Redfin: A New Model for Realtors

10/02/2018 5:00 am EST

Focus: REAL ESTATE

Ian Wyatt

Publisher & Chief Investment Strategist, Wyatt Investment Research

The typical commission for a conventional real estate broker on a property sale is 6% to 7%, notes Ian Wyatt, growth stock expert and editor of Million Dollar Portfolio.

That commission is shared equally between the broker for the buyer and the seller. Of course, the agents also share their commission with their brokerage firm.

Redfin (RDFN) is different from regular brokers. And it all starts with technology. The company was the first to offer map-based searching for properties. That’s common now – but back in 2004 it was unusual. Today, the company’s website gets 26 million visitors per month.

The company also turned the conventional model on its head. Most real estate firms hire agents and let them work 100% on commission. No sales, no paycheck. Instead of doing this, Redfin hires agents and pays them all a salary. Additionally, agents are incentivized on client satisfaction — not based upon transaction volume.

The company’s model works. Agents at Redfin earn 2x more than the median real estate agent compensation. Plus, the agents close 3x more sales per year. For clients, Redfin also saves them money. Instead of charging a 6% to7% commission, Redfin charges just 3.5% to 4%. That makes the company a cost-effective choice.

As a result, Redfin’s business is booming. Last year, revenues grew by 38% to reach $370 million. This year, sales are expected to grow another 31% to reach $484 million. The following chart shows the company’s consistent sales growth:

Redfin is still a small player in an $80 billion industry. It has 1,400 real estate agents. The company recently reported a 0.73% market share among nationwide real estate brokers. It was founded in Seattle — and that’s the company’s biggest market. In the Seattle area, Redfin has a 5% market share.

The company went public in an IPO in June 2017. Shares were offered to the public at $15 and the company raised $138 million. The stock had a strong debut, closing its first day at over $21. Since then, the stock has moved sideways. And it’s currently “underwater.”

The company raised over $160 million privately – before the IPO. When the company went public, those venture capital investors were distributed shares of common stock in Redfin. As a result, they’ve been able to sell their shares in the public market. And that’s likely weighed on the stock price.

The company also continues to lose money as a result of making a long-term investment in growth. Within two to three years, Redfin could be generating annual sales of around $900 million. Plus, it’s possible that the company will then be operating with 10% to 15% margins on a cash basis. Within three years, I’d look for the stock to be trading above $40.

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