Investors Can Ride This Real Estate Disruptor to Big Returns
In terms of the way consumers buy and sell homes in the United States, not much has changed over the years. Real estate technology company Red woman (NASDAQ: RDFN) is in the process of rebuilding this multi-trillion dollar industry around the consumer. With a modest market cap and huge growth potential, let’s examine why Redfin’s new approach to home buying could make it a home run for investors.
Buying a home in the US is no fun
Homeownership is a cornerstone of the “American Dream”, yet few people really enjoy the buying process. Consumers rely on real estate agents, banks, and lawyers to get into a new home, and each party takes their pound of meat away. Sellers lose 4% to 6% of the home’s selling price through commissions, while buyers also pay banks and attorneys thousands of dollars.
The process is tedious with up to 12 steps to close a home, and one study showed that up to 88% of home buyers are nervous throughout the process. There are more than 1.5 million active brokers and over 100,000 active brokers in the United States, according to the National Association of Realtors. The market is fragmented and there are no clear leaders that consumers could be drawn to.
Buying a home is the single biggest financial decision most consumers will make in their lives, and the state of the industry has made it ripe for upheaval.
Put the consumer first
Redfin is a digital real estate agent using technology to provide home buyers and sellers with an “end-to-end” transactional process where an offer can be made, accepted and completed, all under one roof.
This is done through the three main segments of the company:
- Redfin Brokerage & Redfin Now (Buyer and Seller Agree to Sell)
- Redfin mortgage (buyers finance the sale)
- Title Forward (the sale can be closed)
Redfin employs agents but deals them directly with salaries and benefits versus commissions to align their interests with the client for a more seamless transaction and experience.
The company also offers a website and mobile app with tools to make finding the right home easy, including map-based search, 3D home tours, and the ability to buy and sell direct from Redfin without the help of an agent. Redfin gathers data with every transaction and learns from it in order to train its algorithms that determine the values of offers and estimates. And sellers save money with Redfin and only pay a 1.5% listing fee.
Redfin has competition, but it’s not who you think it is
Redfin has grown sales at an average annual rate of 36.5% over the past five years, with sales reaching $ 886 million in 2020. With only 1.1% of US homes sold (by value) in the first quarter, the company has a great opportunity to continue growing and gaining market share.
While it competes with other real estate disruptors such as Zillow and Open door – and this trio of companies is often lumped together – they don’t step on their toes in the market. Opendoor has estimated its market share at 2% and Zillow is only starting transactions while its main business is advertising.
The reality is that these “disruptor” companies each have a lot of leeway before they actually clash. Redfin’s real competitors remain the traditional brokerage firms that exist in the US
The company has clear competitive advantages over most traditional brokers, including its seamless transaction process, technology-driven web / app tools, customer-centric experience, and lower fees. Mediocre brokers could battle Redfin, leaving only high quality and niche brokers who can justify their expensive commissions. Redfin doesn’t have to beat Opendoor and Zillow to be successful – it can grow by beating the thousands of mom and pop brokerage firms.
Is Redfin A Buy Today?
Redfin stock is trading at a price to sales ratio (P / S) of 6.3 at the time of this writing, less than the stock’s high of 11 earlier this year. A hot housing market is boosting business, and analysts expect sales to grow 88% to $ 1.67 billion in 2021. Compared to the size of the US real estate market, Redfins’ modest market cap of $ 6.1 billion means investors can still get in while this growth story is in its infancy.
However, investors should note that Redfin is not currently profitable. Gross margin was only 15.8% in the first quarter, but the company plans to expand its higher-margin services that allow buyers to work for transactions directly through Redfin.
Investors need to watch Redfin’s progress in expanding and building a competitive advantage, but given its leadership in transforming the real estate market, its long-term potential is enticing.
This article represents the opinion of the author who may disagree with the “official” referral position of a premium advisory service from the Motley Fool. We are colorful! Questioning an investment thesis – even one of our own – helps us all think critically about investing and make decisions that will help us get smarter, happier, and richer.