Redfin v. Zillow: How the two compare as Redfin's IPO nears

July 9, 2017

The latest tech IPO taxiing on the runway is Redfin, a Seattle based next-generation real estate brokerage founded in 2004. Since then, the company has been tremendously successful, with over 2000 employees and over $160m raised. At Putnam, I spent lots of time analyzing Zillow, a better-known competitor, so it was great to have stats from Redfin's S-1 to compare the two companies. What we see is a fascinating dichotomy between two very different approaches to attacking the same problem.

 

That problem is the real estate market: it is heinously inefficient. All-in fees for brokers are in the 5-6% range, and economists have long puzzled over why they've stayed so stubbornly high. In regions where homes are relatively expensive, rather than accept a lower fee, there are simply more realtors doing fewer transactions/year. Given that a realtor can make a great living selling just 6-8 high end homes/year, there ends up being massive excess capacity and realtors spend a huge chunk of their time prospecting for new business. Meanwhile, for homebuyers the process is fraught with uncertainty- it is both the most significant financial decision of their lives and one for which they almost always have little practice, lowering their price sensitivity and increasing the need for outside expertise. 

 

In 2004, Redfin sought to change this. It has taken a novel, "full stack" approach. The company employees real estate agents who are paid a salary, not a commission, and also runs its own real estate portal (Redfin.com) which helps create leads for the aforementioned agents. Running this way it is able to charge roughly half the usual fee structure, saving thousands (and sometimes tens of thousands) of dollar for the parties involved. The goal is to upend the whole real estate industry by driving it to a new equilibrium where pricing is lower, and fewer real estate agents are paid steady salaries to do their work, selling more houses/year while spending less time prospecting for new business. It has been steadily expanding for over a decade now, rolling out new geographies and gaining share in existing geographies, patiently working to prove economists right.

 

Two years after Redfin, two companies were founded with a very different vision. Zillow and Trulia both focused their efforts on building scaled portals for homebuyers, selling leads to any real estate agent who would bid on them. As such, they don't immediately disrupt the status quo, rather they help existing agents of all kinds find sales leads. As such, Zillow and Trulia focused their efforts on building traffic and brands, and the results were impressive- both are much larger today than Redfin, both online and in the public perception. After the merger, Zillow is setting out to improve efficiency in its own way: by pushing more of its leads to the higher performing agents, turning them into hyper-productive "super-agents" who can afford to pay more for leads because they are the best at converting them into sales. So, in its own way, Zillow is also helping to make real estate more efficient by making individual agents more productive.

 

The table below summarizes how this has gone so far: Zillow is larger, and running slightly less losses as a % of revenue (adjusting for a one-time litigation settlement), but also growing more slowly. The company benefits from its massively scaled media presence, especially when combined with Trulia's. That said, there's no evidence that Zillow's success has impeded Redfin's- this is a huge market and while Zillow's model seems to have scaled more quickly, there is a more than enough opportunity left for Redfin's more intrinsically disruptive model.

 

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