Apart from both being in the real estate business, what could these two polar opposites — Glenn Kelman, Redfin CEO and industry maverick, and Russell Shaw, mega-producing Phoenix Realtor — have in common? On the surface — nothing, especially when you consider that Russell has been in the business for more years (29, I believe) than Glenn has months (about 13).
Here’s one thing they do have in common: they both aim to move a lot (and I mean a lot!) of real estate. Russell and his team currently sell about 400 homes per year but they’re aiming for 2000. The number of transactions Redfin has had is not public, but however many it is, they certainly also have ambitious expansion plans, including a future foray into Chicago, Boston, and D.C.
How do you do this many transactions? How do you scale any business, for that matter? It’s simple (but not easy): you find ways to outsource and you find ways to become more efficient. And here’s the other thing they have in common: they’ve both found ways to do these things…Russell primarily on the listing side, and Glenn primarily on the buying side.
Russell has apparently built his business the traditional way most large-scale brokers have, by leveraging the natural advantages of the listing agent in this business. You get a listing, put up a yard sign, toss it in the MLS, throw a couple ads in the paper, do an open house or two (or, more likely, get some other agent to cover for you)…and then have dozens of other area agents (your competitors) show the property to their clients and (hopefully) find a buyer for you. Sweet deal. Because of the way the real estate industry is structured, one listing agent can handle perhaps 10 or 12 listings at a time, and if you hire an excellent assistant that number can easily double.
You outsource much of the work to get a home sold to your competitors (for which you compensate them through the “co-broke”) and you increase efficiency by specializing within your team. Russell, for instance, appears to have 12 people on his team. Two of them are “listing specialists” — which I presume means their job is to go on as many listing presentations as humanly possible. They’re really good at it, and every listing they get, they probably hand it over to the “seller consultant” and “listings manager.”
Russell’s team also has three “buyer specialists.” Their job is (duh!) to service the buyers. But here’s the rub: achieving scale on the buy side is much more difficult. A really good full-time buyer’s agent, whose job is nothing but previewing homes and then showing them to the buyers, can perhaps handle 4-5 concurrent clients — and that’s a stretch.
Enter Glenn Kelman and Redfin. If listers can outsource a good portion of work to other agents, why can’t buyer agents also outsource? They can, and Redfin does — to its clients and to its competitors. The buyers themselves do much of the work that a traditional buyers’ agent would do — namely, keeping up with the MLS and viewing homes at open houses, in exchange for which they get compensated by getting a piece of the commission. The sellers’ agents, on the other hand are enlisted (often against their will) to show the properties when there isn’t an open house, in exchange for which their compensation is…absolutely nothing (except avoiding appearing on the “hall of shame.”) Now the buyers’ agent’s job is mostly at the back-end — consummating the transaction — and, voila! now you can scale the business. A Redfin buyers’ agent can probably handle as many concurrent clients as a smoothly running listing agent can: around 10 or 12.
Therein lies both the genius and the tension in Redfin’s business model. The genius is in recognizing that the Internet makes it possible for buyers to do a chunk of the work themselves, but the tension comes about when Redfin — without any compensation — outsources another chunk of work to its competitors.
The other problem is whether Redfin will ever achieve enough profitability to cover the costs of its smart programmers. We’d need more numbers to figure out exactly how many transactions Redfin will have to do in order to go cash-flow positive, but whatever that number is, it’s got to be pretty big.
Tags: Business of real estate, Glenn Kelman, Real estate, Redfin, Russell Shaw
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10 responses so far ↓
1 Russell Shaw // Feb 18, 2007 at 11:00 pm
Fantastic post! I am still laughing out loud. I never dreamed I would be officially recognized as being on the opposite side of the coin from Glenn. Nice job, Kevin!
2 Doug Quance // Feb 19, 2007 at 5:10 am
A big difference - to me, at least - it that Russell’s model has proven to work. Profitably.
Redfin has not calculated the backlash of when more listing agents get wise and reduce the co-broke offered in transactions where the listing agent showed the property.
After the second time I got burned showing clients of a similar business model - I have changed the language in my listings.
When the rest of the listing agents do the same - Redfin is toast.
3 Christian Sterner // Feb 19, 2007 at 8:00 am
Man…this is a forced, one word, comment that I absolutely have no control over: VIDEO! Both sides win if a solid piece of online video is attached to a listing.
4 Kevin Boer, Three Oceans Real Estate // Feb 19, 2007 at 10:58 am
Russell — glad you liked it!
Doug — Fair enough. But keep in mind that, by his own admission, when Russell had been in the business 13 months, his business wasn’t exactly in the black either.
Christian — Forget video for a listing…how about video for a listing contract? I imagine Doug Quance’s would say something like: “…oh, and by the way, if a Redfin client buys this property and I had to show it to them, the co-broke is only 1%! Take that!”
Then again Doug probably has nothing to worry about since Redfin’s model is unlikely to work in a relatively low-priced area like Atlanta.
5 John K // Feb 22, 2007 at 12:30 pm
I hate driving clients around to look at properties. (I hope none of them are reading this, sorry!). I realize that sounds odd, considering it’s always been one of the central parts of a real estate agent’s job, right?
But, it’s time consuming, and sometimes unpleasant. In Boston, we always show properties while accompanied by the listing agent. Yes. I realize now this isn’t the way it is in much of the country. Yes, we schedule appointments with the listing agent. Meaning when I get to a property with a client, we have to endure a twenty-minute presentation by the listing agent; we can’t just walk in the door, have the client say, “I hate it,” and walk out. We’re much more polite than that. We actually might end up spending MORE time in these properties, to make the listing agent feel better.
(I realize we could just be polite and say, “no thanks”, and walk out, but most of the time the buyer doesn’t do that.)
Scheduling appointments are just as difficult, for the reasons I mentioned above. We can’t just get a lockbox number and then show-up at a property within a certain timeframe; we have a ten-to-fifteen minute window to be there when the listing agent is there. Is this typical??? Scheduling a day with a client is just a mess.
I’m not whining, we should all be so lucky to have clients, right? All I’m doing is pointing out that, if Redfin is able to skip these two, very time-consuming steps, then it has cut out a lot of effort. And, since they only end up working with a client when he or she HAS MADE AN OFFER they aren’t dealing with the months and months of prep.
Of course, the trouble they will have is, what percentage of buyers want to do all the front-work by themselves. Also, will enough buyers know about Redfin and think of using them before entering into a buyers’ agent contract with someone else. And, can Redfin make a profit off just this sliver of business (what, 10-33% of a market?).
I think they can build economies of scale, and I think they can find plenty of buyers wishing to work with them.
The real estate agent who is attracted to the Redfin model may not be the entrepreneur-type, who likes the idea of going out and making as much money as they want (and be willing to accept that they might make very little). Some agents would prefer a steady salary; keep in mind, something like 70% of agents drop out during the first two years in the business. That’s because they don’t make any money and can’t sustain themselves.
Redfin says they only hire experienced agents; that’s a necessity for their PR - they don’t want to open themselves to criticisms that they have newbies who have no idea what they’re doing. I personally don’t think a person’s skill in writing up a contract, negotiating an offer, and assisting a buyer after P&S is something you need to learn over time - if you work in an office with people who have done it before, you’ll be fine.
Redfin won’t have trouble finding agents who want to work for them. However, I don’t know if I’d consider their employees “real estate agents”, in the traditional sense. To a certain extent, they are paper-pushers, quantity is job #1. That’s not a criticism, just an opinion. Part of the reason I like being an agent is the face-to-face with buyers, meeting new people, plus the opportunity to see some great architecture and design. Those things aren’t going to happen if I’m in an office, all day. (I won’t be sitting in Starbucks, like I am right now, that’s for sure.)
Another issue for Redfin is its website, which allows buyers to search for properties throughout cities and neighborhoods. This type of mashup is getting pretty common in the industry, so it’s not going to be what drives people to Redfin’s site. We have a pretty good MLS in Boston, plus several of my competitors have already built good user interfaces to the MLS which equal what Redfin has done. Redfin will end up having to compete on what it offers to buyers - rebates on purchases and ancillary services (links to preferred mortgage lenders, inspectors, attorneys, etc.).
I scoff when I read other agents saying, “Redfin can’t save you as much as a really good buyer’s agent.” Really. I must disagree. Does the average person think one agent can get you a better price over another agent? The buyer’s agent is talking to the listing agent. Who is the buyer’s agent going to persuade to take a lower price??? The seller has a price in mind, the buyer has a price in mind. Do you all negotiate more than I do, ’cause it’s always been pretty cut and dry to me. At the end of the day, you might cut $2-3,000 bucks off a property, but the 2.5% commission you were going to pay is going to kick back $10,000 into your pocket, if you’re a buyer.
Kevin, as you know (and as Redfin knows), I’m a big fan of their business model. I am not threatened by their arrival in Boston. It’s a good alternative to the full-service real estate business that I and my competitors have going.
I think a lot of the criticism they are getting is because of fear (obviously). It’s hard to find real, useful criticism from its critics, for this reason (I ran out of words to use).
6 Marlow Harris // Feb 22, 2007 at 4:40 pm
Kevin, in Washington State, for the entire year 2006, Redfin had 235 sales. The average sales price was about $475K.
http://360digest.com/2007/02/09/thank-you-mr-kelman/
7 Danilo Bogdanovic // Feb 22, 2007 at 5:57 pm
Being a Buyer Specialist, I deal primarily with buyers. I have never nor will ever ask a Listing Agent to show my buyers a listing/property. I understand that it is in the best interests of their client for the Listing Agent to show my clients the property in hopes of selling it to them. But that does NOT give me right to be a lazy bum and not earn my commission.
What RedFin is proposing is that Buyer Agents should give back some money because they don’t work as much, but it’s the Listing Agent who picks up the slack and does the work for the Buyer Agent. That is not only not fair to all parties involved, but it also brings up a very scary thing - agency relationship and the buyer getting screwed over.
How? Easily…the Listing Agent only represents the seller and can omit, fail to disclose (they don’t have to disclose anything in VA - it’s a Disclaimer state) and lead the buyer to believe things that are not true. If the Buyer’s Agent does not catch it or know about it, then the buyer gets screwed over (and since the Buyer’s Agent is making a much smaller commission, they’re probably working that much less as well). And the buyer may not realize how agency works and that the Listing Agent’s only fiduciary responsibility is to the seller, not they buyer whatsoever.
I would rather have less buyers and represent them the way they should be and need to be rather than dumping them on Listing Agents and having them screwed over. But that’s just me…
8 Kevin Boer, Realtor, 3 Oceans Real Estate // Feb 22, 2007 at 8:06 pm
Marlow — given you long they’ve been in business, that number is actually pretty impressive.
9 Kevin Boer, Realtor, 3 Oceans Real Estate // Feb 22, 2007 at 8:09 pm
John — There is indeed a certain amount of genius in their model: let the buyers do the bulk of the upfront work, the stuff an agent can’t scale well — especially in a market like yours where the buyer, the buyer’s agent, and the listing agent all need to coordinate to view a property.
And yes, their website and technology, while cool, is not what’s going to make or break them; it’s going to be their business model.
10 Kevin Boer, Realtor, 3 Oceans Real Estate // Feb 22, 2007 at 8:10 pm
Danilo, All fair points, except I don’t think it’s fair to say that the listing agent will always be the one to pick up the slack. In most cases and for most clients its going to be the client himself/herself who will do most of the upfront work.
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