Name: Redfin continues to revolutionize the real estate business
Uploaded: 2021-12-31
Duration: 15 min 22 s
Description: CEO Glenn Kelman discusses the company's latest advancements in the age of digital home buying.

CEO Glenn Kelman discusses the company's latest advancements in the age of digital home buying.

Redfin continues to revolutionize the real estate business 

Real_Estate

Redfin was founded in 2004 with the idea of using technology to disrupt residential real estate brokerage and that business. And the commission's then being charged and the industry was not happy about it as I understand. Well now, uh Redfin has been quite successful and at the same time, there's still a lot of brokers out there collecting pretty big commissions. How come? Well, it's an industry that's slow to change. People only buy a home once every seven or 10 years and when they do, they usually hire their uncle or their neighbor or the person who sold them their last house. So that has just made change slow. But because the market is so large, 60 billion in commissions, another $40 billion dollars paid the lenders every year in fees. You can take just a small piece of it and make a huge difference for Redfin's slow and steady wins the race. We've been gaining market share Every quarter for the past 16 years And I hope that we can do it for another 16. That is remarkable. What is the technology frontier in this business right now. And by that, I mean, what is the technology that's being worked on most urgently now? Well, part of the technology is about visualizing the listing so that people can have an experience of what the home is really like and what the neighborhood around it is like without leaving their own home. And so being able to preview listings just become more important just because more people are relocating across the country because of Covid, they've sometimes been hesitant to get on a plane and they just want to know what it's really like to be inside the house. So there are new three dimensional visualizations of the home. There are these virtual tours that are conducted by a facetime or zoom. People are buying properties in greater numbers than ever before without ever setting foot in those properties. About half the people who bought a home last year made at least one offer where that offer was made before the person had visited the house. So creating that immersive experience to give people a sense of what it's really like, higher stakes than ever in doing that. And then the other area where you just see a massive amount of machine learning is around pricing the home. We want to be able to guide consumers around what to list their home for where to put in their bids. But you also see this i buying phenomenon where technology driven companies are buying the homes ourselves when we put cash on the barrel, let someone move on, we own the property were responsible for selling it. And that means we're taking the risk. If the market changes over the two or three months it takes us to rehabilitate the property and get it on the market. So, using machine learning to predict the market and understand it at a local level because austin texas has completely different housing markets than Bethesda Maryland. That has been a massive challenge. But because we have all the pictures of the homes and we have all this traffic to our website, we can try to gauge what each home is worth across the United States and take that risk so that the consumer doesn't have to. And it is quite a phenomenon, uh just to make sure everybody understands it. I mean, they can get and almost instantaneous offer cash, offer for a home they want to sell. Is that still correct? It is, it takes a few hours. And of course the offer is going to be contention on an in person inspections. So it's not all automated, but mostly you get a price very quickly and within a couple of days you get the certainty that that price is going to stick and that allows you to move on with the rest of your life, whether it's an estate sale where your parents have passed on or gone to a nursing home and you're splitting the pot with your siblings or it's an investor owned property where you're in Seattle and the home is in phoenix, there are many people who really just want to be able to move on very quickly and this allows them to do so, And Redfin is in this business. What have you seen over the past 18 months? Well, it's been a very turbulent time in the market. So in April of 2020, the housing market came to an absolute grinding halt COVID had stopped the economy overall, people weren't able to tour properties, especially in states like California. But then by June the market has come roaring back. We were seeing about seven million units Of homes being sold on an annual basis when it's more typical to see five or 5.5. And now since memorial day in 2021, the housing market has taken one step back. I think some people are now trying to beat an interest rate increase because it's now imminent with inflation fears everywhere. So it's a very uncertain time in the housing market, demand has been very strong, inventory has been very low, but the overall economic condition has been uncertain. And what about you? The eye buying phenomenon? I mean, Redfin, does that, was there a big increase in that during the pandemic or what? There has been a big increase. It started before the pandemic and continued right through it. We have seen some players in the market exit the market because the risks are so great. It's very capital intensive. You have to borrow hundreds of millions and sometimes billions of dollars to be able to own all of these houses. And then that burns a hole in your pocket if you can't sell them right away. So I think we have become more cognizant of the risk than ever before. It is a small part of our business uh in terms of transactions. But it is a huge part of our balance sheet. So we just have to make sure that we're paid well for that risk that we give the consumer convenience. But we're clear with them that that convenience comes at a cost That you are going to get less money for your house if we're going to cash you out on day one and Zillow in particular dropped out of this, uh not too long ago. And they said forthrightly that their algorithms just couldn't price properties well enough for this to work out for them. Is this something that technology must and will eventually solve? Well, technology can never perfectly predict the market. Otherwise, computers would be running the world. There's no one who knows what the stock market's going to do in six months or what the housing market is going to do in six months. So all you can do is price in a margin of error and where different I buyers disagree is just on how large that margin of error should be. Redfin has been fairly clear that we have a larger margin of error than most because I've been through all the ups and downs. I've been at Redford for 16 years. We survived the great financial crisis. We have always been a business where, yes, there is a technology component, but it also has to have a ground game. If you're going to serve customers with real estate agents, you gotta get your hands dirty. And that means that you are really going to experience the ups and downs in a visceral way. And so that has tempered us to be more careful in the eye buying market than most. Um, but hopefully that means that we can build a durable business well and that gets us to this phenomenon you mentioned earlier, which is buying a property without ever seeing it in person. I presume that that increased a lot during the pandemic. But do you expect it to remain at that high level? Will it fall back? But not all the way back? What do you expect? It will fall back some, But I think mostly it's a one way trend. You should be careful though to note that people still inspect the property so before they close on the deal, either an eye buyer or a consumer buyer is going to hire an inspector to walk through the whole property so you have to know what you're getting before you complete the paperwork. I just think that before you Bid many people don't have to see it in person to get a sense of, I'll pay $100,000 to that house or I'll pay $1.2 million dollars to that house. I want that property. Many people are willing to do that based on fairly thorough visualizations of the property. There are now these three dimensional scans that let you pivot in any direction that you want. It's almost like google street view, but inside the house, it's very high resolution And so people have usually an emotional and immediate reaction when they walk through the door of the home that this is right or this is wrong. And I've just been on enough home tours where before you even get through the front door, the buyer knows I don't want this one. And so rather than driving around all day, they're getting to a very narrow list of finalists, sometimes even making a bid on one before they see the property in person. I think a lot of people may not actually understand the basic redfin uh business model and I wonder if you can just explain it very briefly um how you, the commission's, you charge on, how you can charge such low commissions. Sure. Well the world has beat a path to our door because we were the inventors of map-based real estate search. We have 50 million unique visitors on redfin.com. And as a result, those people click on a button to see a home at a moment's notice. It's almost like ordering an Uber. But you can see a property where you arrange a tour. It can be an impersonal tour And then we have real estate agents who help you with the entire transaction but charge about half the fee. So to list the home, the fee can be as low as a 1% fee when the typical Agent charges 2.5 or 3% as her listing commission for that sale. We sell homes faster. We sell them for more money. Our agents are focused on service and not sales. They don't spend their time prospecting for customers. So they're about two or three times more productive than a traditional agent. And what that means is they just closed two or three sales a month instead of one sale every other month. That's the industry average. So as a result, we're able to pay our agents more. We're able to give the consumer a better deal because most of the industry spends most of its time looking for customers instead of serving customers. And we have built technology to put the whole transaction on rails so that an agent can be really efficient. She doesn't spend much time on the paperwork. She really just spends time talking to you, understanding your needs and trying to get the highest possible price for you if you're selling your home or the best possible deal for you if you're buying a home and the technology that's really made a difference for our Homebuyers. Is this on demand touring because it's been so competitive. People want to see a house first. They're not just trying to do that because they're impatient. They're trying to do that because they want to beat other buyers to the punch. And we have enabled that by having an application that alerts you at a moment's notice when the house goes on the market and gives you a button to click to say I want to see it. I can be at that house in half an hour where I want to see it right now. Take me on a virtual tour. I'll stream it from my phone and that has just turned time into our friend um into a real competitive weapon for our customers. So the and the value proposition for agents is I get less per deal but I do way more deals. So on the whole I do better. This also suggests the need for fewer agents overall if this model continues to spread, is that is that right? I think that the industry sometimes has served itself. It's a giant sales and marketing machine. Most of the people in the industry lead lives of quiet desperation where they're always looking for customers. And what we want an agent to do is just to serve those customers. So our agents earned about $100,000. After their first year. Our top Agent earned about $700,000. The average for redfin. It's two or three times higher. When I first got into the business I saw real estate agents as a bug. I was used to working with computer scientists from caltech or stanford or M. I. T. And now I am so proud to deliver that service. I think our customers want great technology but they want someone to answer the phone who really knows the local market, who can walk with them and listen to their needs. And that part of the business used to seem like such a drag. Um, and now it's the part that I'm most proud of having a company that employs both types of people, the engineers and the people in service and treating both of them really well is one of the best things about red test. One of the most vexing parts of residential real estate of buying a home in particular is getting the mortgage. Uh, you know, it's amazing that you can get a car loan in an hour and you drive the collateral away, but it takes weeks to get a mortgage. Do you see anything that can fix that? Yes and no, there's definitely a new generation of innovators in the mortgage space, but all of them are competing with the federal government. So when you are issuing conventional loans, Fannie and Freddie these quasi governmental enterprises subsidize that mortgage and make it very, very cheap. So yes, you can get a car loan, but you can't get a car loan at 3% over 30 years for half of America. And so I think a lot of the innovation in lending is just going to be limited by the fact that no matter how crazy you get, how cool the loan process is going to be. Eventually, the cheapest money is going to come from someone who has fairly extensive documentation requirements. They want to know everything about your debt to income ratio and your job and all of your assets and that's just gonna be a pain in the neck. Obviously there's a paper pushing process that we can automate, we spent five years building software because we're also a lender to try to automate that process. Um but the hardest part of it is just on the consumer side fishing around finding all the documentation and uploading it to a website or connecting the website to your bank's website, the website to your employer's website so that we can figure out where your pay stubs are overall, what's your advice to homeowners, whether for home buyers and home sellers in this market other than to use Redford just to pick a home you love. I see people worry about timing the market, I see them get fancy on an offer and try to get it for $10,000 less. But the way you can really destroy wealth is by moving into a house. Even if you have a lower transaction fee through Redfin, if you move into a place and two years later you sell it the refinancing the brokerage fees. Everything else will eat up your wealth. And so there's a whole bunch of people who are trying to get you to transact, but I would encourage you instead to buy and hold and what that means is that when you see a house you love, Don't worry about over paying for it a little. And if you see a great deal, don't think about underpaying, because if you don't love the house, you shouldn't buy it anyway. That is the simplest advice to follow your heart. But it's true and housing as it is in life.