Why It Matters that Redfin & Compass are Firing
By: Charles Sells
Mid-June, two major real estate companies announced massive layoffs. Redfin announced it would cut 8 percent of its staff. Compass followed, letting 10 percent of all its workers go. Both companies insisted they were not in financial trouble but, instead, that the natural course of the housing cool-down had caused a decline in the need for support staff and some agents.
“With May demand 17 percent below expectations, we don’t have enough work for our agents and support staff,” a Redfin press release proclaimed. That release also announced the final tally of layoffs: 470. Compass made a similar statement with a similar metric, messaging that 450 workers could expect to be laid off in the weeks following.
Compass and Redfin are not alone in the real estate industry right now; they are just the latest, biggest names. In May, Wells Fargo, Rocket, and Better.com all offered buyouts to large numbers of employees and warned that as much as half of their lending-related workforce might be let go in 2022. Some lenders are even considering “selling themselves,” according to the Wall Street Journal, in an effort to survive a sharp decline in refinancing activity as interest rates rise.
Steve Stein, a former executive at Stearns Lending and founder of a recently launched advisory firm that hopes to help lenders stay afloat during the downturn, explained, “Many lenders are losing money and have the prospect of losing money for the foreseeable future.” He added, “Partnering up [or selling out to a competitor] could be a good strategic alternative.”
Stein also noted that lenders are starting to sell off their assets, including mortgage notes. This represents an exciting opportunity for real estate investors, as does the tightening lending market. In recent years, leverage has been so easily obtainable that many creative financing strategies have gone largely unused simply because investors could not appeal to borrowers and buyers by offering private financing, seller financing, lease-options, or subject-to purchases. As lending tightens and interest rates rise, investors will once again be able to negotiate more favorable terms and situations for both themselves and buyers and renters if they are open to creative financing alternatives.
It is worth noting that this is not the first time Redfin has laid off hundreds of employees. In fact, early in the pandemic, the company cut 40 percent of its agents and staff before going on a hiring spree that CEO Glen Kelman described as “requiring berserk levels of recruiting, training, and licensing.” He emphasized the layoffs were a result of the housing market, not failure on the part of any employees.
For investors, the best bet will remain to work with boutique investment firms instead of large behemoth companies simply because the level of turnover in the firms is likely to be less than the bigger institutions. At companies like Platinum Investment Properties (PIP) Group, we have expanded with the housing economy but in a sustainable way that has prepared our clients and our own portfolio for any volatility in the future.