What went wrong at Redfin?

Launched in 2004, Redfin was named after the company’s mission — to redefine the real estate industry. It offered an innovative take on the agent compensation model and got a headstart on Zillow in the portal wars.

But in a turbulent housing market, it may have been this innovation that ultimately ended Redfin’s run as a standalone company.

“[The compensation model] made them more susceptible to feeling the pain in a downcycle,” said Ryan Tomasello, managing director at Keefe, Brunette & Woods. “They still have to bear the cost of those agents, despite production not being there in a terrible housing market.”

Compensation model fell short

The primary innovation of the Redfin business model was to offer agents a salaried W2 position, as opposed to a traditional commission split or serving as a franchisee. Agents got benefits like health insurance, a 401(k), vacation time and a more predictable stream of income.

But some agents — particularly high-performing agents — thought the arrangement put a cap on how much they could earn. It shows in the data. Since the first quarter of 2021, Redfin’s agent count has fallen by 22.5%.

At the same time, agent counts at other publicly traded companies have exploded, with The Real Brokerage (+1,173%), Fathom Realty (+136.6%), Compass (+78.8%) and eXp Realty (+64.9%) leading the way. Some of these companies are much younger and are in a heavy growth stage, so it’s not an exact comparison.

Still, it illustrates how the W2 model fizzled over the long term, as does Redfin’s 2023 pivot to Redfin Next, a more traditional compensation model. 

“It was hard to grow agents in the past because agents who’ve been in the business for 20 years don’t like the payout structure,” said John Campbell, a real estate equities analyst at Stephens. “They have that ‘eat what they kill’ mentality. [Redfin Next] has rejuvenated agent growth. They’ve actually added agents rapidly in the last couple months.”

Lower commissions meant little to clients

The W2 compensation model allowed Redfin to bill itself as a discount brokerage by attracting customers who didn’t want to pay hefty commissions to agents who operate on traditional splits.

Simply put, this competitive advantage didn’t materialize. Buying or selling a home is an infrequent, complex and highly consequential transaction — and it’s often more emotional than rational. Many consumers like having an agent guide them through the process, particularly because it’s nearly impossible for a buyer or seller to execute the transaction on their own.

This dynamic makes many consumers willing to pay for a full-service brokerage, if for no other reason than to reduce their anxiety. As a result, the percentage of buyers and sellers using a traditional brokerage over a discount firm has actually gone up over the past 20 years.

“Limited-service, low-fee brokerages are in every market in the country, and collectively I don’t think they’ve ever had more than a few points of market share,” RealTrends founder Steve Murray said. “Redfin leaned into that, and it didn’t work.”

Another element is that, historically, sellers have paid the commission for the buyer’s agent, which diminishes the value of a discount brokerage for a buyer.

No room for error, financially speaking

Like all aspects of the U.S. economy, the housing market ceased to function when the COVID-19 pandemic began in March 2020. Redfin responded by laying off agents.

But in the months that followed, work-from-home policies spread and people looked for housing that provided more space. Coupled with rock-bottom mortgage rates, housing markets across the country boomed, and Redfin found itself unable to rehire agents at the pace necessary to take advantage of the moment.

This is emblematic of the shortcomings of Redfin’s business model. It has more predictable fixed costs with salaried agents, but it also has higher fixed costs and longer hiring times. When the market was stable, Redfin was able to work around small downturns here and there.

But the extreme volatility of the boom-and-bust pandemic market made it harder to manage, a situation exacerbated by huge bets on iBuying, mortgage origination and RentPath.

“When things get really bad, they have to eat it on margin,” Campbell said. “They have a fixed-cost element that other brokerages don’t have. With the fluidity around COVID, then mortgage rates moving at the fastest rate they’ve ever moved, then housing taking a nosedive, that just put them in a bad position.”

The slow response time might be evident in its annual revenues. While other brokerages experienced heavy swings in revenue — with some now maintaining higher levels of revenue than pre-pandemic days — Redfin’s stayed remarkably consistent at about $1 billion.