Today’s New York Times has a provocative article featuring Redfin, the Seattle-based broker with an innovative web site and business model. The thrust of the article is captured well by its headline: “The Last Stand of the 6-Percenters?”
Does Redfin’s entry into the market indeed spell the end of the traditional compensation model, in which the seller pays a commission — fully negotiable and often around 6 percent — which then gets split — often 50/50 — between the seller’s agent and the agent who brings the ultimate buyer? Redfin’s approach is quite different: in exchange for doing a lot of the work involved in a real estate transaction yourself, you pay significantly less.
Judging by the paranoid, almost apoplectic, reaction of the traditional real estate industry to Redfin and other “discount brokerages,” you would think armageddon is just around the corner. I beg to differ. While Redfin et. al will certainly help change the commission structure, I don’t think they will end it. Rather, I think we’ll see a split in the market, with some firms, like Redfin, concentrating on budget-minded, do-it-mostly-yourself clients, and other firms continuing to work with those who want the traditional “full-service” treatment.
One size does not fit all, and kudos to Redfin for recognizing that as a business opportunity. Perhaps there’s an analogy between real estate and hair salons. Some people want the $45 “full service” haircut, which is an hour-long ritual that includes a shampoo, a soothing scalp massage, a high-quality haircut, a comfortable chair, stylish surroundings, and maybe even a glass of wine.
Others, however, prefer the $7 “discount” experience: it takes only 10 minutes, the chair’s not that comfortable, the ambiance isn’t much to brag about, and you’d better have done part of the work –shampooing your hair — ahead of time. They’re both haircuts, but they’re distinctly different experiences, designed for distinctly different consumers. Likewise, Redfin’s product and the traditional broker’s product are both “real estate services,” but they’re distinctly different experiences, designed for distinctly different consumers. I’ll have lots more to say about alternative real estate business models in other posts, but for now I’ll close with a few other comments on the article…
- It’s a shame, though perhaps understandable, that technology-driven innovation in real estate is largely coming from outside the real estate industry: not only Redfin, but also Zillow, Trulia, Google (e.g. Google Base), and Yahoo (now allied with Prudential and Zillow), and smaller players like Altos Research (which provides market analysis).
- The reluctance of listing agents to show properties to buyers being represented by Redfin is not necessarily “blacklisting.” Part of the duties of a traditional buyer’s agent — for which he/she is compensated 3% — is to show properties, often literally dozens of properties, to clients. Though it’s understandable that Redfin, at $2000 per transaction, simply can’t do that for its buyers, it’s also understandable that the seller’s agent would be reluctant to essentially do somebody else’s job, for no additional compensation.
- While Redfin’s search technology is incredibly Web 2.0-cool, I have to wonder if it’s defensible. Movoto created quite the buzz when they launched their also-cool Web site, but now that Redfin is also operating in the Bay Area, Movoto now has only the second-coolest site in town. If another startup with $1 million in funding comes along — or, for that matter, a tech-savvy realtor figures out a neat Google Earth mashup — maybe Redfin will also drop to second place. Ultimately, it has to be their business model, not their technology, that will determine Redfin’s fate.
- Finally, an admittedly nit-picky point on the article’s use of the phrase “selling agent.” In the industry, the person representing the seller is most commonly referred to as the “listing agent.” The buyer’s representative is, oddly and confusingly enough, most commonly referred to as the “selling agent.” In a few instances, the article incorrectly referred to the seller’s representative as the “selling agent.”
Tags: Real estate
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3 responses so far ↓
1 Linda // May 3, 2007 at 3:59 pm
I’m not in the real estate business. Just a San Francisco homeowner and mother of 2 looking to move down the peninsula. My husband and I are considering using Redfin. We have been using the online MLS, newspapers and realtors’ websites, and have gone to dozens of open houses without an agent for almost 4 months. It’s pretty simple to print out listings, research them on Zillow, and then use Google maps on our cell phones to find the houses. Driving around all weekend looking for the right place can be tiring and frustrating, but our experience without a realtor hasn’t been any more difficult than our experience with a realtor when we did this five years ago in San Francisco. In fact, since we have to drive around with our two young children, there isn’t any room for a realtor in our car. When we get to each house, we know what we like and what we don’t like, and don’t really need any help.
We will likely use a traditional broker to sell our current home because we need someone to do most of the marketing, staging, inspections coordination and paperwork that we don’t have time for, but we feel that we really don’t need a full service broker to buy a house. That’s why we are considering Redfin. I’m glad that a few traditional agents such as yourself understand this, but I am finding out that some agents do not. I’ve mentioned that we might use Redfin to only five agents I have met at open houses on the peninsula. Two of the agents didn’t know anything about Redfin, but three of them advised us strongly not to use Redfin. They told us that if they received multiple offers, they would discourage their clients from accepting a Redfin offer because discount agents often don’t know what they’re doing. One of these listing agents even told me that she thinks Redfin agents don’t know the comps very well and are likely to push buyers to bid too high.
I am not too concerned about bidding too high, because I think my husband and I now have enough info about comps on the Peninsula to come up with reasonable bids. However, I think it’s it really unethical for listing agents to steer their clients away from Redfin buyers. I just want to be able to negotiate fairly, regardless of who my agent is. Are there any listing agents out there who can comment on this dilemma? Do you really have a bias against Redfin buyers?
2 Kevin Boer, Realtor, 3 Oceans Real Estate // May 3, 2007 at 4:37 pm
Linda, thanks for dropping by and for your insightful comments on the Redfin model. Redfin isn’t for everybody, but you seem like a good candidate: a person who’s willing and able to do most of the up-front work yourself, then hand over the deal-making part of it to a professional.
Redfin’s model certainly isn’t new, but they have managed to get in the spotlight much more than their predecessors.
Our industry tends to feel skeptical — even threatened — by innovation, which is what accounts for much of the tragic hostility towards Redfin.
I will say this — when hosting open houses, many of the Redfin folks who come through tend to be bargain-seekers (sample quote: “How can I get this property for $100K under this list price?” What I wanted to respond, but didn’t: “Simple. Build a time machine and buy this home 6 weeks ago.”)
In the market we have in the Peninsula right now, bargain seekers are nearly always going to be outbid. Most properties are selling quickly and above list price.
If you’re on top of the current market situation (which involves more than looking at Zillow, since Zillow’s comps are usually at least a month old, which is not adequate in a quickly-rising market) there’s no reason why a Redfin client couldn’t win a bid.
The onus, however, will be on the Redfin agent making the offer presentation to prove that he/she can perform well since — again, tragically and unfairly — the traditional industry assumes that anybody from outside the traditional industry is incompetent.
Best of luck, and drop by again sometime to keep us posted on your house-hunting adventures!
3 Cynthia Pang // May 7, 2007 at 10:33 am
Linda, (In full disclosure, I work for Redfin.)
It sounds like Redfin is the perfect real estate brokerage for your family. It’s unfortunate you have run across agents whom don’t understand the benefits of using Redfin, and would consider not accepting a Redfin offer. Isn’t it their job to sell the home? I wonder if their clients are aware they are turning down a potentially better offer?
Our agents definitely know what they are doing. They are very experienced in helping people like your family buy and sell homes. We have local SF Bay Area agents and every one has completed more than 20 transactions - most have more under their belts. Our agents aren’t paid on commission so they have no reason to drive up the price. They want to get the best deal for you. We did a study in Washington state that shows our agents negotiate better than traditional real estate agents, saving buyers almost an additional 1%. You can find the report here ( (Kevin even validated our numbers).
To add to your comp arsenal, if you haven’t already, you can perform a simple comp using Redfin (sorry for all the links, but here are instructions for how to do it.)
Also, it sounds like you know that Redfin sells homes too. However, I wanted to make sure you knew what services are included in the low, flat-fee: we list your home in the MLS, provide yard signs and a lockbox as well as some online marketing. This is in addition to everything from offer to close, which includes negotiations, paperwork and making sure all the things such as inspections get done.
If you have any questions about Redfin, please contact Rosemary Vo, Redfin’s Bay Area manager: , x 520.
I hope this helps and good luck on your home search.
Regards,
Cynthia Pang
Redfin
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