Tim Beyers: [MUSIC] Hey, Fools. Welcome to our interview. We have Glenn Kelman, the CEO of Redfin. I'm Tim Beyers here with Austin Smith. Glenn, we are thrilled to have you back. So great to see you again. Thanks for coming on.
Glenn Kelman: It's an honor to be here. Thanks for having me.
Tim Beyers: It's a thrill for us too. I think most Fools know a little bit about Redfin, but if we could just say, you have said many times in the past, this Redfin is the technology powered real estate brokerage. We think that's a good description for what you do, but things are changing a little bit and one of the things that's changed since we last talked to you is a pretty big acquisition of a company called RentPath. Glenn, maybe we could start there, tell us why the acquisition of RentPath and what you expect to get from it?
Glenn Kelman: Well, we acquired RentPath because we saw this strengthening digital asset. It is one of the leading rental websites, but it had declining sales. There is obviously a convergence with Zillow, CoStar, and Redfin, all pursuing both rentals and for sale inventory on our websites. We want to build relationships with consumers from the time people go off to college or look for their first apartment until they're ready to buy a home. It's very important to us to aggregate all the inventory, not just the for sale inventory. We've already seen that when we link these two websites together that our standing with Google and other Internet search engines has improved as we get the RentPath inventory onto redfin.com which is now scheduled for March of 2022. We think we can significantly increase the number of people who are looking for rental apartments and deliver more value to RentPath customers, while at the same time delivering a better experience to redfin.com visitors.
Austin Smith: Glenn, thank you so much for that. Can you talk a little bit about the opportunity that Redfin sees in rentals? Everybody is seeing the demand for home buyers right now. and all the crazy stories, but the rental market doesn't get quite as much attention. What is it that you saw in RentPath that you think is valuable for Redfin? Is it lead generation for your brokerage services or is it something else?
Glenn Kelman: Well, first of all, we just want to compete as immediate side. It's very important that Redfin is a top destination for people looking for housing. If we only serve the for sale market, we can compete for people's attention when they turn 30 or 35 and have enough money to buy a house. But for the first 10 or 15 years of their lives as adults, those folks are going to be looking elsewhere. The fact that the number 1 rentals website has come into the for sale space with CoStar making a number of acquisitions, and then the fact that Zillow has long competed both as a rentals website and a purchase website, it just means that if you want to compete at that level, if you want your shot at the title, you've got to offer both types of inventory. The first rationale was just to drive more traffic. What we found is that we're not just going to get people looking exclusively for rentals who won't contribute to the brokerage. We're going to get people who are looking for both types of inventory and they'll end up hiring Redfin real estate agents to buy a house instead of renting one. Traffic is just a good asset to have. We've been growing very fast. Mostly we've been the number 1 major US real estate website in terms of our growth, but to sustain that growth over five years, we're going to have to add a few new tricks to the deck and that's why we did this. As far as how we can help RentPath, about one in five of redfin.com visitors are looking at rental properties at least once or twice a month and so that company really needed a partner to give it more scale, is now competing against these mega websites. The idea that you can be a pure play rental website and compete in that space, I think has become more challenging. It's just that we saw an opportunity. I think there have been extractive relationships between websites and the property management companies that are the customers of those rental websites. We just think there is an opportunity to make the rental experience so much better. We have experimented with self-service tours, we've experimented with digital contracts. We would love to reinvent the rental experience so that you could see a place online and rent it in 30 minutes instead of going through a much more conversant sales process. I hope that we can be a better partner to property management companies. I hope we can still serve consumers better by pairing people with the right place to rent. It's a pretty big opportunity for consumer-friendly company.
Austin Smith: That's a really good point. I guess, if there's anything Redfin has done it is known for it for removing that friction pain from the home buying experience and it still exists in the rental space. Just a quick one just for me then and then maybe back to Tim. How long do you think it would take before you have a handle on what that conduit is between the rental and the brokerage market? I hear you on being able to improve the rental experience, that's value enough on its own merit, but ultimately, it sounds like this is also part of getting new people into the Redfin brand and the Redfin experience. How long do you think it is before we'll see the strength of that conduit, is that the March 2022 integration you had talked about, earlier, later?
Glenn Kelman: Well, I think March 2022 is when we would get the RentPath inventory on redfin.com. We should see an immediate benefit there, but it does take time to build up your authority for a new type of inventory. Google will take some time to recognize Redfin as an authority. The consumer will take some time to think of Redfin when thinking about a website to look for rental housing. I think it compounds not just over one year, but over three, four or five years. The RentPath business itself has coming out of bankruptcy, so we are going to have to invest in that business. We didn't buy it for three times revenue on the assumption that immediately sales would shoot through the roof. [laughs] But we did think traffic was increasing even through bankruptcy that's what got our attention is that it's delivering more traffic and more potential residents to these property management companies, even though it has been left for dead. If we make a real investment in it, we think we've got a strong digital asset to build on.
Austin Smith: Thank you.
Tim Beyers: It's a really good point. I don't think you said this explicitly, Glenn, but I think it's implied that what you're building at least it sounds like what you're building is this hope of generating a very long-term relationship with a Redfin customer. You want to give them a little earlier in the process through RentPath.
Glenn Kelman: Yeah.
Tim Beyers: Okay. If that's true, I mean, this is a relationship business. Like real estates always been a relationship business. What else are you doing or just how are you thinking about driving repeat business and generating a very long-term relationship with a Redfin customer?
Glenn Kelman: Well, I think the first order of business is just to knock your socks off the first time you sell your house through Redfin. It doesn't matter what follow-up email you send, what additional products you offer. That first experience just has to be amazing. You obviously want to have a very loyal workforce because we found that mostly people are loyal to the brand and the platform. But it helps when their agent is still employed at the company 5, 10, 15 years later. We want to be the premier employer in real estate. Then we want to offer just a wide range of products because you may want rentals at one stage of your life. You may want on-demand tours when you are looking to buy your first home, at some point, you may want a cash offer to get you out of a place so you have the dry powder to buy your next one. At another point in your life when you really on a fancy place, you may want to concierge service where we handle all the renovations, get the grass cut, bring in some nice furniture, and have it marketed to a tee. Just in general, you've seen Redfin made aggressive investments in not just the core brokerage and removing friction from the experience so we can make it more efficient for consumers and give them a better deal, but also just different products to control the entire experience, make it perfect and to appeal to a broader range of customers.
Tim Beyers: If I can follow up on one thing you said there, of all of the things all of that sounds amazing. It feels like the hardest thing though would be to get an agent and actually keep them as a Redfin agent for 10-15 years. Can you talk a little bit about what you're doing from a culture perspective to actually capture that 15 year Redfin agent? [laughs]
Glenn Kelman: Well, we have those agents. So I don't know where to start, but I think what's really special about Redfin is not that we invented map-based search, not that we've invested for 10 or 15 years and making the brokerage more efficient so that we can save consumers' money, it's this partnership between the agents who do the actual work and the folks building the technology, and the executives, and the people behind the marketing campaigns, and all the rest. There is a schism in America. There's certainly a schism in the technology industry where most of the people doing the work do it as Uber drivers, as food delivers, as grocery pickers. We want those people to be our employees, our partners, our colleagues, our friends and that means we have to give folks a career path. It means that we have to let them develop the business within Redfin. When you first come to Redfin, you are entirely dependent on the website to meet customers and we help you get established in the industry. But 10 years later, the agents who are here at Redfin are mostly off the website. They're still using our tools, they are still using our network of folks to help them get into properties and everything else, but they are not being promoted as aggressively on the website. We just have to pay them commensurately because some of the business that they're doing is because of them and not just because of the company. I think understanding that partnership and developing more of our agents to build repeat and referral business with us is going to be part of our growth story. The website is going to keep growing 10, 20, 30, 40 percent a year depending on whether housing is up or down, but I think the other part of this is this is the best place in the world to be a real estate agent. There's a sense of love, and soul, and purpose, and mission that no other brokerage has.
Austin Smith: That's so great to hear, and it's interesting that we've accepted that there is so much natural tension in the traditional real estate model, top to down in the transaction process. Sometimes even between brokers and their own agents. So to see Redfin wholesale cast off their attention, and say that makes no sense, [laughs] is so refreshing. Glenn, can we pivot a little bit to RedfinNow, and you had mentioned earlier, it's only when you may want to buy a home or sell home. They might want the flexibility to be able to sell, to rent, from immediately. That industry is white hot right now it's really competitive, but it would still appear relatively low margin, and most of the bottom line impact has come from appreciation. Is that service they are offering just to make their experience better, or service we expect to be profitable? How does that fit into the Redfin portfolio and strategy?
Glenn Kelman: Well, every product we offer has to have sustainable economics. I wouldn't think of iBuying as a loss leader for mortgage, nobody would start a lending company and say, "My customer acquisition strategy is first to buy every house in America. Then when I sell it to someone else, that person will use me for the mortgage." iBuying has to be profitable as its own segment. But having said that, I just think the reality is that many people looking to sell a house are now going to compare instant liquidity, a cash offer from an iBuyer to other options. Most of them will choose a brokerage sale because it's still gives you the maximum net proceeds. I have heard iBuyers argue that it's a better deal economically, that is almost impossible just because when you have three owners of the property, the original owner, the ultimate owner, and this middle-man, the iBuyer. The iBuyer has to pay all the holding costs while it's taken, and it's not providing the iBuyer any kind of shelter. I don't think they had pure-play iBuyer is going to exist. I don't care if it's opened, or offer pad, or what have you. All of them are going to get into the brokerage business. They're going to build a website for customer acquisition, they are going to get into the mortgage and title business. Just because so many people who come to you looking to get an instant offer are also going to evaluate all these other options. That's the way it makes sense for us. There are going to be markets like this one where there's just a massive tailwind, and appreciation is underwriting the business, where you're going to see a shift toward iBuying, and then there are going to be other markets where the holding costs are very high, and t's hard to sell the property, the cost of capital is high. We're going to see a shift to a brokerage sale. We just want to be in a position where we're agnostic about that. Both of the investor, where you just know that either way we're going to sell houses, but also with a customer that when we talk to you about the best way to sell your house, we don't have a dog in a fight where we make more money with one product than another. If a brokerage sales is what's best for you, then that's what's best for Redfin.
Tim Beyers: It's really interesting if I could share my screen really quickly here, because I think there's something that speaks to the point you're making here, Glenn. This is from your latest 10Q, and I'm just looking at the RedfinNow. By the way, for investors who've never seen this, Redfin does an amazing job of putting out all its key metrics every quarter. I really love that you do that, by the way, Glenn. I want to compliment you for that.
Glenn Kelman: Don't compliment me, Alaina [inaudible 00:15:25] , Chris Stocking, Chris Nielsen, Meg Donnelly, and the whole finance team paired with Charles Lee and Anthony Kappus, we love you. They fight for transparency. They want you to have the information. If you knew everything about Redfin, you'd own more of it as an investor. They really have faith in the business, and faith in the investor to understand it.
Tim Beyers: I love that so much. That's great. I'm glad you mentioned all those names.
Glenn Kelman: Yeah, thank you.
Tim Beyers: It's one of the things I love the most about Redfin. But anyway, we just look here. On a year-over-year basis, the number of RedfinNow homes sold was exactly the same. But the revenue per home sold was up about 14 percent year-over-year. Please correct me if I have this wrong, Glenn, was this the first quarter in which there was a gross profit for RedfinNow?
Glenn Kelman: Yes.
Tim Beyers: I mean, what's interesting to me is that right now, what drove a little gross profit here does feel like prices are soaring, and you're able to get a better deals here. I wonder if this is partly because some of the adjustments you made, you talked a little bit about the last time we talked to you, there were some pricing adjustments you had to make as a company to just mitigate risk of holding things like inventory when you're doing iBuying through RedfinNow, is this a transient advantage that we're seeing because the market is so hot? Or is this a function of just a better, more stable RedfinNow?
Glenn Kelman: Well, that's the argument within Redfin. Every team always wants to take credit for a success, but a tailwind is part of it. I think some of the advantages is transient, and some of it is probably durable. The transient part of the advantage can actually become a disadvantage so that even as you're getting more operationally efficient, you're now meaning into a headwind, and liquidating houses, and in the declining market or something like that. I think we learned a lot going through a downturn. We have learned how fast we could cover any potential losses. It's given investors more confidence in the space, every time you talk to an investor in 2019 or early 2020 about the iBuying space, you had to talk about your balance sheet, and what happened in a downturn. The team just executed beautifully, and executing ourselves from that. Obviously, in hindsight, we wish we have. [laughs] All the inventory, just become a RTE. But that's not the business that we're in and people who are arguing to take that position just didn't understand the covenant that we have with the investors, which is we're a provider of liquidity. We're trying to help people sell their home. We're not going wrong on the real estate market.
Austin Smith: Glenn, can you help Tim and I orient to the best environment to be an iBuyer. We've had endless back-and-forth debate here. I don't think we have an opinion, but I will tell you that I think we landed originally, or at least I did. It's better to be an iBuyer in a hot market because you can then move your inventory because there was so much balance sheet risks,, and balance sheet concerned like you had alluded to. But maybe now I'm seeing that that's too competitive, and if somebody can get a more competitive brokerage offer, it's not the best. What environment do you think iBuying thrives in best? Or is there one?
Glenn Kelman: I think this market is optimal for iBuying. Other people disagree. There's an argument that in a bear market, a bear housing market, that the owner of a home, will pay a massive premium for liquidity, and that iBuying can be even more profitable in those markets. But I have been through 2008, in a great financial crisis where just as the listing, not as a counterparty, but as a fiduciary, we would tell people your baby ain't so pretty, we are going to list this at 380 not at 420. People took offense to it. I am more skeptical that cash offers when price appropriately for market risk in a bear market will be embraced. I think the current market is good for iBuying, especially because you would think that everyone would want to list a home right now in such a hot sellers market. But not everybody does because they found a home of their dreams. They waited to list their property until they found that home of their dreams because it's so hard with such low inventory, and now they need to cash tomorrow to compete as a buyer innovating war. There's just a massive premium that consumers are willing to pay for liquidity in such a hot market, and iBuyers have benefited from that.
Austin Smith: Thank you.
Tim Beyers: Let's pivot to the other services because you talked about this upfront here Glenn, that Redfin increasingly, and maybe this is not the right phrasing, but I think of you as very vertically integrated. You have mortgage. [laughs] Great, fantastic. You're increasingly serving the home buyer and seller by taking and adopting the services that we need to buy and sell homes. Can you talk a little bit about what you're doing now, particularly with Redfin Mortgage, and maybe if there's something that you have your eye on in terms of a service you could offer that you don't offer yet. That would be interesting to hear because you're definitely, as the growth story continues, the degree to which you stretch your vertical integration, as well as how much of the markets you serve, it's two ways that you grow.
Glenn Kelman: Absolutely. Redfin Mortgage is limited in its growth just by its ability to hire lenders, train lenders, serve customers well. I've learned from bitter experience that when you grow too fast, your systems crash, your people burn out, your customers are unhappy but we have massive demand for Redfin Mortgage. We've built our own loan origination system, so I think long term, our cost of goods sold is just going to be lower. We're going to able to underwrite a loan faster and cheaper than anybody else. But we still have growing pains. The engineering team that built that loan origination system is a little tired, the lending team is going through its own issues, you just keep going up and up, but you have little deeps along the way. I think the consumer experience is going to be fantastic. Investors are going to see great results from Redfin Mortgage but internally, there's a lot of people running pretty fast on the hamster wheel to make it all work. Title as a separate business is going through a thing in 2021 where we've had to reorganize it for greater scale. Just at certain points when you hit five million or 10 million or 20 million a business, you just run into a brick wall and that's what's going on with Title. I think when you look at the other revenue segment of Redfin, mortgage is doing so well and you can't quite see it because Title is having some challenges, and hopefully those two things will trade off year-over-year so that if you've ever raised kids, when one parent is tired, the other parent is alive. I hope that happens with Title and mortgage. Where we want to innovate is just probably around solving the same problem we're discussing with iBuying. There's a hole in the credit markets that iBuyers are solving. People can't get two loans for two houses at the same time. There's such an intense inventory shortage that your credit isn't even good anyway, and you need cash to compete for a bidding war, and they're just has to be a more efficient way to handle that problem than taking possession of a house. Even though mortgage is just very busy doing conventional loans then trying to get out to FHA and VA loans, which will really drive the tax rate off our brokerage business, we need to do refinancing. We need offer services directly to consumers on our website, we don't do any of that. There's so much growth ahead, but I think if we really want to serve our brokerage customers better, it's figuring out a way to make their currency more competitive when they're buying a house. The reason I got into this business wasn't just to get two dollars out of a customer instead of one. The reasons we got into the mortgage business was to make the brokerage business better. To let you buy a house that you otherwise couldn't buy because as a lender, we have information about you, we know the home that you're selling is worth a lot of money and we're willing to take more risk on you because of that, and we know the home that you're buying is also a good bet. Knowing about which property you're selling and which property you're buying is more information than most lenders have and we should be able to take more risk as a result. But that's a long ways off. Right now, we're selling very conventional products, we're just trying to underwrite them more efficiently and then sell the risk to Wall Street.
Austin Smith: Thank you so much, Glenn. I know we're almost out of time here, so I have a two-part question coming out of a pandemic, if we can ask for some predictions. Which changes did the pandemic bring that appear transient in the homebuyer experience and which ones are permanent?
Glenn Kelman: I think long-term change is just somewhere Americans are going to live. Once you move from LA or New York City to Ohio, and you have a four bedroom house and a three car garage, you are never going back. Offices are going to reopen, people like working together. I don't think people are going to work five days a week in the office. I think they're going to work two in the office, that's what most white collar workers want and you're just going to see businesses and their workers embrace this idea that America and the world is a big place, and that flexibility to work wherever you want is here to stay.
Austin Smith: Thanks. Tim, anything else from you?
Tim Beyers: Well, let's just wrap with this one question here, Glenn. There's so many amazing things about Redfin, what is one thing that you think people ought to know about Redfin that they don't? Because I'm sure that there is something that's just hidden that you wish it would be like, "Men, I wish people knew this thing about Redfin" What is it?
Glenn Kelman: The people. It's always that, isn't it? But I just think there's this fallacy that the CEO is the author of a company's success. I preside over it, but Allina, the person on this call with me is a superstar. Bridget Fry, Adam Wiener, Chris Nielsen, Christian Talman, Eileen Khoo, Scott Nagel, the friends who have built this company with me are amazing, and I'd put that executive team up against any crew. If things of the soccer field, they would beat FC Barcelona. It is an amazing team, and I don't know about, hate, that's such a strong word, but it drives me crazy the way the world and the media really make it all about one person, it isn't. The whole idea behind Redfin is not me, but we. That's it. Guys, I got to go.
Austin Smith: No problem, Glenn.
Tim Beyers: Thank you so much, Glenn, we really appreciate it.
Glenn Kelman: Lots of love. Bye.
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