Seattle real estate giant Redfin announced that it will pay an estimated $135 million in cash and stock to purchase Bay Equity Home Loans, a Bay Area-based mortgage lender that is active in 42 states and employs 1,200 people.
The deal should provide a boost to Redfin’s lending business. Bay Equity closed $8.5 billion in loans last year and is nearly 10X the size of Redfin Mortgage. It has also generated positive net income each of the last three years.
Redfin will consolidate its Redfin Mortgage operations under Bay Equity, which will retain its name and continue working with other brokerages following the acquisition.
Redfin said it will reduce investment in lending software and also lay off 121 people as part of the transaction, or less than 2% of its overall workforce. Its mortgage business employed around 250 people as of Dec. 31.
Redfin will help place the workers in other roles at the company, or offer between 12 and 26 weeks of severance. Bay Equity will not lay off staff.
The purchase price represents a $72.5 million premium over Bay Equity’s estimated tangible book value as of Dec. 31.
“We view this deal positively as it will allow Redfin to accelerate its goal of attaching mortgage (and other ancillary real estate transaction services) onto the core brokerage business — a key part to any good bull thesis on RDFN,” Brad Erickson of RBC Capital Markets wrote in a report.
In a press release, Redfin CEO Glenn Kelman said the acquisition will help the company combine lending and brokerage services under one roof, and support the company’s long-term vision of letting “customers buy homes they couldn’t have gotten through a stand-alone broker or lender.”
Redfin launched Redfin Mortgage five years ago in an effort to service its customers from start to finish in the home-buying process. At the time, some real estate professionals raised concerns about a potential conflict of interest between the brokerage and mortgage sides of Redfin.
Various real estate companies have tried to bring multiple real estate services “under one roof,” including fellow Seattle giant Zillow Group.
Redfin Mortgage closed 24% more loans in the third quarter of 2021 compared to the year-ago period. But overall mortgage revenue fell 5% due to a decline in revenue per sold loan, Kelman said on the company’s Q3 earnings call.
Kelman said the percentage of Redfin homebuyers who choose a Redfin Mortgage is “still too low.”
“We expect to make changes to our loan-origination system in the first half of 2022 to support a wider range of loans,” he added. “With a complete product suite, and as allowed by the laws of different U.S. states, we can then launch incentives for brokerage sales that also involve mortgage and title services.”
Jason Bateman, the longtime leader of Redfin Mortgage, departed in August for a managing director role at Goldman Sachs. Kelman said in November that the company had made “great progress” in finding a replacement.
After a big spike in its stock price throughout 2020, Redfin’s shares fell nearly 60% in 2021. The stock was flat in after-hours trading.