Little has changed over the years in terms of how consumers buy and sell homes in the United States. Real estate technology company Redfin (NASDAQ: RDFN) is in the process of rebuilding this multi-million dollar industry around the consumer. With a modest market cap and huge growth potential, let’s find out why Redfin’s fresh approach to home buying can make it profitable for investors.
Buying a home in the USA is not fun
Owning a home is the cornerstone of the American Dream, but few people like the process of buying it. Consumers rely on real estate agents, banks, and lawyers to get into their new home, and each side takes its own pound of meat along the way. Sellers lose 4% to 6% of a home’s sale price due to commissions, while buyers also pay banks and lawyers thousands of dollars.
The process is tedious, with up to 12 steps before closing a home, research has shown that up to 88% of home buyers are nervous throughout the entire process. According to the National Association of Realtors, there are over 1.5 million active agents and over 100,000 active brokerage firms in the United States. The market is fragmented and there are no clear leaders to gravitate towards.
Buying a home is the largest financial decision most consumers will make in their lives, and the state of the industry has led to serious disruption.
The consumer comes first
Redfin is a digital real estate brokerage that uses technology to offer home buyers and sellers a “walk-through” transaction process in which an offer can be made, accepted and closed under its roof.
This is done through three main segments of the company:
- Redfin Brokerage and Redfin Now (buyers and sellers agree to sell)
- Redfin Mortgage (buyers pay for the sale)
- Title Forward (sale can be closed)
Redfin uses agents, but hires them directly, receiving salaries and benefits over commissions, to align their interests with consumers to ensure a smoother transaction and a more enjoyable experience.
The company also offers a website and mobile app with tools that make it easy to find a suitable home, including map searches, 3D home tours, and the ability to buy and sell directly from Redfin without the help of an agent. Redfin collects data from each transaction and learns from it to train its algorithms that set the values of offers and ratings. And sellers save money by using Redfin, paying as little as 1.5% per listing.
Redfin has competitors, but that’s not who you think of
Over the past five years, Redfin’s revenue has grown 36.5% annually, with revenues reaching $ 886 million in 2020. With just 1.1% of US homes sold (by value) as of the first quarter, the company has a tremendous opportunity to continue to grow and gain market share.
While he competes with others property destroyers Such as Zillow and Opened door – and this trio of companies often lumps together – they don’t step on each other’s heels in the market. Opendoor estimates its market share at 2%, and Zillow is just getting started with deals, while its main business is advertising.
The reality is that each of these “disruptive” companies has room to work before they actually collide with each other. Redfin’s real competitors are traditional brokerage companies throughout the United States.
The company has clear competitive advantages over most traditional brokerage firms, including its seamless transaction process, technology-driven web tools and tools, customer-focused experience, and lower fees. Mediocre brokerages can fight Redfin, leaving only quality and niche realtors who can justify their high commissions. Redfin doesn’t need to beat Opendoor and Zillow to be successful – it can grow by defeating thousands of mom and dad brokerages.
Is Redfin a buy today?
Redfin shares are trading at a price-to-sell (P / S) ratio of 6.3 at the time of this writing, up from a peak of 11 earlier this year. BUT hot housing market drives business developmentand analysts expect revenue to grow 88% to $ 1.67 billion by 2021. Compared to the size of the US housing market, Redfin’s modest $ 6.1 billion market cap means investors can still get in while this growth story is in the early chapters.
But investors should note that Redfin is currently not profitable. Gross margin in the first quarter was only 15.8%, but the company plans to expand its higher-margin services, which will allow shoppers to work directly through Redfin for transactions.
Investors will need to keep an eye on Redfin’s progress as it expands and strengthens its position against the competition, but given its leading role in transforming the real estate market, its long-term potential is very attractive.
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