Redfin is more than two years into what was once an experiment, buying homes from people, sprucing them up and then selling them, and it has learned some lessons along the way.
“We felt more careful about it over the past two years than we do now, because at first we bought some homes that were total dogs,” Redfin CEO Glenn Kelman said. “They sat on the market for a long time, and we had to take a loss. But eventually you figure out a formula where you know you’re going to be able to sell this house at a profit. And I think we were one step more cautious about scaling the business before we really knew what that formula was. But at this point we feel very confident that we can scale that more quickly.”
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After taking some lumps, Redfin took the experimental tag off RedfinNow last summer, making it a permanent fixture of the tech-powered brokerage’s business. It is scaling the business now and jumping into new markets, but it is doing so at a careful pace. And while revenue from the Properties group that includes RedfinNow has increased seven-fold from a year ago, Redfin is taking it slow with only about 50 sales in the last quarter.
Redfin’s expansion into home sales predates that of its crosstown rival Zillow Group. But Zillow’s stunning announcement that it would dramatically re-orient its business around home sales, with a goal of bringing in $20 billion in revenue from that division alone within three to five years, has overshadowed Redfin’s push.
Zillow is getting into a lot of new real estate businesses, from mortgages to title and escrow, and maybe even moving. Redfin has been in those worlds for years, and Kelman knows what it takes to spin up new businesses like that quickly.
“They have a massive audience, they have tons of money,” Kelman said of Zillow. “I think their challenge is going be that they used to be the website that worked for traditional agents, and now I think they are going to increasingly be the company doing the transaction, and that’s just very operationally intense. If anyone can make that transition, they can.”
In addition to newfound competition with Zillow, Kelman also discussed the state of the real estate market in general, the role of technology in the industry and Redfin’s first foray into investing in other companies and the possibility of a surprising merger between his company and its cross-town rival. The conversation has been edited for style, clarity and length.
GeekWire: It feels like we are in the wild west for real estate technology in the middle of a crazy housing market. What’s your take on the landscape right now?
Glenn Kelman: I think there’s a bubble, so part of it is just the amount of capital that’s come into the space. You had $30 million invested in real estate technology companies in 2012, and now it’s $4.5 billion in private capital in 2018, so that has fueled a land grab. There’s a feeling now among Wall Street investors, and perhaps the general public, that everything’s up for grabs, that real estate’s really going to change. And when you have 20 percent of the U.S. economy at stake, you’re going to see companies take larger losses and bigger risks to try to win the prize.
Zillow has done that, Redfin has done that. You’ve got Opendoor and Compass raising billions of dollars in private money. It puts a lot of pressure on all of us. We want to be the source of that pressure, but I think we also feel it, because you know that one day the music’s going to stop, that companies ultimately are valued on their profits. And so at this moment I think we are all taking significant risk, because we see the opportunity, but it’s probably more risk than we had in mind, say two years ago.
GW: What does winning the prize mean for Redfin?
Kelman: Winning the prize for Redfin means making real estate better for all the people buying and selling homes.
We obviously want to take more market share, but we also want to have a service that feels totally different to consumers, where the quality of the service is better, you can get into houses faster and you can sell your home on the spot if you want to. You can keep the home while we try to sell it, but we still fix it up for you. All of this is delivered more efficiently than ever before, and the consumer just gets a better deal.
There’s all this innovation in real estate, but I still think Redfin is one of the only companies that’s trying to give the consumer a better deal. And if you were to ask consumers how they want real estate to change, the problem they want to solve in real estate is that it’s too expensive. And so our goal is just to make real estate a little more affordable by making the fees that an agent charges a little more accessible.
GW: How much can real estate tech companies like Redfin really impact housing prices, when a lot of the important factors are out of your control?
Kelman: The factor we can control is the fee we charge for our own service. And I think most people would agree that in the U.S. real estate fees are higher than anywhere else in the world, and that there’s probably room for the internet to make that more efficient. And so that’s our premise as far as just making housing generally less expensive.
I don’t know that it’s an internet problem. I really think it’s a social problem, and we’re limited to just advocating for more density. You know it seems clear to us that especially in the coastal cities, home prices have appreciated more than wages, and as a result people are migrating to the center of the country, and the character of these cities is changing. Seattle used to be kind of a middle class city, where people worked at Weyerhaeuser and Nordstrom and Boeing and Starbucks as well as Microsoft and Amazon. And now I think mostly it’s a software-driven city. It’s a technology driven city, and it’s become really expensive for almost anyone else to be here. And I’ve seen that before, in San Francisco.
So I’m glad that we’ve done what we can. I think the HALA initiative, which was very controversial at the time and Redfin was a very vocal supporter of, has filled the skyline with cranes. You see more density in transit spots. Just on my bike ride home I see high rises going up at the Capitol Hill light rail station, and I think that’s a good thing. And once I was on my soap box with a HALA supporter about how we needed to do more density, and she just said, “I’m getting out a map of Seattle right now. I want you to pick the areas near transit that need to be up-zoned.” And then she unfurled it and said, “Here, here and here. We’ve already done it. What are you even talking about?”
And I do think you have to give Seattle some credit for that. It’s built more housing than most other cities. We still could do more, but I want to at least note that there’s been some progress, whereas in other cities, especially in Silicon Valley, people go ape every single time they want to have a two-story apartment building.
GW: What are your thoughts on the housing market right now? When will it slow down?
Kelman: I think we would all agree that the housing market is in the later stages of a bull run. There probably won’t be a correction this year. There may not even be a correction next year, but a correction is inevitable and we’re fairly close to it, just because it’s been such a long bull run. And so I’m painfully aware of that.
Sometimes when I meet the CEOs of other real estate technology companies I ask, “Have you ever been through a recession?”, because all your good ideas become bad ideas. And all the people you hired are suddenly at risk. And when John (Cook) asked me about this at (the GeekWire Summit) last year, I just told him that we will give up a few points of growth so that we can keep our covenant with employees, and if you listened to our earnings call you heard us say that we now have more demand that we can handle. That’s because there had been a slow down in the fourth quarter and then things picked back up as soon as the Fed ordered lower rates again, and we did not grow as much as we could have.
We’re willing to take that consequence because I’ve walked around with cardboard boxes and told people this is your last day at Redfin, and the day before they felt like family. So I know that there will be a correction, but I also know that fortune favors the bold. So right now Redfin is two-plus years into a properties business with RedfinNow. We’re three or four years into a mortgage business, we’re doing a title business, we’re doing a brokerage business. We’re two years into Redfin Concierge, which is a renovations business, and any rational person would say, “Oh man, it’s too much.”
Demand for all of those businesses is really strong, and the sum of the whole may be greater than the parts. We’ve just found that being able to buy someone’s house on the spot has helped the homebuyer who sees a house that she has to have and only then realizes, “Oh my gosh, where am I going to get the money for it? I need to sell my current house immediately.”
So I think it’s a lot of risk. The music’s gonna stop playing; the shiitake mushrooms are going to hit the fan and all of us hope that we’re the fan and the other guy’s the mushroom, but you have to be humble about the possibility that maybe you’re wrong.
GW: Both Redfin and Zillow have gotten into buying and selling homes in recent years. Can you contrast your approach to Zillow’s?
Kelman: I’m very enthusiastic about our properties business. We started it years ago, it’s still growing. We’re expanding it much faster now.
We felt more careful about it over the past two years than we do now, because at first we bought some homes that were total dogs. They sat on the market for a long time, and we had to take a loss. But eventually you figure out a formula where you know you’re going to be able to sell this house at a profit. And I think we were one step more cautious about scaling the business before we really knew what that formula was. But at this point we feel very confident that we can scale that more quickly.
But at the same time, if your premise is that I’m gonna reinvent real estate by buying every home for sale in America, well there just isn’t enough tea in China to do that. And you have to take account of the fact that there couldn’t be a better time than right now for a properties business. Capital’s incredibly cheap for tech companies, consumer credit is still somewhat restricted and the housing market has low inventory, so if you’re buying starter homes you know you’ll find a market for them.
In a different market, where capital’s more expensive, where the months of supply goes from one, two or three months up to six, eight or nine months, then I think that risk will be priced into the offer you give a homeowner, and fewer people will take it.
If we just buy a home and then sell it, and that’s the only transaction we have with a customer, great. We need to make money on that transaction. But what we found is that somebody contacts us; they want to sell a house. We give them an immediate offer, but we also tell them this is what we can sell it for through a real estate agent, which is a higher amount of money. And that process, when it’s unified, when one person has talked to people about their options in a reasoned way, people love that experience. People love that experience, because they now have absolute certainty at one end of the spectrum and higher proceeds at the other end, and they feel like they have a choice.
But what’s even more appreciated is this buyer, someone who’s shopping for a home, they see it, they have to have it, they haven’t even gotten their old place ready to sell, but they need the money to buy the new place. And we can provide liquidity on the spot for them. There is a real liquidity crunch for people who are trying to move up, because they can’t get two loans at the same time. So this ability to solve that problem lets us buy one home and sell it, but also helps someone else buy their next home. And it has become a really powerful tool for our brokerage.
So the combination of the brokerage and instant offers in so many different ways has just been really effective for us. When our listing agents visit a house and talk to people about their options, when our buying agents work with someone who’s trying to get their hands on the money to get that place, that’s where our conviction comes in, that when you’re trying to help somebody move, there’s a whole bunch of problems you have to solve, and usually the sticking point is liquidity from their old home, and RedfinNow can solve that.
So we think we’re going to do really well here. We’ve been selling homes for 14 years, we’ve got a field operation, we’ve got a brokerage already. I don’t know how you make money on a properties business if you don’t have the other pieces, and we do.
GW: What do you think about what Zillow’s doing in transforming their company, and with Rich Barton becoming CEO?
Kelman: I think Rich is a fantastic CEO and Zillow is a formidable company. They’re very well run. They have a massive audience, they have tons of money. I think their challenge is just going to be that they used to be the website that worked for traditional agents, and now I think they are going to increasingly be the company doing the transaction, and that’s just very operationally intense. If anyone can make that transition, they can. It obviously brings them closer to competing with Redfin, but I can’t blame them for that. I’ve always thought this is the biggest opportunity in real estate, and I think Rich has probably felt that way for a long time too.
GW: Barton recently said that Zillow is trying to build a “Microsoft Office for real estate,” doing everything from mortgages to title and escrow, and even moving. Is the best way for a company to change and disrupt real estate to own the entire sales process?
I would say we want to deliver a complete solution. Customers should still have a choice about which lender they work with, for example. The reason I feel careful about that is if somebody else has a better rate on a loan, I hope the Redfin agent recommends that other player and not Redfin Mortgage. So I don’t want to be too greedy about it all, but I would say that what you heard is what we’ve already done. Three years in mortgage, seven years in title, 14 years in brokerage, two years in the properties business, a couple of years now in renovations.
We haven’t done moving. I think that is very operationally intensive. It’s a low margin business. It’s hard to standardize, where people are happy with their movers. You’ve got to get someone who really cares about the quality of the experience, but who’s also willing to lift a piano, and that’s a hard person to find.
GW: You’d probably just have to buy Dolly or a company like that to make it happen.
Kelman: I’m not even going to go there. Our whole argument has been for the longest time that we’re not the Google of real estate. We didn’t expand to every market in the country. We’ve been very slow about our geographic footprint — we still only cover three quarters of the U.S. — but in exchange for that breadth we have depth. And now we see other folks trying to build those businesses very quickly with a massive amount of capital, and that can be daunting, just because there’s so much money and so much talent focused on that. But it’s also validating at some level.
This is the ground on which we’ve always wanted to fight. Not up in the clouds, but in the streets where you have to have operational efficiency, where you have to have financial discipline. People are going to shop for rates on a mortgage, so you have to be more efficient than any other lender. People are going to shop for rates on real estate agents. Redfin has made sure of that. We’ve had great success with our 1 percent campaign. So you have to be efficient at that.
Definitely on instant offers, people are going to take the highest offer. So being able to combine software with a local presence and really make that work in an efficient way is what we consider to be our special sauce, our thing. And having all those pieces working together has been hard for us, but it’s worked well.
GW: Redfin recently invested in the startup Pro.com. Why did the company do that, and has it done any other investing in the past?
Kelman: This is the only investment we’ve ever made.
We just don’t meet many software companies that decide to get their hands dirty. Pro.com is a general contractor, so it has software for managing projects and making bids, but it also goes to people’s houses and makes sure that the deck gets built and the kitchen is remodeled in exactly the right way. And we think that the future of software, the way it’s really going to make a difference in the real world is by having a real-world operation paired with it. You can be a media company where you generate leads for general contractors or for real estate agents or for some other industry, but eventually someone’s going to actually take that industry on, and that’s going to be a much larger opportunity.
And I think Pro.com decided instead of being a website that farms out work to handy people, it’s going to be the general contractor, and that was exciting to us. And obviously it rhymes with everything that we’re doing to renovate homes, because when we offer our Concierge service, as we do here in Seattle, it’s a turnkey solution for people who want to sell. We stage the house, we paint the house, we do the landscaping, we charge 2 percent instead of 1 percent. The home sells for more money, and it is worth it. Anyone listening to this, or reading this, you should do it. But we have to get more efficient at doing all that work, and that’s something that Pro.com has really thought about.
Now they’re focused on really large-scale remodeling projects and we’re focused on getting a house ready to sell in two weeks, which is very different, but that’s something that’s going to help our Concierge service and RedfinNow. In both cases the key factor in getting more money for a house isn’t marketing online anymore, it’s making it look better at the moment of truth, when somebody drives up and sees the house. The reason our houses sell for more money now is the investments we’re making in renovations. And we just have to do a lot more there.
So I think Pro.com is just a natural partner for us, and we felt like we wanted to understand that business better.
GW: What impact can technology have on the real estate industry, and why is Redfin the best option for that disruption?
Kelman: There’s this false dichotomy between software and the rest of the world. And it contributes to the schism in our society, where you’re either in tech, or you’re left behind. And I think it’s a better way to build a company, and a better way to build a society when you have all types of workers, including software engineers, working together. But it’s also the only way you’re going to build a deep, competitive advantage.
What Redfin has done to pair agents and engineers is our crowning cultural achievement, and it’s why we think we’re going to be better at the properties business, better at the lending business and better at the brokerage business. Because, you know, it turns out that you can’t just run a website to flip houses. You can’t just run a website to buy or sell houses. People want electronic service, but you also need to make that house look better, you also need to get that buyer into the property.
And so that is the one thing that we think we do better than anyone else. If it’s just pure coding algorithms — we’re obviously proud of our engineers. If it’s just pure service — we’re obviously proud of our agents. But when you have to build a process that involves some software to make it more efficient, but also some service to make it feel human, and to get the actual work done, that’s when we say, “That’s a Redfin problem.”
That’s something that was just really hard. It used to be that our agents and engineers hated each other, that we developed software that didn’t really make real estate better, that we designed processes that didn’t really work for the customer. And it’s this magical, alchemical blend that has been our hardest and best work.
GW: If you need people on the ground to succeed, it seems like Zillow should beef up its operations there. We’ve had some long debates about this in the GeekWire office: Should Zillow acquire Redfin? Would you be open to that?
Kelman: Redfin is not interested in getting bought by Zillow. It’s such a mission-driven company. I understand the logic, and I also understand my obligation, Rich’s obligation, to shareholders to do whatever leads to the most valuable return. But if you are asking whether that’s something that Zillow wants to do, not that I know of. Whether it’s something that Redfin wants to do, not that I know of. We’ve worked a few blocks away from each other for 14 years, and so it’s a little bit like your Mom asking, “Well why don’t you marry that roommate you’ve been living with all this time?” If that were going to happen, don’t you think it would have happened by now?
But you can never say never. It’s my job to be open to every possibility, and to consider it carefully. It’s just not something that we aspire to and I don’t think it’s something that they do either.