Entries Tagged as 'Alternative business models'
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.
Tags:
Alternative business models,
Clayton Christensen,
Coldwell Banker,
Glenn Kelman,
Redfin,
The Innovator's Dilemma,
The Innovator's Solution
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Tags: Alternative business models · Clayton Christensen · Coldwell Banker · Glenn Kelman · Redfin · The Innovator's Dilemma · The Innovator's Solution
With starter homes in some parts of the Bay Area over $1M, even well-educated high-earning, dual-income couples are having a hard time getting in, especially with interest rates creeping up.
Enter a long-existing but obscure concept called “equity sharing” and a new online service called — appropriately enough — HomeEquityShare.com. The idea is simple: match prospective priced-out and/or risk-adverse home buyers with real estate investors who don’t want the pain of landlordship. The home buyer and the investor together come up with an appropriate down payment, sign an ownership agreement, and buy a suitable property. The investor gets the best of all possible tenants: one who treats the home as if it were his own — which of course it largely is.
At the end of a specified time period, the home owner buys out the investor, or they sell the property and split the money.
The devil, as always, is in the details. The site explains some of the basics of how these agreements are structured, who pays what, how the taxes work, and so forth. The “Chief Real Estate Officer” of the company is Marilyn Sullivan, a Santa Barbara-based real estate attorney with two decades and 3000 transactions’ worth of equity sharing experience.
The site includes a calculator to estimate the co-ownership structure of the deal.
My thoughts? I think it’s a brilliant idea — partly because it’s something a friend of mine and I toyed with already several years ago but simply never executed on. Many local couples with $300K plus year combined salaries are simply being priced out of areas like Palo Alto, and this makes it possible for them to get in the market. Many investors are wary of getting into consistently negative cash flow real estate investments.
The major red flag I see is one of branding: this looks and feels very much like a tenancy-in-common arrangement. (In fact, according to Marilyn Sullivan’s site, it is tenancy-in-common.) When I hear that phrase, warning bells of real estate deals gone awry in the People’s Republics of San Francisco, Oakland, and Berkeley start ring. Due to ownership laws in those cities, condo-type ownership is difficult for certain older buildings, and so people resort to tenancy-in-common arrangements, which are more difficult to structure, more difficult to get loans for, and greatly dependent on good cooperation amongst the co-tenants.
Still, I’ll reserve judgement about the efficacy of this kind of ownership. If Marilyn has done several thousand of these deals, I’m sure the agreement itself is pretty solid and caters for all sorts of thing that could go wrong.
Time to go register to join their network and learn more.
Tags:
Alternative business models,
Co-ownership,
Consumer,
Equity Sharing,
HomeEquityShare.com,
Industry,
Real estate investing,
Tenancy-in-common
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Tags: Alternative business models · Co-ownership · Consumer · Equity Sharing · HomeEquityShare.com · Industry · Real estate investing · Tenancy-in-common
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.
Tags:
Alternative business models,
Consumer,
Glenn Kelman,
Industry,
Real estate,
Redfin
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Tags: Alternative business models · Consumer · Glenn Kelman · Industry · Real estate · Redfin
March 18th, 2007 · 1 Comment
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.
Tags:
Alternative business models,
Glenn Kelman,
Industry,
Real estate,
Redfin,
San Francisco Chronicle
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Tags: Alternative business models · Glenn Kelman · Industry · Real estate · Redfin · San Francisco Chronicle
October 9th, 2006 · 1 Comment
Weighing in at an impressive 77 pages and 394 footnotes, Mark S. Nadel’s recent tome on real estate commissions is not for the faint of heart. Since I’m skeptical about anything written about real estate by the Freakonomics economists I decided to ignore their advice and read Nadel’s piece about alternative business models (ABM’s) in real estate (RE) anyway.
I often find it best to use a grain of salt when digesting content from any potentially biased source — be it the conservative American Enterprise Institute-Brookings Joint Center (which hosts, and presumably sponsors, Nadel’s research) or the liberal Center for American Progress.
While Nadel is quite critical of NAR itself, he has a refreshing absence of the extreme anti-Realtor vitriol so common in writings of this type. His proposed solution to the problems he sees with today’s real estate industry is not, as one might expect of a conservative commentator, simply “let the market take care of it.” On the other hand, he does not propose, say, nationalizing the industry.
In all, it’s a good read when you’ve got some time on your hands. Starting here, I’ll post some thoughts on what he has to say.
Nadel’s hypothesis is pretty straightforward:
The traditional, straight percentage-of-sale residential real estate brokerage commission does not serve the interests of either home buyers or sellers.
His solution leads me to suspect he’s been reading Greg Swann’s blog:
The foundation of a new fee structure should have buyer’s brokers setting their own fees or negotiating with buyers, not relying on standard, default commissions set by sellers’ brokers in the MLS.
More thoughts later…
Tags:
Alternative business models,
Disintermediation,
For sellers,
Freakonomics,
Mark Nadel,
Real estate,
Real-estate-commissions
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Tags: Alternative business models · Commissions · Disintermediation · For sellers · Freakonomics · Mark Nadel · Real estate
