Reposted with permission from Rob Hahn.

I have been waiting, wanting, hoping for Redfin to go public for a few years now. For a bunch of reasons, mostly having to do with getting another company in real estate to have to report publicly about its operations and its numbers.

Well, my wish has been granted. Redfin just filed its S-1 to go public a couple of days ago.

I don’t have any strong opinions at the moment, besides wishing Glenn Kelman and crew lots of luck. But looking through Redfin’s S-1, I had a few random thoughts. I figured I’d share them with you all, taking a bit of a break from the internal machinations of NAR.

This is a game changer. The industry as we know it will never be the same after Redfin’s IPO. I’ll post on that later, but I wrote most of this before I started thinking harder, so I figure I might as well share this with you all while I work on the bigger piece.

$100 million IPO? Valuation?

The first thought that struck me was that if Redfin manages to price correctly and raise $100 million from its IPO, it would dwarf what Zillow managed in its IPO in 2011: $69.2 million. And we’ve all seen what Zillow became after its IPO.

What will Redfin be after its IPO?

It’s difficult to compare apples and oranges (the two companies have totally different business models, after all), but if Zillow has $846 million in 2016 revenues, and Redfin has $267 million in 2016 revenues, that’s approximately a 3:1 ratio. Zillow’s current market cap is $9 billion. So that would make Redfin worth about $3 billion?

On the other hand, Redfin claims to be a brokerage company, so maybe the proper comp is Realogy? Well, Realogy’s market cap is about $4.5 billion on 2016 revenues of $5.8 billion. That’s right; its valuation is lower than its revenues — by $1.3 billion.

And Re/Max, a franchisor, has a market cap of about $1.7 billion on $176 million in 2016 revenues. It’s hard to think of Re/Max as a comp for Redfin though, because they’re so different.

Guess we’ll see.

Comparing to Zillow

One of the more interesting comparisons is Redfin and Zillow at the time when Zillow went public.

The big obvious thing to note is revenues. Zillow had $30 million in revenues in 2010 when it filed to go public; Redfin has $267 million in revenues in 2016.

But the two things I thought were most interesting was how much each company was spending on sales and marketing and on technology.

Zillow in its S-1 said that it spent the following in 2010:

Sales and marketing: $14.9 million Technology and development: $10.6 million

Redfin in its S-1 reports:

Marketing: $28.6 million Technology and development: $34.6 million

Redfin is way ahead of Zillow in terms of where the two companies were at the IPO filing.

Now, of course in 2017, Zillow dwarfs Redfin in every measure: revenue, technology spend, marketing spend, etc. In 2016, while Redfin spent $34.6 million on technology and $28.6 million on marketing, Zillow spent $273 million and $380 million, respectively.

But, let’s recall that in 2011, when Zillow was going public, the top dog in online real estate was Move, Inc., which operates realtor.com. And Move was magnitudes larger than Zillow back then, similar to how Zillow is magnitudes larger than Redfin today.

For example, 2011 Move, Inc:

Revenues: $191.7 million (versus $30 million for Zillow) Sales and marketing: $68.6 million (versus $14.9 million for Zillow) Technology and development: $34.7 million (versus $10.6 million for Zillow)

At the time of Zillow’s IPO, very few people thought Zillow was going to be the top dog in real estate within a couple of years. And yet, that’s exactly what happened.

Do some ratios though.

Move : Zillow

Revenues: 6.39 Sales and marketing: 4.6 Technology and development: 3.3

Zillow : Redfin

Revenues: 3.2 Sales and marketing: 13.3 Technology and development: 7.9

In other words, it’s going to be a lot more difficult for Redfin to catch Zillow than it was for Zillow to catch Move. The key spending ratios are dramatically higher for Zillow : Redfin.

This is not to say it can’t happen or won’t happen. It’s just to make an observation.

One difference is that Move didn’t increase its investment into technology as the upstart Zillow was breathing down its neck. Here’s Move, Inc.’s technology spending as Zillow was climbing up:

2011: $34.7 million 2010: $34.3 million 2009: $27.8 million 2008: $26.3 million 2007: $34.6 million

Compare that to Zillow’s technology spend over the past few years:

2016: $273 million 2015: $198.6 million 2014: $84.7 million 2013: $48.5 million 2012: $26.6 million

You find similar patterns in the marketing spend; Move actually decreased its marketing spend over the five years from 2007-2011. Zillow dramatically increased marketing from 2012-2016.

I have a feeling that Spencer Rascoff and crew aren’t going to sit back and watch Redfin go public, ramp up its marketing and technology, become a serious competitor and — do nothing or even worse, start decreasing its own investments as Move once did.

If anything, I could easily see an arms race between those two companies that will suck the oxygen out of the room for everybody else.

We’ll see.

Where’s #StopRedfin?

Finally, the S-1 really makes me think that Redfin should send a case of wine to Zillow or something for providing a smokescreen of distraction as evil personified in real estate.

Because while the industry kept Jay Thompson busy and employed with all of the outrage and #Zaterade and Zillow Fever stuff, Redfin built up precisely that which the Zillow haters constantly harp on Zillow about.

For example, the Zestimate. The industry hates the Zestimate, right? Because no computer can be as accurate as a living agent. Well, Redfin has the Redfin Estimate, which the S-1 describes thusly:

“Our access to detailed data about every MLS listing in markets we serve has helped us build what we believe is the most accurate automated home-valuation tool. According to a 2017 study we commissioned, among industry-leading websites that display valuations for active listings, 64 percent of the listings for which we provided a public valuation estimate sold within 3 percent of that estimate, compared to only 29 percent and 16 percent of the public estimates for the two other websites in the study.”

Mum’s the word, though, huh? Zestimate equals Satan’s spawn. Redfin Estimate, made far more accurate thanks to unrestricted access to MLS data, equals enjoy the silence.

How about the whole “Zillow is going to become a brokerage and disintermediate the agent!”? Well, Redfin is a brokerage — and is actively trying to disintermediate (that is, put out of business) every agent who doesn’t work for Redfin.

In that, Redfin is no different from any other brokerage, who all compete to gain market share at the expense of other brokerages and agents.

But I think about the outrage from the real estate interwebs because Zillow “crossed the line” into the brokerage world with Zillow Instant Offers and wonder why the chorus of crickets when it comes to Redfin.

Speaking of Zillow Instant Offers, that sucker triggered so many fragile, fear-driven agents that there’s a #StopZillow movement complete with website. Amazingly, in one of the announcements about Bob Goldberg’s being named as CEO, the comments are all full of “When are you gonna fight against Zillow?” type of stuff.

Meanwhile, Redfin is debuting Redfin Now. Which is exactly like Zillow Instant Offers, except that no other agents or brokerages can participate. Cool!

And the best part is, you know all that “Zillow is making billions exploiting our data!” stuff that’s like, everywhere? Well, read ’em and weep:

“As a brokerage, Redfin has complete access to all the homes listed for sale in the local multiple listing services, or MLSs, in the markets we serve. MLSs are used by real estate agents to list properties and coordinate sales. Although websites that do not operate a brokerage often have access to these MLSs, the terms of their access vary widely. As a result, brokerage websites often get more listings from MLSs, or more detail about each listing, than other websites.

“Access to this extensive data, paired with local knowledge, lets us give our customers what we believe to be the most comprehensive information on homes for sale.

“Additionally, our streaming architecture is designed to recommend listings to our customers by mobile alert or email soon after these listings appear in the MLS. These advantages in loading listings data and quickly notifying consumers come not just at the listing debut in the MLS, but in recognizing when a price changes or a home sells. For over 80 percent of these listings, we can show the listing on our website and mobile application within five minutes of its debut in the MLS. According to a 2017 study we commissioned, we notify our customers about newly listed homes between three to 18 hours faster than other leading real estate websites.”

Let’s not forget that Redfin was never seriously a listing brokerage, even with its 1 percent commission thing, for years. Most of its revenues came from, and still come from (70 percent or so) representing buyers who come to the Redfin website to view listings of (you guessed it!) other brokerages.

Talk about making billions on the data of real estate agents and brokers, yet, no outrage.

But Rob, that’s OK, because Redfin is a brokerage and a participant of the MLS and has all due rights to all of the data. Well, if you believe Redfin is a brokerage — I guess you also have to believe that OpenDoor is a brokerage. They both offer full cooperation and compensation, after all.

Redfin is not a brokerage, guys. Seriously. Check your premises.

Why do I say that?

Because there is no way in hell Redfin is going public at brokerage valuations. Nobody who matters thinks Redfin is a brokerage. Look at the coverage in the media — it all mentions Zillow. It doesn’t mention Realogy and Re/Max and HomeServices of America.

Goldman Sachs doesn’t agree to underwrite Redfin’s IPO, if it thinks Redfin is a real estate brokerage. The VC firms backing Redfin don’t allow Redfin to IPO at brokerage valuations.

The reason is simple: money money money!

Zillow’s market cap is $9 billion on revenues of $846 million. Realogy’s market cap is $4.5 billion on 2016 revenues of $5.8 billion. Realogy’s valuation is below its annual revenues.

If Redfin is a brokerage, making $256 million in revenues and losing tens of millions every year. It’s worth zip. Zilch. Zero. Nada.

If Redfin is a technology company that happens to make money from commissions — it’s worth $3 billion or so (or more!)

I’ll do a bigger post later on Redfin once I’ve thought through some more things and read the S-1 more, but boy, all y’all who are on the #StopZillow crusade are going to be awfully sad when the supercharged Redfin with IPO cash and stock-as-currency comes to eat you all for lunch and makes all of your worst nightmares come true.

Conclusion

I am writing the conclusion after my “let me think about this more” time so, let’s just say that this is a big deal. I can see everything changing in the relatively near future. Yep, big things poppin’ and little things steppin’. For now, enjoy the tidbits of thought above.

Robert Hahn is the Managing Partner of 7DS Associates, a marketing, technology and strategy consultancy focusing on the real estate industry. Check out his personal blog, The Notorious R.O.B. or find him on Twitter: @robhahn.

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