Redfin (NASDAQ: RDFN) is one of the most talked-about companies in the residential real estate field. The technology-powered real estate broker is known for selling homes using a discounted commission model and is also one of the leaders in iBuying.
In a recent members-only Motley Fool Live segment, CEO Glenn Kelman sat down with Austin Smith, the Director of Millionacres, to talk about the macro environment in real estate, how COVID-19 is impacting the homebuying process, and where the industry is going.
Homebuying demand has come roaring back -- can you comment on what you're seeing right now and what's behind this unexpected surge in demand?
Kelman: It's been strongly V-shaped. Demand plummeted; it reached a bottom around the end of March or the first week of April. And since then, every single week, it has gotten stronger. It's driven by low interest rates in part, but also, I think, a sense that America is going to move, that people don't have to live in San Francisco to work at a technology job, they don't have to live in Manhattan to work in a finance job.
Many people feel the home is more important than ever, and they've been liberated to live where they want. Housing demand has been strong. We may be taking more than our fair share, just because we offer these virtual capabilities around doing a video chat tour or exploring a home through a three-dimensional scan. There are some puts and takes there, because we have an employee model that limits our capacity to serve all of our customers, but definitely the housing market is very strong.
The one caveat, which you've already noted is that home sellers, I think, are reluctant to list their properties. It's one thing, as a buyer, to say that I'm willing to take the risk to see this one property, I'm going to put a mask on, or I'm going to ask an agent to host a video tour, but it's another as a seller, to live in a house that 20 or 30 people are going to walk through every day. You don't know how long it'll be on the market, you don't know how many buyers are going to walk through.
And so, we meet sellers who are anxious about the market and also about the health risk. It's a very volatile time. It's hard to predict what will happen over the next six months. It feels crazy that housing demand is so strong when unemployment is so high, but it is strong.
How has buying behavior changed? I think I'd seen some data recently that showed as many as one-third of your buyers were doing remote showings and agreeing to a price before actually touring the home in person. Is that just an adaptation because of where we are with COVID, or is that a long-term trend that's been pulled forward where Redfin might be uniquely positioned to benefit?
Kelman: It's a long-term trend. I think it will subside somewhat because of COVID. We've actually seen the percentage of video chat tours declined slightly over the past few weeks. That in part is because there's another kind of tour that's even better, which is this three-dimensional scan. It's like using Google's Alphabet (NASDAQ:GOOG) (NASDAQ:GOOGL) Street View but inside a house so you can control the perspective, you can move into the bathroom, you can spend more time in the living room, you could look up at the ceiling. People like that better than video chat tours.
But the other factor is just migration. So, it used to be that it was easy to tour a home in person because you were going to drive across town to see this house, but now people are moving across the country. And so, we see more people, especially those who are reluctant to get on a plane saying, "I want to tour this house," in say, Grand Rapids, Michigan, without driving around Lake Michigan from Chicago. So as an agent, can you host that tour?
And it does seem to be somewhere between 20 and 30% of demand doing that. And because of COVID, contracts changed; you can now agree to a price without necessarily having seen the home in person and just have a caveat that once we agree on basic terms, and it looks like the buyer and seller can work together, that's when I'll get into your house, that's when I'll tour it. And the seller is as eager to do that often as the buyer is. Neither wants a lot of personal interaction with one another.
That might not hold up in the peak of the homebuying season. As we go into the summer, demand is so strong. Almost all contingencies are going to be waived in many cases because of the bidding wars that we’re undoubtedly going to see.
Can you comment on how you think the iBuying business is positioned today and going forward?
Kelman: Well, I think there's probably two ways to answer that short-term and long term. In the short term, when you have sellers who are anxious about people walking through their house and anxious about the long-term economy, they'll probably pay a premium for liquidity. And if you pair that premium that they're willing to pay for liquidity with the fact that actually home demand is really strong, it's not a bad time to own a large number of houses.
The future of iBuying
But the long-term question is whether that's fundamentally a more efficient way for a large part of America to sell a home where there's the original owner, the ultimate owner, and someone in between, an iBuyer. And we are probably more skeptical about that. We think there's a place for iBuying in the market; we know that many sellers are going to want to evaluate an instant offer before deciding to list their home. But we've also been consistent in our opinion that most consumers would be best served selling their home while living in it, not to an iBuyer, but directly to the ultimate owner.
If it's an estate sale and you're splitting the pot three or four ways, I don't think you're going to worry so much about the margins and then an instant offer is going to be worth it. The convenience is just so king, but in other situations, I still think sellers care about their net proceeds, and they're going to want a more efficient model.
So, we're trying to scale that business in a responsible way. And we're just being mindful of how capital-intensive it is. Anyone who says iBuying is a high-margin business is crazy. That is going to be a game of inches where you're tying up $3-400,000 in a house and trying to get a 2% or 3% margin on it. I don't think we want that to be a big part of our business.
One of the challenges investors have with iBuying is that you're not able to just look at the profits of the business or the revenues of the business; you also have to understand the quality of our inventory. This has been an issue before with lenders, where they're making money on every loan but it turns out they've got a bunch of loans in their desk drawer that end up sinking the company. And the reason we spent so much time talking about both our mortgage business and our iBuying business is we want to be careful. We want to make sure that there's no balance sheet risk, that every house that we buy, we can sell, that every loan we originate, we can also sell as a mortgage-backed security.
And so far we've demonstrated that. I think the great confidence people should take out of this pandemic for Redfin is that Redfin Now was able to liquidate its assets in a fairly expeditious way with minimal losses in a very V-shaped situation, where demand fell off a cliff for a couple of months.
We capped it at first because we weren't sure we could make money on it, and we weren't sure we wanted to be in the business. And now we've settled that. We think we can make money in iBuying. We think we're going to be in that business long term, but we still have a cap because we just have to limit financial risk.
We've slowly opened more markets again to Redfin Now. The consistent way that we've positioned this product -- and it's what I really believe -- every seller should be able to consider a cash offer next to a brokered sale and decide what's best for him or her. And we want to be able to offer those choices. We think that most people will choose and should choose a brokered sale. But some people need the money right away and we should provide that, and the way I can go to sleep at night is by offering everyone that choice and making sure that each owner of the home understands that choice. So that if you do take the money, you know this is easier, it's more convenient, it happens right away. I can move on with my life, but I might have made more money if I'd listed the property.
What are some of the other major trends and technologies that are coming to real estate?
Kelman: I think the virtualization of the homebuying experience is a massive opportunity. Matterport has made these three-dimensional scans. Zillow also has developed some technology for three-dimensional scans, and it's just jaw-dropping. If you see that technology, it's amazing.
We have thoroughly integrated it into our site. Self-service access is also really important. We are going to be one of the first brokers to let people open the door to a house with an iPhone. And it sounds trivial, there are actually major security concerns because you want to make sure that one person has left the house and another person isn't going to get mugged or assaulted by the last visitor.
You need to insure the property, so that people who own it don't worry that it's going to get burned down or someone's going to have a party in it, but man, when you can use your phone to access a house whenever you want without having to call a real estate agent, when every single Redfin listing has a giant "We're Open" sign on it 24/7, or almost 24/7, that's exciting. I think there are much better markets on the back end of the process with title and mortgage when you can digitize everything; the amount of document exchange and scanning, the fact you have to do in-person notaries and wet signatures to be able to sell some loans is just outrageous.
And what was interesting about that, by the way, is that during the pandemic, there was this massive push to virtualize but there was also this seize up in the credit markets. We were trying to get more buyers of mortgage-backed securities to let us send them digital loans, so that we didn't have to do the wet signature, because sometimes it was just hard to get people to come into the office and they were just at a moment when they wanted to take no new risk whatsoever.
We are seeing margin improvement on the back end of the process, but it's halting as we get more of the parties who have to sign off on a closed real estate sale to agree to do it electronically. And that's just where we've got a huge iceberg underneath the water. People see Redfin mostly as a technology company through our consumer application and our website, but most of the engineering projects we have are around the back end, so that we can charge a lower fee and still deliver better service, so that our agents spend time talking to customers but no time dealing with paperwork -- and the same is true of lenders.
And just one further comment on that is that it's been easier to automate lending than real estate brokerage. It's a document-driven, regimented process. Pushing paper is what engineers love to do; it's just so easy to make that process more efficient. And there have been some disruptive changes in Fannie and Freddie being willing to take on all-electronic applications that have made incumbents I think actually have to upgrade their legacy systems and give us an opening to be better.
You've always been outspoken about the responsibility of Redfin to promote diversity both in the neighborhoods you're serving but also in the agents you're working with. Can you talk a little bit about your initiatives with us, recognizing fully well that you've been discussing diversity well before it was a national talking point?
Kelman: Well, all of us are going to get to the end of our careers and ask, "Did we do enough?" And I don't think on the question of diversity many of us will retire and say, "I did too much on diversity. I focused on that more than I should have." I think we'll say, "I should have helped out my fellow person, my colleague at work, my fellow citizen more, and given them a fair opportunity." It's not just about being a white savior, it's about making sure that the business is fair so that a hard-working African-American employee, a hard working Asian-American employee has the same opportunity to rise.
And there's all this rhetoric around diversity and fairness, but the reality is that at Redfin and other companies, we don't have as many people of color in the executive ranks, we don't have the same attrition for Black and white employees. And that is a great shame on how I've run this business. When you get to a position of power, you have to think about whether you are being fair.
You have to spend a significant portion of your time worrying about that. And it's not just a self-serving impulse, because Redfin needs to be fair to our employees. Yes, but we also need to serve African-American people trying to buy a home, and there is a massive amount of research, which we've talked about over and over again over the past two or three years, that shows that a real estate agent can really make a difference, he can connect with that Merrill Co. working land or he knows the builder who will still fix something even though they're past the date of doing that.
That often white real estate agents work with white customers, the industry is overwhelmingly white because it's a sales job and it helps to be in the majority. So this is something we can do. This is something where we can make a difference. And I want to look back on it and say that I used my privilege and power to do all of that. Every few years, you get to this juncture where you say, "Oh, my gosh. I still haven't done this. I still haven't done it right."
This interview has been edited for length and clarity.