With surprisingly little fanfare, Redfin, that pesky little Seattle brokerage the real estate industry loves to hate, announced yesterday their “Redfin Select” program, which looks suspiciously more and more like … a traditional brokerage offering.

Redfin’s initial business model, which made great sense in the VC’s conference rooms, was to outsource a big chunk of the buying process to its clients in exchange for a big chunk of the buy-side commissions.  For better or for worse, however, that model has continued to run dab-smack into the middle of the reality of real estate:  the listing agent, though representing the seller, is not usually responsible for showing the property to every interested buyer.  That service is usually provided by the agent representing the buyer.  The problem?  In order to make offers on a property, Redfin’s clients have to actually, well, see it.  If they don’t manage to hustle there during an open house, then they’re SOL — unless a Realtor-magic-key-toting Redfin agent comes by to open it.  And just like that, poof! goes half the business model.

Fast forward to today.  If you’re a Redfin client and you want a regular set of property showings, just give up a portion of the commission that was coming due to you and have Redfin show you around, just like a traditional broker would do.  Instead of getting 66% of the commission back, you get 50% back.

Possible explanations come from two different fronts:

First is my “Innovator’s Dilemma” proposition:   Redfin as a classic disruptive company, will first figure out how to be profitable serving the lower end of the market, the price-conscious clients that traditional brokers don’t mind losing.  Then it will move upmarket, charge more, and offer more service — ie. become more like a traditional brokerage, but with fatter margins.

At first glance, Redfin’s move seems to fit this pattern.  However. by Redfin’s own admission, they’re not growing as quickly as they would like, their business model is not as scalable as they had hoped, and they certainly are too young of a company to have taken significant market share yet.

So perhaps the better explanation comes from Mike Simonsen over at Altos Research.  Mike suggests it’s a simple pragmatic response to the harsh realities of the market place and their VC backers:  they need to become a $100M company as quickly as possible, and doing it at $10000 rather than $5000 per transaction will bring that about more quickly.

Other commentary:

• The Bloodhound notes that the rules around home showing seem strict and, well, a bit school-marm-ish.
• Greg Tracy suggests Redfin is becoming what they hate: a traditional brokerage.
• Jon Washburn notes the progression leading to this model and wonders if Redfin may end up becoming simply a lean-and-mean traditional brokerage.

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I’ve accused David “Hi this is David G from Zillow” Gibbons of having a technorati-enabled chip embedded in his ear that buzzes whenever anybody, anywhere on the Internet mentions his employer. Rumors have been circulating that Greg Swann may have a similar device, which sends out the bat-signal any time one of numerous companies — especially Redfin — is mentioned.

It appears the bat-signal just rang, this time initiated by an article in Forbes about Redfin. The title alone — Swimming With Sharks — immediately reveals the author’s slant, and Greg properly and roundly chews him out. The good guys — in this genre, it’s Redfin, always Redfin — “say” and “write” when communicating, and the bad guys — traditional brokers, in this case exemplified by Gary Bulanti of Alain Pinel Realtors, my ex-broker — “sniff,” as in:

“In our area the consumer is savvy enough to know that they want value and a high-quality agent,” sniffs Gary Bulanti, a Realtor with Alain Pinel Realtors in Menlo Park, Calif.

(I should note that Gary Bulanti does not sniff when he talks. Au contraire, his nasal passages are actually quite clear, thank you very much.)

So, yes, I will agree with Greg that the mainstream media has — once again — done unbiased journalism a dis-service.

But let’s overlook that for a moment — if we can — and think about this: Shouldn’t we be far more outraged at the dirty broker tricks being done against Redfin?

If the traditional industry believes Redfin’s days are numbered, why not let the market take its course? Why resort to middle school-style behavior such as:

• Not presenting offers
• Bad-mouthing Redfin
• Destroying Redfin signs
• Bribing lobbying state legislatures to outlaw rebates

If these things are actually going on — and I see no reason to believe Redfin CEO Glenn Kelman is “just making this stuff up” — we should be apoplectic! These incidents give the industry a worse name than it already has — a pretty difficult thing to do — and provide the media and Redfin with more ammo.

I personally have not seen first-hand these kinds of things directed at Redfin, but I have seen enough shenanigans in this business to have no doubt that they are actually occurring.

Not presenting offers? Come on! That is such a clear violation of ethics, fiduciary duty, common sense, fairness, sanity…and I can completely believe it happens.

Finally, Glenn, if you’re reading this, I hope you were misquoted when you said: [bold italics mine]

“Every week we have a selling agent tell one of our clients that their offer will go nowhere,” Kelman says. “They say, ‘We control the inventory, and you will never get this house.’”

A listing agent represents the seller. A selling agent represents the buyer. I know, it’s kind of silly, but that’s the way it is.

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Inman News today announced their list of 2007’s “Most Influential Bloggers.” (May soon  disappear behind a pay firewall)  Yours truly was honored and humbled to make the cut.

A number of equally and more well-deserving folks unfortunately didn’t make the cut, including most prominently — in my opinion — the incomparable Kris Berg, Brian “Puke All Over The Internet” Brady, and Athol “Sock Puppet” Kay.

A number of good friends and colleagues of mine made the list, including (warning to my civilian readers:  corny inside jokes galore ahead…)

• The Sellsius Twins
• My own twin Pat Kitano (inside joke)
• Greg “The Libertarian Jesuit Bloodhound” Swann
  
• Teresa “St.-Paul-Not-Minneapolis” Boardman
• “Ahdell” DellaLoggia
• Marlow “Elvis Has Not Left The Building” Harris
• Doug “Mini Cooper” Heddings
• Noah “Down mahket?  What down mahket?  I work Manhattan, baby” Rosenblatt
• Dustin “Can’t comment on Move.com vs. Active Rain” Luther
• Jonathan “Neo” Miller
• Joel “Brad Inman Jr.” Burslem
• Jim “The Tomato” Cronin
• Adam “Plugged-In” Koval
• David “Aagh, neh mahn!” Gibbons
• Glenn “Re.net Punching Bag” Kelman

The others I don’t know well enough to bestow a nickname, but here they are:

• Morgan Brown
• Todd Carpenter
• Calculated Risk
• Paul Jackson
• Jonathan Butler
• John Cook
• Peter Coy et. al
• Everybody’s second favorite sock puppet, Keith
• Patrick Killelea

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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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Redfin is the company everybody in the traditional real estate industry loves to hate. “They’ll go bankrupt just like all discount firms do when the market turns bad.” “Can you believe how they force listing agents to do all the work?” “Their agents don’t have a clue about the market!”

Deride Redfin if you want, be skeptical of its business model, take potshots at Glenn Kelman all you want…but whatever you do, don’t dismiss Redfin out of hand, at least not before hearing what this man has to say.

Clayton Christensen is a professor at Harvard Business School who has become well-known for his research into how technology disrupts industries. His theory, put forth in his books The Innovator’s Dilemma and The Innovator’s Solution posits that new entrants into an industry often take advantage of a disruptive technology to enter the marketplace at the lower end, catering to the low-margin customers that the established players aren’t that interested in serving. He gives examples in many industries, including financial services (Charles Schwab came into the brokerage business catering for the budget stock investor), steel manufacturing (mini-mill technology), and hard drives.

While Redfin is by no means the first entrant in the discount brokerage space, it is arguably the one that has generated the most attention. Redfin’s technology — its slick real estate search site, its semi-automated offer-writing system — may not appear too disruptive, but its technology and associated business model have struck a chord with a growing market segment that is disenchanted with the traditional real estate industry, and, not coincidentally, the industry has returned the favor. That market segment — initially diehard do-it-yourself’ers who just don’t see the value of schlepping around town with a real estate agent — is one the traditional industry isn’t too fond of catering for, on the assumption that if we let clients out on their own, they might discover it’s not that difficult to plan an afternoon’s home-shopping around an open house schedule, and then they might question our overall value. For the most part, the traditionalists aren’t too sad to see this type of client defect to Redfin. “They think they know everything, they don’t see the value of a Realtor, and then they want part of my commission!”

What is common about the customers of these new lower-end entrants in any industry is that they’re not interested in a gold-plated product or service — they want something “good enough” and cheap.

If the new entrant succeeds, it starts to take market share from the incumbents, who finally wake up — often too late — and discover that the “cheap, undesirable” part of the market is both larger and more lucrative than they previously thought.

Even more interesting is that as the new entrant grows, its clients’ needs often change over time — to the point where the new entrant now also provides more of a “traditional” experience. Think back to Charles Schwab: its early customers were drawn in by the prospect of significantly less expensive stock brokerage services. The Charles Schwab of today still provides that, but also provides a higher-touch, higher-cost service, akin to that of the Merrill Lynches.

Might this happen to Redfin? Nobody knows…but if they are successful in what they’re doing, don’t be surprised if five years from now Redfin offers not only a discount real estate experience, but also a full-service one.

How can established companies lessen the risk of a low-cost competitor coming in at the lower end, then working its up the value chain? One of Christensen’s suggestions is as audacious as it is — for most companies — implausible: spin off a separate lower-cost business unit to learn about the lower end of the market.

So, how about a “Coldwell Banker Lite” offering? Want a full-service, full-fee experience? You can use the Coldwell Banker you’ve always known. Thinking of using a discount service, but unsure about Redfin’s brand? Then you can go to the Coldwell Banker Lite offering. Either way, Coldwell Banker can serve you. From the company’s point of view, they’ve retained a client; sure, it’s a low-margin client — for now. But five years down the road, the customer’s good experience may lead him back to the Coldwell Banker name, and perhaps this time using the full-service, high-margin option.

Skeptical of Redfin? That’s fine — but just don’t write them off until you look at the uncanny resemblances between our industry today and the industries Christensen describes in his books.

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Fresh from a successful round of meetings with VC’s over on Sand Hill Road, Redfin just announced closing a successful fund-raising round of $12M, led by none other than Draper Fisher Jurvetson.

The coverage of this event has been predictable: Techcruch claims that Redfin’s goal is to “completely remove real estate agents and brokers from at least half of a home sale” (in which case they would immediately go bankrupt, since in most states you can only claim compensation for representing somebody in a real estate transaction if you’re a licensed agent.) The Bloodhound notes that this brings investors’ stake in the company to around $40,000 per transaction, while the indefatigable Kris Berg compares Glenn Kelman to those infamous Internet scammers (”419′ers” being the technical term) promising untold riches.

While both Kris and I have met Glenn Kelman, we clearly have different opinions about him. Say what you will about Redfin’s disruptions of our staid industry, but I’m thinking their business model may just have fins — er, legs — and that we castigate them to our own potential future peril. Besides, even if he tries, Glenn Kelman doesn’t have nearly the right accent to be a true 419′er. I, on the other hand…(ask me at Inman.)

But we digress. From an inside source at Redfin, I hear the team is busy divvying up the spoils as we speak.

1. Sick of their current digs, they’re about to make an offer — using Redfin direct — on this swank place.
2. Media & PR person Cynthia Pang’s is changing her title to “Lady Pang, Public Relations Mogul” and buying these guys.
3. Each Redfin’er is getting one of these. Oh, wait a minute — Redfin’s site doesn’t work with Safari. Scrap that idea.
4. Glenn is pursuing his love of Mustangs by getting one of these.
5. Newsflash: Offer on 1) above was rejected “out of hand” so now they’re hiring none other than the Grand Dame of Seattle real estate to represent them. Rumor has it she’s agreed to refund Redfin $25 of her commission.
6. They’re making 1.3M DVD copies of this show and have asked these guys for their mailing list.

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Industry maverick Redfin today launched an initiative aimed at defining and protecting real estate consumers’ rights. (See Inman’s coverage here, unfortunately behind a subscription wall.) CEO Glenn Kelman gave myself and some others a preview of it yesterday and asked if we would be willing to put our name down in support of it. Knowing full well it could draw the ire of my fellow agents and re.net writers, I decided to do so.

Why did I do so?

Not because I am uncritically accepting of everything Redfin foes; quite the contrary, I have called them out on blurring the distinction between correlation and causation (see my articles Redfin Numbers Food Fight and Agents Who Take More Pictures are Better Negotiators), I have criticized their advertising as needless stick-it-in-the-eye tactics, and I have criticized Glenn for making reckless statements to the media that do nothing to endear him to the real estate community.

Not because I think Redfin’s business model will revolutionize the industry and change the way things are done forever. Quite the contrary, I remain skeptical that reimbursing 2/3rds of the commission on the revenue side, while spending heaps of money on the technology side, is a long-term recipe for success.

Why then am I supporting this initiative? Simply because I like the idea of somebody shaking up this industry and standing up for the consumer, and if that “somebody” happens to be a competitor, so be it. I have never doubted Glenn’s commitment to being firmly on the consumer’s side, and I have no problem with his company making money from it. I don’t even have a problem with Redfin getting positive publicity from it because I know that’s not the primary reason they’re launching this initiative.

As this conversation continues — which will no doubt become quite contentious, as befits many Redfin initiatives — we’ll get into the meat and potatoes of the Bill of Rights itself. I’m not in unanimous consent on all the issues — for instance, I think there are situations in which dual agency is not only needed, but is best for both clients — but overall I like what I see and I’m happy putting my name behind it.

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In a stunning move announced just hours ago, Seattle-based real estate startup Redfin.com announced it has purchased online real estate giant Move.com. With full details still to be announced, it appears that Redfin CEO Glenn Kelman dug deep into his warchest — and possibly tapped his Venture Capital investors to join in — and made a strategic acquisition.

“This acquisition just made darn good sense,” Kelman is quoted as saying. “Our main costs have been technology, in particular integrating our platform with local data feeds in our key markets. Since Move.com already has those data feeds in place on its own site, this reduces the costs of entering any new markets dramatically.”

Move.com’s CEO Alan Dalton, feisty as always, apparently vigorously fought against the deal over the last couple of days that negotiations were taking place. After Kelman sweet-talked the Move.com board into voting in favor of the takeover — a vote which is understood to have been nearly unanimous — Dalton reluctantly capitulated. “I wasn’t in favor of the deal at first,” he admitted in the joint press conference, “but in the end, the offer was just too good to turn down. Besides, we’re kind of sick of this whole online real estate thing anyways, and by turning the keys over to Redfin — a good and honorable bunch of folks, who have shown they are committed to the well-being of Realtors everywhere — we can get rid of what has been a huge personal headache for me.”

While the deal still has to be approved by Move.com’s shareholders, approval is all but guaranteed, as the offer was apparently several dollars per share higher than Friday’s closing price.

Much of the negotiation centered around what the name of the new company would be. Kelman: “We considered RedfinMove.com and MoveRedfin.com, but nobody liked how those names sounded. When somebody suggested RedfinMakeMeMove.com, almost as a joke, we all liked it. We figured we could capitalize on the buzz Zillow has been creating with its MakeMeMove concept.”

Questions about the deal have flying around the re.net all day. Rudy and Joe of Sellsius, a leading real estate blog, were skeptical about the prospect of Dalton and Kelman working closely together. “They’re both strong personalities, and we saw some sparks flying in their last encounter at Inman.”

“It’s all about transparency,” says Pat Kitano of TransparentRe.com. “Move.com has been translucent, perhaps even opaque, in its dealings. Shining the RE.net light on the company will definitely make it more transparent.”

Teresa Boardman of StPaul (Not Minneapolis) RealEstateBlog was also succinct. “Redfin? You’ve got to be kidding. We’re in flyover country here, with real estate prices stuck in the five digit range. Redfin doesn’t know we exist.”

Asked about the prospect of working together, Dalton was caught rolling his eyes before responding amicably, “I have no problem with Glenn. He’s an honorable man. A decent and honorable man. I look forward to working together.”

Kelman, the glow of victory all around him, is rumored to have muttered under his breath, “This’ll teach that old dude to respect me some more” before making a more conciliatory public statement, “I know Alan and I have had our differences. But at the end of the day, it’s all about helping the consumer, which this deal will definitely do.”

Dustin Luther, uber-blogger of RainCityGuide.com and also a Move.com employee, confirmed speculation about his role in the new company. “It’s like pulling teeth getting Realtors to blog on Move.com. Redfin’s idea of cutting out Realtor bloggers and replacing them with paid civilians is sheer genius. I look forward to taking over and re-branding Redfin’s Sweet Digs blogging series.”

Asked to comment on the rumor that any agent wanting an enhanced listing on the new site would have to first contribute 20 quality blog posts, Luther was non-commital.

The final piece of still unresolved negotiation is where the new company’s headquarters will be. With Redfin currently located in Seattle, and with Move.com’s headquarters in LA suburb Westlake Village, it is rumored that Bay Area realtor Kevin Boer has suggested splitting the difference and moving to the Bay Area. “Heck, I’ll find them a good building. I’ll even rebate them 2/3rd’s of the commission!”

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Brought to you by the 2007 re.net April Fool’s commission.

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The Seattle guys are on a roll…a post in today’s Redfin blog alerted me to today’s San Francisco Chronicle, which has a feature article on Redfin and Glenn Kelman.

While much of it is stuff we’ve all heard before — Glenn didn’t set out to become an industry maverick, the Redfin model isn’t new, blah blah blah — two specific items stood out for me.

First, it appears Redfin agents are paid “$60,000 or more [emphasis mine] based on their performance, which is tied to customer service rather than the number of sales completed.” For Rosemary Vo and the other agents, I can only hope that the “or more” bit is “a lot more.” I’m assuming this means a base salary of $60,000 a year, plus performance-based bonuses. If these bonuses equal a full 100%, that would mean a total compensation package of $120,000 — not enough to live a comfortable middle class life in the Bay Area, but certainly more than most agents net after paying their broker cut and other expenses.

[3/20 update:  Just received an anonymous email tip that my estimates for Redfin agent pay are waaaaay off.  My source says the base is $50K and the bonus is $20K.  Not knowing who this person is, or their affiliation -- if any -- with Redfin, I can't vouch for the accuracy of these numbers.  Anybody else have an idea?]

Secondly:

At the same time, his company also must play by the industry’s rules or risk losing access to the vital database of home listings that is the heart of Redfin’s service.

“It’s our third rail,” Kelman said. “We have no backup. If we lose access to the feed, game over.”

Many of us agree that the protectionist rules of most MLS’s are antiquated, but breaking these rules is indeed playing with fire. I personally crossed the line once while conducting a several-month-long experiment with Google Base, but when I got caught, I got caught good. Ouch.

Redfin was displaying information on sold content well before our local MLS changed the rules and made that legal, and it’s still against the MLS rules to display the days on market of a property — which is exactly what Redfin does. Well, not exactly…technically what Redfin displays is something like “Days on Site” — ie the number of days which a property has been displayed on the Redfin site. And hey, if that number by complete coincidence happens to be the same as the days on market number 99.9% of the time, who’s complaining?
Stupid rules lead to creative interpretation.

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—- STOP PRESS —-
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…
——–

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.

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