How Redfin Direct Is Positioning to Shake Up How We Buy Homes

On its first-quarter conference call, Redfin (NASDAQ: RDFN) unveiled a new program focused on unrepresented homebuyers. This new offering, called Redfin Direct, will allow unrepresented buyers to make offers on homes directly through Redfin's website in exchange for a reduced commission.

On this clip from Industry Focus: Energy, Motley Fool analyst Tim Beyers and Industry Focus host Nick Sciple break down the significance of this move for Redfin and how it affects the company's relationship with other real estate brokerages.

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This video was recorded on May 23, 2019.

Nick Sciple: Redfin is, at least for some customers, experimenting with this Redfin Direct offering that they revealed with their most recent earnings conference call, earnings press release. They will offer unrepresented buyers the ability to bid for properties through Redfin's platform directly. Just 10,000-foot overview, Tim, can you for our listeners describe what Redfin Direct is, and the value proposition for a homebuyer?

Tim Beyers: Yeah. The idea here is that, if you're looking for a house, and you find what you want -- this is only in the Boston area right now. This is in Boston, Massachusetts. It's a trial. It began in March. Really, it's just a pilot project. The Redfin website, in every market that it's in, is driven algorithmically. There's a lot of data behind it. Redfin has a very big engineering team. They have as many engineers roughly, the last I checked, as they do brokers. That's amazing. So they really do put a lot of energy into getting good data, good tools, and the right information in front of buyers who visit the website.

So, if you do that in Boston, you can make a bid directly. You don't have to have an agent, you don't have to have a Redfin agent. The seller pays, it's just a total commission of 2% if the offer is accepted. And there weren't very many accepted offers. I think it was five out of 127 offers. But there were 12 offers rejected that were very competitive, they were in the game. There is something to be said. More than 10% is pretty interesting. And it's brand new. This is straight from ground zero to say: "Look, you don't need an agent. We're going to take the model that is fairly traditional for new construction, where you represent yourself; only this time, you're going to go look at a house. You're going to make a bid yourself through our platform. And we'll just put you into the mix." I think that's very interesting.

The biggest potential drawback here is that it really flies -- I mean, if Redfin was disrupting the brokerage industry before, now they are outright going to war with the brokerage industry with Redfin Direct if they take it national. Then you're saying, "You don't need an agent unless you're selling a home." That's the underlying message of Redfin Direct. Now, they're not saying that, but if it does gain mass acceptance, that's the practical effect.

Sciple: Yeah. CEO Kelman said they still expect the vast majority of homebuyers to use an agent, and they hope it's someone employed by Redfin. However, giving this offering to customers gives them a chance to, when you're paying less of a commission, you as a buyer could pay a lower effective price, but the seller could still end up taking home more than they would selling to a buyer who may have been represented elsewhere, just because of the commissions. But, as you say, this does put Redfin -- and this was always something that was going to happen with this company as it reached scale -- in a directly antagonistic position, in this case, to buyers agents. There are certain number of transactions that buyers agents will just not have access to because Redfin is offering this service. This ties into why RE/MAX withdrew from their corporate partnership with Redfin, following the Redfin Direct announcement. Redfin's management had said, "Hey, we communicated that we were going to roll out this Redfin Direct offering." Told RE/MAX, "We don't view this as directly threatening to you." But REMAX, with some merit, had some concern that this was going to undermine the ability for buyers agents in North America to continue practicing their trade.

For me, I'm not super concerned by this. As I said, eventually, as Redfin was disrupting this industry, sooner or later, they're going to be antagonistic. I think the management's comfortability taking this risk at this time -- they had said they'd attempted this in the past and it had not had as much success. But, their ability to go back and try this again suggests to me that management is getting confident they have the scale to live on their own and be antagonistic to the rest of the industry, which to me is a sign that hey, maybe management thinks they've turned a corner. What are your thoughts on this, Tim?

Beyers: I agree with you. I also think this is emblematic of the way Redfin runs as a company. I think this is important to note for investors. Redfin is a deeply conservative company. For example, Redfin Now was rolled out over a year. There was a trial period, it was a whole year, and there was a limit on what the company could spend in terms of buying houses, and it was $25 million. Now they've upped that a little bit. But they tend to do things in stages. They experiment. They experiment, they get the data, they see what's going on. And if it's not working, they immediately pull the plug. Redfin Direct, by being in just one market, with a small trial, and then taking the data and then slowly moving forward -- don't expect this to go nationwide anytime soon. In fact, I would guess that even if it is successful, it'll be at least three years before this is available across the country. Even that may be conservative, because this is a company that is very careful about how it uses capital, what kinds of solutions it wants to put in front of customers, so that they can serve them best.

This company was founded in 2005, but Glenn Kelman came on in 2006. By 2008, they were in the middle of the worst housing crisis we've seen in...maybe ever. Certainly one of the worst housing crises. That has made an impression on this business. They're not going to just throw everything to the wind and go whole hog on something. They're going to be very deliberate, very careful, and make sure they're serving customers properly. You can expect that from Redfin Direct, I definitely think that more brokers are going to wake up and smell the threat that Redfin poses. But because they're moving deliberately and with care, it's more like the frog that jumps into the hot water, and then you turn it up to boiling just a degree at a time. I think by the time Redfin really does get scale, it may be too late for some of those brokers.

Sciple: Right. And then where do those brokers go to make a nice, comfortable salary with benefits and equity in a company that is growing and has reached scale in an industry with a huge addressable market? Well, they could go work for Redfin, and the cycle helps them once again.

Nick Sciple owns shares of Redfin. Tim Beyers owns shares of Redfin. The Motley Fool recommends Redfin. The Motley Fool has a disclosure policy.