In a surprise move, Rocket mortgage is acquiring the real estate brokerage company Redfin for 1.8 billion. Why is a mortgage company interested in a real estate broker? What does this mean for realtors, consumers, and competitors? Will this purchase radically alter the American real estate competitive landscape?
What was in the news about Redfin and Rocket Mortgage?
Rocket Cos. said Monday it would pay $1.8 billion in stock for the online real-estate agency Redfin Corp. in an effort to make it easier for customers to buy property using their mobile devices.
“We want a customer to be able to check her phone to find out what she can afford, see which homes are just right for her, schedule a tour with a local, expert Redfin agent, and get pre-qualified for a loan, all in a matter of minutes,” Redfin Chief Executive Glenn Kelman said in a prepared statement.
Why is a mortgage lender buying a brokerage company?
Real estate has historically been very disjointed. Buyers contact a realtor to look at a house, they then contact a mortgage broker or lender for financing, they get a house under contract and then title is pulled by a separate title company or attorney depending on the state laws. In essence, all the services for homebuying are separate. This is where the merger comes in. Rocket Chief Executive Varun Krishna said the deal will connect steps of the real-estate search and financing process in a way that ”removes friction, reduces costs and increases value to American homebuyers.”
In essence the deal to buy Redfin aims to consolidate the homebuying process by bringing everything under one roof to reduce costs for the consumer and in turn increase profit for the combined redfin and rocket companies by not only having a consumer use their brokerage, but also their lending, closing services, etc…
Recent real estate settlement on listing fees accelerated the market
The prospective team up between Redfin and Rocket would not be as beneficial without the recent settlement by the realtor’s association on listing fees where the seller no longer has to pay the buyer’s agent. This change created a huge opening for Redfin and in turn Rocket mortgage. Redfin is a mass-market low-cost realtor that can easily pivot to charge a small flat fee to view a property. We are seeing in many markets the beginning of a pivot to this model where buyers use a transaction agent like Redfin to save money. These clients in turn can be filtered into Rocket’s mortgage product.
The crux of the deal is about access to client and data
At the end of the day, the deal between Rocket and Redfin is about access to data. Redfin’s clients are extremely valuable to Rocket as it focuses on the less volatile purchase market as opposed to the refinance market. Having multiple products like mortgages and realtors together allows them to cross sell products to vetted customers.
Does the combination of Redfin and Rocket radically alter the market?
For the last 50 years integration of the real estate industry has been the holy grail. There have been countless companies that have attempted this feat, but the overwhelming majority have failed. Combing two billion dollar companies creates a scale for integration that we have yet to see. If they are successful, you will see other large companies pivot to a similar model to integrate lending, title, and realtors under one roof to bring down the price of the services while maximizing profit.
If this merger is successful it will usher in a wave of pair ups in the industry to compete with the scale of Redfin and Rocket. Furthermore, this new discount model will put huge pressure on realtors focusing on mid/lower priced real estate as it will be difficult to compete with the scale and cost efficiencies of a billion-dollar company.
Will the merger between redfin and rocket actually succeed?
I’ve heard this countless times over the last 25 years that real estate will undergo a rapid change and yet 25 years later, real estate is basically bought and sold the same way with a few twists like online listings. But, at the core not too much has changed in the real estate transaction.
Fast forward and the new lawsuit settled by the realtors association where sellers are no longer required to pay buyers commissions radically alters the competitive landscape. Prior to this settlement there was little incentive for a low cost broker as the seller was paying the fees anyway. Now that the buyer is on the hook it creates an opening for a combined company like Redfin and Rocket to offer a one stop low cost option. Because of this settlement I would put the odds of success at the new company at around 70% due to the billion dollar backing along with the change in the rules.
If this merger is successful, look for huge changes over the next 3-5 years as the entire market goes through a huge consolidation to scale up to compete at lower costs. This outcome is not a given based on history, but the odds are definitely in the favor of Redfin/Rocket to radically alter the industry.
Additional Reading/Resources
- https://www.fairviewlending.com/will-realtors-settlement-lower-home-prices-2/
- https://www.marketwatch.com/story/mortgage-lender-rocket-is-acquiring-redfin-to-combine-home-buying-and-financing-39cef57f
- https://www.fairviewlending.com/realtors-reach-game-changing-settlement-in-home-buying-and-selling/
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Glen Weinberg personally writes these weekly real estate blogs based on his real estate experience as a lender and property owner. I’m not an armchair reporter/writer. We are an actual private lender, lending our own money. We service our own loans and own commercial and residential real estate throughout the country.
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Written by Glen Weinberg, COO/ VP Fairview Commercial Lending. Glen has been published as an expert in hard money lending, real estate valuation, financing, and various other real estate topics in Bloomberg, Businessweek ,the Colorado Real Estate Journal, National Association of Realtors Magazine, The Real Deal real estate news, the CO Biz Magazine, The Denver Post, The Scotsman mortgage broker guide, Mortgage Professional America and various other national publications.
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