Zillow Group’s surprising decision this week to back out of iBuying raised questions about the overall viability of the tech-fueled home buying offering for other companies.
At least one competitor seems to be moving along just fine.
Seattle-based Redfin today reported its third quarter earnings Thursday, beating expectations for revenue ($540 million, up 128% year-over-year), and just missing on earnings per share (-$0.20).
On a call with analysts, Redfin CEO Glenn Kelman fielded several questions about RedfinNow, the company’s iBuyer business which aims to digitize and accelerate how people sell homes.
iBuying is billed as a way for consumers to sell their home for a lower price but avoid the hassle, time commitment and uncertainty of a traditional sale. iBuyers then “flip” homes and quickly put them back on the market, hoping to make a profit.
Redfin’s Properties segment, which includes RedfinNow, posted revenue of $238.4 million in the third quarter, up from $19 million last year (Redfin paused home buying at the pandemic’s outset), and turned a small gross profit of $20,000. Redfin sold 388 homes via RedfinNow in the quarter, up from 37 in the year-ago period, and expanded the program to five additional cities.
Zillow said it decided to shut down its iBuying program Zillow Offers after failing to accurately forecast home prices. Earlier reports this week indicated that homes Zillow purchased are now worth less than what it paid for them amid a cooling housing market.
So what did Redfin do differently?
Kelman said Redfin took a disciplined approach to pay for homes via RedfinNow, lowering its threshold beginning in March as it anticipated a summer deceleration in home price increases, and continued to reduce RedfinNow offers through September.
“We were paying less, and if that meant that we didn’t grow as fast as we could have, so be it,” Kelman said. “This is a business that could scale to any size you want if you’re willing to overpay for housing.”
Redfin’s home sales that closed in the third quarter averaged 101.1% of the forecasted price.
Zillow’s failure with iBuying showed that there are components of iBuying — and business in general — that are not better served with AI algorithms doing the job.
Kelman said Redfin uses software to help figure out RedfinNow offers, but it also uses “two layers of human governance.” It slows down the process of generating an offer but helps Redfin be more cautious.
“The idea that a machine learning algorithm could get us into a pickle is one that all the iBuyers have worried about. We’ve tried to figure out the right balance between scale and caution, and Redfin is probably at the far end of caution,” he said.
“There are going to be times when that bites us in the butt. I know being cautious is not always the right move. But in this business, that’s just going to be our approach because it’s so capital intensive.”
Zillow CEO Rich Barton said Zillow Offers would only become consistently profitable at scale. “We have determined this large scale would require too much equity capital, create too much volatility in our earnings and balance sheet, and ultimately result in far lower return on equity than we imagined,” he said.
Shares of Zillow sank this week following the move, which will result in approximately 25%, or about 2,000 people, being laid off. The company will take a write-down of more than $500 million related to the shutdown.
Kelman said the biggest challenge for RedfinNow is speed of renovation, or how quickly Redfin can get a house back on the market. “Our capacity to renovate a home is limited,” Kelman said. “We’ll limit the number of homes we buy. Our first priority is, as always, to build a sustainable business.”
Furthermore, Redfin isn’t placing all its eggs in one basket with iBuying. “It’s part of what we do, but it’s not who we are,” Kelman said, noting that it’s one of many offerings available to customers, including a brokered sale with a lower transaction fee paid by the homeowner.
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“If you have to buy houses every day of the week, in every type of market condition, you are just force-feeding yourself potentially toxic assets,” Kelman said.
One analyst asked about a scenario where iBuying as a business completely disappears. He said iBuying isn’t going away, but it also isn’t the only direction the industry is moving.
“It isn’t the end all and be all, the future of real estate,” he said. “And it isn’t the Alpha and Omega, the Vishnu God of Destruction. It’s an option that some people are going to want to consider.” (Editor’s note: Kelman apologized to readers for “ignorance of Hinduism.” He meant to reference Shiva, known as “The Destroyer,” not Vishnu, known as “The Preserver.”)
Redfin shares are down more than 40% since February, but were up 8% Thursday. Shares fell more than 5% in after-hours trading.
Other iBuying companies include Opendoor and Offerpad. Following Zillow’s announcement, an Opendoor spokesperson said the company “is open for business. We have demonstrated strong growth and unit economics, and we are energized to help homeowners nationwide move with simplicity, certainty and speed.”
Barton said that shutting down Zillow Offers was not about “making a call on the housing market.”
The housing market has shown signs of cooling but “will likely stay hot until mortgage rates rise substantially,” according to Redfin Chief Economist Daryl Fairweather in a recent Redfin report.
