CNN Business —
Redfin plans to close its home-resale business and cut its workforce by 13%, laying off 862 employees.
Of the layoffs, approximately 264 are directly related to the closure of RedfinNow, the company's instant buying (iBuying) business, which purchases homes as-is, makes minor renovations and resells them on the open market.
“The wind-down of RedfinNow is a strategic decision made by the company in the face of rising capital costs and to focus resources on our core businesses,” the company said in a filing with the Securities and Exchange Commission.
Redfin and other iBuyers, including Zillow, which shut down its home-flip unit a year ago, say they are buying homes at higher prices than they can sell for in the future, making the capital-intensive business unsustainable.
Redfin's remaining job cuts primarily target real estate services staff and employees in its corporate headquarters. The cuts will reduce the company's number of lead agents by 9%, or about 197. Additionally, Redfin said about 218 employees will have their current roles eliminated but will be offered new roles within the company.
Real estate companies likely couldn't expand fast enough during the boom times during the pandemic, when mortgage rates were ultra-low and home prices soared, but now many are cutting jobs as the housing market cools and the economic outlook becomes more uncertain.
Redfin laid off 8% of its workforce in June due to the slowing housing market. The company said its total employee headcount has fallen 27% since April due to layoffs and attrition.
“These cuts are tough but necessary. While we plan to continue to grow our market share, the market will likely be 30% smaller in 2023 than it was in 2021,” Redfin CEO Glenn Kelman said in an email to employees on Wednesday. “The June cuts were in response to our expectation of declining home sales in 2022, and these cuts assume the downturn will continue through at least 2023.”
Opendoor, a leader in the internet buying market, cut 550 jobs across all divisions last week, about 18% of its total workforce. “The reality is we are navigating one of the toughest real estate markets in the last 40 years and we need to adjust our business,” Opendoor CEO Eric Wu said.
Zillow announced last month that it was cutting 300 jobs as it shifts its focus to technology roles, an area in which it is still hiring. Zillow cut 2,000 jobs last year, laying off a quarter of its workforce, when it shut down its iBuying business.
The iBuying model is proving difficult as buyer demand dries up and home prices fall, especially in a very booming real estate market.
Kelman said RedfinNow's business was too costly and too risky, but the company has argued for years that it's what drives it.
“One issue is that as iBuying becomes more widespread, it becomes less certain that iBuying will gain market share, especially since our asking prices are so low right now,” Kelman said.
He also said it currently costs a huge amount of money to buy and hold a home, despite the uncertainty of the return.
“We've put hundreds of millions of dollars into homes you don't want to own right now,” Kelman said. “Even before expenses, RedfinNow's real estate division could lose $22 million to $26 million in 2022. No matter how small our iBuying losses are relative to others, those losses are more than we can afford to absorb again.”
Redfin took an $18 million inventory impairment charge in the third quarter as a result of purchasing homes at prices higher than the company expected to sell them for in 2022, according to a statement it filed with the SEC.
As part of its downsizing, the company said it would complete the purchase of homes it was contractually obligated to buy, then quickly renovate and sell the properties.
Earlier this week, analysts at Oppenheimer said Redfin's business model was “fundamentally flawed,” and the company's shares plummeted 17% on Monday to an all-time low.
“We believe there is something fundamentally wrong with Redfin's business as the company continues to operate a fixed-fee model for real estate agents,” Oppenheimer analyst Jason Helfstein wrote in a client note. “This prevents the company from optimizing its margins when the housing market declines, limiting its share growth when the market recovers.”
Redfin has long differentiated itself from other real estate companies by offering home sellers low commissions. Redfin agents earn a base salary and receive a bonus every time a home is bought or sold.
For a typical agent, total commission is 5% to 6% of the home sale price, with the seller's agent and buyer's agent each receiving 2.5% to 3% from the commission-paying seller. Sellers who use a Redfin agent pay their agent about 1% commission and the buyer's agent 3%, bringing the total commission down to 4% on a typical home sale.
Looking ahead to next year, Kelman said doing fewer things better will be a safer bet than expanding beyond its core markets into areas like iBuying.
“We will be laughed at for thinking they could have succeeded,” he wrote, referring to the closure of his iBuying business and other projects. “After pushing ourselves to the limits for so long, we have been forced to admit that even if we had the funds to do more, we would be happier and more successful if we did it better with less effort.”