Redfin is making some bodacious bets on the future of the real estate market. Its time for a check-in on those bets.

Redfin’s mission is to redefine real estate in the consumer’s favor. One way they do this is by hiring Real Estate agents as employees and paying them a flat salary instead of a commission percentage per home transaction. In doing this Redfin is able to cap the amount the agent gets per sale, letting the buyer and seller of the home keep more money. The agents lose, the consumer wins.

Because of this setup Redfin has higher upfront overhead. They pay their agents regardless of whether those agents bring in any deals or not. The bet Redfin is making, (and the bet you’re making if you invest in Redfin) is:

The number of deals coming in will be enough to cover agent salaries.

That sounds obvious, but now think about the current situation: In March and April we had a shock to the real estate system where the shutdowns stopped virtually everything in its tracks.

That means all of a sudden Redfin was severely losing its bet. To compensate, it started furloughing and laying off its employees.

What happened next? Real Estate came roaring back.

That was the exact worst timing for Redfin because they needed all hands on deck to service the demand.

Remember, the way the bet works, if Redfin can do enough transactions to cover agent salaries, it wins. And every transaction after covering its agent’s salaries is profit. The way Redfin hits home runs is by achieving scale. The market we’ve been in the last couple of months is the ideal situation for Redfin to prove its value proposition EXCEPT for the fact that Redfin JUST laid off and furloughed employees in March, so they didn’t have enough people to meet the huge upswing in demand in May, June, July, and August.

The thing biting them in the butt right now is that their business model is not very flexible. They need to have the right amount of agents to meet the market demand. The less predictable the market demand, the more Redfin looks silly compared to normal brokerages.

That’s the trade off of being so purpose focused- Redfin is predicting a transition towards lower real estate transaction fees, and the steadier that transition, the better. They could be right, and yet if they aren’t nimble enough to meet demand where it’s at, then they will overpay employees when demand is low and under-deliver their service when demand is high.

If you’re rooting for Redfin, you want less volatility in the housing market, because the business model doesn’t react as fast to swift changes in demand as traditional brokerages.

To me, I think it’s a safe bet that what we saw in March was abnormal, and that going forward Redfin will continue to take market share because the housing market won’t continue to be so volatile. But now you know what you’re getting yourself into.

A bet on Redfin is a bet on calmer waters in the housing market.