The Opportunities and Risks Facing Redfin

By reducing costs and simplifying the homebuying process, Redfin (NASDAQ: RDFN) is disrupting the real estate industry. However, competitors are lurking, and they won't go quietly.

In this clip from Industry Focus: Energy, Motley Fool Analyst Tim Beyers and Industry Focus host Nick Sciple discuss the opportunities and risks facing Redfin today and lay out why they think it will be a winning investment over the long term.

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This video was recorded on May 23, 2019.

Nick Sciple: From a demographic point of view, you talked about the 2008 real estate market. I think structurally, there's a nice little put at the bottom of this real estate market for someone like Redfin in this entry-level homebuyer market. If you look out over the past 20, 30 years, the long-term median age of a first time homebuyer has been 32 years old. Millennials, the average age of a millennial right now is 30 and a half. They're reaching that part of their life, where if you want to have children and raise them in a home, it's put-up-or-shut-up time. And when you're a first time homebuyer, you are particularly price conscious, more so than almost anyone else in the market. In a scenario like that, as I said earlier on the show, those couple of percent that amount to thousands of dollars can really be a driving force for you. As someone who is 26 years old, of that generation, I'm much more comfortable with finding things online, taking care of things myself to get that lower price, which is what Redfin offers.

I think the offering for a buyer really makes a ton of sense. The offering for a broker really makes a ton of sense. It's in an industry that appears ripe for disruption, that high commission level is an opportunity. Your margin is my opportunity; that's an opportunity for Redfin. The demographics line up for them. I see really a lot to like with this business. Obviously, I own the stock, so I'm talking my own book.

Tim, big takeaway, when you look at this company moving forward, is there anything that's going to disrupt this, break this story? It appears they've got a lot of runway ahead of them. Obviously, they're going to be antagonistic to brokers. We'll see how that happens. But the opportunity looks very large.

Tim Beyers: It is very large. There are two big risks. The first is that they get too greedy, they take on too much with Redfin Now, and what has been a group of very careful capital allocators gets themselves into balance sheet trouble, and they have inventory they can't turn, and then they start hitting writedowns, and then it becomes very hard to recover from that. This is why homebuilders tend to be very careful. They tend to buy land, so when things get wonky, they really take some pretty hard hits. NVR is one of the only that does not do that. I think Redfin is careful enough to avoid that risk, but you don't know.

And then, of course, there are some heavyweights. Zillow (NASDAQ: ZG) is also in this market. Zillow does not have the same level of "do everything for you" that Redfin does. They still contract out brokers, you buy your leads from Zillow if you are a traditional realtor. It's interesting. Having said that, they're moving very aggressively into the instant buying space. Zillow Offers is a real threat. Here at The Fool, I told you about Austin. We did a small experiment here in which we looked at three different types of brokers to make an offer on his house. Zillow came in at the top, and called him, and was very hands-on, asking questions about improvements. Then there was Open Door, which is a start-up that's very tech driven, almost exclusively tech driven. It came in with the lowest offer. There was no call. It was just assumed that there were no improvements on his house whatsoever. And right in the middle was Redfin. There was a little bit of touch, not as much high-touch as Zillow. But the data was very solid. Zillow would have been the one that won the business just in terms of price. But, as is typical, Redfin came in with a pretty conservative but reasonable bid, right there in the middle. That's kind of the way they operate.

They do have some competition, and that's not going anywhere. But I think that Redfin is pretty well positioned. It's going to take Zillow some time to build out the rest of that ecosystem that Redfin already has and then decide whether or not they really want to go whole hog and build their own army of brokers that Redfin's already got. I don't think they're going to go there. Right now, they're using the fees that they get from brokers in order to build this other area of their business. It's a little bit of, six one way, half a dozen the other. You don't want to totally disrupt everything at once, but they need to disrupt things. So, Zillow is a threat, but I like where Redfin is positioned.

Sciple: Yeah. It's interesting for me, Zillow seems to be on the other side of that market from Redfin. If you're a real estate broker and you don't have a relationship with Zillow, you're going to have a really hard time getting leads. They provide the tools that allow the existing real estate brokerage industry to flow, have the leads flowing. Whereas Redfin is really disrupting the real estate industry at its core, changing the way that it services customers. Zillow has struggled more, as you mentioned, to move into parallel industries, whereas that has been a core aspect of Redfin's strategy from the very beginning.

Yeah, I think that this is a company that I really like. It's sold off since the announcement of Redfin Direct. There's been concerns about their antagonistic stance with the brokerage industry. I think this is a buying opportunity for the company. I don't think it added any more risk than the company already had. They're doing this in a very purposeful, strategic way. Even if it's a total flop, the business can still continue and maintain its momentum.

Before we go away, I want to read one quote from the CEO that I think is indicative of this company and its culture. He said at the end of the most recent earnings call,

I think that stands to, Redfin is leveraging technology, but also having that high-touch, high-service relationship that people look for. I think the opportunity is big for them. I think they're well managed, and I think investors should look at shares of this company as something to invest in for the long term. Any last thoughts?

Beyers: Yeah, I just want to say, that is very consistent. That's a great quote that is very indicative of Glenn Kelman. He does a lot of interviews, he blogs at Redfin. That's Kelman. He's very sincere. He's in it to win it. This is the company I think he wants to retire with. This is it. This is his final act. He didn't need the money when he joined Redfin, he still doesn't need the money. He's doing this because he believes in it. That's the best place to be.

But something he said at the time of Redfin's IPO, I think you may want to go back if you're an investor and read this. It's super interesting! What he said was, he likened Redfin to Amazon, in two ways. One was that they wouldn't be afraid to disrupt the industry, and second, that they would roll up and create efficiencies that were needed in this industry. He was talking about this back at the IPO. You knew that they'd been cooking this strategy for a while. They've been cooking this strategy, what we're seeing now, for a very long time. This is consistency of vision. It's ambition. It's a very heartfelt, they see this as a big mission. And when you have a mission-driven company with a little bit of an edge, it can go a really long way. I'm a pretty happy shareholder, too, Nick, I like this one for the very long term. It's a Rule Breaker!

Sciple: Yeah. And combine all that with an industry where the opportunities seem obvious for someone to come in and disrupt, and they're doing it.

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Nick Sciple owns shares of Redfin. Tim Beyers owns shares of Redfin. The Motley Fool owns shares of and recommends Amazon, Zillow Group (A shares), and Zillow Group (C shares). The Motley Fool owns shares of NVR. The Motley Fool recommends Redfin. The Motley Fool has a disclosure policy.