I read 1,800 employee reviews & 2000 app reviews to understand why Redfin isn’t profitable, despite raising over $500 million. Here’s what I discovered:
1. Redfin employee training sucks.
Many employees are never taught standard operating procedures. Frequently because no SOP even exists.
The company also disincentivizes the best agents from sharing their sales tactics with other agents.
2. Redfin jobs are overspecialized, yet overlapping.
Redfin has broken the “agent” role into multiple specialized subroles: tour coordinator, transaction coordinator, listing coordinator, operations manager, buyers agent, listing concierge, closing specialist, and so on. However, the job duties for the same role are not standardized across different teams. And frequently, the responsibilities of different roles end up overlapping. The result is employee confusion & duplication of work.
3. Redfin has TONS of time-wasting, mandatory meetings.
Some of these meetings have no agenda.
4. Redfin has a culture of nepotism.
Redfin is known for its technology, but it’s human middle managers who decide which agent gets a lead. And often, that decision is made more on the basis of friendship than on ability. The same is true of promotions.
5. Redfin’s business model is game-able.
Most buyers’ agents create customer loyalty through 2 mechanisms: (1) exclusive agency agreements, and (2) the psychological principle of reciprocity which makes someone feel like they owe the buyers agent something after the buyers agent has spent time doing showings with them “for free”.
Redfin doesn’t benefit from either mechanism. They don’t require exclusive agency agreements, and if someone schedules multiple showings, Redfin doesn’t pair them with the same agent for every showing.
As a result, many people use Redfin to do showings, but when they’re ready to actually buy, they use their realtor cousin…
I was curious if the discount real estate brokerage model could be profitable if the issues I mentioned were fixed, so I tracked down the founder & CEO of a 6-year old startup named Simple Showing that has a similar business model to Redfin.
The answer: Yes. After raising less than $2 million, Fred McGill has grown Simple Showing to a couple million in revenue. And they are PROFITABLE. So I interviewed him on my podcast about how he managed to do what Redfin could not:
Last week, I talked to a guy who owns several truck stops, a diesel fuel wholesaling company, and a portfolio of industrial real estate. He told me that he could buy truck parking lots and rent them at a cap rate of 8% per year… in New Jersey! That’s a better return than I can get on single family rentals in south Florida, and with none of the property maintenance headaches (he’s literally renting out land).
I went down the rabbit hole and discovered 3 things:
The vast majority of trucking parking lots in the U.S. are small (1-5 acre) lots that are owned by mom and pop investors,
There is rapidly growing institutional interest in buying truck parking lots, and
Institutions are having difficulty investing in truck parking lots because the market is so fragmented and there are very few large portfolios available for them to buy.
I immediately start daydreaming about rolling up small truck parking lots at high cap rates, bundling them together, and then selling them off as a lower cap rate portfolio to some industrial REIT.
Since cities want the tax dollars from expensive properties, they tend not to approve the demolition of existing industrial buildings if there is no plan to replace them. That means the supply of land in dense urban areas is slowly being diminished, without replacement. So truck parking lots in large cities have a strong business moat & limited competition.
But my daydream gets even better. The average home insurance premium in Florida rose 42% from 2022 to 2023, and a similar story is true for commercial and industrial real estate in Florida. That means good real estate investments in Florida are hard to come by right now. Except… truck parking lots are not buildings… The cost of property insurance for these lots is minuscule compared to the revenue they bring in. You still need general liability insurance, but the cost of that insurance hasn’t been driven up by hurricanes, tornadoes, and roofing fraud to the same degree that the cost of property insurance has been.
So here’s the strategy:
Buy up small 1-5 acre parcels of industrial zoned land in Miami (these lots are too small for most brokers to care about and are frequently not listed on costar, which means there is serious potential to buy mispriced assets).
Choose land with easy access to nearby highways, the cargo port, the airport, and/or large distribution centers, since that is where the highest demand for truck parking is.
Also try to find land that is in the path of development so that when I’m ready to sell, I can stoke a bidding war between industrial REITS and industrial developers who want to buy the land.
Regrade the land if necessary, finish with gravel or pavement, and set up fences & cameras for security.
Rent out the land. Minimize vacancy by finding short term tenants on Truck Parking Club (basically Airbnb for truck parking) between my longer term tenants.
And in fact, my pool of potential tenants is actually much larger than just truckers. Construction companies need industrial land to store heavy equipment. Contractors need to store bulk materials. And logistics companies need to store shipping containers. That’s why institutional investors have started calling these industrial land parcels “industrial outdoor storage” (IOS) instead of truck parking lots. IOS is a $200 billion market in the U.S.
One major hiccup in the IOS roll-up strategy though is financing. Many banks won’t finance raw industrial land, especially if the land is not already generating cash flow. And rolling up enough lots to be interesting to an institutional investor would take tens of millions of dollars. That’s a lot of fundraising.
Also, because you don’t have to do much to turn land into a parking lot, it’s questionable whether an IOS roll-up could benefit from my favorite real estate tax strategy: opportunity zones. That’s a shame because a lot of industrial land in Miami is already in an opportunity zone.
Still, the combination of strong moat / limited competition, diminishing supply, increasing demand, low insurance costs, and lots of institutional buyers willing to buy a roll-up at a higher cap rate than I can buy individual lots makes the business of truck parking compelling enough for me to dig into more. Next week I’ll be publishing a podcast interview with the New Jersey truck stop owner I mentioned before, but if you happen to know anyone who owns IOS lots in Miami specifically, I’d love an introduction.
Want to make viral tweets for a business audience? Here are 24 patterns you can use.
1. Point out a common, obvious mistake
Strip Mall Guy currently has 214.7k followers, and this tweet from a year ago has 1.5 million views.
Gas Biz Guy (just under 40k followers) made this tweet (228k views):
2. Play on people’s fear of “you will own nothing & be happy about it”
Ellie Frost (44.7k followers) posted this tweet (30k likes) over a year ago:
Then, Trung posted a slightly modified version of the tweet several months later, and it also went viral (he currently has 689k followers, and the tweet had 2.3 million impressions):
3. Talk about a current or upcoming financial or business crisis
David Sacks currently has just under 785k followers, and this tweet got 2.9 million impressions:
Carried No Interest (14.5k followers) made this post on a pending decline in the financial industry (49k views):
And another post from a day earlier got 98k views:
4. Talk about boomers building wealth at the expense of younger generations
LaVonne Idlette (19.2k followers) made this tweet (59k likes):
5. Preach that you can have a 9-5 and also invest or have a side hustle
Porsha (less than 10k followers) posted this tweet (23k likes):
6. Make fun of real estate agents
Emily June has 53k followers, but this tweet from 6 months ago has 2.5 million views:
Prozac Princess only has 3,377 followers, but her tweet from 1.5 years ago has 107k likes:
7. Admit to not being self-made (genuinely or as a joke)
Nick Huber currently has under 350k followers, and this tweet from over a year ago has 855k views:
Here are more examples:
8. Talk about tax loopholes
Ankur Nagpal has 79k followers, but this tweet from over 6 months ago has 1.7 million views:
9. Talk about going back to the office being unjustified
Emily Freeman has 83.3k followers, but this tweet from 2.5 years ago has 66k likes:
San Viva has fewer than 2500 followers, but this tweet from almost 2 years ago has 88k likes:
10. Talk about tattoos not holding you back in business
Carrie has 24.5k followers, but this tweet from 1.5 years ago has 37k likes:
11. Talk about building, investing in, or making money from taboo businesses
Shaan Puri (391.6k followers) posted this tweet (829k views):
Several months earlier, he also posted this (3.5 million views):
Gas Biz Guy (under 40k followers) made this tweet (105k views):
12. Talk about replacing Americans with foreign workers or AI
Marshall Haas has fewer than 35k followers, but his post about a dentist hiring a Philippino receptionist got 3.5 million views:
Nick Huber also had a viral post with 1.5 million views:
13. Offer a business opportunity (job, exclusive networking opportunity, etc)
Another of his tweets implicitly offers an opportunity to join an MFM poker event:
Additionally, one of the taboo tweets we looked at earlier is also offering an opportunity:
14. Tell people they don’t need to be smart to get rich
Nick Huber (347.9k followers) got 954k views for his thread explaining this stance:
15. Give a list of signs that someone is a winner
Everyone wants to know whether they fit a definition of a winner. This will work especially well if the definition is attainable:
We already saw another example as well:
16. If you’re perceived as an expert, give a list of tips & recommendations
Shaan (391.6k followers) posted this tweet (1.1 million views):
He also said he wanted to copy someone else’s website.
And he admitted to hiring a family chef (which is a braggodocious statement that most people wouldn’t talk about):
Nick Huber said it’s a worthwhile investment for rich people to spend money on private jets (this also has the secondary benefit of being environmentally controversial):
18. Describe a relatable frustration
Here’s another example of a frustrating situation that is used to give business advice:
19. Ruffle feathers by calling an entire industry or a common business practice a scam
Nick Huber got 1.4 million views by calling vehicle safety ratings a scam.
20. State controversial beliefs or predictions
21. I’m an {impressive person} who looked at {tons of data} and found {THIS}
Carried No Interest (14.5k followers) got 125k views on his tweet following this pattern:
22. Reveal under the hood of a business (or point out a weird business that shouldn’t exist)
Gas Biz Guy made another viral tweet about why a business failed:
Strip Mall guy (just under 215k followers) posted a tweet (4.5 million views) about a business that seemingly shouldn’t exist:
He also posted another viral tweet looking under the hood of a failing business:
23. I just bought/sold a company
24. Humble brag about interacting with rich people
Aleksey (20k followers) posted a tweet about sitting next to a rich person on a plane, and it got 1 million views:
Santa undoubtedly learned how to deliver billions of packages around the world, by aircraft, in a single night, by emulating FedEx.
In 1971, Yale alumni Fred Smith founded FedEx with the goal of providing an end-to-end, air cargo delivery network for the U.S. To make the deliveries efficient, FedEx relied on a hub-and-spoke distribution system where all packages would be rapidly shifted among airplanes at one central airport each night. That meant the entire customer experience relied upon the FedEx night shift completing their job of shifting packages as quickly as possible. But for some time, they just couldn’t manage to do it — the night shift would rarely complete its mission on time.
FedEx’s management team tried changing the night shift’s processes, how packages would be stacked and organized during the shift, how packages would be loaded, what type of equipment was used to help move the packages, how packages were labeled and tracked — nothing worked. The management team appealed to the night shift’s sense of mission, but that didn’t work either.
Finally, a FedEx manager got the bright idea that it was counterproductive to pay the night shift by the hour when the company wasn’t trying to maximize billable hours but rather accomplish a specific task (shifting the packages among all the planes) as quickly as possible. So FedEx started paying the night shift employees on a per shift basis rather than a per-hour basis, and employees were allowed to go home when all the planes were loaded. And, overnight, FedEx’s night shift became a paragon of efficiency, and FedEx’s problem was solved.
“Incentives are superpowers… Never, ever, think about something else when you should be thinking about the power of incentives.”
Charlie Munger
For fun, here is a modern day example of an equally terrible incentive mistake that many companies are still making:
Many large tech companies compensate their engineering employees with stock options. Those stock options benefit underperforming employees the same as over-performing employees, which has several undesirable psychological consequences that impact the company’s bottom line:
Employees don’t “feel” a direct connection between their performance and their compensation. The stock option is perceived as part salary and part casino winnings, rather than as compensation that depends on the employee’s actual quality of work.
The highest performing employees can feel that they are not being compensated fairly, since their compensation is tied to the same stock performance as the worst performing employees.
Stock options are supposed to create loyalty from employees. However, in a bull market, they can have the opposite effect. Employees can get rich quickly even if they haven’t provided significant value, and then retire early, leaving the company shareholder’s worse off not only because the employee was compensated for more value than they provided but also because the company has lost an employee who must now be replaced.
In a bear market, stock options can become worthless even for highly productive employees. That can disincentivize a company’s most valuable employees and lead to some of them leaving to join other companies that offer stock options with lower strike prices for the current market.
Advertising / lead gen for real estate buyers’ agents
Secondary Businesses:
Rental unit advertising
Property management software
Mortgage origination
Escrow & title closing services
Annual Financial Stats (2022):
Revenue: $1.958 billion (66% from buyer agent advertising)
Gross Profit: $1.591 billion
Operating Expenses: $1.684 billion
Net Loss: $101 million
Primary Moats:
Network Effect
Brand
Primary Weaknesses
Stale data
Low quality leads
Summary
Zillow is an advertising company that makes the majority of its money from real estate buyers’ agents who pay for leads.
Zillow pulls listings from the MLS, publishes them on Zillow’s consumer-facing website, and then charges real estate agents for incoming phone calls from Zillow users who are interested in a particular listing.
Zillow refers to the agents who pay for leads as “Zillow Premier Agents”. In 2022, the company generated $2.0 billion in total revenue, and $1.3 billion of that was from Premier Agents.
How Zillow Leads work
Zillow Premier Agents bid on one or more zip codes where they would like to receive leads. Typically, these agents will spend at least $500 per month. In exchange, they will receive two types of leads:
Connections. Bob is browsing a listing on Zillow and wants to request more information about a property or a property showing. He can do so by entering his contact info into a Zillow form. A Zillow employee will then call Bob, and then he’ll be connected to a Premier Agent. Bob is a “connection” (the most valuable type of lead on Zillow). When an agent buys connections, they don’t actually buy a specific number of connections. Rather, they bid on “share of voice” which means they are paying to receive a certain percentage of Zillow connection calls for a specific zip code. However, in some markets, Zillow has also rolled out “Flex” — a pay-for-performance marketing program where agents only pay for connections when they lead to a transaction.
Nurture Leads. These are people who are looking at a property but aren’t very serious and might just be looking for a rental. Nurture Leads are sent to Zillow Premier Agents by email, and the agents then can follow up and nurture these leads until they are ready to buy or rent.
In late 2022, Zillow began rolling out no-call tour scheduling in Atlanta. The experience is like making a restaurant reservation online, similar to Redfin. This feature (called ShowingTime+) connects prospective home buyers directly with the listing agent of a property, so it will be interesting to see whether this reduces the number of Zillow connections and leads to a drop in Premier Agent revenue.
Zillow Revenue Streams
Zillow’s primary business is selling home buyer leads to real estate agents, but it also makes money in other ways. It’s biggest revenue streams are:
Premier Agent ad spend ($1.291 billion)
Rentals advertising ($274 million)
Real estate agent software & other media ($274 million)
Mortgage originations ($119 million)
In total, Zillow generated $1.958 billion of revenue in 2022, and 66% of Zillow’s revenue came from Premier Agents.
Zillow is trying to expand into adjacent markets as well, although those endeavors are still early. Zillow Closing Services offers title and escrow services, and Zillow Home Loans is a licensed mortgage originator (i.e. they lend and then resell the mortgages to banks and other lenders).
“In 2022, we turned our efforts toward building the foundation for a substantial direct-to-consumer purchase mortgage-origination business. We are working to… increase awareness of Zillow Home Loans, bolster loan officers’ capabilities so they can effectively handle our volume, and build integrated processes with Zillow Home Loans for our customers and Premier Agent partner base.”
Zillow 2022 Annual Report (Published April 2023)
However, Zillow Home Loans is still a tiny business. They originated less than 0.05% of all U.S. mortgage originations (i.e. fewer than 2,500 originations) in 2022.
Zillow also owns a portfolio of subsidiary brands, including:
Trulia
StreetEasy
HotPads
Out East
Zillow Total Addressable Market (TAM)
Zillow used to calculate its TAM as the residential real estate-related advertising market (about $19 billion). Now, it calculates TAM much more broadly, including all residential brokerage fees.
Submarket
Total U.S. Market Revenue (2022)
Residential real estate industry transaction fees
$96 Billion
U.S. mortgage origination revenue
$76 Billion
Title & escrow services transaction fees
$20 Billion
Rentals advertising spend
$11 Billion
Property management software revenue
$7 Billion
Total Addressable Market
$210 Billion
Zillow has also expressed potential interest in expanding into additional markets:
Market
Total U.S. Market Revenue (2022)
Home insurance
$121 Billion
Home renovation services
$657 Billion
Moving services
$19 Billion
Home appraisal services
$10 Billion
Zillow has grand ambitions.
“Our vision of a ‘housing super app‘ is to help customers across all their real estate needs, serving as one ecosystem of connected solutions for all the tasks and services related to moving… We also believe that the path to improving our growth metrics and ‘housing super app’ vision involves product initiatives within five key growth pillars:
Touring — Make it easier for high-intent customers to take in-person tours and connect with our partner agents
Financing — Prepare customers to be transaction-ready with financing early in their home buying journey
Expanding sellers services — Continue to innovate on novel solutions to help sellers and seller agents
Enhancing our partner network — Work with the best agents in real estate
Integrating our services — Bring our engagement, products and services together to drive more transactions and more revenue per customer transaction”
Zillow 2022 Annual Report (Published April 2023)
And Zillow is already getting into auxiliary listing services:
“In early 2023, through ShowingTime+, we launched a photography service and comprehensive media package called Listing Media Services that enables listing agents to seamlessly deliver beautiful, immersive media for the homes they are selling. This service is a critical precursor to our upcoming Listing Showcase product, which we plan to launch in summer 2023.”
Zillow 2022 Annual Report (Published April 2023)
iBuying
Zillow had a disastrous time with their iBuying (instant buying) program. They operated the program from 2018 to 2022 and lost over $1 billion in the process. The program is now officially gone and wrapped up, but Zillow still offers sellers an instant cash offer via a partnership with iBuying company Opendoor.
“Customers who start their selling journey with Zillow can now simultaneously request a cash offer from our partner, Opendoor, and receive an estimate of their open-market home sale price with a local Premier Agent partner.”
Zillow 2022 Annual Report (Published April 2023)
Moats
Network Effects
Every additional prospective home buyer that uses Zillow makes the platform more valuable to real estate agents, and Zillow currently has about a 65% market share, as measured by the number of mobile real estate marketplace users.
Every home seller who goes on Zillow to look at the Zestimate for their home is likely to also be a home buyer who will use Zillow to find a new home.
Brand
In 2022, more people searched Google for “Zillow” than for “real estate”.
Ecosystem-Based Switching Costs
Zillow offers software tools to real estate agent, such as IDX websites and a CRM. Those tools make Zillow sticky for real estate agents. However, this stickiness does not carry over to the consumers using Zillow. That means, for example, that this moat protects Zillow from other advertising portals such as Homes.com and Realtor.com but not from brokers like Redfin.
Proprietary Data
Zestimate (Zillow claims the Zestimate had a median error rate of 2.7% for homes listed for sale and 7.6% for off-market homes).
Weaknesses
Stale data. Zillow data has a reputation for frequently being out of date.
Zillow leads are low quality. This frustrates many real estate agents. If technology and/or regulations increase the perceived difficulty of the industry, it’s possible that the high churn of the real estate industry may decline, and that may hurt Zillow by reducing the stream of new, naive real estate agents who are ready to take a chance on Zillow leads.
Zillow realtors are often low quality. The majority of times I have reached out to a real estate agent through Zillow, that agent has been unprofessional, unresponsive, uneducated about market nuances, or even “slimy”. I can’t say for sure whether this is a Zillow problem or an industry problem, but I do know that I have had MUCH better experiences with agents recommended by BiggerPockets.
Zillow doesn’t control commissions. Zillow (unlike Redfin) does not actually provide real estate brokerage services. Instead, Zillow derives the majority of its revenue from real estate brokers around the country who advertise on Zillow. That means Zillow is vulnerable to competitors who offer a comparable consumer-facing data product but also directly provide services while charging much less than the industry average (e.g. 1% commissions instead of 3% commissions). Zillow could start offering brokerage services directly, but to do so it would have to bite the hand that feeds it 66% of its revenue (third-party agents paying for Zillow ads). This is a classic example of the innovator’s dilemma, and the faster a competitor could scale, the more likely it would be to successfully take market share from Zillow before Zillow would be willing to directly offer lower-cost brokerage services itself.
Limited functionality. Zillow doesn’t have crime data, local air/water pollution data, or cost of living data. It does have limited school information but doesn’t have a good way to search by school quality. It also doesn’t give investors options to search for properties in special tax zones or explanations of what different zoning codes mean.
Company Culture
Mission:
“Zillow’s mission is to give people the power to unlock life’s next chapter so we can help make home a reality for more and more people.”
Company Values:
Customers are our North Star. We’re here to help our customers in their journey to discover what’s next, and we strive to deliver an integrated experience that creates trust, delight, and joy (yes, joy!)
Turn on the lights. We believe that information is power, and we’ve made it our business to increase transparency in real estate and within our company. Our purpose is to unlock information and empower people, customers, and partners to make better decisions.
Do the right thing. We believe trust is earned, and we work to gain it every day. We act with integrity at every turn, speak up even when it’s difficult, and do what’s right even when no one is watching.
Own it. We say what we’ll do and do what we say. We hold ourselves and each other accountable, and we treat Zillow resources like our own.
Better together. We know we’re stronger when we work together as a team. We value what each and every person at Zillow brings to the table, and we strive to consistently treat each other with respect, empathy and appreciation to serve our customers, community and partners.
Include and empower. We foster an environment where everyone feels included and empowered. We welcome new ways of thinking and are always looking at how we can create equitable opportunities for our people, customers and partners.
Thing big, move fast. We’re a company of bold thinkers with the courage to try things that have never been done before. We reward and recognize pioneering spirit, even if ideas and first attempts fail.
Deliver quality on time, every time. We work to deliver a seamless, convenient and consistent customer experience, from the initial search process through to closing. We balance quality, effort and speed, while learning from past mistakes, executing with discipline and high quality.
The Most Commonly Negotiated Terms of a Home Sale (other than Price)
Sale isn’t the only thing negotiated between buyer and seller. Here are 8 of the the most commonly negotiated terms of a home purchase (other than price):
1. Contingencies
A contingency in a home purchase offer essentially says that the buyer doesn’t have to go through with the purchase if certain conditions are not met. Contingencies are good for buyers and bad for sellers. Common examples of contingencies are:
The house must pass a home inspection,
The title insurance company must not find any issues with the title,
The buyer’s lender must come through with the financing on time, and
The buyer has to finalize the sale of their own, previous home before closing the deal.
Buyers and sellers negotiate which contingencies go into an offer, the timeline for different contingencies to be satisfied, and what happens if contingencies are not satisfied (e.g. does the buyer forfeit an earnest money deposit if their lender doesn’t come through with the financing).
I’ve also dealt with a situation where a seller was trying to offload a property with permitting issues as fast as possible. Most buyers wanted to add a contingency that they could clear up the permitting issue before closing. The seller ended up choosing a lower offer which did not have such a contingency.
2. Closing Date
A seller wants to close as fast as possible. A buyer often wants to ensure they have enough time to secure a mortgage before closing (lenders often promise they can come through in 30 days but in reality often take longer).
If either the buyer or seller is an investor, then they may also have tax considerations which affect their desired closing date. For example, investors have a limited amount of time between when they can sell one property and buy another if they want to use a 1031 exchange or invest in an opportunity zone.
3. Repairs & Credits
Are there any repairs the seller will complete before closing? If the seller will complete repairs, then will the buyer have any say into what contractor is hired to complete the repairs or how the repairs are completed? Typically, it’s better for the buyer to NOT have the seller complete any repairs prior to sale but to instead give a credit to the buyer for the expected cost of the repair. Then the buyer can ensure the repair is done properly after the sale goes through.
4. Appliances & Credits
Which appliances are included in the sale? I once bought a property where the initial listing specified that the oven was included. However, right as the sale was about to close, the seller notified me that the oven was actually owned by the existing tenant. I then negotiated a $500 credit from the seller to take the place of the oven that had initially been promised.
5. Home Warranty
Buyers sometimes want the seller to pay for a home warranty which covers certain repairs if certain appliances or systems break.
6. Property Taxes
Will the seller pay all property taxes due up until the sale? Will they make a prorated payment for property tax liability accrued but not yet due before the sale? If the answer to either of the previous questions was ‘no’, then will the seller provide any credit to the buyer to cover those expenses?
7. Move Out Arrangements
Sometimes, a seller will want to remain in a property for a period of time after closing. This can be negotiated within the purchase contract or as an accompanying lease agreement.
8. Closing Costs
Who is responsible for various closing costs (e.g. title insurance, transfer taxes, document fees, attorney’s fees, etc)?
Bonus
When selling a home, it’s important for a seller to consider the merits of different buyers who submit offers. If a seller wants to sell their home quickly, then it may be better for them to choose a slightly lower cash offer instead of a slightly higher offer from someone who needs to qualify for an FHA loan. This isn’t something that is actually negotiated between buyer and seller, but it is a “soft” factor that sellers should consider before accepting an offer.
