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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A while back Joel Burslem — author of FutureOfRealEstateMarketing.com — joined Inman.

Today we hear that Rudy of Sellsius has joined Trulia.

Other (still unconfirmed) transitions we hear are in the works:

• Redfin buys Bloodhound Realty and its associated blog, and Greg Swann becomes Redfin’s Arizona broker-of-record.  Redfin CEO Kelman, distressed at Swann’s self-proclaimed disinterest in national parks, sends him off to Yosemite to distribute Redfin stickers, with strict instructions to send back Latin-only postcards.   Russell Shaw, sick of the traditional broker model, is seen handing out the Book of Kelman on street corners in Phoenix.
• Overwhelmed by her increased workload, Redfin media maven Cynthia Pang brings aboard uber-consultant Marc Davison — at Greg Swann’s recommendation.  Marc and Greg are spotted writing press releases in Haiku.
• Rudy’s long-time business partner Joe Ferrara joins Zillow as its “Chief Zestimate Accuracy And Opt-Out Evangelist.”
• Brad Inman, founder of Inman News, having successfully convinced the real estate industry to adopt electronic signatures, heads to the Middle East to replace Tony Blair as peace envoy.
• Athol Kay gets hired by Kodak.  His new job?  Do nothing, absolutely nothing.  In particular, PLEASE DON’T POST ALL THOSE BAD PICTURES!!! It makes our industry look bad.

• Marlow Harris, burnt out with real estate, moves to Memphis, TN, and becomes a Graceland docent.
  
  
• Daniel Rothamel moves to Masai Mara, Kenya and becomes a safari guide.  On weekends, he heads into Nairobi to coach and ref basketball games.
• Dustin Luther, missing the corporate life, moves back to Move.com.
• Brian Brady gets an emergency call from Washington.  “Bernanke quits.  We need you.  P.S. Leave the suspenders in San Diego.”

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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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As I previously reported, Foxton’s the now-defunct east coast discount shop, is, well, defunct.  They recently fired most of their staff and declared bankruptcy.  What to do with the thousands of listings they had, however?

RIS Media reports that a tranche of some 1400 of them have been taken over by another broker, Fillmore, for about $110,000, which puts a value of $78.57 per discount listing.  With most agents spending hundreds or thousands of dollars in acquisition costs per listing, this sounds like an absolute bargain.

However…these being discount listings, the math might be different.  For a full service listing netting, say, 2.5% on the listing side, I’d be willing to pay significantly more than $78.57.  I believe Foxton’s, however, only charged a few thousand dollars per listing, out of which they had to cover employee costs (their agents were largely salaried, not commissioned), office costs, and the nifty little cars each agent got.  This model only works well in volume, when the market is spinning along comfortably.  With the market slowdown, however, things didn’t go so well.  As Foxton’s VP of Sales Mark Horvat delicately puts it:

We regret to inform you that, due to the recent down turn in the residential real estate market, Foxtons has decided to conduct an orderly liquidation of its business.

If Foxton’s couldn’t make it happen with their fees, how will Fillmore manage it?  Only two ways to do so profitable that I can see:

1. Charge more.  This is a non-starter, however.  The listing agreement that Foxton’s clients signed specified a certain listing fee, and Fillmore would be contractually bound.  Mark Horvat again:With the exception of the identity of the listing broker, all of the terms of your listing agreement with Foxtons would remain the same.
2. Lower costs.  Fillmore doesn’t seem to be going down this road either.  It appears they’ll be launching new satellite offices, hiring some 40 top-performing Foxton’s agents, buying their agents laptops, renting them cars, and putting them through their “Fillmore University” training program.

The math just doesn’t make sense to me.  If Foxton’s couldn’t swing it financially, how is this not financial suicide for Fillmore to take over the listings at the same fee, with the same cost structure?  What am I missing?

Foxton’s did not, apparently, have any Boston coverage.  If it did, I find myself wondering if Redfin might have tried to purchase any of those listings.

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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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Exciting times indeed in real estate! Market woes, mortgage troubles, bankruptcies, lay-offs…

Adding to the bad news is that Foxtons, the UK-based discount real estate brokerage, is laying off 350 employees from its New York and New Jersey operations. Some have predicted that this down market will weed out the non-traditional players [see comments section], Redfin being the company most commonly named. Michael Wurzer, meanwhile, says his long-time prediction of declining agent numbers may finally be coming true.

Inman reports that Move.com, the 800-pound gorilla of the business, is being sued by Active Rain, the utterly addictive 50,000-strong online real estate community. It has been an open secret in the real estate world that Move.com was positively salivating over Active Rain’s strong viral network of real estate professionals, and that negotiations had broken off. Now the full story has come out. Active Rain’s side of the story is, essentially, that Move.com took a page out of Microsoft’s playbook of the 1990’s, before they got smacked down by some unfavorable court rulings: court a smaller company, find out everything you can about its business model, technology, and market…then break off the talks at the end and do it yourself. Move.com, meanwhile, says that nothing Active Rain showed them during negotiations was even remotely earth-shattering.

ActiveRain’s official statement to the ActiveRain community: (login required)

Members of the ActiveRain Real Estate Community,

Recently Inman News reported on a lawsuit brought by ActiveRain against Move, Inc. Of course reports of this nature raise a lot of questions, and it has always been a part of our culture to openly discuss things with our community. We would like to be able to discuss these issues more with you. However, since this is a matter of pending litigation, our counsel advises us not to comment.

Should you be interested in the positions of ActiveRain and Move, Inc. in this lawsuit, attached are ActiveRain’s Complaint and Move, Inc.’s Answer filed with the Court in this proceeding.

We thank you for your continued support and understanding.

ActiveRain members, by and large, appear to be supportive of the company, suspicious of Move.com’s intentions, but perhaps a bit concerned that ActiveRain would have considered consorting with Move.com in the first place. The delightful and ever-opinionated Laurie Manny says: [boldface mine]

Imitation is the most sincere form of flattery.

How did Realtor.com/Move.com expect to become successful without us, the membership? Realtor.com has been repelling Realtors with their high prices and lack of performance for well over a year now. Free blogs - for how long? They do not rank up on the engines now on their own, they need AR to do that. What are they offering the membership that we do not already have? Ok, so maybe in about 6 months we would all acheive similar rankings to what we already have?

I think you guys at AR are fantastic, but I have to ask. Why the hell did you jump into bed with such losers to start with? If they were going to pay it somebody else would have as well.

Live and learn.

ActiveRain complaint

Move.com response

Other commentary on the same story:

• Joel Burslem at FOREM speculates that some Active Rainers may not be happy to find out they`were about to consumed by the borg, and he goes on to remind readers that the content you contribute to online communities like Active Rain doesn’t necessarily belong to you.
• Douglas Heddings suggests that full-service agents will be partying late into the night at this news.
• Stefan Swanepoel weighs in.
• Brian Brady thinks they’ll settle for $8M to keep this thing from going to court and having a California jury hear stories about cigar-chomping good ol’ boys fleecing a trio of hard-working American entrepreneurs.
• The Libertarian Jesuit Bloodhound says Active Rain doesn’t have a case.  Move.com, a big, slow, and stoopid Realtor-teat-sucking monster if ever there was one, actually made a wise decision for once, and decided they’d be overpaying for what was essentially a commodity product.

Pictures courtesy of thisfabtrek.com, foxtons.com, gorillahub.com, move.com, and activerain.com

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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 <insert shock> 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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There, I knew I’d grab your attention with a headline like that!

Imagine you could wave a magic wand and, presto! our whole industry structure disappears and gets replaced instantaneously with whatever you decide.  What would the new real estate industry look like?

Would you want to recreate what we have now, with some 1.x  million independent contractors working under the casual-at-best supervision of brokers who then help themselves to a significant chunk of the commission pot?  Would you recreate an incentive system that encourages churn-and-burn of new agents?
Think about it: In order to be really successful in this business, you’ve got to be pretty handy in at least these completely different areas:

1. Attracting new customers
2. Managing client relations
3. Negotiating
4. Providing counsel
5. Managing transactions and work flow

Is it any wonder so many agents don’t make it through the first year?  You could be the world’s best haggler, able to sell ice cubes in winter to my Dutch kin at $50 a pop…but if you’re not also good at shaking new clients from the tree, you’ll never get a chance to demonstrate your negotiation prowess.  Or, you might be really skilled at building up a client base, but detail-oriented paperwork isn’t your thing, so your deals have a tendency to self-destruct.

Most well-run companies cater for people’s diverse skill sets by specializing.  Marketing and sales teams fish for new clients.  Account executives manage the client relationship.  When there are deals to be made, other folks step in.  A back-end team handles the paperwork.

As it turns out, this is pretty much how perennial bad boy Redfin seems to run its business.  The agents who show houses at $x/hr may not be the same as those who write up and negotiate the contract, and they’re certainly not the same folks who make their web site oh-so-web-2.0-sticky or write content for their blog.  And open houses?  Well, they sub that work out to the cheapest labor force imaginable:  their own clients!
Redfin may or may not succeed in the end.  If they do, a big part of their success will be the leveraging of their employees’ different skills to achieve cost savings…which they then, to the chagrin of their competitors, pass on to their clients.  If they don’t succeed, it will largely be because of the resistance of the Coldwell Bankers of the world to doing things any differently.

[Yikes, do I sound like a recovering management consultant, or what?]

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In a post aptly titled A Crazy Decision, Redfin’s blog announced yesterday that they’re temporarily turning away new listing clients.  Why?  It appears demand for their services has increased so much over the last few weeks — perhaps partly due to the glowing coverage 60 Minutes gave them — that they simply don’t have the bandwidth.

Gotta tell you — that’s a wonderful problem to have!
Pssssst to all you Bay Area folks affected by Redfin’s decision…give me a call. 

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