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While finalizing this blog post on a potential error I found in Redfin’s “we’re great negotiators” calculations, Glenn Kelman of Redfin pinged me to let me know that indeed, the error existed, but only in one transaction. Gotta hand it to these folks: they may be rabblerousers in the real estate industry, but when they make a mistake, however minor, they’re quick to fess up to it. When I pointed out the below to Glenn a few days ago, I had no idea it would lead to numerous hours of poring over HUD-1’s to get to the bottom of it!

Redfin will shortly be posting a mea culpa about this mistake – which as it turns out is quite trivial.

Original article follows…
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Much ado has been made of Redfin’s recent claim that its buyer clients gained two-fold: First, from the ~2% refund they get back from the purchase and secondly from an apparent additional advantage of nearly 1% due to Redfin’s agents’ negotiating prowess.

The 2% refund is itself controversial, generating a lot of heat from the traditional industry; Alan Dalton himself has publicly stated that Redfin’s buyers are likely to lose a lot more than the 2% refund because they’re being served by, well, by inferior beings — “discount” agents.

The claim that Redfin is not only cheaper, but also better by nearly a full percent at negotiating — such that the total average advantage is on the order of 3% — brought the company even more flack. Odysseus the skeptical Jesuit didn’t buy it, TransparentRE weighed in, a heated discussion ensured at Rain City Guide, Dame Marlow Harris would have none of it…you get the picture.

While any of the explanations floating about that seek to debunk Redfin’s claim could be true, there is the uncomfortable reality that…the numbers might be true, that Redfin’s agents perhaps are indeed simply better negotiators.

My initial stab at the numbers, using one of the seven man-made wonders of the world, confirms Redfin’s results to two decimal places:

Of course, there is another possible explanation…that Redfin’s rocket scientists may (and I stress “may” because this is only a theory) have made an innocent error in methodology, which could perhaps best be described as double-counting.

Bear with me as we work through the numbers on a sample transaction. Let’s make it simple: list price of $1,000,000, purchase price of $1,000,000, and an overall commission of 6% divided equally between the listing broker and Redfin, with 2/3rds of Redfin’s side — ie $20,000 — going to the buyer, to be used at his discretion.

Let’s say the buyer decides to apply $15,000 of his rebate towards the purchase and take the other $5,000 as a refund check once the transaction closes.

The most common and tax-effective way of applying the $15,000 towards the purchase is to write up a simple addendum that reduces Redfin’s commission from $30,000 to $15,000 and then reduces the purchase price from $1,000,000 to $985,000. The seller and listing broker net out the original amount of money, the buyer gets $15,000 off the price, and everybody goes home happy.

The transaction closes and it goes on the MLS at a sale price of $985,000. Here’s the key: Redfin’s accounting method would tally this transaction as a 1.5% negotiating advantage for their agents, but the truth is that that 1.5% came out of the commission and had nothing to do with negotiation — good, bad, or otherwise.

But let’s give Redfin credit; after all, many agents with many companies often use part of their commission to sweeten the deal, and these sweeteners appear on their ledgers as “good negotiating” as much as they do on Redfin’s.

However…if I understand Redfin’s methodology…that same $15,000 of the rebate that morphed into a “negotiating advantage” was then also counted as part of the overall $20,000 rebate this client received.  Double counting.

What impact might this have on Redfin’s actual numbers?

Only a painstaking analysis of Redfin’s accounting records will untangle how much double-counting may have happened.

Tags: Alan Dalton, Glenn Kelman, Real estate, Redfin
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