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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2019

or

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___ to ___

Commission file number 001-38160

Redfin Corporation
(Exact name of registrant as specified in its charter)

Delaware
 
74-3064240
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
 
 
 
1099 Stewart Street
Suite 600
 
 
Seattle
WA
 
98101
(Address of Principal Executive Offices)
 
(Zip Code)

(206)
576-8333
Registrant's telephone number, including area code

Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol
Name of each exchange on which registered
Common Stock, $0.001 par value per share
RDFN
The Nasdaq Global Select Market

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
 
 
 
 
Yes
No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act.
 
 
 
 
Yes
No
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
 
 
 
 
Yes
No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
 
 
 
 
Yes
No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
Accelerated filer
Non-accelerated filer
Smaller reporting company
 
 
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
 
 
 
 
 
 
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
 
 
 
 
Yes
No

As of the last business day of the registrant’s most recently completed second fiscal quarter, the aggregate market value of the registrant's common stock held by its non-affiliates, computed by reference to the price at which the common stock was last sold, was $1,547,297,147.

The registrant had 93,123,373 shares of common stock outstanding as of January 31, 2020.

DOCUMENTS INCORPORATED BY REFERENCE

The portions of the registrant's proxy statement to be filed in connection with the registrant’s 2020 Annual Meeting of Stockholders that are responsive to the disclosure required by Part III of Form 10-K are incorporated by reference into Part III of this Form 10-K.



Redfin Corporation

Annual Report on Form 10-K
For the Year Ended December 31, 2019

Table of Contents
 
 
 
PART I
 
Page
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
 
 
 
PART II
 
 
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
 
 
 
PART III
 
 
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
 
 
 
PART IV
 
 
Item 15.
Item 16.
 
 
 
 
 




As used in this Annual Report on Form 10-K (this "Annual Report"), the terms "Redfin," "we," "us," and "our" refer to Redfin Corporation and its subsidiaries taken as a whole, unless otherwise noted or unless the context indicates otherwise.

Note Regarding Forward-Looking Statements

This Annual Report contains forward-looking statements. All statements contained in this report other than statements of historical fact, including statements regarding our future operating results and financial position, our business strategy and plans, our market growth and trends, and our objectives for future operations, are forward-looking statements. The words “believe,” “may,” “will,” “estimate,” “continue,” “anticipate,” “intend,” “expect,” “could,” “would,” “project,” “plan,” “potentially,” “preliminary,” “likely,” and similar expressions are intended to identify forward-looking statements. We have based these forward-looking statements largely on our current expectations and projections about future events and trends that we believe may affect our financial condition, results of operations, business strategy, short-term and long-term business operations and objectives, and financial needs. These forward-looking statements are subject to a number of risks, uncertainties, and assumptions, including those described under Item 1A. Moreover, we operate in a very competitive and rapidly changing environment. New risks emerge from time to time. It is not possible for our management to predict all risks, nor can we assess the effect of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make. In light of these risks, uncertainties, and assumptions, the future events and trends discussed in this report may not occur and actual results could differ materially and adversely from those anticipated or implied in the forward-looking statements. Accordingly, you should not rely on forward-looking statements as predictions of future events. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee that the future results, performance, or events and circumstances reflected in the forward-looking statements will be achieved or occur. We undertake no obligation to update any of these forward-looking statements for any reason after the date of this report or to conform these statements to actual results or revised expectations.

Note Regarding Industry and Market Data

This Annual Report contains information using industry publications that generally state that the information contained therein has been obtained from sources believed to be reliable, but such information may not be accurate or complete. While we are not aware of any misstatements regarding the information from these industry publications, we have not independently verified any of the data from third-party sources nor have we ascertained the underlying economic assumptions relied on therein.


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PART I

Item 1. Business

Overview

We help people buy and sell homes. Our primary business is a residential real estate brokerage, representing customers in over 90 markets in the United States and Canada. We pair our own agents with our own technology to create a service that is faster, better, and costs less. We meet customers through our listings-search website and mobile application.

We use the same combination of technology and local service to originate mortgage loans and offer title and settlement services; we also buy homes directly from homeowners who want an immediate sale, taking responsibility for selling the home while the original owner moves on.

Our mission is to redefine real estate in the consumer’s favor.

Representing Customers

Our brokerage efficiency results in savings that we share with our customers. Our homebuyers saved on average approximately $1,850 per transaction in 2019. And we charge most home sellers a commission of 1% to 1.5%, compared to the 2.5% to 3% typically charged by traditional brokerages.

The results of our customer-first approach are clear. We:

helped customers buy or sell more than 235,000 homes worth more than $115 billion through 2019;

drew more than 33 million monthly average visitors to our website and mobile application in 2019, 23% more compared to 2018;

earned a net promoter score, which is a measure of customer satisfaction, that was 18% higher than competing brokerages, as measured by a study we commissioned in November 2019;

had customers return to us for another transaction at a 59% higher rate than competing brokerages;

sold Redfin-listed homes for nearly $1,800 more on average compared to the list price than competing brokerages’ listings in 2019, according to a study we commissioned;

had listings on the market for an average of 36 days in 2019 compared to the industry average of 41 days, according to a study we commissioned; and, according to the same study, approximately 77% of Redfin listings sold within 90 days versus the industry average of approximately 75%; and

employed lead agents who, in 2019, were on average three times more productive and earned a median income that was twice as much as agents at competing brokerages; our lead agents were also 24% more likely to stay with us from 2018 to 2019 than agents at competing brokerages.

To serve customers when our own agents can’t due to high demand or geographic limitations, we’ve developed partnerships with over 3,600 agents at other brokerages. Once we refer a customer to a partner agent, that agent, not us, represents the customer from the initial meeting through closing, at which point the agent pays us a portion of her commission as a referral fee.

Complete Customer Solution

Our long-term goal is to combine brokerage, mortgage, title services, and instant offers to directly purchase a consumer's home into one solution, sharing information, coordinating deadlines, and streamlining processes so that a consumer's move is easier and often less costly. As we integrate these

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services more closely over time, we believe we can help consumers move much more efficiently than a combination of stand-alone brokerages, mortgage lenders, and title companies ever could.

Redfin Mortgage underwrites mortgage loans according to investor guidelines and, after originating each loan, Redfin Mortgage sells the loans to those investors. Redfin Mortgage does not intend to retain or service mortgage loans. Redfin Mortgage has officially launched in 54 markets across Colorado, District of Columbia, Florida, Georgia, Illinois, Maryland, Massachusetts, Michigan, Minnesota, New Jersey, North Carolina, Ohio, Pennsylvania, South Carolina, Tennessee, Texas, Virginia, and Wisconsin.

We offer title and settlement services through Title Forward. Title Forward has officially launched in 28 markets across Colorado, District of Columbia, Florida, Georgia, Illinois, Maryland, Minnesota, New Jersey, Pennsylvania, Tennessee, Texas, Virginia, and Wisconsin.

We buy homes directly from homeowners and resell them to homebuyers through RedfinNow. Customers who sell through RedfinNow typically get less money for their home than they would listing their home with a real estate agent. However, they get that money faster with less risk and disruption. RedfinNow has officially launched in 13 markets across California, Colorado, Nevada, and Texas.

Competition

The residential brokerage industry is highly fragmented, with numerous active licensed agents and brokerages, and is evolving rapidly in response to technological advancements, changing customer preferences, and new offerings. We compete primarily against other residential real estate brokerages, which include franchise operations affiliated with national or local brands, and small independent brokerages. We also compete with hybrid residential brokerages, which combine Internet technology and brokerage services, and a growing number of others that operate with non-traditional real estate business models. Competition is particularly intense in some of the densely populated metropolitan markets we serve, as they are dominated by entrenched real estate brokerages and are the primary markets for innovative and well-capitalized new entrants.

We believe we compete primarily based on:

access to timely, accurate data about homes for sale;

traffic to our website and mobile application, which themselves are subject to competition against real estate data websites that aggregate listings and sell advertising to traditional brokers;

the speed and quality of our service, including agent responsiveness and local knowledge;

our ability to hire and retain agents who deliver the best customer service;

the costs of delivering our service and the price of our service to consumers;

consumer awareness of our service and the effectiveness of our marketing efforts;

technological innovation; and

depth and breadth of local referral networks.

For mortgage origination, we compete with numerous national and local multi-product banks as well as focused mortgage originators. We compete with other providers based primarily on service, product selection, interest rates, and origination fees.

For title and settlement services, we compete with numerous national and local companies that typically focus solely on these services. We compete primarily on timeliness of service and fees.


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Our RedfinNow service competes with real estate companies whose primary service is buying and selling homes, and home rental companies that purchase homes and then rent them. We also compete with divisions of several residential real estate companies and a real estate data website. We compete primarily on the prices we offer customers to buy their homes.

Seasonality and Principal Markets

For the impact of seasonality on our business, see "Quarterly Results of Operations and Key Business Metrics" under Item 7. For the principal markets for our brokerage business, see "Key Business Metrics-Revenue from Top-10 Markets as a Percentage of Real Estate Services Revenue" under Item 7.

Information about our Executive Officers

Below is information regarding our executive officers. Each executive officer holds office until his or her successor is duly elected and qualified or until the officer’s earlier resignation, disqualification, or removal.

Glenn Kelman, age 49, has served as our President and Chief Executive Officer since September 2005 and one of our directors since March 2006.

Bridget Frey, age 42, has served as our Chief Technology Officer since February 2015.

Scott Nagel, age 54, has served as our President of Real Estate Operations since April 2013.

Chris Nielsen, age 53, has served as our Chief Financial Officer since June 2013.

Christian Taubman, age 41, has served as our Chief Product Officer since October 2019. Previously, Mr. Taubman served in several different roles with Amazon (a technology company) from April 2011 to October 2019. As Director - Smart Home Verticals from December 2017 to October 2019, Mr. Taubman led employees in product management, software engineering, and program management, with the mission of helping customers to connect more smart devices to Amazon's Alexa virtual assistant. As Senior Manager - International Retail Expansion from May 2016 to December 2017, Mr. Taubman led an initiative to create a faster retail international expansion model. As Senior Manager - Prime Delivery from April 2011 to May 2016, Mr. Taubman helped launch Amazon's Prime free same-day delivery benefit in the United States, United Kingdom, and Germany.

Adam Wiener, age 41, has served as our Chief Growth Officer since May 2015. Previously, Mr. Wiener served as our Senior Vice President - Marketing, Analytics & New Business from December 2013 to May 2015.

Other Information

We were incorporated as Appliance Computing Inc. in Washington in October 2002. We reincorporated in Delaware in February 2005 and changed our name to Redfin Corporation in May 2006.

We regard our trademarks, copyrights, patents, domain names, trade secrets, and similar intellectual property as critical to our success, and we rely on trademark, copyright, and patent law, trade-secret protection, and contractual provisions and restrictions to protect our proprietary rights. Our patents expire between June 2025 and February 2034.

As of December 31, 2019, we had 3,377 employees.

Our website is www.redfin.com. Through this website, we make available, free of charge, our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to these reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities

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Exchange Act of 1934, as soon as reasonably practicable after we file such material with, or furnish it to, the U.S. Securities and Exchange Commission (the "SEC").

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Item 1A. Risk Factors

You should carefully consider the risks described below, together with all other information in this Annual Report, before investing in any of our securities. The occurrence of any single risk or any combination of risks could materially and adversely affect our business, operating results, financial condition, liquidity, or competitive position, and consequently, the value of our securities. The material adverse effects include, but are not limited to, not growing our revenue or market share at the pace that they have grown historically or at all, our revenue and market share fluctuating on a quarterly and annual basis, an extension of our history of losses and a failure to become profitable, not achieving the revenue and net income (loss) guidance that we provide, and harm to our reputation and brand.

Risks Related to Our Business and Industry

The health of the U.S. residential real estate industry and macroeconomic factors may significantly impact our business.

Our success depends largely on the health of the U.S. residential real estate industry. This industry, in turn, is affected by changes in general economic conditions, which are beyond our control. Any of the following factors could adversely affect the industry and harm our business:

seasonal or cyclical downturns in the U.S. residential real estate industry, which may be due to any single factor, or a combination of factors, listed below, or factors which are currently not known to us or that have not historically affected the industry;

slow economic growth or recessionary conditions;

increased unemployment rates or stagnant or declining wages;

inflationary conditions;

low consumer confidence in the economy or the U.S. residential real estate industry;

adverse changes in local or regional economic conditions in the markets that we serve, particularly our top-10 markets and markets into which we are attempting to expand;

increased mortgage rates; reduced availability of mortgage financing; or increased down payment requirements;

low home inventory levels, which may result from zoning regulations and higher construction costs, among other factors;

lack of affordably priced homes, which may result from home prices growing faster than wages;

volatility and general declines in the stock market or lower yields on individuals' investment portfolios;

rising insurance costs that increase the expenses associated with home ownership;

newly enacted and potential federal, state, and local legislative actions that would affect the residential real estate industry generally or in our top-10 markets, including (i) actions that would increase the tax liability arising from buying, selling, or owning real estate, (ii) actions that would change the way real estate brokerage commissions are negotiated, calculated, or paid, and (iii) potential reform relating to Fannie Mae, Freddie Mac, and other government sponsored entities that provide liquidity to the mortgage market;

changes that cause U.S. real estate to be more expensive for foreign purchases, such as (i) increases in the exchange rate for the U.S. dollar compared to foreign currencies and (ii) foreign

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regulatory changes or capital controls that make it more difficult for foreign purchasers to withdraw capital from their home countries or purchase and hold U.S. real estate;

changed generational views on homeownership and generally decreased financial resources available for purchasing homes; and

war, terrorism, political uncertainty, natural disasters, inclement weather, and acts of God.

Our business is concentrated in certain geographic markets. Disruptions in these markets or events that disproportionately affect these markets could harm our business. Furthermore, our failure to adapt to any substantial shift in the relative percentage of residential housing transactions from these markets to other markets in the United States could adversely affect our financial performance.

For the year ended December 31, 2019, our top-10 markets by real estate services revenue consisted of the metropolitan areas of Boston, Chicago, Denver (including Boulder and Colorado Springs), Los Angeles (including Santa Barbara), Maryland, Northern Virginia, Portland (including Bend), San Diego, San Francisco, and Seattle.

Local and regional economic conditions in these markets may differ significantly from prevailing conditions in the United States or other parts of the country. Accordingly, events may adversely and disproportionately affect demand for and sales prices of homes in these markets. Any overall or disproportionate downturn in demand or home prices in any of our largest markets, particularly if we are unable to increase revenue from our other markets, could result in a decline in our revenue and harm our business.

Our top markets are primarily major metropolitan areas, where home prices and transaction volumes are generally higher than other markets. As a result, our real estate services revenue and gross margin are generally higher in these markets than in our smaller markets. To the extent people migrate to cities outside of these markets due to lower home prices or other factors, and this migration continues to take place over the long-term, then the relative percentage of residential housing transactions may shift away from our historical top markets where we have historically generated most of our revenue. If we are unable to effectively adapt to any shift, including failing to increase revenue from other markets, then our financial performance may be harmed.

Competition in each of our lines of business is intense, and if we cannot compete effectively, our business will be harmed.

We face intense competition nationally and in each of the markets we serve for each of our businesses - residential brokerage, mortgage, title and escrow, and buying and selling homes directly. See "Competition" under Item 1 for a general discussion of the competitive conditions in each of our businesses.

Many of our competitors across each of our businesses have substantial competitive advantages, such as longer operating histories, stronger brand recognition, greater financial resources, more management, sales, marketing and other resources, superior local referral networks, perceived local knowledge and expertise, and extensive relationships with participants in the residential real estate industry, including third-party data providers such as multiple listing services ("MLSs"). Consequently, these competitors may have an advantage in recruiting and retaining agents, attracting consumers, and growing their businesses. They may also be able to provide consumers with offerings that are different from or superior to those we provide. The success of our competitors could result in our loss of market share and harm our business.

Each of our businesses also faces competition from potential new entrants, particularly those driven by technology. These potential competitors may have substantial financial support that allows them to offer services superior to ours. The introduction of additional competitors may also adversely impact our market share and harm our business.


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We may be unable to maintain or improve our current technology offerings at a competitive level or develop new technology offerings that meet customer or agent expectations. Our technology offerings may also contain undetected errors or vulnerabilities.

Our technology offerings, including tools, features, and products, are key to our competitive plan for attracting potential customers and hiring and retaining lead agents. Maintaining or improving our current technology to meet evolving industry standards and customer and agent expectations, as well as developing commercially successful and innovative new technology, is challenging and expensive. For example, the nature of development cycles may result in delays between the time we incur expenses and the time we introduce new technology and generate revenue, if any, from those investments. Anticipated customer demand for a technology offering could also decrease after the development cycle has commenced, and we would not be able to recoup costs, which may be substantial, we incurred.

As standards and expectations evolve and new technology becomes available, we may be unable to identify, design, develop, and implement, in a timely and cost-effective manner, new technology offerings to meet those standards and expectations. As a result, we may be unable to compete effectively, and to the extent our competitors develop new technology offerings faster than us, they may render our offerings noncompetitive or obsolete. Additionally, even if we implemented new technology offerings in a timely manner, our customers and agents may not accept or be satisfied by the offerings.

Furthermore, our development and testing processes may not detect errors and vulnerabilities in our technology offerings prior to their implementation. Any inefficiencies, errors, technical problems, or vulnerabilities arising in our technology offerings after their release could reduce the quality of our services or interfere with our customers' and agents' access to and use of our technology and offerings.

We may be unable to obtain and provide comprehensive and accurate real estate listings quickly, or at all.

We believe that users of our website and mobile application come to us primarily because of the real estate listing data that we provide. Accordingly, if we were unable to obtain and provide comprehensive and accurate real estate listings data, our primary channels for meeting customers will be diminished. We get listings data primarily from MLSs in the markets we serve. We also source listings data from public records, other third-party listing providers, and individual homeowners and brokers. Many of our competitors and other real estate websites also have access to MLSs and other listings data, including proprietary data, and may be able to source listings data or other real estate information faster or more efficiently than we can. Since MLS participation is voluntary, brokers and homeowners may decline to post their listings data to their local MLS or may seek to change or limit the way that data is distributed. A competitor or another industry participant could also create an alternative listings data service, which may reduce the relevancy and comprehensive nature of the MLSs. If MLSs cease to be the predominant source of listings data in the markets that we serve, we may be unable to get access to comprehensive listings data on commercially reasonable terms, or at all, which may result in fewer people using our website and mobile application.

We rely on business data to make decisions and drive our machine-learning technology, and errors or inaccuracies in such data may adversely affect our business decisions and the customer experience.

We regularly analyze business data to evaluate growth trends, measure our performance, establish budgets, and make strategic decisions. Much of this data is internally generated and has not been independently verified. While our business decisions are based on what we believe to be reasonable calculations for the applicable period of measurement, there are inherent challenges in measuring and interpreting the data, and we cannot be certain that the data are accurate. Errors or inaccuracies in the data could result in poor business decisions, resource allocation, or strategic initiatives. For example, if we overestimate traffic to our website and mobile application, we may not invest an adequate amount of resources in attracting new customers or we may hire more lead agents in a given market than necessary to meet customer demand.


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We also use our business data and proprietary algorithms to inform our machine learning, such as in the calculation of our Redfin Estimate, which provides an estimate on the market value of individual homes. If customers disagree with us or if our Redfin Estimate fails to accurately reflect market pricing such that we are unable to attract homebuyers or help our customers sell their homes at satisfactory prices, or at all, customers may lose confidence in us.

We may be unable to attract homebuyers and home sellers to our website and mobile application in a cost-effective manner.

Our website and mobile application are our primary channels for meeting customers. Accordingly, our success depends on our ability to attract homebuyers and home sellers to our website and mobile application in a cost-effective manner. To meet customers, we rely heavily on traffic generated from search engines and downloads of our mobile application from mobile application stores. We also rely on marketing methods such as targeted email campaigns, paid search advertising, social media marketing, and traditional media, including TV, radio, and billboards.

The number of visitors to our website and downloads of our mobile application depend in large part on how and where our website and mobile application rank in Internet search results and mobile application stores, respectively. While we use search engine optimization to help our website rank highly in search results, maintaining or improving our search result rankings is not within our control. Internet search engines frequently update and change their ranking algorithms, referral methodologies, or design layouts, which determine the placement and display of a user’s search results. In some instances, Internet search engines may change these rankings in order to promote their own competing services or the services of one or more of our competitors. Similarly, mobile application stores can change how they display searches and how mobile applications are featured. For instance, editors at the Apple iTunes Store can feature prominently editor-curated mobile applications and cause the mobile application to appear larger than other applications or more visibly on a featured list.

Additionally, our marketing efforts may fail to attract the desired number of customers for a variety of reasons, including the creative treatment for our advertisements may be ineffective or new third-party email delivery policies that make it more difficult for us to execute targeted email campaigns.

If we are unable to deliver a rewarding experience on mobile devices, whether through our mobile website or mobile application, we may be unable to attract and retain customers.

Developing and supporting a mobile website and mobile application across multiple operating systems and devices requires substantial time and resources. We may not be able to consistently provide a rewarding customer experience on mobile devices and, as a result, customers we meet through our mobile website or mobile application may not choose to use our services at the same rate as customers we meet through our website.

As new mobile devices and mobile operating systems are released, we may encounter problems in developing or supporting our mobile website or mobile application for them. Developing or supporting our mobile website or mobile application for new devices and their operating systems may require substantial time and resources. The success of our mobile website and mobile application could also be harmed by factors outside of our control, such as:

increased costs to develop, distribute, or maintain our mobile website or mobile application;

changes to the terms of service or requirements of a mobile application store that requires us to change our mobile application development or features in an adverse manner; and

changes in mobile operating systems, such as Apple’s iOS and Google’s Android, that disproportionately affect us, degrade the functionality of our mobile website or mobile application, require that we make costly upgrades to our technology offerings, or give preferential treatment to competitors' websites or mobile applications.


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Our business model of employing lead agents subjects us to challenges not faced by our competitors.

As a result of our business model of employing our lead agents, our lead agents generally earn less on a per transaction basis than traditional agents who work as independent contractors at traditional brokerages. Because our model is uncommon in our industry, agents considering working for us may not understand our compensation model or may not perceive it to be more attractive than the independent contractor, commission-driven compensation model used by most traditional brokerages. If we are unable to attract, retain, effectively train, motivate, and utilize lead agents, we will be unable to grow our business and we may be required to change our compensation model, which could significantly increase our lead agent compensation or other costs.

Also as a result of employing our lead agents, we incur costs that our brokerage competitors do not, such as base pay, employee benefits, expense reimbursement, training, and employee transactional support staff. As a result, we have significant costs that, in the event of downturns in demand in the markets we serve, we will not be able to adjust as rapidly as some of our competitors. In turn, such downturns may impact us more than our competitors. Additionally, due to these costs, our lead agent turnover may be more costly to us than to traditional brokerages. Our business may be harmed if we are unable to achieve the necessary level of lead agent productivity and retention to offset their related costs.

Referring customers to our partner agents and our third-party partnerships may harm our business.

We refer customers to third-party partner agents when we do not have a lead agent available due to high demand or geographic limitations. Our dependence on partner agents can be particularly heavy in certain new markets as we build our operations to scale in those markets. Our partner agents are independent licensed agents affiliated with other brokerages, and we do not have any control over their actions. If our partner agents were to provide poor customer service, engage in malfeasance, or otherwise violate the laws and rules to which we are subject, we may be subject to legal claims and our reputation and business may be harmed.

In certain markets where RedfinNow does not currently operate, we have a partnership with Opendoor whereby home sellers can request, through Redfin's website and mobile applications, an instant offer from Opendoor to purchase their home. Home sellers will have this ability to request an Opendoor offer in addition, and as an alternative, to retaining a Redfin agent to represent them during the home selling process.

From time to time, we may enter into additional arrangements to refer consumers to, or partner with, third parties when we are unable or unwilling to serve those consumers directly.

Our arrangements with third parties may limit our market share, revenue, growth, and brand awareness. For example, referring customers to third parties potentially redirects repeat and referral opportunities to those third parties. Furthermore, to the extent we enter into a new, or seek to expand operations in an existing, market where we have an arrangement with a third party, consumers may choose to continue to work with those third parties, which limits our growth. Additionally, any third-party arrangements may also dilute the effectiveness of our marketing efforts and may lead to consumer confusion or dissatisfaction when they are offered the opportunity to work with the third party rather than us.

If we do not comply with the rules, terms of service, and policies of MLSs, our access to and use of listings data may be restricted or terminated.

We must comply with an MLS’s rules, terms of service, and policies to access and use its listings data. We belong to numerous MLSs, and each has adopted its own rules, terms of service, and policies governing, among other things, how MLS data may be used and how listings data must be displayed on our website and mobile application. These rules typically do not contemplate multi-jurisdictional online brokerages like ours and vary widely among markets. They also are in some cases inconsistent with the rules of other MLSs such that we are required to customize our website, mobile application, or service to accommodate differences between MLS rules. Complying with the rules of each MLS requires significant

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investment, including personnel, technology and development resources, and the exercise of considerable judgment. If we are deemed to be noncompliant with an MLS’s rules, we may face disciplinary sanctions in that MLS, which could include monetary fines, restricting or terminating our access to that MLS’s data, or other disciplinary measures. The loss or degradation of this listings data could materially and adversely affect traffic to our website and mobile application, making us less relevant to consumers and restricting our ability to attract customers. It also could reduce agent and customer confidence in our services and harm our business.

If we fail to comply with the requirements governing the licensing of our brokerage, mortgage, and title businesses in the jurisdictions in which we operate, then our ability to operate those businesses in those jurisdictions may be revoked.

Redfin, as a brokerage, and our agents must comply with the requirements governing the licensing and conduct of real estate brokerage and brokerage-related businesses in the markets where we operate. Furthermore, we are also required to comply with the requirements governing the licensing and conduct of mortgage and title and settlement businesses in the markets where we operate. Due to the geographic scope of our operations, we and our agents may not be in compliance with all of the required licenses at all times. Additionally, if we enter into new markets, we may become subject to additional licensing requirements. If we or our agents fail to obtain or maintain the required licenses for conducting our brokerage, mortgage, and title businesses or fail to strictly adhere to associated regulations, the relevant government authorities may order us to suspend relevant operations or impose fines or other penalties.

Our recently implemented pricing change may result in loss of customers and unintended financial consequences.

Prior to December 2019, we charged home sellers in most of our markets a 1% listing fee when using our brokerage services to sell their home. For our other markets, we charged home sellers a 1.5% listing fee. The listing fee paid by a home seller was not dependent on whether the home seller also purchased a home using our brokerage services. Starting in December 2019, we changed our listing fee across all of our markets such that home sellers pay a 1% listing fee only if they both buy and sell a home with us within a year. Otherwise, a home seller will pay a 1.5% listing fee.

This pricing change may result in fewer home sellers using our brokerage services to list their home. As a result, our market share may decrease or grow at a slower rate or our real estate services revenue may grow at a slower rate.

RedfinNow may overestimate the amount it should pay to purchase a home, and homes owned by it may significantly decline in value prior to being sold.

RedfinNow uses automated valuations and forecasts in concert with our real estate knowledge to assess what a home is worth and how much to pay for its purchase. This assessment includes estimates on time of possession, market conditions and proceeds on resale, renovation costs, and holding costs. The assessment may not be accurate, and RedfinNow may pay too much for the home to realize our desired investment return. Additionally, following its acquisition of a home, RedfinNow may need to decrease its anticipated resale price for the home if it discovers a defect in the home that was unknown at the time of acquisition. This adjustment to the price may also affect our investment return on the home.

Homes that RedfinNow owns may also rapidly lose in value due to changing market conditions, natural disasters, or other forces outside of our control. RedfinNow's geographic concentration in four states - California, Colorado, Nevada, and Texas - particularly exposes it to the factors affecting home value in those states that may not apply to the United States generally. As a result, we may be required to write down the inventory value of homes and may not be able to resell homes for more than our costs of acquiring and renovating the homes, or at all.

RedfinNow relies, in part, on third parties to renovate and repair homes before it resells the homes, and the cost or availability of third-party labor could adversely affect our holding period and investment return for homes.

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Upon purchasing a home, RedfinNow frequently needs to renovate or repair parts of the home prior to listing it for resale. RedfinNow relies, in part, on third-party contractors and sub-contractors to make these renovations and repairs. These third-party providers may not be able to complete the required renovations or repairs within RedfinNow's expected timeline or proposed budget. Furthermore, if the quality of a third-party provider's work does not meet RedfinNow's expectations, then RedfinNow may need to engage another third-party contractor or subcontractor, which may also adversely affect its timeline or budget for completing renovations or repairs.

A longer than expected period for completing renovations or repairs could negatively impact RedfinNow's ability to sell a home within its anticipated timeline. This prolonged timing exposes us to factors that adversely affect the home's resale value and may result in RedfinNow selling the home for a lower price than anticipated or not being able to sell the home at all. Meanwhile, incurring more than budgeted costs would adversely affect our investment return on purchased homes.

If Redfin Mortgage were unable to sell the mortgage loans that it originates, then it will need to service the loans itself or hire a third-party servicer, and either option could impose significant costs, time, and resources on Redfin Mortgage. Additionally, we may become more exposed to adverse market conditions affecting mortgage loans.

Redfin Mortgage intends to sell the mortgage loans that it originates to investors in the secondary mortgage market. Redfin Mortgage's ability to sell its originated loans in the secondary market depends largely on there being sufficient liquidity in the secondary market and its compliance with contracts with investors who have agreed to purchase the loans. If Redfin Mortgage were unable to sell its originated loans, then it may need to establish a servicing platform or hire a third party to service the loans. Redfin Mortgage does not currently have a servicing platform, and establishing such a platform may result in significant costs and require substantial time and resources from its management. Additionally, Redfin Mortgage may be unable to retain a third-party servicer on economically feasible terms. As a result, Redfin Mortgage's inability to sell its originated loans may materially and adversely affect its operations and financial condition.

Redfin Mortgage's inability to sell loans in the secondary market also exposes us to adverse market conditions affecting mortgage loans. For example, we may be required to write down the value of the loan, which reduces the amount of our current assets. Additionally, if a homeowner were unable to make his or her mortgage payments, then we may be required to foreclose on the home securing the loan. In these situations, the proceeds from selling the home may be significantly less than the remaining amount of the loan due to Redfin Mortgage. Finally, if Redfin Mortgage borrowed under one of its warehouse credit facilities for the loan, then it may be required to immediately repay the borrowed amount, which reduces our cash on hand that is available for other corporate uses.

Our decision to expand our service offerings into new markets may consume significant financial and other resources and may not achieve the desired results.

We regularly evaluate expanding our brokerage and non-brokerage services into new markets. Any expansion may require significant expenses and the time of our key personnel, particularly at the outset of the expansion process. Expansion may also subject us to new regulatory environments, which could increase our costs as we evaluate compliance with the new regulatory regime. Notwithstanding the expenses and time devoted to expansion into a new market, we may fail to achieve the financial and market share goals associated with the expansion.

We experience variability in our financial results and operating metrics on a quarterly and annual basis and, as a result, our historical performance may not be a meaningful indicator of future performance.

We historically have experienced, and expect to continue to experience, variability, on both a quarterly and annual basis, in our financial results and operating metrics. As a result of such variability, our historical performance, including from recent quarters or years, may not be a meaningful indicator of future

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performance and period-to-period comparisons also may not be meaningful. The variability may be due to the other risks described in this Item 1A, certain risks that are not currently material but may become material in the future, or risks currently unknown to us.

Cybersecurity incidents could disrupt our business or result in the loss of critical and confidential information.

Cybersecurity incidents directed at us or our third-party service providers can range from uncoordinated individual attempts to gain unauthorized access to information technology systems to sophisticated and targeted measures known as advanced persistent threats. Cybersecurity incidents are also constantly evolving, increasing the difficulty of detecting and successfully defending against them. In the ordinary course of our business, we and our third-party service providers collect and store sensitive data, including our proprietary business information and intellectual property and that of our customers and employees, including personally identifiable information. Additionally, we rely on third-parties and their security procedures for the secure storage, processing, maintenance, and transmission of information are critical to our operations. Despite measures designed to prevent, detect, address, and mitigate cybersecurity incidents, such incidents may occur to us or our third-party providers and, depending on their nature and scope, could potentially result in the misappropriation, destruction, corruption, or unavailability of critical data and confidential or proprietary information (our own or that of third parties, including personally identifiable information of our customers and employees) and the disruption of business operations. Any such compromises to our security, or that of our third-party providers, could cause customers to lose trust and confidence in us and stop using our website and mobile applications. In addition, we may incur significant costs for remediation that may include liability for stolen assets or information, repair of system damage, and compensation to customers, employees, and business partners. We may also be subject to government enforcement proceedings and legal claims by private parties.

We process, transmit, and store personal information, and unauthorized access to, or the unintended release of, this information could result in a claim for damages, regulatory action, loss of business, or unfavorable publicity.

We process, transmit, and store personal information to provide services to our customers and as an employer. As a result, we are subject to certain contractual terms, as well as federal, state, and foreign laws and regulations designed to protect personal information. While we take measures to protect the security and privacy of this information, it is possible that our security controls over personal data and other practices we follow may not prevent the unauthorized access to, or the unintended release of, personal information. If such unauthorized access or unintended release occurred, we could suffer significant damage to our brand and reputation, customers could lose confidence in the security and reliability of our services, and we could incur significant costs to address and fix these security incidents. These incidents could also lead to lawsuits and regulatory investigations and enforcement actions.

We rely on third-party licensed technology, and the inability to maintain these licenses or errors in the software we license could result in increased costs or reduced service levels.

We employ certain third-party software obtained under licenses from other companies in our technology. Our reliance on this third-party software may become costly if the licensor increases the price for the license or changes the terms of use and we cannot find commercially reasonable alternatives. Even if we were to find an alternative, integration of our technology with new third-party software may require substantial investment of our time and resources.

Any undetected errors or defects in the third-party software we license could prevent the deployment or impair the functionality of our technology, delay new service offerings, or result in a failure of our website or mobile application.

We use open source software in some aspects of our technology and may fail to comply with the terms of one or more of these open source licenses.


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Our technology incorporates software covered by open source licenses. The terms of various open source licenses have not been interpreted by U.S. courts, and if they were interpreted, such licenses could be construed in a manner that imposes unanticipated restrictions on our technology. If portions of our proprietary software are determined to be subject to an open source license, we could be required to publicly release the affected portions of our source code, re-engineer all or a portion of our technologies, or otherwise be limited in our use of such software, each of which could reduce or eliminate the value of our technologies.

Moreover, our processes for controlling our use of open source software may not be effective. If we do not comply with the terms of an open source software license, we could be required to seek licenses from third parties to continue offering our services on terms that are not economically feasible, to re-engineer our technology to remove or replace the open source software, to discontinue the use of certain technology if re-engineering could not be accomplished on a timely basis, to pay monetary damages, to make generally available the source code for our proprietary technology, or to waive certain intellectual property rights.

We may be unable to secure intellectual property protection for all of our technology and methodologies, enforce our intellectual property rights, or protect our other proprietary business information.

Our success and ability to compete depends in part on our intellectual property and our other proprietary business information. To protect our proprietary rights, we rely on trademark, copyright, and patent law, trade-secret protection, and contractual provisions and restrictions. However, we may be unable to secure intellectual property protection for all of our technology and methodologies or the steps we take to enforce our intellectual property rights may be inadequate. Furthermore, we may also be unable to protect our proprietary business information from misappropriation.

If we are unable to secure intellectual property rights, our competitors could use our intellectual property to market offerings similar to ours and we would have no recourse to enjoin or stop their actions. Additionally, any of our intellectual property rights may be challenged by others and invalidated through administrative processes or litigation. Moreover, even if we secured our intellectual property rights, others may infringe on our intellectual property and we may be unable to successfully enforce our rights against the infringers because we may be unaware of the infringement or our legal actions may not be successful. Finally, others may misappropriate our proprietary business information, and we may be unaware of the misappropriation or unable to enforce our legal rights in a cost-effective manner. If any of these events were to occur, our ability to compete effectively would be impaired.

The third-party networks and mobile infrastructure that we depend on may fail, and we may be unable to maintain and scale the technology underlying our offerings.

We depend on the reliable performance of third-party networks and mobile infrastructure to provide our technology offerings to our customers and agents. The proper operation of these networks and infrastructure is beyond our control, and if they fail, we may be unable to deliver our services to our customers or provide the necessary support for our agents.

As the number of homebuyers and home sellers, agents, and listings shared on our website and mobile application and the extent and types of data grow, our need for additional network capacity and computing power will also grow. Operating our underlying technology systems is expensive and complex, and we could experience operational failures. If we experience interruptions or failures in these systems for any reason, the security and availability of our services and technologies could be affected.

Our website is hosted at a single facility, the failure of which could interrupt our website and mobile application.

Our website and mobile application are hosted at a single facility in Seattle, Washington. If this facility experiences outages or downtimes for any reason, including human error, natural disaster, power loss, telecommunications failure, physical or electronic break-ins, terrorist attack, or act of war, we could

13


suffer a significant interruption of our website and mobile application while we implement the disaster recovery procedures we have developed to restore the function of our website and mobile application on a cloud-based hosting service. This service interruption may be extended if we discover previously unknown errors in our disaster recovery procedures.

We are subject to a variety of federal, state and local laws, and our compliance with these laws, or the enforcement of our rights under these laws, may increase our expenses, require management's resources, or force us to change our business practices.

We are currently subject to a variety of, and may in the future become subject to additional, federal, state, and local laws. The laws include, but are not limited to, those relating to real estate, brokerage, title, mortgage, advertising, privacy and consumer protection, labor and employment, and intellectual property. These laws and their related regulations may evolve frequently and may be inconsistent from one jurisdiction to another. Additionally, certain of these laws and regulations were created for traditional real estate brokerages, and it is unclear how they may affect us given our business model that is unlike traditional brokerages or certain of our services, such as Redfin Direct, that historically have not been offered by traditional brokerages.

These laws can be costly for us to comply with or enforce. Additionally, if we are unable to comply with and become liable for violations of these laws, or if courts or regulatory bodies provide unfavorable interpretations of existing regulations, our operations in affected markets may become prohibitively expensive, consume significant amounts of management's time, or need to be discontinued.

Data protection legislation is also becoming increasingly common in the United States at both the federal and state level. For example, the California Consumer Privacy Act (the "CCPA"), took effect on January 1, 2020 and has the potential to impose additional onerous privacy requirements on companies serving California consumers, including us. We will need to carefully consider the compliance mandates of the California law as well as similar state or federal laws or interpretations currently being proposed. Additionally, the Federal Trade Commission and many state attorneys general are interpreting federal and state consumer protection laws to impose standards for the online collection, use, dissemination and security of data. The burdens imposed by the CCPA and other similar laws that may be enacted at the federal and state level may require us to modify our data processing practices and policies and to incur substantial expenditure to comply.

We are subject to costs associated with defending and resolving proceedings brought by government entities and claims brought by private parties.

We are from time to time involved in, and may in the future be subject to, government investigations or enforcement actions and private third-party claims arising from the laws to which we are subject or the contracts to which we are a party. Such investigations, actions, and claims include, but are not limited to, matters relating to employment law (including misclassification), intellectual property, privacy and consumer protection, the Real Estate Settlement Procedures Act of 1974, the Fair Housing Act of 1968 or other fair housing statutes, cybersecurity incidents, data breaches, and commercial or contractual disputes. They may also relate to ordinary-course brokerage disputes, including, but not limited to, failure to disclose property defects, failure to meet client legal obligations, commission disputes, personal injury or property damage claims, and vicarious liability based upon conduct of individuals or entities outside of our control, including partner agents and third-party contractor agents.

Any such investigations, actions, or claims can be costly to defend or resolve, require significant time from management, or result in negative publicity. Furthermore, to the extent we are unsuccessful in defending an action or claim, we may be subject to civil or criminal penalties, including significant fines or damages, the loss of ability to operate in a jurisdiction, or the need to change certain business practices (including redesigning, or obtaining a license for, our technology or modifying or ceasing to offer certain services).

As described in Item 3, we are currently the subject of a claim alleging that we had misclassified our associate agents as independent contractors instead of employees. While we have previously settled

14


similar complaints, there is no assurance that we will be able to settle this claim on similar terms or at all. Accordingly, this complaint may be costly to resolve, require significant time from management, result in negative publicity, or require us to change certain business practices related to our associate agents. Furthermore, we may be subject to additional lawsuits or administrative proceedings for similar claims, which may have similar negative effects on us.

We have also, in the past, been the subject of complaints alleging that we had improperly classified certain of our employees as exempt from minimum wage and overtime laws. The legal tests for determining overtime exemptions consider many factors that vary from state to state and have evolved based on case law, regulations, and legislative changes, as well as complicated factual analysis. We may be subject to additional complaints or administrative proceedings regarding our employee classification.

We may fail to maintain an effective system of disclosure controls or internal control over financial reporting as we grow our business.

We have established, and intend to maintain, effective disclosure controls and internal control over financial reporting. However, as our current lines of business grow or if we enter into new lines business, we may need to develop new, or revise existing, controls. Any failure to develop new, or revise existing, controls could result in our failure to maintain effective disclosure controls or internal control over financial reporting. Any such failure could cause us to not meet our financial reporting obligations, require us to restate previously issued financial statements, or cause investors to lose confidence in our reported financial statements, even after we remedy the failure.

Some of our potential losses may not be covered by insurance. We may not be able to obtain or maintain adequate insurance coverage.

We maintain insurance to cover costs and losses from certain risk exposures in the ordinary course of our operations, but our insurance may not cover one hundred percent of the costs and losses from all events. We are responsible for certain retentions and deductibles that vary by policy, and we may suffer losses that exceed our insurance coverage limits by a material amount. We may also incur costs or suffer losses arising from events against which we have no insurance coverage. In addition, large-scale market trends or the occurrence of adverse events in our business may raise our cost of procuring insurance or limit the amount or type of insurance we are able to secure. We may not be able to maintain our current coverage, or obtain new coverage, in the future on commercially reasonable terms or at all. Incurring uninsured or underinsured costs or losses could harm our business.

Risks Related to Our Indebtedness

We may not have sufficient cash flow to make the payments required by our convertible senior notes, and a failure to make payments when due may result in the entire principal amount of the notes becoming due prior to the notes' maturity, which may result in our bankruptcy.

We are required to pay interest on our convertible senior notes on a semi-annual basis. In addition, holders of our convertible senior notes have the right to require us to repurchase their notes upon the occurrence of a fundamental change at a repurchase price equal to 100% of the principal amount of the notes to be repurchased, plus accrued and unpaid interest. Furthermore, if the conditional conversion feature of our convertible senior notes is triggered, holders of our notes will be entitled to convert the notes at any time during specified periods at their option. Upon conversion, we will be required to make cash payments in respect of the notes being converted, unless we elect to deliver solely shares of our common stock to settle such conversion (other than paying cash in lieu of delivering any fractional share).

Our ability to make these payments depends on having sufficient cash on hand when the payments are due. Our cash availability, in turn, depends on our future performance, which is subject to the other risks described in this Item 1A. If we are unable to generate sufficient cash flow to make the payments when due, then we may be required to adopt one or more alternatives, such as selling assets, refinancing the notes, or raising additional capital. However, we may not be able to engage in any of these activities or engage in these activities on desirable terms.

15



Our failure to make payments when due may result in an event of default under the indenture governing our convertible senior notes and cause the entire $143,750,000 principal amount, plus accrued and unpaid interest, to become due immediately and prior to the maturity date. Any such acceleration of the principal amount could result in our bankruptcy. In a bankruptcy, the holders of our convertible senior notes would have a claim to our assets that is senior to the claims of holders of our common stock.

Our net working capital may be materially reduced if the conditional conversion feature of our convertible senior notes is triggered. Additionally, any conversion of our notes may dilute the ownership interest of our stockholders and depress the price of our common stock.

Prior to the close of business on the business day preceding April 15, 2023, our convertible senior notes have a convertible conversion feature that allows holders of the notes to convert all or a portion of their notes during the times and upon any of the conditions described below:

during any calendar quarter commencing after the calendar quarter ending on December 31, 2018 (and only during such calendar quarter), if the last reported sale price of our common stock for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on, and including, the last trading day of the immediately preceding calendar quarter is greater than or equal to 130% of the conversion price of the notes on each applicable trading day;

during the five business day period after any five consecutive trading day period in which the trading price per $1,000 principal amount of our notes for each trading day of the measurement period was less than 98% of the product of the last reported sale price of our common stock and the conversion rate of our notes on each such trading day;

if we call any or all of our notes for redemption, at any time prior to the close of business on the scheduled trading day prior to the redemption date; or

upon the occurrence of specified corporate events.

Between April 15, 2023 and the close of business on the second scheduled trading day preceding July 15, 2023, holders may convert all or a portion of their notes without such conditions.

In the event the conditional conversion feature of our convertible senior notes is triggered, then we could be required under accounting rules to reclassify all or a portion of the outstanding principal of the notes as a current, rather than long-term, liability, even if holders do not elect to convert their notes. Any such reclassification would result in a material reduction of our net working capital.

Upon any conversion of our convertible senior notes, we have the option to pay or deliver, as the case may be, cash, shares of our common stock, or a combination of cash and shares of our common stock. If we elect to settle our conversion obligation in shares of our common stock or a combination of cash and shares of our common stock, then the conversion of some or all of our convertible senior notes may dilute the ownership interests of our stockholders and adversely affect the trading price of our common stock. In addition, the existence of the notes may encourage short selling by market participants because the conversion of the notes could be used to satisfy short positions.

RedfinNow relies on a secured revolving credit facility to finance its purchase of certain homes. RedfinNow intends to rely on proceeds from the sale of financed homes to repay amounts owed under such facility, but in certain instances, such proceeds may be insufficient or unavailable to repay the amounts owed.

Pursuant to a secured revolving credit facility with Goldman Sachs Bank USA ("Goldman Sachs"), RedfinNow Borrower, which is a wholly owned subsidiary of Redfin Corporation, may borrow money to partially fund purchases of homes for our properties business. RedfinNow Borrower has the option of repaying amounts owed with respect to a particular financed home upon the sale of such home and using

16


the proceeds from such sale. However, there is no assurance the sale proceeds will equal or exceed the amounts owed.

Additionally, in certain instances, RedfinNow Borrower may be required to repay amounts owed with respect to a financed home prior to the sale of that home. For example, the amount that RedfinNow Borrower is eligible to borrow for a home, which we refer to as the advance rate, depends, in part, on how long it has owned that home. As RedfinNow Borrower owns a home past certain time periods, the advance rate decreases and it becomes obligated to repay all or a portion of the borrowed funds. Additionally, a home must satisfy certain criteria to be eligible for financing under the facility. If a financed home ceases to satisfy the criteria, then RedfinNow Borrower must immediately repay all amounts owed with respect to the home. If either of these scenarios occur, then RedfinNow Borrower will be unable to rely on the proceeds from the sale of the home for repayment.

In the situations described above, RedfinNow Borrower must use its cash on hand to repay the amounts owed. To the extent it does not have sufficient cash and is unable to make the required repayments, then RedfinNow Borrower may default under the facility.

Our inability to comply with the terms of RedfinNow's secured revolving credit facility may adversely affect our properties business and, in some instances, give the lenders recourse to Redfin Corporation when the value of the assets securing the facility are insufficient to cover the amounts owed to the lenders.

Borrowings under our secured revolving credit facility are secured by RedfinNow Borrower's assets, including the financed homes, as well as the equity interests in RedfinNow Borrower. To the extent RedfinNow Borrower is unable to make payments when due under the facility, or it or certain other Redfin entities are unable to comply with the facility's ongoing representations and warranties or covenants (including financial covenants of Redfin Corporation), then an event of default may occur. An event of default would require RedfinNow Borrower to immediately repay all amounts owned under the facility and cause RedfinNow Borrower to be unable to borrow from the facility. As a result, our properties business will need to rely solely on our available cash to fund home purchases, and to the extent cash is unavailable, our properties business would be unable to purchase the homes required for its growth. Furthermore, an event of default may result in Goldman Sachs owning RedfinNow Borrower's equity interests or its assets, including any financed homes and cash held by RedfinNow Borrower, and result in our properties business losing a portion of its assets.

While the lenders' recourse in most situations following an event of default is only to RedfinNow Borrower or its assets, Redfin Corporation has guaranteed amounts owed under the facility and certain expenses in situations involving "bad acts" by a Redfin entity. To the extent a Redfin entity commits a "bad act," then Redfin Corporation may become obligated to pay such amounts owed or certain expenses.

If Redfin Mortgage is unable to obtain sufficient financing through warehouse credit facilities to fund its origination of mortgage loans, then we may be unable to grow our mortgage origination business.

Redfin Mortgage relies on borrowings from its warehouse credit facilities to fund substantially all of the mortgage loans that it originates. See Note 14 to our consolidated financial statements for the current terms of Redfin Mortgage's warehouse credit facilities. To grow its business, Redfin Mortgage depends, in part, on having sufficient borrowing capacity under its current facilities or obtaining additional borrowing capacity under new facilities. If it were unable to receive the necessary capacity, or receive such capacity on acceptable terms, and did not have cash on hand available, then Redfin Mortgage may be unable to maintain or increase the amount of mortgage loans that it originates, which will adversely affect its growth.

Redfin Mortgage has historically been unable to meet certain financial covenants contained in its warehouse credit facilities. While each lender has historically waived these breaches of the financial covenants, there is no assurance that every lender will continue to do so in the event of future covenant breaches. If a lender were to enforce its remedies for a future breach, which may include the right to seize pledged mortgage loans and obtain rights and income related to the loans, then Redfin Mortgage may lose

17


a portion of its assets and will be unable to rely on the facility to fund its mortgage originations, which may adversely affect Redfin Mortgage's business.

The cross-acceleration and cross-default provisions in the agreements governing our indebtedness may result in an immediate obligation to repay all of our outstanding indebtedness.

The indenture governing our convertible senior notes and one of our warehouse credit facilities contain cross-acceleration provisions while our secured revolving credit facility and two of our warehouse credit facilities contain cross-default provisions. These provisions could have the effect of creating an event of default under an agreement for our indebtedness, despite our compliance with that agreement, due solely to an event of default or failure to pay amounts owed under another agreement for our indebtedness. Accordingly, all or a significant portion of our outstanding indebtedness could become immediately payable due solely to our failure to comply with the terms of a single agreement governing our indebtedness.

Certain provisions in the agreements governing our indebtedness may delay or prevent an otherwise beneficial takeover attempt of us.

Certain provisions in the agreements governing our indebtedness may make it more difficult or expensive for a third party to acquire us. These provisions may have the effect of delaying or preventing a takeover that would otherwise be beneficial to our stockholders.

For example, the indenture for our convertible senior notes will require us to repurchase our convertible senior notes for cash upon the occurrence of a fundamental change (as defined in the indenture) of us and, in certain circumstances, to increase the conversion rate for a holder that converts its notes in connection with a make-whole fundamental change. A takeover of us may trigger the requirement that we repurchase our convertible senior notes and/or increase the conversion rate, which could make it more costly for a potential acquirer to engage in such takeover.

Furthermore, under the loan agreement for our secured revolving credit facility, an event of default occurs upon a change in control (as defined in the loan agreement), unless Goldman Sachs, as the administrative agent, consents to the change in control. Accordingly, a takeover may require us and the third-party acquiror to obtain Goldman Sachs's consent.

If the London Inter-Bank Offered Rate ("LIBOR") is discontinued, interest payments under our secured revolving credit facility and certain warehouse credit facilities may be calculated using another reference rate.

In July 2017, the United Kingdom Financial Conduct Authority ("FCA"), which regulates LIBOR, announced that the FCA intends to phase out the use of LIBOR by the end of 2021. In response, the U.S. Federal Reserve, in conjunction with the Alternative Reference Rates Committee, has proposed replacing U.S. dollar LIBOR with the Secured Overnight Financing Rate ("SOFR"), which is a new index calculated by short-term repurchase agreements and backed by U.S. Treasury securities. The market transition away from LIBOR towards SOFR is expected to be complicated, and there is no guarantee that SOFR will become a widely accepted benchmark in place of LIBOR. LIBOR is used as a benchmark rate throughout our secured revolving credit facility and certain of our warehouse credit facilities and some of these agreements do not provide fallback language for circumstances in which LIBOR ceases to be published. The transition process may involve, among other things, increased volatility and illiquidity in markets for instruments that currently rely on LIBOR and may result in increased borrowing costs, the effectiveness of related transactions such as hedges, uncertainty under our secured revolving credit facility and certain of our warehouse credit facilities, or difficult and costly processes to amend such documentation. There remains uncertainty regarding the future utilization of LIBOR and the nature of any replacement rate, and we are uncertain what impact a transition away from LIBOR may have on our business, financial results, and operations.

Risks Relating to Ownership of Our Common Stock


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Provisions of Delaware or Washington law and our governing documents could make an acquisition of us, which may be beneficial to our stockholders, more difficult and may prevent attempts by our stockholders.

We are governed by Section 203 of the Delaware General Corporation Law (the "DGCL"), which prohibits a person who owns at least 15% of our common stock from engaging in a "business combination" (as defined in the DGCL) with us for a period of three years after the date of the transaction in which the person reached such ownership threshold, unless the business combination is approved in a prescribed manner and subject to certain exceptions. Furthermore, Chapter 23B.19 of the Washington Business Corporation Act (the "WBCA") may apply to us if we qualify as a "target corporation" under the WBCA. To the extent it applies, Chapter 23B.19 would prohibit us from engaging in a "significant business transaction" (as defined in the WBCA) with a person who owns at least 10% of our common stock for a period of five years following the date of the transaction in which the person reached such ownership threshold, unless the significant business transaction is approved in a prescribed manner and subject to certain exceptions. These provisions of Delaware or Washington law could, under certain circumstances, also depress the market price of our common stock.

As discussed in the "Anti-Takeover Provisions" section of the Description of Common Stock filed as Exhibit 4.2 to this Annual Report (which we incorporate into this Item 1A by reference), certain provisions in our restated certificate of incorporation and restated bylaws may have an effect of delaying, deferring or preventing a change in control of us.

Our restated certificate of incorporation designates the Court of Chancery of the State of Delaware and the U.S. federal district courts as the exclusive forums for certain types of actions that may be initiated by our stockholders. These provisions may limit a stockholder's ability to bring a claim in a judicial forum that it finds favorable for disputes with us or our directors, officers, or employees, which may discourage lawsuits with respect to such claims.

Our restated certificate of incorporation provides that, unless we consent in writing to an alternative forum, the Court of Chancery of the State of Delaware (the "Court of Chancery") will be the sole and exclusive forum for (i) any derivative action or proceeding brought on our behalf, (ii) any action asserting a claim of breach of a fiduciary duty owed by any of our directors, officers, or employees to us or our stockholders, (iii) any action asserting a claim arising pursuant to any provision of the DGCL, our restated certificate of incorporation, or our restated bylaws, (iv) any action to interpret, apply, enforce or determine the validity of our restated certificate of incorporation or our restated bylaws, or (iv) any action asserting a claim that is governed by the internal affairs doctrine. This exclusive forum provision does not apply to actions arising under the Securities Exchange Act of 1934, or, as described below, the Securities Act of 1933.

Our restated certificate of incorporation further provides that, unless we consent in writing to an alternative forum, the U.S. federal district courts will be the exclusive forum for any complaint asserting a cause of action arising under the Securities Act of 1933. However, the Court of Chancery has ruled that exclusive forum provisions for claims under the Securities Act of 1933 are not enforceable as a matter of Delaware law. This ruling is currently on appeal in the Delaware Supreme Court. Accordingly, this exclusive forum provision in our restated certificate of incorporation is subject to and contingent upon a final adjudication in the State of Delaware of the enforceability of such provision. Regardless of whether this provision is enforceable, stockholders will not be deemed to have waived our compliance with the federal securities laws and the rules and regulations thereunder.


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Item 1B. Unresolved Staff Comments

None.

Item 2. Properties

None.

Item 3. Legal Proceedings

On August 28, 2019, one of our former independent contractor licensed sales associates, which we call associate agents, filed a complaint against us in the Superior Court of California, County of San Francisco. The plaintiff initially pled the complaint as a class action and alleged that we misclassified her as an independent contractor instead of an employee. The plaintiff also sought representative claims under California’s Private Attorney General Act ("PAGA"). On December 6, 2019, we filed a motion to compel arbitration and asserted that the plaintiff had agreed to arbitrate her claims and had waived all class claims. Following that filing, we and the plaintiff stipulated to allow the plaintiff to amend her complaint to dismiss the class action claim and assert only claims under PAGA. On January 14, 2020, pursuant to the parties’ stipulation, the court granted the plaintiff leave to file a first amended complaint, and she filed her first amended complaint on January 30, 2020. Following this stipulation, only the plaintiff's claims under PAGA will proceed. The plaintiff continues to seek unspecified penalties for alleged violations of PAGA.

Item 4. Mine Safety Disclosures

None.


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PART II

Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Market Information, Holders of Record, and Dividends

Our common stock is listed on The Nasdaq Global Select Market under the symbol “RDFN.”

As of January 31, 2020, we had 151 holders of record of our common stock.

We have no intention of paying cash dividends in the foreseeable future.

Stock Performance Graph

The graph below compares the cumulative total return of a $100 investment in our common stock with the cumulative total return of the same investment in the S&P 500 Index and the RDG Composite Index. The period shown commences on July 28, 2017, which was our common stock's first day of trading after our initial public offering ("IPO"), and ends on December 31, 2019.

https://cdn.kscope.io/8a17521bb56f921444f8a21f9a03886a-performancegrapha01.jpg

Unregistered Sales of Securities

During the period covered by this Annual Report, we did not sell any equity securities that were not registered under the Securities Act of 1933.

Use of IPO Proceeds    

On July 27, 2017, the SEC declared effective the Registration Statement on Form S-1 (file number 333-219093) for our IPO. There has been no change to the information provided under "Use of Proceeds" in Part II, Item 2 of our Quarterly Report on Form 10-Q for the quarter ended June 30, 2017.


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Purchases of Equity Securities

During the quarter ended December 31, 2019, there were no purchases of our common stock by or on behalf of us or any of our affiliated purchasers, as such term is defined in Rule 10b-18(a)(3) under the Securities Exchange Act of 1934.


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Item 6. Selected Financial Data

The selected financial data set forth below should be read in conjunction with the information contained in Items 7 and 8.
 
As of and for Year Ended December 31,
 
2019(1)(2)
 
2018(2)
 
2017
 
2016
 
2015
 
(in thousands, except per share amounts)
Statements of Operations Data
 
 
 
 
 
 
 
 
 
Revenue
$
779,796

 
$
486,920

 
$
370,036

 
$
267,196

 
$
187,338

Cost of revenue
635,693

 
367,496

 
258,216

 
184,452

 
138,492

Total operating expenses
223,349

 
163,358

 
127,792

 
105,528

 
79,135

Loss from operations
(79,246
)
 
(43,934
)
 
(15,972
)
 
(22,784
)
 
(30,289
)
Net loss
(80,805
)
 
(41,978
)
 
(15,002
)
 
(22,526
)
 
(30,236
)
Accretion of redeemable convertible preferred stock

 

 
(175,915
)
 
(55,502
)
 
(102,224
)
Net loss attributable to common stock—basic and diluted
(80,805
)
 
(41,978
)
 
(190,917
)
 
(78,028
)
 
(132,460
)
Net loss per share attributable to common stock—basic and diluted
(0.88
)
 
(0.49
)
 
(4.47
)
 
(5.42
)
 
(9.87
)
Balance Sheet Data
 
 
 
 
 
 
 
 
 
Cash, cash equivalents, and investments
$
335,686

 
$
432,608

 
$
208,342

 
$
65,779

 
$
87,341

Inventory
74,590

 
22,694

 
3,382

 

 

Working capital
366,411

 
450,029

 
204,349

 
60,445

 
83,234

Total assets
596,213

 
542,821

 
281,955

 
133,477

 
125,054

Convertible senior notes, net
119,716

 
113,586

 

 

 

Redeemable convertible preferred stock

 

 

 
655,416

 
599,914

Total stockholders’ equity (deficit)
331,446

 
371,938

 
235,430

 
(563,734
)
 
(495,713
)

(1) 2019 amounts reflect our adoption of the new lease accounting standard, which resulted in the recording of right of use assets and corresponding lease liabilities. As of December 31, 2019, total assets increased $52,004 compared to the prior periods, which were not restated and reflect our historical accounting policies. See Note 1 to our consolidated financial statements for additional information.

(2) 2019 and 2018 revenue reflect our adoption of a new revenue accounting standard, which we adopted using the modified retrospective method. This change did not have a material impact on our financial results. We did not restate 2017, 2016, and 2015 revenue for the new standard, and they reflect our historical accounting policies.


23


Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis of our financial condition and results of operations should be read together with our consolidated financial statements, the accompanying notes, and other information included in this Annual Report. In particular, the risk factors contained in Item 1A may reflect trends, demands, commitments, events, or uncertainties that could materially impact our results of operations and liquidity and capital resources.

The following discussion contains forward-looking statements, such as statements regarding our future operating results and financial position, our business strategy and plans, our market growth and trends, and our objectives for future operations. See "Note Regarding Forward-Looking Statements" for more information about relying on these forward-looking statements. The following discussion also contains information using industry publications. See "Note Regarding Industry and Market Data" for more information about relying on these industry publications.

When we use the term "basis points" in the following discussion, we refer to units of one‑hundredth of one percent.
    
Overview

We help people buy and sell homes. Our primary business is a residential real estate brokerage, representing customers in over 90 markets in the United States and Canada. We pair our own agents with our own technology to create a service that is faster, better, and costs less. We meet customers through our listings-search website and mobile application.

We use the same combination of technology and local service to originate mortgage loans and offer title and settlement services; we also buy homes directly from homeowners who want an immediate sale, taking responsibility for selling the home while the original owner moves on.

Our mission is to redefine real estate in the consumer’s favor.

Key Business Metrics

In addition to the measures presented in our consolidated financial statements, we use the following key metrics to evaluate our business, develop financial forecasts, and make strategic decisions.
 
Year Ended December 31,
 
2019
 
2018
 
2017
Monthly average visitors (in thousands)
33,473

 
27,261

 
22,623

Real estate services transactions
 
 
 
 
 
Brokerage
53,235

 
42,954

 
35,038

Partner
11,939

 
11,608

 
10,755

Total
65,174

 
54,562

 
45,793

Real estate services revenue per transaction
 
 
 
 
 
Brokerage
$
9,326

 
$
9,459

 
$
9,429

Partner
2,267

 
2,229

 
1,971

Aggregate
8,033

 
7,921

 
7,677

Aggregate home value of real estate services transactions (in millions)
$
30,532

 
$
25,812

 
$
21,280

U.S. market share by value
0.93
%
 
0.81
%
 
0.67
%
Revenue from top-10 Redfin markets as a percentage of real estate services revenue
63
%
 
67
%
 
69
%
Average number of lead agents
1,553

 
1,390

 
1,023


Monthly Average Visitors


24


The number of, and growth in, visitors to our website and mobile application are important leading indicators of our business activity because these channels are the primary ways we meet customers. For a particular period, monthly average visitors refers to the average of the number of unique visitors to our website and mobile application for each of the months in that period. Monthly average visitors are influenced by, among other things, market conditions that affect interest in buying or selling homes, the level and success of our marketing programs, seasonality, and how our website appears in search results. We believe we can continue to increase monthly visitors, which helps our growth.

Given the lengthy process to buy or sell a home, a visitor during one month may not convert to a revenue-generating customer until many months later, if at all.

When we refer to "monthly average visitors" for a particular period, we are referring to the average number of unique visitors to our website and our mobile applications for each of the months in that period, as measured by Google Analytics, a product that provides digital marketing intelligence. Google Analytics tracks visitors using cookies, with a unique cookie being assigned to each browser or mobile application on a device. For any given month, Google Analytics counts all of the unique cookies that visited our website and mobile applications during that month. Google Analytics considers each unique cookie as a unique visitor. Due to third-party technological limitations, user software settings, or user behavior, it is possible that Google Analytics may assign a unique cookie to different visits by the same person to our website or mobile application. In such instances, Google Analytics would count different visits by the same person as separate visits by unique visitors. Accordingly, reliance on the number of unique cookies counted by Google Analytics may overstate the actual number of unique persons who visit our website or our mobile applications for a given month.

Real Estate Services Transactions

We record a brokerage real estate services transaction when one of our lead agents represented the homebuyer or home seller in the purchase or sale, respectively, of a home. We record a partner real estate services transaction (i) when one of our partner agents represented the homebuyer or home seller in the purchase or sale, respectively, of a home or (ii) since the third quarter of 2019 after we commenced a referral partnership with Opendoor, when a Redfin customer sold his or her home to a third-party institutional buyer following our introduction of that customer to the buyer. We include a single transaction twice when our lead agents or our partner agents serve both the homebuyer and the home seller of the transaction. Additionally, when one of our lead agents represents RedfinNow in its sale of a home, we include that transaction as a brokerage real estate services transaction.

Increasing the number of real estate services transactions is critical to increasing our revenue and, in turn, to achieving profitability. Real estate services transaction volume is influenced by, among other things, the pricing and quality of our services as well as market conditions that affect home sales, such as local inventory levels and mortgage interest rates. Real estate services transaction volume is also affected by seasonality and macroeconomic factors.

Real Estate Services Revenue per Transaction

Real estate services revenue per transaction, together with the number of real estate services transactions, is a factor in evaluating revenue growth. We also use this metric to evaluate pricing changes. Changes in real estate services revenue per transaction can be affected by, among other things, our pricing, the mix of transactions from homebuyers and home sellers, changes in the value of homes in the markets we serve, the geographic mix of our transactions, and the transactions we refer to partner agents and any third-party institutional buyer. We calculate real estate services revenue per transaction by dividing brokerage, partner, or aggregate revenue, as applicable, by the corresponding number of real estate services transactions in any period.

We generally generate more real estate services revenue per transaction from representing homebuyers than home sellers. However, we believe that representing home sellers has unique strategic value, including the marketing power of yard signs and digital marketing campaigns, and the market effect of controlling listing inventory. To keep revenue per brokerage transaction about the same from year to year,

25


we expect to reduce our commission refund to homebuyers if more of our brokerage transactions come from home sellers.

From 2018 to 2019, the percentage of brokerage transactions from home sellers increased from slightly over 40% to approximately 44%. However, due to the nationwide pricing change we implemented in December 2019, we expect a minimal increase, no change, or possible decrease in this percentage from 2019 to 2020.

Aggregate Home Value of Real Estate Services Transactions

The aggregate home value of brokerage and partner real estate services transactions is an important indicator of the health of our business, because our revenue is largely based on a percentage of each home’s sale price. This metric is affected chiefly by the number of customers we serve, but also by changes in home values in the markets we serve. We compute this metric by summing the sale price of each home represented in a real estate services transaction. We include the value of a single transaction twice when our lead agents or our partner agents serve both the homebuyer and home seller of the transaction.

U.S. Market Share by Value

Increasing our U.S. market share by value is critical to our ability to grow our business and achieve profitability over the long term. We believe there is a significant opportunity to increase our share in the markets we currently serve.

We calculate the aggregate value of U.S. home sales by multiplying the total number of U.S. existing home sales by the mean sale price of these homes, each as reported by the National Association of REALTORS®. We calculate our market share by aggregating the home value of brokerage and partner real estate services transactions. Then, in order to account for both the sell- and buy-side components of each transaction, we divide that value by two-times the estimated aggregate value of U.S. home sales.

Revenue from Top-10 Markets as a Percentage of Real Estate Services Revenue

Our top-10 markets by real estate services revenue are the metropolitan areas of Boston, Chicago, Denver (including Boulder and Colorado Springs), Los Angeles (including Santa Barbara), Maryland, Northern Virginia, Portland (including Bend), San Diego, San Francisco, and Seattle. This metric is an indicator of the geographic concentration of our real estate services segment. We expect our revenue from top-10 markets to decline as a percentage of our total real estate services revenue over time.

Average Number of Lead Agents

The average number of lead agents, in combination with our other key metrics such as the number of brokerage transactions, is a basis for calculating agent productivity and is one indicator of the potential future growth of our business. We systematically evaluate traffic to our website and mobile application and customer activity to anticipate changes in customer demand, helping determine when and where to hire lead agents.

We calculate the average number of lead agents by taking the average of the number of lead agents at the end of each month included in the period.

Components of Our Results of Operations

Revenue

We generate revenue primarily from commissions and fees charged on each real estate services transaction closed by our lead agents or partner agents, and from the sale of homes.

Real Estate Services Revenue

26



Brokerage RevenueBrokerage revenue includes our offer and listing services, where our lead agents represent home buyers and home sellers. We recognize commission-based brokerage revenue upon closing of a brokerage transaction, less the amount of any commission refunds, closing-cost reductions, or promotional offers that may result in a material right. Brokerage revenue is affected by the number of brokerage transactions we close, the mix of brokerage transactions, home-sale prices, commission rates, and the amount we give to customers.

Partner RevenuePartner revenue consists of fees paid to us from partner agents or under other referral agreements, less the amount of any payments we make to customers. We recognize these fees as revenue on the closing of a transaction. Partner revenue is affected by the number of partner transactions closed, home-sale prices, commission rates, and the amount we refund to customers. If the portion of customers we introduce to our own lead agents increases, we expect the portion of revenue closed by partner agents to decrease.

Properties Revenue

Properties RevenueProperties revenue consists of revenue earned when we sell homes that were previously bought directly from homeowners. Properties revenue is recorded at closing on a gross basis, representing the sales price of the home. RedfinNow is our primary properties offering.

Other Revenue

Other RevenueOther services revenue includes fees earned from mortgage origination services, title settlement services, Walk Score data services, and advertising. Substantially all fees and revenue from other services are recognized when the service is provided.

Intercompany Eliminations

Intercompany Eliminations—Revenue earned from transactions between operating segments are eliminated in consolidating our financial statements. Intercompany transactions primarily consist of services performed from our real estate services segment for our properties segment.

Cost of Revenue and Gross Margin

    Cost of revenue consists primarily of personnel costs (including base pay, benefits, and stock-based compensation), transaction bonuses, home-touring and field expenses, listing expenses, home costs related to our properties segment, office and occupancy expenses, and depreciation and amortization related to fixed assets and acquired intangible assets. Home costs related to our properties segment include home purchase costs, capitalized improvements, selling expenses directly attributable to the transaction, and home maintenance expenses.
Gross profit is revenue less cost of revenue. Gross margin is gross profit expressed as a percentage of revenue. Our gross margin has and will continue to be affected by a number of factors, but the most important are the mix of revenue from our relatively higher-gross-margin real estate services segment and our relatively lower-gross-margin properties segment, real estate services revenue per transaction, agent and support-staff productivity, personnel costs and transaction bonuses, and, for properties, the home purchase costs.

Operating Expenses

Technology and Development

Our primary technology and development expenses are building software for our customers, lead agents, and support staff to work together on a transaction, and building a website and mobile application to meet customers looking to move. These expenses primarily include personnel costs (including base pay,

27


benefits, and stock-based compensation), data licenses, software and equipment, and infrastructure such as for data centers and hosted services. The expenses also include amortization of capitalized internal-use software and website and mobile application development costs. We expense research and development costs as incurred and record them in technology and development expenses. Our technology and development expense grew 41% year-over-year for the three months ended December 31, 2019, and we expect approximately the same amount of growth in this expense for the first six months of 2020.

Marketing

Marketing expenses consist primarily of media costs for online and offline advertising, as well as personnel costs (including base pay, benefits, and stock-based compensation). In 2019, we incurred approximately $36 million in offline advertising media costs, compared to around $12 million for 2018. We expect approximately the same offline advertising media costs in 2020 as incurred in 2019.

General and Administrative

General and administrative expenses consist primarily of personnel costs (including base pay, benefits, and stock-based compensation), facilities costs and related expenses for our executive, finance, human resources, and legal organizations, depreciation related to our fixed assets, and fees for outside services. Outside services are principally comprised of external legal, audit, and tax services.

Interest Income

Interest income consists primarily of interest earned on our cash, cash equivalents and investments.

Interest Expense

Interest expense consists primarily of interest payable and the amortization of debt discounts and issuance cost related to our convertible senior notes, which we issued in July 2018. Interest is payable on the notes at the rate of 1.75% semiannually in arrears on January 15 and July 15.

Beginning in August 2019, interest expense also includes interest on borrowings and the amortization of debt issuance costs related to our secured revolving credit facility. Interest for the facility is payable weekly at a rate of one-month LIBOR (subject to a floor of 0.50%) plus 2.65%.

Results of Operations

The following tables set forth our results of operations for the periods presented and as a percentage of our revenue for those periods.

28


 
Year Ended December 31,
 
2019
 
2018
 
2017
 
(in thousands)
Revenue
$
779,796

 
$
486,920

 
$
370,036

Cost of revenue(1)
635,693

 
367,496

 
258,216

Gross profit
144,103

 
119,424

 
111,820

Operating expenses:
 
 
 
 
 
Technology and development(1)
69,765

 
53,797

 
42,532

Marketing(1)
76,710

 
44,061

 
32,251

General and administrative(1)
76,874

 
65,500

 
53,009

Total operating expenses
223,349

 
163,358

 
127,792

Loss from operations
(79,246
)
 
(43,934
)
 
(15,972
)
Interest income
7,146

 
5,416

 
882

Interest expense
(8,928
)
 
(3,681
)
 

Other income, net
223

 
221

 
88

Net loss
$
(80,805
)
 
$
(41,978
)
 
$
(15,002
)

(1) Includes stock-based compensation as follows:
 
Year Ended December 31,
 
2019
 
2018
 
2017
 
(in thousands)
Cost of revenue
$
6,087

 
$
5,567

 
$
2,902

Technology and development
12,362

 
7,576

 
3,325

Marketing
1,418

 
662

 
487

General and administrative
7,947

 
6,633

 
4,387

Total
$
27,814

 
$
20,438

 
$
11,101


 
Year Ended December 31,
 
2019
 
2018
 
2017
 
(as a percentage of revenue)
Revenue
100.0
 %
 
100.0
 %
 
100.0
 %
Cost of revenue(1)
81.5

 
75.5

 
69.8

Gross profit
18.5

 
24.5

 
30.2

Operating expenses:
 
 
 
 
 
Technology and development(1)
8.9

 
11.0

 
11.6

Marketing(1)
9.8

 
9.0

 
8.7

General and administrative(1)
9.9

 
13.5

 
14.3

Total operating expenses
28.6

 
33.5

 
34.6

Loss from operations
(10.1
)
 
(9.0
)
 
(4.4
)
Interest income
0.9

 
1.1

 
0.3

Interest expense
(1.1
)
 
(0.8
)
 

Other income, net

 

 

Net loss
(10.3
)%
 
(8.7
)%
 
(4.1
)%


29


(1) Includes stock-based compensation as follows:
 
Year Ended December 31,
 
2019
 
2018
 
2017
 
(as a percentage of revenue)
Cost of revenue
0.8
%
 
1.1
%
 
0.8
%
Technology and development
1.6

 
1.6

 
0.9

Marketing
0.2

 
0.1

 
0.1

General and administrative
1.0

 
1.4

 
1.2

Total
3.6
%
 
4.2
%
 
3.0
%

Comparison of the Years Ended December 31, 2019 and 2018

Revenue
 
Year Ended December 31,
 
Change
 
2019
 
2018
 
Dollars
 
Percentage
 
(in thousands, except percentages)
Real estate services revenue
 
 
 
 
 
 
 
Brokerage revenue
$
496,480

 
$
406,293

 
$
90,187

 
22
%
Partner revenue
27,060

 
25,875

 
1,185

 
5

Total real estate services revenue
523,540

 
432,168

 
91,372

 
21

Properties revenue
240,507

 
44,993

 
195,514

 
435

Other revenue
17,634

 
9,882

 
7,752

 
78

Intercompany elimination
(1,885
)
 
(123
)
 
(1,762
)
 
1,433

Total revenue
$
779,796

 
$
486,920

 
$
292,876

 
60

Percentage of revenue
 
 
 
 
 
 
 
Real estate services revenue
 
 
 
 
 
 
 
Brokerage
63.6
 %
 
83.4
 %
 
 
 
 
Partner revenue
3.5

 
5.3

 
 
 
 
Total real estate services revenue
67.1

 
88.7

 
 
 
 
Properties revenue
30.8

 
9.3

 
 
 
 
Other revenue
2.3

 
2.0

 
 
 
 
Intercompany elimination
(0.2
)
 

 
 
 
 
Total revenue
100.0
 %
 
100.0
 %
 
 
 
 

In 2019, revenue increased by $292.9 million, or 60%, as compared with 2018. Brokerage revenue represented $90.2 million, or 31%, of the increase. Brokerage revenue grew 22% during the period, driven by a 24% increase in brokerage real estate transactions and a 1% decrease in real estate services revenue per brokerage transaction. The increase in brokerage transactions was attributable to higher levels of customer awareness of Redfin and increasing customer demand for Redfin services. Properties revenue grew $195.5 million, or 435%, as compared with 2018, driven by greater market presence and consumer awareness of RedfinNow, which resulted in a 407% increase in the number of homes sold. Other revenue increased $7.8 million, or 78%, as compared with 2018.


30


Cost of Revenue and Gross Margin
 
Year Ended December 31,
 
Change
 
2019
 
2018
 
Dollars
 
Percentage
 
(in thousands, except percentages)
Cost of revenue
 
 
 
 
 
 
 
Real estate services
$
373,150

 
$
309,069

 
$
64,081

 
21
 %
Properties
245,189

 
46,613

 
198,576

 
426

Other
19,239

 
11,937

 
7,302

 
61

Intercompany elimination
(1,885
)
 
(123
)
 
(1,762
)
 
1,433

Total cost of revenue
$
635,693

 
$
367,496

 
$
268,197

 
73

 
 
 
 
 
 
 
 
Gross profit
 
 
 
 
 
 
 
Real estate services
$
150,390

 
$
123,099

 
$
27,291

 
22
 %
Properties
(4,682
)
 
(1,620
)
 
(3,062
)
 
189

Other
(1,605
)
 
(2,055
)
 
450

 
(22
)
Total gross profit
$
144,103

 
$
119,424

 
$
24,679

 
21

 
 
 
 
 
 
 
 
Gross margin (percentage of revenue)
 
 
 
 
 
 
 
Real estate services
28.7
 %
 
28.5
 %
 
 
 
 
Properties
(1.9
)
 
(3.6
)
 
 
 
 
Other
(9.1
)
 
(20.8
)
 
 
 
 
Total gross margin
18.5

 
24.5

 
 
 
 

In 2019, total cost of revenue increased by $268.2 million, or 73%, as compared with 2018. This increase in cost of revenue was primarily attributable to a $180.8 million increase in home purchase costs and related capitalized improvements, due to selling more homes by our properties business, a $50.3 million increase in personnel costs and transaction bonuses due to increased headcount and increased brokerage transactions, respectively, and a $13.7 million increase in home-touring and field costs.

Total gross margin decreased 600 basis points for 2019 as compared with 2018, driven primarily by the relative growth of our properties business compared to our real estate services and other businesses, partially offset by improvements in real estate services, properties and other gross margin.

In 2019, real estate services gross margin increased 20 basis points as compared with 2018. This was primarily attributable to a 110 basis-point decrease in personnel costs and transaction bonuses as a percentage of revenue. This was partially offset by a 30 basis-point increase in home-touring and field costs, a 30 basis-point increase in occupancy and office expenses, and a 20 basis-point increase in listing expenses, each as a percentage of revenue.

In 2019, properties gross margin increased 170 basis points as compared with 2018. This was primarily attributable to a 90 basis-point decrease in home purchase costs and related capitalized improvements, a 30 basis-point decrease in personnel costs, and a 30 basis-point decrease in listing expenses, each as a percentage of revenue.

In 2019, other gross margin increased 1,170 basis points as compared with 2018. This was primarily attributable to a 340 basis-point decrease in personnel costs, a 310 basis-point decrease in operating expenses, a 290 basis-point decrease in office and occupancy expenses, and a 230 basis-point decrease in depreciation and amortization, each as a percentage of revenue.


31


Operating Expenses
 
Year Ended December 31,
 
Change
 
2019
 
2018
 
Dollars
 
Percentage
 
(in thousands, except percentages)
Technology and development
$
69,765

 
$
53,797

 
$
15,968

 
30
%
Marketing
76,710

 
44,061

 
32,649

 
74

General and administrative
76,874

 
65,500

 
11,374

 
17

Total operating expenses
$
223,349

 
$
163,358

 
$
59,991

 
37

Percentage of revenue
 
 
 
 
 
 
 
Technology and development
8.9
%
 
11.0
%
 
 
 
 
Marketing
9.8

 
9.0

 
 
 
 
General and administrative
9.9

 
13.5

 
 
 
 
Total operating expenses
28.6
%
 
33.5
%
 
 
 
 

In 2019, technology and development expenses increased by $16.0 million, or 30%, as compared with 2018. The increase was primarily attributable to a $13.5 million increase in personnel costs due to increased headcount.

In 2019, marketing expenses increased by $32.6 million, or 74%, as compared with 2018. The increase was primarily attributable to a $29.2 million increase in marketing media costs as we expanded advertising.

In 2019, general and administrative expenses increased by $11.4 million, or 17%, as compared with 2018. The increase was attributable to an $7.2 million increase in personnel costs, largely the result of increases in headcount to support continued growth, a $2.0 million increase in outside services expenses, primarily Internet-based software services, and a $1.3 million increase in corporate events costs.

Comparison of the Years Ended December 31, 2018 and 2017

Revenue
 
Year Ended December 31,
 
Change
 
2018
 
2017
 
Dollars
 
Percentage
 
(in thousands, except percentages)
Real estate services revenue
 
 
 
 
 
 
 
Brokerage revenue
$
406,293

 
$
330,372

 
$
75,921

 
23
%
Partner revenue
25,875

 
21,198

 
4,677

 
22

Total real estate services revenue
432,168

 
351,570

 
80,598

 
23

Properties revenue
44,993

 
10,491

 
34,502

 
329

Other revenue
9,882

 
7,975

 
1,907

 
24

Intercompany elimination
(123
)
 

 
(123
)
 
N/A

Total revenue
$
486,920

 
$
370,036

 
$
116,884

 
32

Percentage of revenue
 
 
 
 
 
 
 
Real estate services revenue
 
 
 
 
 
 
 
Brokerage revenue
83.4
 %
 
89.3
%
 
 
 
 
Partner revenue
5.3

 
5.7

 
 
 
 
Total real estate services revenue
88.7

 
95.0

 
 
 
 
Properties revenue
9.3

 
2.8

 
 
 
 
Other revenue
2.0

 
2.2

 
 
 
 
Intercompany elimination

 

 
 
 
 
Total revenue
100.0
 %
 
100.0
%
 
 
 
 


32


In 2018, revenue increased by $116.9 million, or 32%, as compared with 2017. Brokerage revenue represented $75.9 million, or 65%, of the increase. Brokerage revenue grew 23% during the period, driven by a 23% increase in brokerage real estate transactions and a 0.3% increase in real estate services revenue per brokerage transaction. The increase in brokerage transactions was attributable to higher levels of customer awareness of Redfin and increasing customer demand for Redfin services. Properties revenue increased $34.5 million or 329% as compared with 2017, driven by greater market presence and consumer awareness of RedfinNow, which resulted in a 267% increase in the number of homes sold. Other revenue increased $1.9 million or 24%, as compared with 2017.

Cost of Revenue and Gross Margin
 
Year Ended December 31,
 
Change
 
2018
 
2017
 
Dollars
 
Percentage
 
(in thousands, except percentages)
Cost of revenue
 
 
 
 
 
 
 
Real estate services
$
309,069

 
$
237,832

 
$
71,237

 
30
 %
Properties
46,613

 
10,384

 
36,229

 
349

Other
11,937

 
10,000

 
1,937

 
19

Intercompany elimination
(123
)
 

 
(123
)
 
N/A

Total cost of revenue
$
367,496

 
$
258,216

 
$
109,280

 
42

 
 
 
 
 
 
 
 
Gross profit
 
 
 
 
 
 
 
Real estate services
$
123,099

 
$
113,738

 
$
9,361

 
8
 %
Properties
(1,620
)
 
107

 
(1,727
)
 
N/A

Other
(2,055
)
 
(2,025
)
 
(30
)
 
(1
)
Total gross profit
$
119,424

 
$
111,820

 
$
7,604

 
7

 
 
 
 
 
 
 
 
Gross margin (percentage of revenue)
 
 
 
 
 
 
 
Real estate services
28.5
 %
 
32.4
 %
 
 
 
 
Properties
(3.6
)
 
1.0

 
 
 
 
Other
(20.8
)
 
(25.4
)
 
 
 
 
Total gross margin
24.5

 
30.2

 
 
 
 

In 2018, total cost of revenue increased by $109.3 million, or 42%, as compared with 2017. This increase in cost of revenue was primarily attributable to a $34.8 million increase in personnel costs due to increased lead agent and related support-staff headcount, a $32.6 million increase in home purchase costs and related capitalized improvements, due to selling more homes by our properties business, a $17.9 million increase in transaction bonuses, and a $12.6 million increase in home-touring and field costs.

Total gross margin decreased 570 basis points for 2018 as compared with 2017, driven primarily by a decrease in real estate services gross margin and the growth of our properties business.

In 2018, real estate services gross margin decreased 390 basis points as compared with 2017. This was primarily attributable to a 210 basis-point increase in personnel costs, a 60 basis-point increase in transaction bonuses, a 60 basis-point increase in home-touring and field costs, a 30 basis-point increase in operating costs, and a 25 basis-point increase in listing expenses, each as a percentage of revenue.

In 2018, we decreased the number of customers introduced to our lead agents as compared with 2017, but did not see improvement in customer close rate. That change resulted in us hiring more lead agents, which contributed significantly to the 210 basis-point increase in personnel costs and stock-based compensation from 2017 to 2018.

In 2018, properties gross margin decreased 460 basis points as compared with 2017. This was primarily attributable to a 280 basis-point increase in the home purchase costs and related capitalized

33


improvements, a 110 basis-point increase in personnel costs, and a 70 basis-point increase in transaction bonuses, each as a percentage of revenue.

In 2018, other gross margin increased 460 basis points as compared with 2017. This was primarily attributable to a 230 basis-point decrease in operating expenses, a 170 basis-point decrease in depreciation and amortization, and a 90 basis-point decrease in office and occupancy expenses, each as a percentage of revenue. This was partially offset by a 50 basis-point increase in personnel costs.

Operating Expenses
 
Year Ended December 31,
 
Change
 
2018
 
2017
 
Dollars
 
Percentage
 
(in thousands, except percentages)
Technology and development
$
53,797

 
$
42,532

 
$
11,265

 
26
%
Marketing
44,061

 
32,251

 
11,810

 
37

General and administrative
65,500

 
53,009

 
12,491

 
24

Total operating expenses
$
163,358

 
$
127,792

 
$
35,566

 
28

Percentage of revenue
 
 
 
 
 
 
 
Technology and development
11.0
%
 
11.6
%
 
 
 
 
Marketing
9.0

 
8.7

 
 
 
 
General and administrative
13.5

 
14.3

 
 
 
 
Total operating expenses
33.5
%
 
34.6
%
 



 
 

In 2018, technology and development expenses increased by $11.3 million, or 26%, as compared with 2017. The increase was primarily attributable to a $10.3 million increase in personnel costs due to increased headcount and a $1.4 million increase in outside services including cloud-based technology. These expenses were related to improving real estate services operations, and building new capabilities for Redfin Mortgage and properties.

In 2018, marketing expenses increased by $11.8 million, or 37%, as compared with 2017. The increase was primarily attributable to an $11.1 million increase in marketing media costs as we expanded advertising.

In 2018, general and administrative expenses increased by $12.5 million, or 24%, as compared with 2017. The increase was attributable to a $8.1 million increase in personnel costs, largely the result of increases in headcount to support continued growth, a $3.2 million increase in outside services expenses, driven by public-company compliance requirements, including the design, implementation, and assessment of the operating effectiveness of internal control over our financial reporting and related audit.

Quarterly Results of Operations and Key Business Metrics

The following tables set forth our unaudited quarterly statements of operations data for the most recent eight quarters, as well as the percentage that each line item represents of our revenue for each quarter presented. The information for each quarter has been prepared on a basis consistent with our consolidated financial statements and reflect, in the opinion of management, all adjustments of a normal, recurring nature that are necessary for a fair presentation of the financial information contained in those statements. The following quarterly financial data should be read in conjunction with our consolidated financial statements.


34


Quarterly Results
 
Three Months Ended
 
Dec. 31, 2019
 
Sep. 30, 2019
 
Jun. 30, 2019
 
Mar. 31, 2019
 
Dec. 31, 2018
 
Sep. 30, 2018
 
Jun. 30, 2018
 
Mar. 31, 2018
Revenue
$
233,191

 
$
238,683

 
$
197,780

 
$
110,141

 
$
124,129

 
$
140,255

 
$
142,642

 
$
79,893

Cost of revenue(1)
193,565

 
185,306

 
149,434

 
107,388

 
97,920

 
97,950

 
97,429

 
74,197

Gross profit
39,626

 
53,377

 
48,346

 
2,753

 
26,209

 
42,305

 
45,213

 
5,696

Operating expenses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Technology and development(1)
19,345

 
18,801

 
16,063

 
15,556

 
13,692

 
14,310

 
13,033

 
12,762

Marketing(1)
8,099

 
8,361

 
27,050

 
33,201

 
8,054

 
8,236

 
14,435

 
13,336

General and administrative(1)
18,992

 
18,779

 
17,654

 
21,448

 
16,969

 
16,470

 
15,288

 
16,772

Total
46,436

 
45,941

 
60,767

 
70,205

 
38,715

 
39,016

 
42,756

 
42,870

Income (loss) from operations
(6,810
)
 
7,436

 
(12,421
)
 
(67,452
)
 
(12,506
)
 
3,289

 
2,457

 
(37,174
)
Interest income
1,341

 
1,576

 
1,913

 
2,316

 
2,334

 
1,775

 
729

 
577

Interest expense
(2,365
)
 
(2,274
)
 
(2,153
)
 
(2,136
)
 
(2,071
)
 
(1,610
)
 

 

Other income, net
51

 
44

 
36

 
92

 
21

 
21

 
21

 
158

Net income (loss)
$
(7,783
)
 
$
6,782

 
$
(12,625
)
 
$
(67,180
)
 
$
(12,222
)
 
$
3,475

 
$
3,207

 
$
(36,439
)
Net income (loss) per share—basic and diluted
$
(0.08
)
 
$
0.07

 
$
(0.14
)
 
$
(0.74
)
 
$
(0.14
)
 
$
0.04

 
$
0.04

 
$
(0.44
)

(1) Includes stock-based compensation as follows:
 
Three Months Ended
 
Dec. 31, 2019
 
Sep. 30, 2019
 
Jun. 30, 2019
 
Mar. 31, 2019
 
Dec. 31, 2018
 
Sep. 30, 2018
 
Jun. 30, 2018
 
Mar. 31, 2018
Cost of revenue
$
1,689

 
$
1,605

 
$
1,328

 
$
1,465

 
$
1,506

 
$
1,370

 
$
1,392

 
$
1,300

Technology and development
3,701

 
3,320

 
2,685

 
2,656

 
2,241

 
2,135

 
1,726

 
1,473

Marketing
393

 
390

 
349

 
286

 
231

 
155

 
157

 
119

General and administrative
2,239

 
2,195

 
1,514

 
1,999

 
1,988

 
1,838

 
1,503

 
1,304

Total
$
8,022

 
$
7,510

 
$
5,876

 
$
6,406

 
$
5,966

 
$
5,498

 
$
4,778

 
$
4,196


 
Three Months Ended
 
Dec. 31, 2019
 
Sep. 30, 2019
 
Jun. 30, 2019
 
Mar. 31, 2019
 
Dec. 31, 2018
 
Sep. 30, 2018
 
Jun. 30, 2018
 
Mar. 31, 2018
 
(as a percentage of revenue)
Revenue
100.0
 %
 
100.0
 %
 
100.0
 %
 
100.0
 %
 
100.0
 %
 
100.0
 %
 
100.0
%
 
100.0
 %
Cost of revenue(1)
83.0

 
77.6

 
75.6

 
97.5

 
78.9

 
69.8

 
68.3

 
92.9

Gross profit
17.0

 
22.4

 
24.4

 
2.5

 
21.1