At the start of the pandemic, Redfin (Nasdaq: RDFN) flinched and furloughed 41 percent of its agents along with support staff. It quickly suspended its iBuying service Redfin Now, and battened down the hatches. Those were some dark days for Redfin, but they did not last.
In early 2020’s tough going, the confidence Henry Ellenbogen of Durable Capital showed shined as bright spot for the company; he invested $110 million into Redfin to shore up its cash reserves. As recounted in Kelman’s post “Diary of A Pandemic,” Ellenbogen asked Kelman how other brokerages would compete with Redfin if the transaction moved online; Kelman answered, “I don’t know.” Ellenbogen responded, “Well, I do. The world is changing in your favor.”
By the end of the third quarter 2020, it appears that Ellenbogen’s faith was amply repaid as Redfin blew through expectations and had a record quarter, as revealed by the following highlights:
- A gross profit of $93 million, an increase of 74 percent from third quarter 2019.
- A net income of $34.2 million, up over five times the amount from third quarter 2019.
- Real estate gross margin increased to 44 percent from 35 percent over the same period in 2019.
It is hard to imagine how the third quarter could have gone better. It was such a boom that Redfin did not have enough agents to keep up with the demand; it ended up referring a ton of business to its partner agents, but Redfin did not even have enough of those. In the third-quarter earnings call, Kelman admitted as much, as inquiries increased year-over-year in October to 58 percent.
Redfin left a lot of money on the table, but we do think that is one of those “good problems to have” in the brokerage business. Going forward, Redfin plans to expand both hiring agents and recruiting partner agents to keep up with demand, betting that the world has changed in its favor. There is evidence to suggest that it has.
Furthermore, because Redfin agents are W-2 employees, Redfin may have the best chance of winning the increasingly popular real estate “ecosystem economics” game. RESPA has an exception for employees, meaning that Redfin’s capture rates for its ancillary businesses of Title Forward and Redfin Mortgage should be well above the industry average, which should generate significant profit growth for Redfin as a company.
Indeed, Redfin Mortgage had a major breakthrough in the third quarter, posting gross profits for the first time. The future looks increasingly bright, and leads one to think that Glenn Kelman might have flinched at the start of the pandemic, but he made one good decision after another, no matter how tough they were, to shepherd Redfin through the storm. We have little doubt that he is one of the most powerful individuals in real estate today.
Kelman entered real estate thirteen years ago as a software engineer and raised $12 million to build a discount real estate website. Previously, he co-founded Plumtree Software, which he helped take public. When he became CEO at Redfin, he thought it would be just another funding experience, but over time has decided that building a consumer-centric brokerage is his life’s calling. Raised in Seattle, he graduated summa cum laude from the University of California, Berkeley.