broker with a website that made a lot of noise that`s all.

    • Hi Margaret,

      Can I ask what market this was in? $1.1M in Phoenix is luxury; in San Francisco, it’s a small condo…. Doesn’t change some of what you wrote, but I’d really like to know to get a better picture.

  10. the end goal I believe for Redfin is to not just be a brokerage that helps people buy and sell homes. Just like how Uber does not want to be a company that just connects drivers and consumers and they want to have a self driving fleet out there one day, I think Redfin would like to control the inventory- when you own real estate, you get to dictate how real estate is bought or sold, and you get to make a much bigger impact on the entire process compared to just being a middleman. I think thats the goal for them long term. I believe they will use Redfin Now to experiment a lot of things- like whether buyers are comfortable going seeing the homes on their own without buyers agents, or are they comfortable using some type of security/lockbox technology that they might develop if it means they can access the home anytime- right now- if not an open house, consumers can only see homes when their agent is available. So, given that Redfin will own the property, they dont need to ask the sellers permission on how to do things- so, I really seeing them conducting a lot of experiments and testing what works and what does not work.

  11. I knew that Redfin was going to be a player when more than a few of my clients told me that I didn’t have to send them the MLS listings anymore because they track homes for sale from Redfin’s website and mobile app. When I checked into it I realized why they were so good. Redfin shoots out new listings within about 5 minutes of it going into the MLS. Same with price changes and status changes. The MLS? Not so much. Every listing on Redfin’s site has more information for the consumer than the MLS’s do. Furthermore, Redfin prominently displays how much money they are going to give the consumer if they buy that house from them. If any traditional agent doesn’t think this is powerful, then they are not paying attention. I don’t care how professional and experienced you are as an agent, the consumer is going to think long and hard about what is more important to them. You, or the $3800 Redfin is going to kick back to them after the sale. Traditional agents need to really change their game plans in order to compete with Redfin. In my opinion they are much more of a threat to us than Zillow. Especially with buyers.

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