Glenn Kelman appeared to be right when he figured COVID-19 would shut down the U.S. Home market. “In April 2020 the housing market came to an absolute grinding halt,” he recalls. “COVID had stopped the economy, and people weren’t able to tour properties.” Yet just two months later “the market had come roaring back” and has continued to roar; last year U.S. Homes sold faster and at higher prices than ever. For Kelman and the company he heads, Redfin, plus competitors including Zillow and Opendoor, this historic white-hot market has been a vast opportunity—and a crucible of technology competition and strategy innovation.
Redfin (the name is an anagram of “finder” and “friend”) was a pioneer of the proptech industry, envisioning online, map-based real estate search in 2002—before technology was fully up to the task. Kelman wasn’t a founder; a few years after graduating from the University of California, Berkeley, he had co-founded Plumtree Software, which went public in 2002 and was sold in 2005 for $200 million. With money no longer a worry, he applied to medical school, an idea he had thought about for years. He was accepted at the University of Washington in his hometown of Seattle but changed his mind before attending; he concluded he wouldn’t be a very good doctor. Then a venture capital firm called and asked if he’d like to be CEO of Redfin. His decision wasn’t easy. In high school he “was determined not to go into business. I just thought it was the definition of evil.” He no longer thinks so and has been running Redfin for almost 17 years.
As the market has boomed, the proptech industry has endured breathtaking ups and downs. Investors initially stampeded to buy shares of Redfin, Zillow, and Opendoor, all of which peaked in February 2021; recently all were down by more than half as competition has intensified and expansion has proven expensive and risky. But Redfin’s strategy is fundamentally different from the others’, as he explains in an exclusive interview with Coins2Day. He also identifies the two technologies that proptech firms are fighting hardest to dominate, explains how he came to love human real estate agents, and offers his advice to home buyers.
Why two technologies are central to the future of buying and selling a home
The pandemic created a paradox in the home market: Millions of people suddenly wanted to buy homes—to escape crowded cities, to make working from home easier, because stimulus payments enabled them to afford one—but buyers didn’t want to travel on planes or trains to see homes, and sellers didn’t want strangers coming in. The solution: better technology for “visualizing the listing so people can experience what the home is really like and what the neighborhood around it is like without leaving their own home,” Kelman says. “About half the people who bought a home last year made at least one offer before the person had visited the house.”
At the same time, the pandemic sparked an urgent desire by home buyers and sellers for the latest estimate of a property’s value. So “the other area where you just see a massive amount of machine learning is around pricing the home. We want to be able to guide consumers around what to list their home for or where to put in their bids. But you also see this iBuying phenomenon, where technology-driven companies are buying the homes ourselves. We put cash on the barrel and let someone move on. We own the property, and we’re responsible for selling it. That means we’re taking the risk if the market changes over the two or three months it takes us to rehabilitate the property and get it on the market. Using machine learning to predict the market and understand it at a local level—because Austin, Texas has a completely different housing market than Bethesda, Maryland—that has been a massive challenge. But because we have all the pictures of the homes and all this traffic to our website, we can try to gauge what each home is worth across the United States and take that risk so the consumer doesn’t have to.”
Why the trend of buying homes sight-unseen will continue beyond the pandemic
“It will fall back some,” Kelman acknowledges, “but I think mostly it’s a one-way trend.” It isn’t quite as hands-free as it seems. “Before closing on a deal, a buyer is going to hire an inspector to walk through the whole property. You have to know what you’re getting before you complete the paperwork.” But “many people don’t have to see it in person to get a sense of ‘I’ll pay $100,000 for that house’ or ‘I’ll pay $1.2 million for that house’—many people are willing to do that based on fairly thorough visualizations of the property. There are now these three-dimensional scans that let you pivot in any direction you want. It’s almost like Google Street View, but inside a house. It’s very high resolution.”
Even buyers who won’t buy remotely will increasingly use this tech. “I’ve just been on enough home tours where before you even get through the front door, the buyer knows ‘I don’t want this one.’ So rather than driving around all day, they’re getting to a very narrow list of finalists, sometimes even making a bid on one before they see the property in person.”
The risks of iBuying and how to avoid them
Zillow announced last October that it was closing its iBuying operation, confessing that its algorithms just couldn’t price properties well enough. “The risks are great,” Kelman says. IBuying “is very capital intensive. You have to borrow hundreds of millions or sometimes billions of dollars to own all of these houses. That burns a hole in your pocket if you can’t sell them right away. It is a small part of our business in terms of transactions, but it is a huge part of our balance sheet. We just have to make sure we’re paid well for that risk. We’re clear with customers that convenience comes at a cost. You are going to get less money for your house if we’re going to cash you out on day one.”
Why Redfin follows a unique strategy
Buying or selling a house through Redfin isn’t entirely digital. The company also has thousands of agents nationwide, and they don’t operate on the traditional business model. “We have 50 million unique visitors on Redfin.com, and those people click on a button to see a home at a moment’s notice, virtually or in person,” Kelman says. “Then we have real estate agents who help you with the entire transaction but charge about half the fee. To list a home, the fee can be as low as 1% when the typical agent charges 2½% or 3% as her listing commission for that sale. We sell homes faster, we sell them for more money, and our agents are focused on service and not sales. They don’t spend their time prospecting for customers, so they’re about two or three times more productive than a traditional agent. That means they close two or three sales a month instead of one sale every other month, which is the industry average. Our agents earn about $100,000 after their first year. Our top agent earned about $700,000. The average for Redfin is two or three times higher [than the industry average].”
Why so many traditional real estate agents are still doing business the traditional way
“It’s an industry that’s slow to change. People only buy a home once every seven or 10 years, and when they do, they usually hire their uncle or their neighbor or the person who sold them their last house. But because the market is so large—$60 billion in commissions and another $40 billion paid to lenders every year in fees—you can take just a small piece of it and make a huge difference. For Redfin, slow and steady wins the race. We’ve been gaining market share every quarter for the past 16 years, and I hope we can do it for another 16.”
Why proptech shouldn’t be all tech
“When I first got into the business, I saw real estate agents as a bug. I was used to working with computer scientists from Caltech or Stanford or MIT. And now I am so proud to deliver that service. I think our customers want great technology, but they want someone to answer the phone who really knows the local market, who can walk with them and listen to their needs.
I used to wonder why our customers were so crazy. But then I noticed that they had just put their parents in a nursing home or lost their job or gotten a new job or fought with their kids all the way across the country when they’re driving a U-haul and telling them they’re going to go to a new middle school and love it. They got married, they had a baby, they got divorced, they broke up. These are people in altered states. And they’re not just buying another asset. They’re imagining a new life for themselves. And so I think I’m the worldwide expert on how far you can go to automate a real estate transaction and where the limit of that is.
“At first we tried to automate everything. And the phone used to ring in the office and it drove me crazy. Why did these people keep calling us asking these dang questions? And now I’ve just come to acknowledge that those phone calls are really what we do, and those meetings are really what we do. Technology can sometimes seem the diametrical opposite of service, but customers don’t see it that way. They want great service, they want great technology. They should be able to have both.”
Advice to home buyers
“Just pick a home you love. I see people worry about timing the market, I see them get fancy on an offer and try to get it for $10,000 less. But the way you can really destroy wealth is by moving into a house—even if you have a lower transaction fee through Redfin—and two years later you sell it. The refinancing, the brokerage fees, everything else will eat up your wealth. There’s a whole bunch of people trying to get you to transact, but I would encourage you instead to buy and hold. That means when you see a house you love, don’t worry about overpaying for it a little. And if you see a great deal, don’t think about underpaying, because if you don’t love the house, you shouldn’t buy it. That is the simplest advice—to follow your heart. It’s true in housing as it is in life.”
Never miss a story: Follow your favorite topics and authors to get a personalized email with the journalism that matters most to you.
