Redfin seeks to eliminate agent commission reimbursement
The second quarter was difficult for red fin. In mid-June, the brokerage laid off 470 employees as housing demand plummeted due to continued appreciation in home prices and rising mortgage rates.
Despite these difficulties, the company generated $606.9 million in revenue during the quarter, a 29% year-over-year increase. However, the company’s net loss fell from $27.9 million a year ago to $78.1 million.
“In the second quarter, Redfin underperformed the expectations we set on our last call,” Glenn Kelman, CEO of Redfin, told investors during the call. call for the company’s second quarter results Thursday evening. “The shortfall was due to the largest rate hike in 35 years, which in June reduced second-quarter lending revenue by Bay Equitythe lender we acquired in April for $15 million.
Although rising mortgage rates hampered Bay Equity’s earnings, Redfin saw mortgage rates rise from 6% in March to 11% in June and 15% in July, almost twice as high as the previous monthly high in 8% of the company.
“When rates stabilize and Bay Equity can raise prices for new loans, and also refinance many of our 2022 loans, we will have the potential to generate more profit from a client than any other broker. This acquisition may change the fundamental physics of our business Redfin has been a new source of sales for Bay Equity, but also a recruiting partner for the development of Bay Equity’s traditional business of meeting homebuyers through agents from other brokerages,” Kelman said.
Redfin’s securities business also saw an increase in its attachment rate, from 12% a year ago to 32%. This growth led to a 72% increase in revenue from the company’s Securities and Closing Services business, which generated $6 million in revenue during the second quarter.
As Redfin seeks to grow revenue and turn a net profit, executives say they are developing a variety of strategies.
During the second quarter, the company’s market share of existing home sales increased five basis points from a year earlier, to 0.82%. The company also added 52 MLSs and its listing coverage expanded to 94% of the US population.
In addition to expanding its coverage, Redfin has also announced changes to its agent commission structure. In late July, the company removed the commission refund it offered to homebuyers in 22 markets, receiving “little objection from customers or agents.”
“If this pilot continues to be successful, we will eliminate reimbursement entirely as of January 2023, improving our core business gross margins by more than 500 basis points,” Kelman said. “In the nine smaller markets that have already removed reimbursement in 2019, we have continued to take share.”
Kelman also told investors that Redfin had again started advertising the 1% listing fee charged to “progressing clients” in certain markets. In those markets, Kelman said new Redfin listings in July grew 10 points faster than the broader market. In comparison, in June, before the campaign launched, new Redfin listings were growing more slowly than the market.
“As we invest more in advertising these fees in 2023, we expect listing market share to accelerate,” Kelman said.
“We’ve long believed that owners’ interest in immediate cash is here to stay, but that we wouldn’t know iBuying’s true margins until we weathered a downturn that lasted longer than the false starts in late 2018 and mid-2020,” Kelman said. “We also believe that iBuying is only worthwhile in a brokerage that can serve owners even when market conditions make iBuying almost cost prohibitive. For every RedfinNow request that led to an accepted offer in June, two more led to the owner hiring a Redfin agent to list the home instead. Increasing brokerage share is the raison d’être not only of RedfinNow, but of each of Redfin’s businesses.
Mirroring the general trend of iBuyers last spring, RedfinNow recorded a 45% annual increase in the number of homes sold. In June and July, the brokerage reported that it sold more homes than it bought. According to executives, the company expects nearly all of the homes purchased in the spring will be sold by the end of the year.
“It was a volatile quarter, and we are reacting to the changing macroeconomic environment and taking steps to manage profitability, including reducing the number of homes we buy through our properties segment, laying off employees from our corporate, real estate services and mortgage businesses and limiting fills for voluntary attrition,” said Chris Nielsen, the company’s chief financial officer.