“The Rise and Fall of iBuying: 2021-2022.”
While you shouldn’t hold your breath to see that book at your local bookseller or library—at least not necessarily with those dates—it is starting to look like the much-hyped rise of instant homebuying might end up as a cautionary tale after Redfin became the latest major real estate company to bail on the business.
In a Q3 earnings release, Redfin CEO Glenn Kelman said the company’s iBuying arm, RedfinNow, was “built…on a knife’s edge” but that “its appeal to consumers has waned as the market turned.”
“The entirety of the earnings shortfall came from RedfinNow, which has been selling homes at lower than expected prices,” said Kelman on the Q3 earnings call.
Sunsetting RedfinNow—which is expected to take until Q2 of 2023—did not happen in a vacuum. Just last week, Opendoor reported staggering losses after letting go of more than 500 workers, citing a “challenging real estate market.”
And Redfin itself has seen financial difficulties across every sector of its business in the face of a brutal shift in the real estate market, driven broadly by higher interest rates.
The company reported that gross profit for Q3 was down 54% year-over-year, at $58.1 million, and Redfin’s real estate services gross profit was $54.9 million, a decrease of 43% year-over-year.
Revenue was up 11% from last year, as the company took in $600.5 million, but it also reported a net loss of $90.2 million, compared to $18.9 million in the third quarter of 2021. Gross profit losses for the full year are projected at $22 – $26 million.
The company’s stock is down more than 90% this calendar year, but had shot up a staggering 30% in early trading following the earnings report.
Ending RedfinNow resulted in laying off 862 employees. The company has now laid off 27% of its workforce this year, according to Kelman.
Speaking about the choice to get out of iBuying, Kelman said the decision to back out is “only partly due to the challenges we’ve had selling RedfinNow homes.”
“Prices may stabilize in 2023 but the cost of capital, especially the capital coming from our balance sheet, is likely to remain higher for the foreseeable future,” Kelman said. “That has already lowered how much Redfin and other iBuyers can pay for homes, which in turn has discouraged Redfin.com visitors from contacting us about an instant offer.”
Kelman further described iBuying as a risk that simply wasn’t worth the benefit it provided to the company’s core business (Redfin had previously described iBuying as supplemental to other real estate sectors rather than “an end in itself”).
Potential iBuying customers will be routed to Opendoor, he added, through a previously existing partnership. The company expects $100 million in cash flow from shuttering RedFin now.
“We can sell more homes over time by focusing on our core business, building our online audience and giving our customers the best brokerage, mortgage, title and rental service,” Kelman added, saying that search-ranking improvement will have the biggest positive effect on the business more than anything else.
With iBuying behind them, Kelman spent much of the earnings call focusing on the company’s fundamentals, including increasing web traffic and search-share growth, as well as a new emphasis on rentals. The company plans to reach profitability next year, Kelman said, hoping to see its rental segment breaking even by the end of 2023—even as there is a chance the market continues to decline.
“We think that the housing market could get worse,” he explained. “We looked at what happened between 2008 and 2011 and took that as a baseline, even though, since then, the United States population has grown.”
In his usual bombastic, colorful style, Kelman continued to project confidence.
“The overriding concern our investors have is whether we can get through this downturn without running out of money. We’ll pay our debts, come heck or high water, and we’ll keep growing,” Kelman expounded. “Our rental progress can double. Our brokerages’ progress on close rates and loyalty sales can send our shares through the roof. Our lending and title service can print money. It’s gonna be a long night but Redfin can still thrive in the darkness.”