Here’s the Business That Will Catapult Redfin Higher

RedFin (NASDAQ:RDFN) shares have enjoyed a remarkable year, with the company climbing more than 250% off of its pandemic-induced low back in late March.

That’s a nice bounce, but the growth for Redfin is still in its early stages. In this Nov. 12 discussion on Motley Fool Live during the recording of the Industry Focus podcast, Motley Fool analyst Tim Beyers and Industry Focus host Nick Sciple discuss why they believe the company can soar higher in the years to come.

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Tim Beyers: Even before this pandemic, we were seeing Redfin take on more elements of the real estate transaction. So, they built a title business and then they’re building a mortgage business, and then they built instant buying — which I’m not going to define just yet, because we’re going to get to that — and then they also bought in some concierge services, improve your home before you sell it. So, all of these ways for Redfin to capture more of the real estate transaction and do it in a very high value way that is affordable to the customer. And the unit economics on this has been really good.

And I think, maybe the unheralded portion of the Redfin business that’s really come through in a big way most recently is the mortgage business. I actually think the mortgage business, even more than instant buying, is going to be the thing that really catapults Redfin forward. Because here’s the thing about mortgage. There’s a lot of banks, there’s a lot of competition in mortgage, but if you’ve ever bought a house — and I don’t know, Nick, have you bought a house yet?

Sciple: No, I’m probably going to be one of these people in that millennial demographic, where with the low interest rates and all those sorts of things, I’ll be in the buying pool, but not right now.

Beyers: Okay. So, the way it tends to work with — and I don’t think this has changed very much, Nick — is that your mortgage broker, unless you’re really super-deliberate about it, and you’re really just relentlessly shopping, it’s very often that you’re going to try and pair that mortgage as close to the real estate transaction anyway. So, your broker, for example, your real estate broker says, hey, here’s somebody who could help you with your mortgage when you’re ready. That is very common, like, that really is very often, that’s how you end up getting your mortgage.

And so, Redfin just said, hey, look, you know what, as you’re looking at this, as you’re buying, let us help you, and just pulled out as part of the transaction, they’re not the only ones that are doing this, by the way, so is Zillow (NASDAQ:Z) (NASDAQ:ZG), Zillow is doing this. So, it becomes very much a referral business. The closer you get to the transaction, the more likely it is you are to win that business. So, I think that Redfin has a lot of ways to compete in this area. And they don’t hold the loans, they write the loan, and they sell it, they take a profit and they move on. So, I think, you know, as we get to a more liquid residential real estate market where people are moving more, maybe moving up more, maybe moving from the coast to the interior of the United States, or vice versa, you’re going to see Redfin getting more transactions into its system. And the more transactions there are, given the way they’ve built their business to capture more of that transaction, the more profitable this company becomes over time. So, it’s early, but I can see the pattern, which is my point here.

Sciple: Oh, yeah, to your point on the Redfin Mortgage business, so it just had its first full quarter of gross profits in the third quarter, gross margins over 30%. Mortgage revenues for the quarter nearly tripled year-over-year, part of that is because there’s just so much demand for mortgages that you can extract a little bit higher rate, but another thing they’re doing is, they’ve talked about expanding to the West Coast, their mortgage offering. So, now they go from somewhere around two-thirds of their customers they could offer a mortgage product to, and now the number they’re suggesting is 94% of Redfin brokerage customers they can now offer a mortgage to.

And so, yes, Tim, this idea is, as they get bigger, and they only have about a 1% market share right now, they can touch more and more parts of this transaction, so there’s lots of different ways for them to win.

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