Professional Documents
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Redfin
Redfin
9 -7 1 8 -4 3 0
REV: DECEMBER 10, 2019
HONG LUO
HUAFENG YU
— Redfin
Redfin started with a simple idea: use technology to make real estate transactions faster, better, and
less costly. The journey, however, was long. Glenn Kelman, who took the helm at Redfin in 2005,
witnessed the company having to transform itself before nearing its ambition of redefining the
industry. Perseverance paid off. As of 2016, Redfin served customers in more than 80 markets
throughout the U.S., employed an average of 763 full-time agents, and had seen annual growth of over
40% since 2014.
Yet that was just the beginning. Redfin still had only 0.5% of the overall U.S. market; even in its
strongest markets, the average share was less than 2%. Opportunities to grow seemed to abound, but
as Kelman had learned from the previous decade, nothing came easy in real estate. Traditional
brokers—aided by Zillow, the dominant and fast-growing listing site—were hard to displace. Many
people used Redfin’s website to search for listings while unaware of its brokerage service. New forms
of competition also started to emerge; a notable example was Opendoor, which purchased homes
directly from home sellers.
Redfin’s public offering in July 2017 brought in more capital, and Kelman faced tough decisions on
how to allocate these resources in order to build a successful and lasting company. How much, and
through which channels, should Redfin spend on advertising? Should Kelman reconsider the policy of
hiring lead agents only as full-time employees? With Opendoor’s aggressive expansion into multiple
markets, should Redfin also purchase homes and hold inventories?
Professor Hong Luo and Research Associate Huafeng Yu prepared this case. It was reviewed and approved before publication by a company
designate. Funding for the development of this case was provided by Harvard Business School and not by the company. HBS cases are developed
solely as the basis for class discussion. Cases are not intended to serve as endorsements, sources of primary data, or illustrations of effective or
ineffective management.
Copyright © 2017, 2019 President and Fellows of Harvard College. To order copies or request permission to reproduce materials, call 1-800-545-
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locating the right home. Then, they often had to bid against other potential buyers and negotiate with
sellers for multiple rounds before their offer was accepted. After that, the long-haul race was still not
over: it was the buyer’s responsibility, with help from their agents, contractors, real estate attorneys,
and mortgage brokers, to conduct a home inspection, negotiate necessary repairs, complete the title
search, and make sure that the mortgage was in place before the closing date.
For sellers, the process could be equally complex. Sellers often did not have channels to effectively
market their homes and find ideal buyers. Since the MLS allowed only member brokers and sales
agents to list properties, a home would not be listed on the MLS unless the seller had hired an agent to
do so. Moreover, sellers faced the huge job of preparing the property for sale, including cleaning and
repairing the house, marketing and pricing the house, and preparing for open houses. It could be a
similarly stressful experience for the seller to wait for offers, adjust prices if offers were slow to arrive,
negotiate with buyers before accepting an offer, and sometimes undertake necessary repairs and deal
with unseen contingencies.
Although costly, hiring a real estate agent was necessary for the majority of home buyers and sellers
in order to access MLS, navigate the complex and stressful process, and receive guidance for
negotiations. Traditionally, the home seller paid a total commission of 5%–6% of the sales price to the
seller’s agent, who would then split the commission revenue evenly with the buyer’s agent. For
example, if a home was sold for $200,000 and the agreed-upon commission was 6%, the seller would
pay $12,000 in total to the seller’s and buyer’s agents, who would each receive $6,000.
This commission structure might have resulted in misaligned interests between agents and their
clients. Because the commission was a small, fixed portion (2.5%–3%) of the final sales price, the seller’s
agent might have compromised a higher sales price for a quicker sale. At the same time, the buyer’s
agent might have settled on a higher price to increase her commission. This phenomenon (a form of
principal-agent problem) was tested and confirmed in several empirical settings. One study using data
on home sales in Cook County, Illinois, found that agents sold their own properties for 3.7% more
(approximately $7,600) and kept their properties on the market 9.5 days longer than their clients’
properties, other things being equal. 1
In the U.S., brokers and agents were primarily regulated at the state level. Laws and regulations
varied greatly from state to state, but generally, they detailed minimum duties, obligations, and
standards of conduct. Some states (not all) allowed dual agency so that agents from the same brokerage
could represent both the buyer and the seller in the same transaction. There were also various federal
and local regulations that brokerages needed to follow, in addition to rules, data licenses, and terms of
service of local MLSs. 2
The market for real estate brokerages was highly fragmented, with hundreds of local, regional, and
national players serving a single market. The 2001 National Association of Realtors (NAR) survey
indicated that 85% of residential brokerages had a single office, and 67% had five or fewer agents. 3
Larger brokerage firms were likely to be affiliates of a franchise company (e.g., Century 21 and
Coldwell Banker).
During the housing bubble in the early 2000s, low interest rates and loose mortgage standards
boosted the demand for housing. When the market reached its peak in 2005, sales of existing homes in
the U.S. were 7 million units, and the median price was $194,000 (2000 dollars) 4 (see Exhibit 1). With a
commission rate of 6%, the total revenue of the brokerage market was well over $100 billion.
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In fall 2005, Redfin raised $770,000 primarily from Madrona Venture Group, and Glenn Kelman
was appointed CEO. 7 The Seattle-born entrepreneur had graduated from U.C. Berkeley in 1993. In
1997, he cofounded Plumtree Software Inc., an enterprise software company that went public in 2002
and was later acquired by BEA Systems Inc. Despite his early success, Kelman felt inspired to seek
solutions to a larger social problem: the common frustration with buying and selling homes motivated
him to take the helm of Redfin.
In 2006, Redfin launched home-buying and selling services, Redfin Direct, in Seattle and the Bay
Area, becoming the first online real estate brokerage in the U.S. 8 “Real estate, by far, is the most screwed
up industry in America,” Kelman told CBS’s 60 Minutes in 2007. “We feel like things that Amazon or
eBay or Yahoo have done for other industries, we can do for the real estate industry.” 9
In addition to a friendly web interface for customers to search homes and past sales prices, Redfin
also departed from traditional brokers in the following major ways. First, Redfin hired agents as full-
time employees rather than as independent contractors. In contrast to traditional agents, whose income
depended entirely on closed transactions, Redfin agents received a base salary and health benefits.
They also received a quarterly bonus, determined by the average customer satisfaction rating surveyed
over all customers, whether or not a deal had been reached.
Second, Redfin envisioned a light-touch model in which clients were expected to self-serve to a
great extent, using the digitized platform in exchange for a significantly lower fee than traditional
brick-and-mortar agents charged. As the seller’s agent, Redfin initially charged a flat rate of $2,000,
increased to $3,000 a year later for a limited set of services, including listing the seller’s home on MLS
and handling offers, negotiations, contingencies, and closing. Sellers had to handle their own
advertising and show buyers the property themselves. 10 As the buyer’s agent, Redfin refunded about
two-thirds of the standard 3% commission to its client. Customers searched for homes on Redfin’s
website and toured on their own, at open houses, or by contacting the listing agent. Although it rolled
out a home tour service in early 2007, after the first tour, which was free, customers were charged $250
per tour. 11 Buyers were connected to an agent only when they were ready to make an offer, and they
could work with multiple agents during the process and even remotely. Therefore, Redfin needed to
employ only a small number of agents.
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the largest transaction in their life. It’s an emotional purchase,” noted Scott Nagel, who had been the
President of Real Estate Operations at Redfin since 2007.
Capital was tight. Redfin’s pitch was constantly turned down by investors, who had a hard time
seeing traditional agents being displaced any time soon. When the financial crisis hit in 2008, Redfin
had to lay off 20% of its workforce.
Redfin’s aggressive pricing and provocative stance also met with antagonistic reactions from peer
agents and brokerages. Kelman testified at a congressional antitrust hearing in 2006: “Competing
agents have threatened us with violence, intimidated our customers and tried to block their offers.
Sixty-three percent of our customers report meddling from other agents.” 12 In 2007, Washington’s
Northwest MLS determined that Redfin’s frank reviews of properties violated its policies against
critiquing customer listings. It fined the company $50,000 and threatened to pull its MLS access. 13
Later, Kelman reflected on the early days: “The biggest mistake I made in starting out at Redfin was
bringing some Silicon Valley swagger into a traditional industry,” he said. “It was unnecessarily
provocative.” 14 Notwithstanding the initial hurdles, Redfin remained persistent in experimenting,
learning, and adapting, making the following major changes along the way.
In 2009, Redfin started forming agent teams, which were managed by local, full-time agents whose
compensation was tied to their management role and team performance. Redfin added employees in
two supporting roles: local coordinators and associate agents. In addition to scheduling home tours,
local coordinators also helped manage the escrow/closing process after a buyer’s offer was accepted—
a task that the agents themselves had handled before the change. Associate agents were independent
contractors who took customers to tour homes when the lead agents were not available. James Gulden,
a Senior Agent based in Boston, commented that, with help from the whole team, he was freed up to
focus on counseling clients, negotiating offers, and prioritizing urgent and critical tasks. This allowed
him to serve a large number of clients at the same time without sacrificing quality. In 2016, a Redfin
agent closed 34 deals, on average, which was 3.8 times the average of the other largest agents in the
industry 15 (see Exhibit 2).
Redfin also introduced the Partner Agent Program in 2009. Participating agents, who came from
other brokerages and met Redfin’s basic criteria, would receive client referrals from Redfin and pay a
referral fee. As Adam Wiener—the current Chief Growth Officer at Redfin who had left Microsoft to
join Redfin in 2007—explained, partner agents helped clients in new markets in which the demand was
not yet large enough to justify full-time local agents. More importantly, the flexibility of the program
helped Redfin to manage the seasonality of the business and maintain the operating efficiency of its
own full-time agent team.
In 2012, Redfin began hiring significantly more local agents, with the goal of each agent serving fewer
customers and offering more personal attention. The full-time agent teams expanded to 422 in 2014 and
to 763 as of 2016. Despite potentially constraining its pace of growth, Redfin continued to hire its lead
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agents as full-time employees. “The biggest challenge for most real estate agents was finding the client,
and the pressure to close a deal was high,” Nagel remarked. With a base salary, benefits, and a steady
feed of clients every month, the pressure on Redfin agents to find clients and close a deal was alleviated
to a great extent. They could, thus, focus more on helping clients and improving the customer experience.
Bonus Structure
Bonuses were based entirely on overall customer satisfaction, whether or not a deal had been closed.
Unfortunately, this bonus structure had unintended consequences. First, agents preferred to work with
fewer clients and to provide better service to each. Second, the bonus system did not provide sufficient
incentive to close a transaction. Starting in 2008, Redfin adjusted the bonus structure such that agents
received a bonus only for closed transactions. The size of the bonus still depended entirely on the
customer’s satisfaction score, with a zero bonus for low scores. Because complex and difficult
transactions were more likely to lead to customer discontent than easier ones, agents were frustrated
when genuine efforts resulted in a zero bonus. To mitigate low morale, Redfin also added a bonus tier
to low scores in 2010.
Over time, Redfin also realized the importance of tying bonuses to the home price for realizing high-
value deals and for retaining top performers. Furthermore, from the seller’s perspective, linking the
bonus to the transaction price also motivated agents to be more aggressive in obtaining a higher selling
price. Starting in 2011, Redfin also included the final sales price as a determinant of the seller-side
bonus. In order to not to disincentivize the agent to negotiate down the price when representing a
buyer, the buy-side bonus was based on the original listing price, not the final sales price. As of 2014,
about 75% of the bonus depended on home price, while 25% was tied to customer satisfaction. 16
A key task for Frey’s team was to develop and refine tools that continued to improve the customer
experience. As of 2016, buyers could use Book it Now to schedule home tours with a straightforward
calendar interface; they received emails and app notifications about new home listings and price
changes through Instant Updates; and once their offers were accepted, they would enter the Deal Room,
a real-time guide that outlined to-do tasks and major deadlines (Exhibit 3a). The seller’s dashboard
displayed real-time information, such as the number of clicks and “favorites” their listed homes had
received, the number of tours scheduled, the performance of other listings in the market, and tips for
driving up interest (Exhibit 3b).
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It was also critical for engineers at Redfin to work closely with agents in order to understand their
needs. One popular tool among Redfin agents was Scouting Report, which provided other real estate
agents’ transaction history through MLS data and their history working with Redfin. “It’s very helpful
when they are working with an agent for the first time to quickly understand their experience,
understanding of the market, and even their pricing and negotiation strategies,” Frey commented.
Agents used the Redfin Agent Tools mobile app to manage appointments and customer information;
this information included homes that a customer searched for and marked as favorites; Open Houses
that customers attended; and price changes and other updates on homes in which a customer had
shown interest. The Fast Offers feature also allowed agents to submit a clean, complete offer in 10 or 15
minutes. Proactive Follow-ups gave agents updates on their customers’ activities, with editable templates
for follow-up emails, which were particularly valuable for maintaining a good client relationship after
closing. In late 2016, Redfin launched Comparative Market Analysis, which automated the process of
preparing comparative data and pricing information so that agents could produce a data-rich report in
5 to 10 minutes.
Internally, Redfin adopted a data-driven approach to managing operations and personnel. For
example, the centralized allocation algorithm allocated agents to potential clients based on factors such
as busyness (the number of clients an agent handled at a certain point), past deal experience, and
customer satisfaction. Managers used key metrics, including the re-engagement rate (the conversion
rate after home tours) and closing rate and time, as a basis to evaluate agent performance and to
identify ways to improve.
Current Redfin
As of end of 2016, Redfin had a presence in more than 80 markets. The traffic on its website and
mobile app had doubled since 2014, reaching an average of 16 million visitors monthly. 18 Redfin’s
revenue had also more than doubled, from $125.4 million in 2014 to $267.2 million in 2016, and gross
margins grew from 26% of revenue to 31% (Exhibit 4). In 2016, Redfin’s 763 lead agents closed 73% of
its total 35,350 transactions, representing 91% of the company’s total revenue. The remaining
transactions, representing 6% of the total revenue, were closed by over 3,100 partner agents. The
company had not yet turned a profit (the net loss was $23 million in 2016), though the net loss as a
percentage of revenue improved over time, implying that revenues had grown faster than costs.
As Redfin expanded into new markets, the top 10 markets’ share of revenue decreased from 80% to
72%. The market share by value, although under 2% in its strongest markets, had grown steadily and
consistently across market cohorts (Exhibit 5).
The company went public on July 28, 2017, raising $138 million. Initially priced at $15, the stock
price surged by 45% and closed at $21.72 on the first day. Kelman commented that going public “opens
a lot of doors for you when you have a lot of cash on your balance sheet.” 19
Competition
Traditional Real Estate Brokers
Redfin faced competition from incumbent brokerages in each individual market. These brokerages
conducted business in brick-and-mortar offices, offering full service and relying heavily on a client
referral network. In 2015, a typical brokerage completed 30 transactions, and the median sales revenue
was $6.3 million. 20 A majority of real estate agents were, effectively, contractors within a brokerage and
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were paid on a 100% commission basis rather than as salaried employees. In 2016, agents’ commissions
accounted for 30% of the industry revenue, and the average profit margin was estimated to be 22.3% 21
(Exhibit 6).
Traditional brokerages were either independent companies serving local markets or franchisees of
recognizable trade names, which were typically owned by a small number of large firms in the
industry, such as Realogy and RE/MAX (Exhibit 7). Franchise companies offered franchisees the brand
name, training system, and operational and marketing support. Franchisees typically had a long-term
contract with the franchisor, paying an initiation fee, a royalty fee as a share of the commission revenue,
and monthly marketing fund contributions. They operated as independent businesses, responsible for
their own profits and losses. Since the peak of the housing market in 2005, many large franchisors had
shut down offices in small domestic markets and shifted more toward international expansion. 22
According to NAR surveys, the five largest franchises in 2005 all encountered a reduction between 30%
and 60% in the number of U.S. offices and in the size of their sales team (Exhibit 8).
Because Zillow and Trulia were not licensed brokers, they did not have access to local MLS
databases. Initially, Zillow relied on agents and sellers to voluntarily post property information on the
website but attracted only about 2% of total MLS listings. Zillow did not start to garner sufficient
interest from agents until the launch of a lead-generating ads service. 27 In parallel, Zillow signed
agreements with MLS data aggregators. Zillow gradually shifted toward signing deals directly with
individual MLSs for real-time updates of the listings. As of early 2017, nearly 550 of about 700 MLSs
nationwide provided listings to Zillow and Trulia. 28
According to comScore, by April 2017, Zillow Group had captured 83 million unique online users
monthly, a 64% traffic share in the online real estate market, making it the largest real estate website in
the U.S. 29 In addition to homes for sale, the Zillow platform offered a wide range of related offerings,
including rental and mortgage listings. Between 2011 and 2016, Zillow Group experienced a 53%
annual growth rate in revenue. The company had not yet turned a profit, with a net loss of $220 million
in 2016, out of $847 million in revenue (Exhibit 9).
Zillow Group’s main source of revenue was from the Premier Agent program ($604 million in 2016,
71% of the total revenue). The program had three tiers, differing in the level of services and pricing.
Agents in the lower two tiers paid a flat fee per month. 30 The top tier was limited in number, and agents
in this tier had their contact information displayed next to listings in purchased zip codes as the elite
agent for buyers to contact. The top-tier pricing varied by zip code, as well as by the number of
impressions delivered. 31 The number of Premier Agent subscribers grew from 29,000 in 2012 to 84,000
in 2016. The average monthly revenue per subscribing agent rose from $156 in 2012 to $571 in 2016. 32,33
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Opendoor
Opendoor, founded by Keith Rabois and Eric Wu in San Francisco in 2014, operated a merchant
model that bought and sold homes like products on a shelf. Home sellers entered home features and
condition online and could get an instant offer if the property met a set of criteria that included a
valuation of $100,000 to $500,000. If the seller accepted the offer, Opendoor would schedule a formal
inspection to confirm the home’s condition, and the seller could choose a move-out date anytime
between 3 and 60 days. 34 The founders of Opendoor believed that home sellers would sacrifice, to some
extent, a high selling price for a quick and hassle-free selling experience. Sellers paid Opendoor a
service fee of 6% plus miscellaneous charges, totaling an average rate of 9%. 35
On the buyers’ side, Opendoor offered an appointment-free open house experience from 6 a.m.–
9 p.m. every day, allowing buyers to enter homes via the company’s mobile app. Buyers who bought
Opendoor’s homes received a 30-day satisfaction guarantee (if not satisfied, the company would buy
the home back) and a two-year home warranty for up to 20 home items. 36
As stated in a Forbes article, “[Opendoor] has to price the homes it buys accurately, without seeing
them, and it has to sell them quickly to minimize the costs of carrying them.” 37 According to the company,
the evaluation process involved both algorithms and human judgment. The algorithm looked at
hundreds of data points based on public information, as well as highly detailed information provided by
the seller. An employee further assessed these numbers before generating an offer to the seller. 38
Opendoor served the metro areas of Phoenix, Dallas–Fort Worth, Las Vegas, and Atlanta. In 2016,
the company raised $210 million in Series D funding and was going to expand its service to 10 cities in
2017. 39 In the two years since its launch, Opendoor had bought more than 4,000 homes. 40 A Property
Portal Watch analysis looked at 350 homes that Opendoor bought in Phoenix in 2016, 235 of which had
been sold by the time of the analysis. The estimated gross profit per sold home was about $8,320
(Exhibit 10). 41 To obtain a more complete picture, one needed to also consider holding costs and further
price reductions for remaining unsold homes.
Going Forward
Compared to its early days, Redfin had come a long way. The leadership at the company was
enthusiastic and optimistic that its current model was capable of providing customers with a superior
experience while also helping them reduce costs. Redfin was also clearly aware that, relative to what
they had hoped to achieve, there was still a long way to go.
A key challenge that Redfin faced in scaling up was a lack of awareness and familiarity. Although
many people used Redfin’s website and even found it better than competing sites, many were not
aware that Redfin was actually a brokerage firm. “They often think we are equivalent to Zillow and it’s
like we’re a website but we don’t have agents,” said Nagel. Many website users were also reluctant to
adopt an unconventional service, given the high financial and emotional stakes of real estate
transactions. Real-world connections and word-of-mouth still played an important role in finding a
real estate agent. “People know real estate agents through friends, relatives, neighbors, somebody you
met at the grocery store and someone at your kids’ soccer field,” Nagel commented. “These existing
relationships were hard to break up.”
Historically, with limited resources, Redfin had been reluctant to spend big on advertising,
especially through traditional advertising channels. Marketing expenditures in 2014–2016 totaled
about 10% of total revenue, averaging $21 million annually. In contrast, during the same period, the
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average annual expenditures on sales and marketing at Zillow were $286 million, about 47% of revenue
(Exhibits 4 and 9). With greater financial resources from the public market, Redfin had been
reconsidering its approach to advertising spending and channels.
In 2014, Redfin tested out a listing commission of 1% in Washington, DC; Maryland; and Virginia.
The price drop accelerated the increase in the listing share in these markets. In the subsequent two
years, Redfin rolled out the 1% listing price in Baltimore, Seattle, Chicago, and Denver, and in 2017,
San Diego. In order to offset the price changes on the listing side, Redfin had to reduce the amount of
buyers’ refund in these markets.
More recently, in the first quarter of 2017, Redfin started testing Redfin Now in two markets, a service
that allowed home sellers to sell qualified homes directly to Redfin, a model that resembled
Opendoor’s. Several motivations led to this experiment. First, there was value to be created by saving
sellers from the stress and costs of an uncertain selling process. Chris Nielsen, Redfin’s Chief Financial
Officer (previously the CFO and COO of Zappos.com), explained, “[I]f you own a home and you’re
trying to buy another home, you’re in a tight spot, because you probably can’t carry both mortgages at
the same time.” Second, potentially removing agents from the process could pass savings on to
customers. Third, Redfin believed that being the listing agent and having yard signs outside houses
would help the aforementioned awareness problem. Lastly, controlling the listing side would allow
Redfin to provide a smoother buying experience.
“There are clear risk concerns with this new venture, given the amount of capital required for
holding home inventory,” Nielsen commented. “However, we believe that our analytics capability and
our ability to reach [the] more [than] 20 million monthly average visitors of our website and mobile
application, together with our network of former Redfin buyers, will effectively limit our risk and
eventually let us make a profit along the way.”
Redfin Mortgage
In the first quarter of 2017, Redfin began originating and underwriting loans to customers in Texas
through Redfin Mortgage, a wholly owned subsidiary. 43 The goal was to build technology that could
ultimately support a completely digital closing process.
The mortgage service fit into the future vision of Redfin: a “vertical integration” of all major
components involved in a real estate transaction so as to reduce time and effort for customers. In 2016,
Redfin had already launched the title and settlement services, Title Forward, in eight states. In those
states, 46% of its home buyers also chose its title and settlement service.
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In his final remarks about Redfin, Kelman concluded: “Everything we tried, everything we did was
wrong at Redfin for years. The only thing we had was that we picked the right problem.”
Exhibit 1 Sales and the Median Price of Existing Homes in the U.S.
Source: Housing statistics of National Association of REALTORS are compiled from the following sources:
– “Historical Data,” Office of Policy Development and Research, U.S. Department of Housing and Urban
Development, accessed September 6, 2017.
– Walter Molony, “December Existing-Home Sales Rise, 2013 Strongest in Seven Years,” National Association of
REALTORS, January 23, 2014, https://www.nar.realtor/news-releases/2014/01/december-existing-home-sales-
rise-2013-strongest-in-seven-years, accessed September 4, 2017.
10
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Source: RE/MAX Investor Presentation (September 2017) and Redfin IPO Prospectus.
Note: Except for Redfin, transaction sides and transaction per agent are calculated and collected by RE/MAX.
a Redfin’s transaction sides refer to transactions closed by Redfin’s full-time lead agents.
11
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Source: Redfin.
Source: Redfin.
12
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a Interest, tax related items include “Total interest income and other income, net” and “Income tax benefit (expense).”
13
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Number of markets 10 19 55
2016 total market transactions (in billions) $328 $319 $265
2016 mean home sale price $530,617 $313,180 $245,684
Redfin's market share by value (%):
2014 1.15 0.29 0.02
2015 1.41 0.39 0.1
2016 1.66 0.47 0.2
Redfin's revenue (in thousands):
2014 $97,801 $23,268 $735
2015 $136,261 $37,786 $7,399
2016 $186,922 $55,334 $18,127
Redfin's revenue per transaction:
2014 $9,590 $7,561 $6,790
2015 $9,889 $7,791 $6,815
2016 $10,208 $8,026 $7,389
Redfin's cost of revenue (in thousands):
2014 $69,055 $19,099 $1,466
2015 $94,740 $28,804 $7,978
2016 $122,439 $39,367 $14,602
Redfin's gross margin (%):
2014 29.4 17.9 N.M.
2015 30.5 23.8 -7.8
2016 34.5 28.9 19.4
a Major metropolitan areas such as Seattle; San Francisco; Los Angeles; Boston; Washington, DC; and Chicago.
c Smaller metropolitan areas such as Minneapolis, Cincinnati, Nashville, and Kansas City.
14
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% of
Revenue
Revenue 100.0
Commissions and wages 33.0
Purchases 8.2
Marketing 5.4
Rent & Utilities 3.7
Depreciation 0.8
Other costs 26.6
Profit 22.3
Source: Stephen Morea, “IBISWorld Industry Report 53121: Real Estate Sales & Brokerage in the US,”
IBISWorld, p. 21, accessed June 17, 2017.
Exhibit 7 2016 Income Statement of Realogy and RE/MAX (in thousands of dollars)
Revenues
Gross commission income 4,277,000 37,209
Service revenue 955,000 -
Franchise fees 372,000 138,981a
Expenses
Selling, operating and administrative expenses 5,049,000c 87,629
Depreciation and amortization 202,000 16,094
Other expense, netd 210,000 9,496
Total expenses 5,461,000 113,219
Income (loss) before income taxes, equity in earnings
and noncontrolling interests 349,000 63,083
a Includes continuing franchise fees, annual dues, and franchise sales and other franchise revenue.
b Brokerage fees assessed by the RE/MAX’s owned brokerages for services provided to their affiliated real estate agents.
c Includes commission and other agent-related costs, operating, marketing, general and administrative.
d Consolidates other expense items, including interest expenses and restructuring costs.
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NUMBER OF OFFICES
Coldwell
Franchises Century 21 Banker ERA Prudentialb RE/MAX
2005 7,222 3,652 2,631 1,800 5,409
2007 8,391 3,789 2,973 2,100 6,898
2009 7,705 4,230 2,828 1,940 6,971
2011 7,864 3,202 2,523 1,700 6,259
2013 2,500 2,291 578 -- 3,314
2015 2,231 3,047 528 -- 3,452
Marketplace revenue (in thousands) $42,190 $86,670 $154,208 $267,242 $555,904 $778,060
Real estate 36,749 75,900 132,396 239,039 482,092 706,927
Mortgages 5,441 10,770 21,812 28,203 44,263 71,133
Display revenue 23,863 30,180 43,337 58,651 88,773 68,529
Income (loss) from operations 997 5,797 (16,949) (44,695) (149,531) (192,854)
Unique Users (in thousands) 23,507 34,535 54,358 76,713 123,658 140,141
Premier Agent Subscribers 15,799 29,473 48,314 62,305 92,366 84,151
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Revenue $31,479
Fees 19,563
Appreciation 11,912
Cost of Services 23,159
Closing costs on purchase (escrow, title, transfer tax) 4,347
Rehab (replacing carpets, landscaping, exterior/interior paint) 4,000
Holding costs (financing, property tax, utilities, HOA, home ins) 3,872
Buyer concessions (closing costs on sale, paid by Opendoor) 4,347
Buyer agent commission 6,592
Gross Profit 8,320
Source: Mike Delprete, “Inside Opendoor: what two years of transactions say about their prospects,”
Property Portal Watch, December 16, 2016, accessed September 6, 2017.
a The calculation was based on the assumption that on average Opendoor pays $217,370 for a home and charges a 9% fee,
holds the home for 88 days, and sells it for 5.5% more than it paid.
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Endnotes
1 Steven D. Levitt and Chad Syverson, “Market distortions when agents are better informed: The value of information in real
estate transactions,” The Review of Economics and Statistics 90 (2008): 599-611.
2 Redfin Corporation, SEC Form S1 (Prospectus), July 2017, p. 1.
3 “The 2001 National Association of Realtors Profile of Residential Real Estate Brokerages,”
https://www.nar.realtor/Research.nsf/files/firmhilites.pdf/$FILE/firmhilites.pdf, accessed June 16, 2017.
4 Jeffery Sparshott, “The U.S. Housing Market in 9 Charts,” Wall Street Journal, June 23, 2016,
https://blogs.wsj.com/economics/2016/06/23/the-u-s-housing-market-in-9-charts, accessed June 5, 2017.
5 Brad Stone, “Why Redfin, Zillow, and Trulia Haven’t Killed Off Real Estate Brokers,” Bloomberg, March 7, 2013,
https://www.bloomberg.com/news/articles/2013-03-07/why-redfin-zillow-and-trulia-havent-killed-off-real-estate-brokers,
accessed June 2, 2017.
6 David Eraker, Adam Dougherty, Edward Smith, and Stephen Eraker, Web-based real estate mapping system, U.S. Patent
US20050288957A1, filed June 16, 2005, and issued December 29, 2005.
7 Brad Stone, “Why Redfin, Zillow, and Trulia Haven’t Killed Off Real Estate Brokers.”
14 Brad Stone, “Why Redfin, Zillow, and Trulia Haven’t Killed Off Real Estate Brokers.”
19 Katie Roof, “Redfin soars 45% after IPO; CEO calls it ‘Amazon of real estate,’” TechCrunch, July 28, 2017,
https://techcrunch.com/2017/07/28/real-estate-site-redfin-soars-45-after-ipo/, accessed August 25, 2017.
20 “2016 Profile of Real Estate Firms,” National Association of REALTORS,
https://www.nar.realtor/sites/default/files/reports/2016/2016-profile-of-real-estate-firms-09-20-2016.pdf, accessed June 16,
2017.
21 Stephen Morea, “IBISWorld Industry Report 53121: Real Estate Sales & Brokerage in the US,” IBISWorld, accessed June 17,
2017.
22 Meg White, “The Future of the Franchise,” Realtor Mag, July 2015, http://realtormag.realtor.org/for-brokers/franchise-
report/article/2015/07/future-franchise, accessed June 10, 2017.
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For the exclusive use of A. Gao, 2022.
23 Peter Coles and Benjamin Edelman, “Pricing and Partnership at Zillow Inc.,” HBS No. 913-021 (Boston: Harvard Business
School Publishing, 2015), p. 4.
24 Chris Morrison, “Zillow gets $30M more for online real estate – despite credit crunch,” VentureBeat, September 19, 2007,
https://venturebeat.com/2007/09/19/online-real-estate-heating-up-zillow-receives-30-million-in-funding/, accessed June 16,
2017.
25 Inman Staff Writer, “Zillow closes Trulia acquisition,” Inman, January 4, 2015,
https://www.inman.com/2015/02/17/zillow-trulia-merger-closes/, accessed April 3, 2017.
26 Capital IQ, accessed on August 19, 2017.
27 Peter Coles and Benjamin Edelman, “Pricing and Partnership at Zillow Inc.,” p. 5
28 Teke Wiggin, “Zillow Group nixes manual listing entry for real estate agents, doubles down on direct listing feeds,” Inman,
February 27, 2017, https://www.inman.com/2017/02/15/zillow-group-nixes-manual-listing-entry-real-estate-agents-
doubles-direct-listing-feeds/, accessed June 16, 2017.
29 Caroline Feeney, “Zillow snags more internet market share than ever,” Inman, May 19, 2016,
https://www.inman.com/2016/05/19/zillow-snags-internet-market-share-ever/, accessed May 7, 2017.
30 Inman Staff Writer, “Zillow moving agents to new ad model,” Inman, August 13, 2012,
https://www.inman.com/2012/08/13/zillow-moving-agents-new-ad-model/, accessed April 3, 2017.
31 “Frequently Asked Questions – Premier Agent Program,” Zillow, https://www.zillow.com/advertising/frequently-asked-
questions.htm, accessed June 21, 2017.
32 Zillow Group, 2012 Annual Report, March 4, 2013, p. 18, http://investors.zillowgroup.com/secfiling.cfm?filingID=1193125-
13-88650&CIK=1349454, accessed June 16, 2017.
33 Zillow Group, 2016 Annual Report, February 7, 2016, p. 55,
http://investors.zillowgroup.com/secfiling.cfm?filingID=1193125-17-33300&CIK=1617640, accessed June 16, 2017.
34 “Frequently Asked Questions,” Opendoor, https://www.opendoor.com/faq/, accessed June 20, 2017.
35 Amy Feldman, “Silicon Valley Upstart Opendoor Is Changing The Way Americans Buy And Sell Their Homes,” Forbes,
November 30, 2016, https://www.forbes.com/sites/amyfeldman/2016/11/30/home-shopping-networkers-opendoor-is-
upending-the-way-americans-buy-and-sell-homes/#31c87881430c, accessed May 12, 2017.
36 Kia Kokalitcheva, “How this Real Estate Startup Is Tackling Buyer’s Remorse,” Fortune, June 2016,
http://fortune.com/2016/06/07/opendoor-money-back-gurantee/, accessed September 2, 2017.
37 Amy Feldman, “Silicon Valley Upstart Opendoor Is Changing The Way Americans Buy And Sell Their Homes.”
39 Kyle Tibbitts, “Opendoor, the Online Marketplace for Home Buyers and Sellers, Raises $210 million in Series D Financing,”
Official Opendoor Blog, November 30, 2016, https://www.opendoor.com/blog/series-d-press-release, accessed June 2, 2017.
40 Kyle Tibbitts, “Opendoor.”
41 Mike Delprete, “Inside Opendoor: what two years of transactions say about their prospects,” Property Portal Watch,
December 16, 2016, http://www.propertyportalwatch.com/inside-opendoor-what-two-years-of-transactions-say-about-their-
prospects/, accessed August 18, 2017.
42 Ralph McLaughlin, “House Arrest: How Low Inventory Is Slowing Home Buying,” Trulia’s Blog, March 21, 2016,
https://www.trulia.com/blog/trends/inventory-price-watch-q116/, accessed June 16, 2017.
43 Ali Kramer, “Redfin Launches Mortgage Business,” Redfin (blog), January 26, 2017,
https://www.redfin.com/blog/2017/01/redfin-launches-mortgage-business.html, accessed June 17, 2017.
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