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Redfin Posts 3Q Loss, Blames iBuying Business

David Krechevsky
Nov 09, 2022
RedfinNow 3Q 2022 results

CEO says company will sell RedfinNow inventory of homes by Q2 2023.

KEY TAKEAWAYS
  • Redfin reported a net loss of $90.2 million, or 83 cents per diluted share.
  • Gross profit was $58.1 million, a decrease of 54% year-over-year.
  • CEO Glenn Kelman said 'the entirety of the earnings shortfall came from RedfinNow, which has been selling its homes at lower-than-expected prices.'
  • Redfin announced Wednesday morning that it would close RedfinNow and lay off more than 800 workers.

Following the early-morning announcement that it will close its iBuying business and lay off 13% of its staff, Redfin Corp. reported another quarterly loss after the market closed Wednesday.

The Seattle-based, technology-driven real estate brokerage reported a net loss of $90.2 million, or 83 cents per diluted share, 15.5% more than the net loss of $78.1 million, or 73 cents per diluted share, in the second quarter. 

Third-quarter revenue was $600.5 million, down 1% from $606.9 million in the second quarter but up 11% compared to the third quarter of 2021. 

Gross profit was $58.1 million, a decrease of 54% year-over-year. Gross profits from real estate services was $54.9 million, down 43% year-over-year, while the real estate services gross margin was 26%, compared to 37% in the third quarter last year.

Adjusted EBITDA loss — earnings before interest, taxes, depreciation, and amortization, an indicator of the overall profitability of a business — in the quarter was $51 million, compared to adjusted EBITDA income of $11.8 million in the third quarter of 2021.

Second Big Layoff Of 2022

The announcement Wednesday morning of the decision to close RedfinNow and lay off 862 employees represented the company’s second major downsizing this year. Redfin announced in June it had laid off about 6% of its workforce.

In addition to the 862 employees laid off, Redfin CEO Glenn Kelman said the company also eliminated the roles of 218 employees, “who can choose over the next few days to stay at Redfin in another role; if all of those employees were to leave, the reduction would be 16% in November and 29% since April.”

Redfin CEO Glenn Kelman
Redfin CEO Glenn Kelman

In remarks prepared for an earnings call with analysts, Kelman said the June layoff “was a reaction to slowing 2022 home sales. Today’s layoff assumes a housing downturn that lasts at least through 2023, letting us earn adjusted EBITDA next year even if home sales decline to the levels of the Great Financial Crisis, when the U.S. population was 10% smaller.”

Despite the increased net loss in the third quarter, Kelman said Redfin still plans “to generate our first annual net income in 2024.” He also noted that “the entirety of the earnings shortfall came from RedfinNow, which has been selling its homes at lower-than-expected prices.”

As recently as August, he noted, Redfin still anticipated full-year gross profits from its properties segment, which includes both RedfinNow and Redfin Concierge service. Instead, the segment posted a $5 million gross loss through the first three quarters of 2022. 

The company now forecasts full-year gross-profit losses of between $22 million and $26 million, Kelman said.

“Our inventory of homes has declined from its August peak of $432 million to $265 million as of Oct. 31, with another $92 million under contract to sell,” he said. “Of the purchases that went under contract in the second quarter, 67% had sold or were under contract for a sale by Sept. 30; by Oct. 31, that number was 82%.”

Redfin expects to complete the liquidation of RedfinNow’s inventory of homes in the second quarter of 2023, Kelman said. “Starting from the end of the third quarter, this will return more than $100 million of cash to our balance sheet,” he said.

“Our decision to close our iBuying business is only partly due to the challenges we’ve had selling RedfinNow homes,” he said. “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. 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.”

He said website visitors who still want a cash offer “will largely be routed to Opendoor, through a partnership that has been in place since 2019, with renewed activity in the first half of 2022.”

Opendoor Technologies Inc. has a similar partnership with Zillow, which closed its iBuying business, Zillow Offers, last year. Zillow said it sold off the final homes in its inventory in the third quarter of this year.

iBuying 'Only A Means To An End'

While expressing gratitude for the “dedication and ingenuity of the people leaving” and stating that the is “heartbroken that we don’t have enough customers to pay for their work,” Kelman expressed confidence that closing RedfinNow is the right decision.

“iBuying for Redfin has never been an end in itself, but only a means to meet more homeowners when they first consider moving,” he said. “Now that iBuying’s contributions to listing demand have become smaller and less certain, it isn’t worth the risk. We can sell more homes over time by focusing on our core business — building our online audience, and giving customers the best brokerage, mortgage, title, and rentals service.”

He noted that each of those areas has improved its performance, even as housing demand has fallen. 

“We increased our share of listing-search traffic in the third quarter,” Kelman said, “and expect those gains to accelerate now that we’ve fixed a ‘bug’ in our software that — from April 25 to August 30 — precluded new online visitors from getting listing recommendations.”

The software bug was the main reason that, from the third quarter of 2021 to the third quarter of 2022, Redfin.com visitors declined by 5%, he said. 

“Fixing the bug boosted our traffic in the final month of the third quarter and beyond,” Kelman said. “Even with the bug, Redfin’s year-over-year decline in third-quarter visitors was nine points better than Realtor.com, which we seek to overtake as America’s No. 2 real-estate site; by September, the magnitude of our year-over-year decline was one point better than the top incumbent, Zillow.com.”

He added that the company now expects its listing-search share to accelerate. Traffic from new visitors coming to Redfin.com via search engines increased 14% year-over-year in October, he said.

He also acknowledged that investors in the company are concerned about whether Redfin can “get through this downturn without running out of money. We’ll pay our debts come heck or high water.”

He also said he expects the company to keep growing. “Redfin’s still-regional listing-search site can gain on its rivals for years to come; our rentals business can double, our brokerage’s progress on close rates and loyalty sales can send our share through the roof, our lending and title businesses can print money. It’s going to be a long night, but Redfin can still thrive in the darkness, and when the sun rises, we’ll be stronger than ever.”

Other highlights from Redfin’s third-quarter earnings report:

  • Reached market share of 0.8% of U.S. existing home sales by units in the third quarter of 2022, up 2 basis points from a year earlier.
  • Redfin’s mobile apps and website reached more than 51 million average monthly users in the third quarter, a 3% increase year over year.
  • Brought Redfin agent service to Hilton Head, S.C., and expanded listing coverage to a total of 96% of the U.S. population.
  • Streamlined Redfin Concierge service with a simpler pricing model that helps customers fix their homes to sell for top dollar. “In our pilot markets, adoption in homes valued at more than $500,000 grew from 6.8% in the first quarter of 2022 to 24% in the third quarter.”
  • Increased representation of underrepresented racial or ethnic groups in senior leadership to 13% in the third quarter, up from 10% in the prior year. Focused internal diversity, equity, and inclusion resources on educating agents about the needs of Hispanic and Latinx homebuyers and better equipping them to serve customers with limited English proficiency.
  • Delivered software to improve the customers experience and employee productivity:
    • Added down payment assistance information to U.S. for-sale home listings, making it easier for consumers to discover assistance programs they may qualify for in order to make home ownership more affordable.
    • Added transit data to listing pages, showing renters and buyers the stops that serve each home.
    • Introduced a low-code tool that allows product teams and marketers to launch new Redfin.com resources quickly and easily.
    • Newly designed listing pages on Android, which increased buy-side contacts by more than 9% and scheduled tours by more than 8%.
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