Inman

9 risks that could derail Redfin after it goes public

For more than a decade, Redfin has fought tooth and nail for a small fraction of market share — without turning a profit.

Some analysts think the high-tech brokerage can quickly grow into a multibillion dollar company after its initial public offering (IPO), scheduled for July 28. But it’s far from clear whether the company can develop into anything more than a niche player.

In its recent IPO filing, Redfin detailed a laundry list of challenges that could derail the company.

Some of the risks cited, such as the emergence of an alternative to the multiple listing service (MLS), apply to many brokerages, while others may be unique to Redfin. Here are nine that stand out.

Redfin’s market share in established markets.

1. Progress has been gradual, and losses have accumulated

Redfin more than doubled revenue to $267.2 million from 2014 to 2016. But that growth came at a net loss of $77.4 million.

The company’s $167 million in venture funding, massive technology investments and more than 10 years of experience have so far failed to translate into profitability (at least in the last three years for which we have data).

What’s to say the company can reverse this pattern? Will another $100 million do the trick?

“[W]e may not be able to achieve or maintain profitability and we may continue to incur significant losses in the future,” Redfin said in the filing, after noting that it had an accumulated deficit of $613.3 million as of March 31.

2. Competition from traditional brokerages and look-a-likes

Redfin noted the risk of “intense” competition.

Because it pays salaries and benefits to its lead agents, the company can’t adapt to market changes as quickly as many competitors, it said. Some brokerages also have stronger brands and may be able to attract better talent because their agents tend to earn more on a per transaction basis, according to the company.

“If we‘re unable to attract, retain, effectively train, motivate and utilize lead agents, we will be unable to grow our revenue and we may be required to significantly increase our lead agent compensation or other costs,” Redfin said.

Moreover, the industry has a history of quickly mimicking technologies developed by Redfin, such as map-based listing search. And Redfin lookalikes are popping up left and right. Some could steal its thunder.

3. Commission compression

Competition may become so fierce that Redfin — which already charges less than half of the typical 6 percent list-side commission to homesellers — could be forced to trim its fees even further, according to Redfin.

“As competitors introduce new offerings that compete with ours or reduce their commission rates, we may need to change our pricing strategies to compete effectively,” it said.

4. Declining website and mobile app popularity 

“Our success depends on our ability to attract homebuyers and homesellers to our website and mobile application in a cost-effective manner,” Redfin said.

Google could make tweaks to its algorithm that punish redfin.com search results. Or the editors of the Apple iTunes Store could promote other listing search apps over Redfin’s.

“Listings on our website and mobile application have experienced fluctuations in search result and mobile application rankings in the past, and we anticipate fluctuations in the future,” Redfin said.

5. Increased marketing costs

The company also flagged what could be another challenge for many brokerages, not just Redfin: rising ad rates.

“Advertising platforms, such as Facebook, Google, and others, may raise their rates significantly, and we may choose to use alternative and less expensive channels, which may not be as effective at attracting homebuyers and homesellers to our website and mobile application,” Redfin said.

As competition heats up, “generating a meaningful return on our marketing initiatives may be difficult,” it added.

6. Data access and speed

Redfin touts its ability to efficiently collect and exploit data, including MLS listings, as one of its biggest advantages.

But virtually all brokerages have the same level of access to the MLS as Redfin, and plenty also have proprietary data that they could put to use.

That raises the risk that some brokerages “may be able to source listings data or other real estate information faster or more efficiently than we can,” Redfin said.

The company also must be careful to play nice with MLSs. If Redfin skirts any MLS rules, the firm could get booted, potentially resulting in a hit to its site traffic and service.

Each of the 130 MLSs that Redfin belongs to “has adopted its own rules, terms of services and policies governing, among other things, how MLS data may be used, and listings data must be displayed on our website and mobile application,” Redfin notes.

7. An MLS alternative? 

Observers have long speculated over the potential for new online databases to sideline MLSs, seeing threats in Zillow Group’s “Coming Soon” listings and pocket listing aggregators, among other projects.

But these fears have not materialized, perhaps in part due to the readiness of some MLSs to adapt — such as by accepting coming soon listings, rather than shunning them.

Still, Redfin takes the threat of MLS disruption seriously.

“A competitor or another industry participant could also create an alternative listings data service, which may reduce the relevancy and comprehensive nature of the MLSs,” it said.

A weakened MLS could mean a weakened Redfin (unless, perhaps, Redfin itself created an “alternative listings data service”).

8. Poor investments 

Redfin has a long track record of building innovative tools and services for its agents and customers.

But maintaining a tech edge could be tough. Investors have poured billions of dollars into competing real estate startups and brokerage software providers.

Redfin can’t guarantee that “products and services developed by others will not render our offerings noncompetitive or obsolete,” it said.

The company has a lot riding on the success of its new lending operation, which will be crucial to achieving its goal of creating an end-to-end homebuying experience. And Redfin Now, which allows investors to sell their homes directly to Redfin, is largely untested.

“The revenue recognition terms and gross margin profile of our new services, in particular Redfin Now, substantially differ from our core brokerage service and therefore may impact our overall results in a manner difficult for us or analysts to predict,” it said.

9. Regulation

Redfin will have to navigate a thicket of regulation as the company weaves together its brokerage, title and lending operations.

These laws — which include the Real Estate Settlement Procedures Act (RESPA) and the Fair Housing Act — were designed for traditional real estate brokerages, not Redfin. So regulators may take a close look at how Redfin deals with the existing legal framework.

If the brokerage is found in violation of any rules, it “may require us to expend significant time, capital, managerial and other resources to modify or discontinue certain operations, limiting our ability to execute our business strategies, deepen our presence in our existing markets, or expand into new markets.”

Email Teke Wiggin.