In episode 468 of the Mail Right Show, Robert Newman and Jonathan Denwood discuss the significant real estate market implications of Rocket Mortgage’s acquisition of Redfin, especially to homebuyers, real estate agents, and the broader industry. Robert Newman is the founder of Inbound REM, an inbound marketing agency focusing on real estate and SEO. Meanwhile, Jonathan Denwood is the co-founder of Mail-Right, a CRM lead generative platform providing a great website solution.
How Redfin Started?
Tech entrepreneurs, including David Eraker, Michael Dougherty, and David Selinger, started Redfin. These founders came from Stanford University and brought innovative ideas to real estate. They introduced map-based search and other tools that improved the home-buying experience. Later, Glenn Kelman joined as CEO, becoming the company’s public face. However, despite its technological advancements, Redfin faced problems due to its business model.
Why Redfin’s Business Model Failed
Redfin’s approach was different from that of traditional real estate companies. Instead of paying agents based on performance (commission), they offered salaries. This led to several issues. Top Agents left as they felt their earnings were limited and joined other companies where they could earn more. Redfin has high fixed costs, as paying salaries to all agents increases expenses even during slow markets. Furthermore, clients didn’t care about lower commissions. Redfin promised lower fees (1-2% instead of 3%), but most homebuyers preferred better service over small savings. In 2021, Redfin lost 22.5% of its agents, while competitors like eXp Realty and Compass grew rapidly.
Moreover, OpenDoor, a company that buys homes directly from sellers and resells them online, also faces challenges. First, because of high interest rates, fewer people are willing to sell their homes quickly at a discount. With fluctuating home prices, OpenDoor risks losing money on homes it buys, and most buyers still prefer seeing a home in person before purchasing. Some believe OpenDoor’s model could work in the future with better technology, such as virtual reality tours, but others think the company may struggle to survive.
Why Rocket Mortgage Bought Redfin
Rocket Mortgage, one of the largest mortgage lenders in the U.S., acquired Redfin for $1.75 billion. The deal makes sense for Rocket Mortgage because Traffic and Leads on Redfin’s website receive millions of visitors, which Rocket can use to generate mortgage leads.
Rocket can also reduce Redfin’s expenses by changing its business model. Rocket Mortgage can also offer homebuyers a complete package in finding a home and getting a mortgage in one place. The deal is considered a smart move for Rocket, especially since they bought Redfin at a low price during a tough market.
The real estate industry is changing, with big companies like Rocket Mortgage making strategic moves. Redfin’s acquisition could help Rocket Mortgage dominate real estate and mortgage services. Meanwhile, OpenDoor’s future remains uncertain as it navigates a challenging market. For agents and brokers, remember that good service matters more than low fees. Clients value expertise and personal attention, which is why traditional, commission-based agents thrive.
