Redfin is set to shutter its home-flipping business and reduce its workforce by 13%, laying off 862 employees.
About 264 of the job cuts will be directly related to the shutdown of RedfinNow, the company’s instant buying, or iBuying, business in which it purchases a home as-is, completes minor improvements and resells the home on the open market.
“Winding down RedfinNow is a strategic decision we made in order to focus our resources on our core businesses in the face of the rising cost of capital,” the company wrote in a filing with the Securities and Exchange Commission.
Redfin and other iBuyers like Zillow, which closed its home-flipping arm a year ago, have said the capital-intensive business has become unsustainable because they were buying homes at higher prices than they could sell them for in the future.
Redfin’s remaining workforce cuts are primarily among real estate services staffers and employees at the company’s headquarters. The cuts will reduce the company’s number of lead agents by 9%, or approximately 197. In addition, Redfin said, approximately 218 employees will have their current role eliminated, but are being offered a new role within the company.
While real estate companies couldn’t seem to expand fast enough during the go-go years of ultra-low mortgage rates and skyrocketing home prices during the pandemic, many are shedding jobs now as the housing market cools and the economic picture becomes more uncertain.
In June, Redfin laid off 8% of its workforce due to the slowing housing market. Through layoffs and attrition, the company said it has now reduced its total number of employees by 27% since April.
“A layoff is awful but we can’t avoid it. We plan to keep increasing our share of the market, but that market in 2023 is likely to be 30% smaller than it was in 2021,” Redfin CEO Glenn Kelman wrote in an email to employees Wednesday. “The June layoff was a response to our expectation that we’d sell fewer houses in 2022; this layoff assumes the downturn will last at least through 2023.”
Opendoor, the leader in the iBuying market, cut 550 people across all functions, about 18% of the company, last week. “The reality is, we’re navigating one of the most challenging real estate markets in 40 years and need to adjust our business,” said Opendoor CEO Eric Wu.
Zillow announced last month that it would be reducing its workforce by 300 people. The company said it is shifting its focus toward technology-related positions, for which it is still hiring. When Zillow shuttered its iBuying business last year, it shed 2,000 jobs and eliminated a quarter of its employees.
The iBuying model has proven difficult as buyer demand dries up and home prices, especially in very hot real estate markets, are dropping.
Kelman said RedfinNow’s business cost too much money and presented too much risk, even though for years the company said it helped drive business.
“One problem is that the share gains we could attribute to iBuying have become less certain as we rolled it out more broadly, especially now that our offers are so low,” said Kelman.
In addition, he said that buying and holding homes costs a staggering amount of money for a less certain profit now.
“We’ve tied up hundreds of millions of dollars in houses that you yourself wouldn’t want to own right now,” Kelman said. “Even before its overhead expenses, the RedfinNow properties segment will likely lose $22 to $26 million dollars in 2022. However small our iBuying loss may be compared to others, that loss is still larger than we could afford to bear again.”
In the third quarter, Redfin recorded an $18 million write down of inventory as a result of purchasing homes during 2022 at higher prices than the company estimates it could sell them for, according to the company’s statement to the SEC.
As part of the wind down, the company said it would complete the purchase of homes it is contractually obligated to buy and to renovate and sell those properties quickly.
A ‘flawed’ business model
Earlier this week, analysts at Oppenheimer said Redfin’s business model was “fundamentally flawed,” spurring the company’s stock to plummet by much as 17% to an all-time low on Monday.
“We believe that Redfin’s business is fundamentally flawed, as the company continues to use a fixed-cost model for agents,” Oppenheimer analyst Jason Helfstein wrote in a note to clients. “This prevents the company from optimizing margins when the housing markets decline and limits share gains when markets rebound.”
Redfin has long differentiated itself from other real estate firms by offering home sellers lower agent commission fees. Redfin agents earn a base salary and then bonuses for every home purchase or sale they close.
At a typical brokerage, the total commission is 5% to 6% of the home’s selling price, with the seller’s agent and buyer’s agent each getting paid 2.5% to 3% by the sellers who pay the commission. A seller using a Redfin agent pays their agent about a 1% commission fee and the buyer’s agent a 3% fee, which lowers the total commission to 4% for a typical home sale.
Kelman said doing fewer things better will be a safer bet going into the next year, rather than extending the business beyond its core market into things like iBuying.
“We’ll be ridiculed for thinking they could’ve succeeded,” he wrote, referring to the iBuying business and other projects that are ending. “Having strained ourselves to the limit for a long time, we have to acknowledge that, even if we had the money to do more, we’ll be happier and more successful doing less, and doing it well.”