Tipped off by another insightful Greg Swann piece (Greg — do you ever sleep?) I just read through Glenn Kelman’s fascinating soul-baring finances-revealing post over on Guy Kawasaki’s blog. As a serial entrepreneur — and quite a successful one at that — Glenn has certainly done more than his fair share of financial modeling, and his post is rich in advice for the prospective entrepreneur.
What is particularly fascinating is how Redfin’s financial modeling is thoroughly and utterly unlike that of a traditional broker. That makes sense, of course, since Redfin is, well, not a traditional broker. In particular, unlike traditional brokers, Redfin makes its money through the act of – wait for it — brokerage — that is, representing buyers and sellers of homes.
Traditional brokerages — Coldwell Banker, Prudential, ReMax, Keller Williams, Alain Pinel — on the other hand, most emphatically do not make money through brokerage activities — they leave that work to their agent work force, usually a collection of independent contractors. Traditional brokerages, you see, make their money through landlording.
They provide agents with office space, training, mentoring, branding, open house opportunities, telephone lines, etc. and then charge these agents twofold: first, a portion of their commissions (starting at 50% or more for new agents, going down to perhaps 5% or 10% for the top agents, averaging perhaps around 25%) and secondly, a rather long laundry list of fees, including tech fees, desk fees, legal fees, and a myriad of others.
Much of what remains in the agent’s pocket after the broker’s share is divvied up among countless vendors, including the local MLS, newspapers, cell phone carriers, web site vendors, and Lexus dealers.
Here’s a picture of the money trail:
…and here’s one of them new-fangled Sketchcasts…
Further commentary from others:
- Ardell summarizes her take on the article: Sounds like the practical people are the ones asking for money, and the impractical ones are the people giving the money.
- Joel wonders if the downturn in the market will do a Foxton’s to Redfin.
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Tags: Alain Pinel, Coldwell Banker, Glenn Kelman, Industry, Keller Williams, Redfin, ReMaxPossibly related posts
8 responses so far ↓
1 Agent Scoreboard // Oct 1, 2007 at 10:51 pm
kevin,
good sketch…
what happens to a the fin when their competition starts to lower the co-broke? Can’t the traditional broker go to the virtual office /hoteling model and lower fixed costs? Its suprising but brand is still a big pull for consumers. It seems easier for the big boys to scale down their expense model faster than others can capture market share.
I think the industry is all about risk mitigation, I’m not sure the set fee model will take off until consumer begin to assume some of the risk in the transaction, which RF is doing well in WA, but is barred from doing in CA.
2 Phil Hoover // Oct 2, 2007 at 5:55 am
Then there are the OTHER broker scams like collecting leads on the company’s website and distributing them to the agents on the lowest commission splits ~ to maximize the company dollar.
Or, working for a selling broker who skims the best leads off the top before doling them out to the agents.
Been there; experienced that
3 Kevin Boer, Realtor, Alain Pinel Realtors, // Oct 2, 2007 at 7:43 am
Agent Scoreboard — I can’t see the Coldwell Bankers of the world abandoning their plush digs in every downtown area in favor of a lower cost model. Brand and image are still too much a part of the game. It seems many consumers still want to see that there’s a real company behind the transaction, to give them comfort in case anything goes wrong. It’s a bit like banking in that way — most consumers like the idea of walking into a big plush building where they can deposit their money.
Phil — I hear you! Here’s my favorite: Lead comes in on the company web site and gets sent out. Agent who closes the deal owes a) a 25% referral fee to the company’s “Internet Response Team” and b) a further 25% on the remaining 75%, as part of his/her standard split.
4 Agent Scoreboard // Oct 2, 2007 at 8:05 am
Banks have steadily been shrinking the sizes of their branches and BofA’s stated profit growth goal is to open “more” and “smaller” branches that can reach customers where they are. I think big real estate could take a page out of that play book. Your local C21 at a small grocery store outlet. Coldwell banker has a very successful hoteling operation here in Manhattan Beach that occupies about 1/8th the floor space a traditional operation does with about 90% the revenue. I don’t think they’ll close the stores down but they can run them better.
5 Kevin Boer, Realtor, Alain Pinel Realtors, // Oct 2, 2007 at 10:20 am
Agent Scoreboard — Good point. Plus, agents in grocery stores already have name recognition from sponsoring grocery carts!
6 Redfin The Transparent Real Estate Brokerage at The XBroker // Oct 2, 2007 at 4:33 pm
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