Redfin Business Model | How Redfin Makes Money?

Redfin is a real estate platform that uses a hybrid of automation and human intervention to facilitate deal flow between buyers and sellers. 

Redfin charges a listing fee of between 1.0 and 1.5 percent to sellers. Additionally, the company purchases properties through RedfinNow and resells them on its website for a profit. 

Additionally, Redfin earns money through its financing solutions and concierge services.

Redfin business model is dedicated to reinventing real estate to make it more beneficial to the buyer. 

This aim is evident in Redfin’s business model and marketing strategy. Rather than pitching space to land specialists or accepting referral fees, this group promises to save clients money and reward operators who provide great client service.

Redfin aims to reimagine the real estate sector in a way that benefits the consumer. The Redfin business model exemplifies this objective. 

The company does not sell advertising space to real estate brokers, nor do they charge referral fees. Customer service agents are instead rewarded for providing exceptional service, saving them money.

What is Redfin?

Redfin is a technology-enabled real estate firm that optimizes the home buying and selling experience.

Redfin’s business model is built around the concept of collecting a listing fee for each home sold via their platform. 

Redfin Business Model

Redfin earns money by flipping homes, collecting a service charge (through RedfinNow), referring mortgage clients, and providing concierge service.

Redfin was founded in 2002 and has grown to become one of the biggest online brokerage firms in North America. After going public in 2017, Redfin has a value exceeding $4 billion.

Company NameRedfin
Company TypePublic
FoundersDavid Eraker
ProductRedfin
Founded DateOctober 2002
HeadquarterSeattle, Washington, United States
Location ServedThe United States and Canada
Websitehttp://www.redfin.com

How Does Redfin Work?

Redfin is a real estate company that leverages technology to enhance consumer and agent experience when buying or selling a house.

Buyers can acquire properties in more than 1000 cities across the United States and Canada on Redfin’s marketplace. Purchases can be made directly through Redfin or the vendor. 

Redfin agents visit the client at their place or virtually through video-chat tours throughout the process.

Redfin splits the seller’s agent commission with the buyer after completing the purchase, usually between 2% and 3%. 

Redfin offers various tools to help buyers decide, including its Affordability Calculator and free home buying workshops.

The company also offers sellers the option of selling their houses directly to Redfin or using one of their agents to guide them through the process. 

A seller can determine the maximum price for a house by using the company’s house evaluation tool.

Redfin operates a marketplace for borrowers that enables them to compare loans from more than 50 lenders nationwide. 

Zillow powers the marketplace, which is surprising. A mortgage calculator provides borrowers with an estimate of what they will ultimately pay in interest.

Additionally, Redfin’s platform connects users with other real estate service professionals. Users can also find handy workers, stagers, and photographers, among other services, besides the more than 1,000 agents employed by the organization. 

Redfin can be accessed via the company’s website or its Android and iOS mobile applications.

How Does Redfin Make Money?

Redfin earns money from listing fees, house flips, referral fees, and related services.

Redfin’s revenues are divided between service and product segments. There are several sources of revenue created by the corporation within each segment.

The company has undergone a substantial change since its inception. Its primary revenue stream is agent commissions on all sales made through its platform, just as any other traditional brokerage would.

Redfin Business Model

The company has expanded its scope since then. Redfin now generates revenue through home flipping, mortgage sales, and advertising for service professionals. 

Here are a few income streams that you may be interested in.

Listing Charges

There is a listing fee of 1% or 1.5 percent for sellers, depending on the market. It varies by city how much Redfin charges as a commission. 

Dallas has a minimum commission of $3,250, while Los Angeles has a minimum commission of $6,250.

The traditional brokerage fee is about 2.5 percent. The buyer’s agent commission is then added. If the agent fee is 2.5 percent, it will cost the seller 3.5 percent for sale, thereby going through Redfin.

With more than 50 cities served by Redfin agents in the USA and Canada, buyers can find a property to suit their needs. 

As a result, buyers frequently work with Redfin-employed agents when purchasing properties.

Redfin estimates that sellers can earn an additional $2,800 per sale when using their platform. Further, this organization is five days faster than a conventional broker.

The closing costs for purchasing a house have historically been borne by the buyers. 

Closer fees and charges include those associated with purchasing or selling a property, such as a title insurance, taxes, appraisal, and lender’s fees.

When a purchaser engages the services of a Redfin agent, they receive a closing cost refund at closing. Some states, like Arkansas and Iowa, do not permit the Redfin Refund due to legal restrictions.

Redfin accounted for over 1% of all home sales in the United States in 2019. The Redfin Refund and lower listing fees saved homebuyers and sellers a combined $180 million during the same time.

Redfin Mortgage

Redfin Mortgage, which launched in January 2017, is the company’s home financing division. This service enables homebuyers to refinance their current debt and fund their purchases.

Redfin earns money when the borrower pays interest on the loan, like any other lender. The interest rate determines the loan amount, the repayment period, and the down payment needed to secure the loan.

The preapproval options are quick preapproval (with a turnaround time of 90 minutes) and underwritten preapproval. 

The service is now offered in a limited number of states, including Arizona, Colorado, Florida, and Georgia.

Redfin advertises interest rates for many other lenders on its marketplace besides offering finance. Zillow runs the service in collaboration with the company.

Redfin earns commissions on each lead generated via the marketplace. In all likelihood, Zillow receives a portion of that revenue.

RedfinNow

Redfin said in 2018 that it would begin purchasing properties and reselling them on its marketplace. Redfin’s platform labels homes listed by the company as Listed By Redfin.

RedfinNow earns money when a home is sold for more than it was originally acquired for. Additionally, ancillary costs like possible upgrades or personnel pay must be included.

Redfin’s foray into real estate flipping is part of a broader trend known as the iBuyer (or Instant Buyer) paradigm. This approach relies on algorithms to create an “efficient” purchasing price based on a large amount of data.

This enables them to make practically instant offers. Additionally, the enhanced speed enables sellers to load their houses more quickly, increasing convenience and a more positive selling experience. Additionally, there is no prep work or showings required, and closing dates are flexible.

Apart from the profit generated through home flipping, Redfin also earns money through the service fees it charges. 

Redfin Business Model

The service costs range from 6% to 12% on average. A Redfin agent will also charge you 1% for closing costs and 0% to 3% for connected repairs.

The Collateral Analytics analysis indicates that iBuyers charge between 13 and 15% of the home’s sale price, while agents charge between 5% and 7%. The cost of representing you will be much higher.

MarketWatch substantiates these data by claiming that owners earned 11% less on Instant Buyer sales than on the open market.

Concierge Service

Redfin’s concierge service supports sellers with home preparation, allowing them to sell their property more quickly and for a greater price.

The concierge package covers the following services:

  • A personalized home improvement strategy
  • Redfin manages the vendor work from start to completion.
  • Preferential pricing through Redfin’s trusted vendor network
  • Professional photographs and a three-dimensional walkthrough.

And many more. Redfin charges an extra 1% on top of the listing fee for this service.

Redfin offers a concierge service for homes priced at $500,000 or more. Redfin claims to prepare homes for sale 15 percent faster on average than those prepared by other businesses.

What is the Funding and Valuation of Redfin?

Crunchbase reports that Redfin has raised $319.6 million in 12 rounds.

Dragoneer Investment Group, T. Row Price, Tiger Global Management, and Greylock Partners are investors.

Redfin raised an additional $138 million when it went public in July 2017. Public investors valued the company at $1.2 billion, based on a $15 share price. This value has more than doubled to $7.2 billion by 2021.

What is the Revenue of Redfin?

Redfin reported $886 million in revenue for the fiscal year 2020, a 14% increase year over year. Net losses decreased to $18.5 million in 2019 from $80.8 million the previous year.

How does Redfin get its data?

As a brokerage, Redfin is eligible to join the Multiple Listing Service (MLS). MLS are databases/software tools that realtors populate and utilize to extract real estate data for appraisal purposes.

MLS data includes, but is not limited to, sales home data, sold home data, and the property’s qualities (e.g., bathroom size, kitchen equipment, whether it has a pool or not). 

Redfin must obtain permission from the county’s accessors office to display and use such data.

Redfin facilitates the sale of thousands of units every year through its platform. Data from this source forms an additional input when the company’s house price estimations are calculated.

Among the listings that are not included in Redfin’s estimation are the following:

  • Commercial real estate
  • Listings that are no longer valid
  • Pre-foreclosure real estate
  • Craigslist advertisements

Redfin’s database is updated every five minutes. Its data dates back to the early 1990s.

How Accurate Is The Redfin Estimate?

Redfin asserts that its Redfin Estimate has a median inaccuracy rate of 1.57 percent and an average deviation from the mean for homes listed for sale. 

Redfin’s median mistake rate on homes that are not currently on the market is 6.54 percent.

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However, as the business emphasizes, this should be considered an estimate and not a basis for appraisal. Rather than that, it is recommended that an agent inspect the property in person.

Its estimate may overlook key value-adding modifications, such as kitchen renovations or the bathroom state.

Success Story of Redfin

Redfin was formed in October 2002 as Appliance Computing Inc. by David Eraker, Michael Dougherty, and David Selinger.

Eraker, who earned a bachelor’s degree in biochemistry from the University of Washington, was looking for a place to live in Seattle.

He encountered crowds of real estate agents, making him wildly disparate offers for the same type of listings. Realtors frequently exploited their clients by inflating prices and pocketing astronomical fees for themselves.

In June 2004, the team submitted a patent for an online real estate marketplace. The mockup includes an aerial map that the user could traverse.

When the company began in September 2004, it was the first website to provide such a function – attracting quick notice and visitors. 

Redfin went on to announce a $770,000 funding round backed by Madrona Venture Group soon after.

The party for Eraker and his staff was soon ended. As is customary for many early business executives (ask Etsy founder Robert Kalin), the founders were forced out by main investors Madrona and replaced by a more seasoned executive.

Glenn Kelman previously led Plumtree Software through its initial public offering in 2002. Kelman remains CEO of Redfin to this day.

Redfin is still holding onto a few amusing anecdotes from Eraker’s tenure. 

As a neighbor of Sami Inkinen in 2004, Eraker provided insight into Redfin’s business model. Inkinen later returned to San Francisco and founded Trulia after interning at Microsoft.

Even more intriguing is Eraker’s experience with Rich Barton. A lead investor in companies such as Glassdoor and Nextdoor, he met in his Seattle office in 2004. 

Barton offered to acquire Redfin before the company raised its first round of funding from Madrona.

Eraker withdrew. Thus, a year later, Barton founded Zillow, drawing heavily on Eraker’s concept. 

Zillow began with a mapping feature in which houses were displayed on a map with their pricing mentioned.

While Redfin began as a brokerage, Trulia and Zillow adopted an advertising business. 

The corporations are essentially charged for the placement of advertisements on their websites. However, for the time being, let us return to the subject at hand.

Redfin’s success immediately drew fire from the usually opaque real estate business. 

The company’s low sales commissions revealed how much agents were overcharging at times for the first time. 

As a result, its employees have encountered several cases of threats, stalking, and other unsettling behavior over the years.

Fortunately, this did not affect the company’s course, which knew only one direction – upward. 

Redfin was financially profitable and generating $15 million in sales by 2009, only three years after its IPO. They remained profitable even after they laid off 20% of their workers during the housing crisis.

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Redfin continued to grow its platform over the next few years, adding users and new product features. The company’s rise can be ascribed to a variety of causes, including the following:

They charge upfront costs while continuously attempting to reduce them, thereby passing them on to the consumer. Selling fees began at 6% and have since decreased to as low as 1.5 percent.

Using technology to expedite the process of purchasing and selling. For example, the corporation built a slew of internal technologies to assist its agents in processing requests considerably more quickly.

Taking use of content marketing. Redfin routinely publishes housing data, which is then syndicated by major news organizations throughout the country, increasing awareness of the brokerage service.

Not being afraid to collaborate with competitors. Redfin, for example, inked an agreement with upstart Opendoor in 2019 to buy and sell homes collectively in select areas.

This continuing development resulted in Redfin’s July 2017 initial public offering, which enabled the firm to raise an additional $138 million. 

The company had previously raised more than $100 million at a valuation of $1.2 billion.

Nonetheless, not everything happened as planned. Michael Dougherty and David Selinger, the business’s co-founders, sued the company in 2014 for misuse of their shares. 

Eventually, Redfin settled the lawsuit for over $1 million, with the duo receiving over $1.1 million in compensation.

A few months later, in October, fair housing organizations sued Redfin, alleging systematic racial discrimination. 

The lawsuit, brought by Eraker through his new venture Surefield, involves an alleged patent infringement in a 3D home tour technology. The case is still pending.

Despite these setbacks (including Covid-19’s impact on housing demand), Redfin continued to expand its business. The company completed its second and largest acquisition in February 2021. 

It paid $608 million for RentPath, an internet rental provider (which owns Rentals.com and ApartmentGuide.com, amongst others).

The company employs over 5,000 individuals across more than 50 locations throughout the United States and Canada.

Key Takeaways From Redfin Business Model

Redfin is a real estate brokerage startup that leverages technology to disrupt the historically conservative real estate market and simplify home buying and selling.

Redfin leverages both human and technological skills to keep expenses to a minimum for interested parties. 

How Revolut Makes Money?

As is the case with most brokerages, the brokerage earns revenue through listing fees and a location-based commission plan. 

Furthermore, the sale of a home through Redfin involves a fee for the seller’s use of an agent. When a buyer also uses Redfin, the company earns a combined commission of up to 6%.

Redfin offers house financing and a concierge service to help sellers prepare for a sale as well as extra revenues.

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