Ibuyers are burning Wall Street money

[Timothy Lewman]

Those of us in the housing industry are concerned about the rise of the Ibuyer - companies that buy your house so that you can buy another one without waiting for a traditional buyer and the months it takes to find them and for them to close. Thankfully some of these companies are public and have to report their earnings every quarter so we can see how their business lines are doing. There's more to this report - and the earnings call transcript - I'm only concerned about the flipping side of the business. 1) Redfin.com (RDFN) is one of these Ibuyers, lets see how they did. According to the latest earnings release, Redfin's first quarter revenues were $110.1 million, up 38% from the first quarter of 2018. The cost of that revenue was $107.338 million. Thus gross profit was $2.8 million, a decrease of 52% from $5.7 million in the first quarter of 2018. Gross margin was 3%, compared to 7% in the first quarter of 2018. Add in an operational loss of $67.2 million compared to a $36.4 million loss in the first quarter of 2018, with the loss widening due largely to investments in mass media ads and new businesses (Ibuyer program called RedfinNow, concierge services, mortgage business and title business). Operating expenses were $70.2 million, an increase of 64% from $42.9 million in the first quarter of 2018. Operating expenses were 64% of revenue, up from 54% in the first quarter of 2018. Bottom line: these start up costs are expensive; flipping houses is expensive, margins are being hurt, money is being lost and the earnings per share of stock shows it: Net loss per share was $0.74, compared to net loss per share of $0.44 in the first quarter of 2018. 2) Launched RedfinNow Remote Offers. "We can now give customers a cash offer remotely over the phone, without having to visit their house. Redfin can leverage Remote Offers to increase efficiency and expand RedfinNow to more markets across America." Their methodology is fraught with risk, the general public and agents aren't trained to assess a home and the repairs it may need: "ask people to upload photos and answer more questions about the home. The listing agent can also provide some color." 3) They charge 1% of the selling price to list your house as an agent or 2% for the "Concierge Service" - fixing the house up for sale. On a $300,000 house that's $3,000 to fix up the house for sale by painting, front landscaping, staging - this cost more than $3,000 in my state of Massachusetts! Selected excepts from Redfin's earnings call:
"We expect offline media spending to be between $35 million and $45 million in 2019, about triple what it was in 2018." "What's limiting RedfinNow's growth and slowing our ability to sell the homes we've already bought is our renovations capacity. We are now hiring quickly with an operations hub in Dallas responsible for setting jobs scopes and paying subcontractors. Local field employees still make sure the work is done well and handle on-the-spot repairs."
"Online marketing is a major reason why we can sell homes for more money, but the best brokers make the actual homes show better at the moment of truth, when a their buyer pulls up to the curb for a tour. This is why the Concierge Service we offer listing customers has grown so quickly even at double the fee of our 1% service. The renovations capability we're building through RedfinNow will also support our Concierge Service."
"Total operating expenses increased 64% year-over-year and represented 64% of revenue, up from 54% one year ago, primarily driven by marketing. Marketing expenses increased 149% year-over-year, driven by elevated spending related to our brand advertising campaign. We spent $21.1 million on offline media during the first quarter."
"So the change that we've made in the past few months has been to let RedfinNow buyers, these are the people who are responsible for signing the offers, to buy a home from a homeowner make those offers remotely. And some of the information they need is actually gathered directly from the consumer. So we've just become more active about asking people to upload photos and answer more questions about the home. The listing agent can also provide some color. And what's pleased us is that we haven't seen an increase when we've made remote offers and the number of offers where we have to add repair fees later on. What we worried about was a bait-and-switch dynamic, where you start with a low price assuming that everything with the house is perfect, then pretend to be surprised when it isn't. That isn't the way we want to run this business."
"If you are paid truly for the risk that you are taking, where priced into the break even is the cost of weathering a downturn? Maybe. But I really think you have to be compensated for the risk that you're taking. And the reason that we do think that iBuying in our product mix is going to expand and contract as the market goes north or south is, because we have to be paid for that risk. And when that risk premium goes up I think more people are going to choose the brokerage. And when that risk premium goes down more people are going to choose iBuying. But the idea that we'd be buying houses to subsidize the rest of the business is untenable."
http://investors.redfin.com/news-releases/news-rel... https://www.fool.com/earnings/call-transcripts/201...