This is the first in a series of 10 reports on the challenges the country’s largest brokerages, portals and iBuyers face in 2023. Check back as Inman dives into the biggest obstacles of the new year for Anywhere, Compass, Keller Williams and more all this month. And look back at the challenges they faced in 2022 here.
Redfin has had quite a run.
The online brokerage and portal giant was founded in 2004, meaning that 2022 marked the 18th anniversary of the company’s creation. And over the course of those nearly two decades, the company has expanded into new markets, added a variety of ancillary services and taken a number of stands on hot-button issues. Redfin’s age and scope make it one of real estate’s older stalwarts at this point.
Nevertheless, 2022 also saw the company effectively fall in with a much younger crowd of real estate upstarts and startups. Redfin suffered, for example, amid the carnage in iBuying as the market slowed. The firm’s share price fell to record lows, along with peers like Compass and Opendoor, this year. And some of Redfin’s most distinctive features began to elicit skepticism from the analyst set.
Redfin is absolutely still a juggernaut. The company had a market cap of about half a billion dollars as of mid-December, and it spent the final quarter of 2022 aggressively addressing some of its biggest challenges.
But to understand what lies ahead, Inman reached out to a group of analysts and industry observers. And the takeaway from these conversations was that in some ways Redfin’s unique diversification strategy means that it faces more, and steeper, challenges than peer businesses. That doesn’t mean the company is doomed — far from it — but it does mean that Redfin may have to work harder and hustle faster than the industry average if it wants to have a successful 2023.
Here are the five main challenges experts say Redfin is likely to face next year:
The salaried agent model
One of the challenges that came up again and again in conversations for this story was Redfin’s brokerage model, which employs agents as salaried workers. That contrasts with the much more common commission model, in which agents are classified as independent contractors.
This fall, however, observers began vocally raising questions about Redfin’s model. The debate flared up in early November when analyst Jason Helfstein of Oppenheimer & Co. described the company’s approach as “fundamentally flawed” and downgraded Redfin’s stock.
In a conversation with Inman, Russ Cofano — a longtime real estate veteran who is currently the CEO of Collabra Technology — made a similar point, saying that “their business model of employing agents has not worked.”
“I think the experiment is just not working, Cofano said. “I don’t think anybody believes it. The folks at Redfin may believe it, but I doubt many folks outside of Redfin believe it.”
The argument is that when agents are on a salary, they collect checks even if they’re not closing deals or bringing in any money. So, they cost a lot. That contrasts with the commission model, which pays agents only when they actually make money.
Analyst Mike DelPrete told Inman that the market downturn that happened in 2022 “is a problem for everyone in the industry, not just Redfin.” But he also pointed out that the commission model insulates more traditional brokerages from some of the market’s biggest swings.
“If I’m a Keller Williams agent and that’s happening to me, that’s not hurting Keller Williams’ bottom line,” DelPrete explained.
Redfin has been steadfast in its commitment to the salary model. And in a recent conversation with Inman, Jason Aleem — a senior vice president at the company — pushed back against the naysayers.
“I’d say our model is a little more resilient than people give us credit for,” Aleem said. “We’ve always been able to be flexible between sending demand to our employee agents and our partner agents. So I think we’re a little bit more resilient than people give us credit for.”
Aleem was referring to the fact that Redfin handles excess demand for its staff members by referring some would-be clients to outside agents. Ergo, if there is a lot less demand for housing and fewer would-be clients in Redfin’s pipeline, it’s theoretically possible for the company to deal with that by reducing the number of employees it has and then leaning more heavily on partner agents as needs arise.
Whether that will be enough to bat down concerns over the salary model and mitigate its challenges in a shrinking housing market remains to be seen. But Aleem reiterated to Inman that Redfin does not plan to abandon this unique feature of its brokerage business.
“I love our employee model,” he said. “We’re going to keep that.”
The need to cut costs
Closely related to the challenges Redfin faces over its salary model is the need to cut costs. And to that end, the company has made some big moves in 2022. Redfin held two rounds of layoffs, cutting 8 percent of its staff in June and another 13 percent in November. Asked about the cuts and Redfin’s employees, Aleem said “we think we’re close to where we need to be with regard to our staffing levels.”
The other big thing Redfin did in 2022 to cut costs was shut down RedfinNow, the firm’s iBuying program.
Asked about cutting costs, Aleem said “we think we’ve positioned ourselves well to attack the market and gain market share.”
John Campbell, a managing director at market research firm Stephens Inc., pointed to such moves as positives for Redfin’s overall health and described the extent of Redfin’s cost cutting as “basically bracing themselves for a return to housing crisis levels.”
“They’ve really dramatically cut costs really deep,” Campbell said. “They did this around COVID and they did it again in the last couple of months.”
In some sense, then, Redfin has already tackled this challenge. But because 2023 hasn’t happened yet, it remains to be seen if the cuts will be adequate and if they’ll persuade outsiders that the company has responded appropriately.
Bernie McTernan, a senior analyst with Needham & Company, told Inman that on this front Redfin also faces the challenge of not having “the same kind of cost base to cut” as other large companies, such as Compass. And he argued that “the more they can cut costs the better their stock will do.”
“Now it’s about weathering the storm, there’s really not much they can do to prevent the macro headwinds,” McTernan said. “All they can do is control what they can and that’s their cost structure.”
The skeptical stock market
Speaking of stocks, Redfin has had a rough ride over the last 12 months. Year-to-date, the company’s share price had fallen nearly 90 percent as of mid-December. As of Dec. 22, shares were trading at just above $4. That’s a monumental drop from February 2021, when shares were nearly $100.
Redfin shares ultimately hit an all-time low of just over $3 on Nov. 9 but have since rebounded somewhat.
Of course, the entire stock market is also way down. And most real estate companies have experienced losses that outpace the broader market. Redfin is not the only company that had a rough time this year.
But Redfin’s losses have far outpaced those of the market generally, and they’ve been much worse than other big players in real estate, such as Anywhere or rival Zillow.
A dropping share price isn’t necessarily an immediate threat — at least assuming it doesn’t get too low. But Cofano said that as Redfin’s share price dropped, it made the company “more vulnerable” to a variety of less-than-desirable outcomes, such as takeovers, acquisitions or becoming underwater thanks to too much debt, among others.
“Redfin is a very vulnerable company today,” Cofano said.
Campbell argued that Redfin’s share price won’t make a huge difference for the company’s balance sheet and is unlikely to impact day-to-day operations. But he noted that another challenge of having lost so much value in the stock market is that “clearly they can’t raise a lot of cash.”
“So if there’s some massive acquisition they were looking at they can’t do it,” he said.
McTernan also said companies with falling share prices can run into a “vicious cycle” where investors believe they need to raise money, but a falling share price leads to diminishing returns. As a result, Redfin could “have a real issue” if it needs to raise capital, though McTernan added that he doesn’t “think it’s a real issue at this time.”
When Inman asked Aleem about Redfin’s stock, he said the company does discuss market performance internally. But “the most important thing through all the conversations we’ve had about that is that you never lose sight of what’s going to help the customer.”
“We know you need to create value,” he added, “and the best way to do that is to help the customer.”
Ultimately, Redfin’s share price will reflect the company’s financial performance and the success of its cost-cutting efforts. But it also offers a hint at how investors feel about the company over the short, medium and longer term. And so part of the challenge for Redfin in 2022 is persuading the world that it knows what it’s doing.
The push into ancillary services
A lot of companies have in recent years framed ancillary services as their silver bullet. But Redfin is somewhat unique in the breadth of its offerings. And DelPrete speculated that the company may have “bit off more than they can chew.”
“Redfin is doing a lot of things,” DelPrete said. “Redfin has had and has a lot of irons in the fire. And they’re just running out of wood.”
Among other items, DelPrete pointed out that Redfin has a brokerage, a portal, a rental company and a mortgage company that was acquired earlier this year. DelPrete said that in retrospect, the mortgage acquisition probably happened at the “worst time for that.” The comment alluded to 2022’s spiking mortgage rates, which in turn tamped down demand for loans.
Conventional thinking would suggest that having a highly diversified business is a good thing, and most of the analysts who spoke with Inman had positive things to say about Redfin on this point. DelPrete, for instance, praised the company’s website. And McTernan spoke positively about Redfin’s rental business as a potential bright spot in the future.
But spreading out over a lot of different verticals also means having to be good at a lot of different, and sometimes disparate, things.
“Doing a lot of things well in real estate is really hard,” DelPrete said. “It’s like training for a marathon and beating yourself up and sweating and bleeding. And then halfway through, deciding you’re going to get into discus throwing.”
So the challenge in 2022 will be to ramp up offerings, such as rentals and mortgages while making sure that all of the company’s services are adding to the bottom line. In other words, and to continue DelPrete’s metaphor, the challenge is to be good at marathon running and discus throwing and everything else.
The path to profitability
Ultimately at the end of the day, the goal for Redfin is to get closer to profitability. This objective is closely related to cutting costs, but also more expansive. It’s proactive, not just reactive.
In a November earnings call with investors, Redfin CEO Glenn Kelman said he expects Redfin to turn an annual net profit in 2024. That goal takes some of the pressure off next year, which is useful, because during that same call, Kelman said 2023’s market decline could ultimately be “similar to the great financial crisis.” Still, Kelman also said Redfin was positioning itself to thrive even in bleak times.
“We have to assume the sun will never come up, that it’ll be night always,” Kelman elegized during the call. “All we can do is prepare for the market we are in.”
The experts were divided on how exactly Redfin can achieve its goals. Cofano, for instance, suggested Redfin could have a strong lead generation business if it wanted one. That’s the way Zillow makes most of its money, though Cofano wasn’t convinced that would actually be the right move for Redfin.
“I don’t know how they make money unless they just decide to be a lead generation company,” Cofano said. “But that’s not their mission. Their mission was never to be a lead gen company.”
McTernan thinks it would be “tough” for Redfin to already be profitable in 2023, but he spoke positively about the company’s website as a strong point in its business.
“They’re working on some things, like SEO is helping their website traffic,” he said. “I do think that their website is improving and I do think that that helps.”
Campbell echoed others who said rentals may ultimately help Redfin’s bottom line, and he captured a prevailing sentiment among those who spoke out for this story: “If the market is going back to some degree of normal cyclicality I think they’ll be fine.”
“For Redfin I think there’s been a lot of rushed or kind of premature judgment on their model in general,” Campbell added.
The point is that while Redfin faces a large number of challenges in the coming year — arguably more so than some other companies — the firm is also not on the verge of collapse. And most of the experts who spoke to Inman envisioned Redfin remaining a player in real estate well into the future.
“Is this an existential moment?” DelPrete ultimately concluded. “No I don’t think so. The business works.”
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