SubscribeIf You Were Designing The Real Estate Industry From Scratch, Would It Look More Like Coldwell Banker Or Redfin?
June 26, 2007
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:
- Attracting new customers
- Managing client relations
- Negotiating
- Providing counsel
- 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?]
Tags: Coldwell Banker, Consumer, Real estate, Redfin
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14 Responses to “If You Were Designing The Real Estate Industry From Scratch, Would It Look More Like Coldwell Banker Or Redfin?”
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Contributors
Broker/Owner
3 Oceans Real Estate
Menlo Park, CA
(DRE 01404898)
Realtor
Keller Williams
Palo Alto, CA
(DRE 01708130)
Mortgage Broker
Equitas Capital
San Jose, CA
(DRE 01730869)
Stager
Staged4More
Burlingame, CA
Realtor
Keller Williams
San Jose, CA
(DRE 01385188)
Attorney
RHRC
San Jose, CA
Mortgage Banker
Absolute Mortgage
Palo Alto, CA
(DRE 01361721)
Kevin -
You make an interesting observation about the benefits of division of labor, and applying them to the practice of real estate. Redfin seems to up against a couple of barriers that may limit them in Silicon Valley:
1) Large investment, small revenue - As noted in a comment to your previous post on Redfin (https://3oceansrealestate.com/blog/and-redfin-wonders-why-some-traditional-real-estate-agents-are-um-hostile.html), Redfin is spending a lot on technology and marketing, while rebating the bulk of the brokerage fees it receives from the listing broker back to the consumer. Sounds like the business model that made Pets.com the poster child of the dot-bomb economy.
2) As provocatively noted in the book Freakonomics, real estate agents ARE like the mafia. Listing agents give preferable treatment to certain agents and companies. Just look at how many listings are sold by an agent from the same brokerage.
3) I think this is key. Redfin looks at real estate buyers as consumers. Other brokerages look at them as clients (so does the Department of Real Estate). If you read the sale contracts (not everyone does), agents have a fiduciary responsibility to those they represent and are to act accordingly. My understanding is that Redfin requires Buyers to complete their own contracts, which misses out on that fiduciary responsibility.
Anecdotally, I can tell you that the buyers of my recent listing in Redwood City had gone 0 for 2 making offers on other properties using Redfin, and were more than happy to work with the Keller Williams agent they met at the open house because she got them the house. She didn’t refund them a nickel of her commission, but she did a lot of work on their behalf and did buy them coffee.
Homes are expensive, complex purchases, so real estate may not be something that lends itself to an online purchase process. Of course, we said that about cars a few years ago too . . .
Interesting points, Chris, well put.
A few thoughts…
Having thought about it more, the division of labor idea actually does exist in traditional real estate, but really only on the mega-agent teams, who tend to have “listing specialists” and “buyer specialists”, amongst others, on their team. Pretty much every other agent, however, is essentially a combined CEO/CFO/CMO/CEO/CTO/CIO/VP Biz Dev/VP Marketing/VP R&D/Chauffeur/Messenger/Document Manager/Janitor etc. Surely this can’t be the most efficient way of running an industry, and it certainly isn’t to the benefit of the majority of agents — most of whom are only great at a small handful of the above roles.
Your point about consumers vs. clients — not sure if I agree. Redfin may offer less of a hands-on, personal relationship (which is part of their appeal to a certain segment of the market) but, at least on paper, they’re pretty fanatical about customer service. Don’t know of many other brokerages that offer a 100% guarantee. (Actually, come to think of it, your team at Ventoux does indeed have some kind of a guarantee, I believe.)
Re. the anecdote of your recent Redwood City listing…in this tough market, going for 0 for 2 ain’t necessarily a question of agent performance. Did these folks provide more detail about why it was their previous offers failed? Also, it almost sounds like your KW colleague that was holding your listing open may have…poached these Redfin clients?
Kevin, from a non-Realtor p.o.v. I would argue that the multiple-hat wearing is a skill necessary for many professionals (namely anyone running their own business). My stepfather singlehandedly runs a small yet successful painting business (and does all of his own paperwork, labor and marketing). My father owns an art illustration business and does all of his own work from recruiting business to accounting.
What sets Realtors apart is that they are a two years of law school away from being lawyers. I believe this is where some fail (the ability to negotiate from a legal rather than personal standpoint). With that in mind as the factor that differentiates my husband from my father(s), it is clear why my husband has more money than the other men in my life- his ability to wear all of those hats successfully (thus he succeeded in his first year).
We can expect Realtors to be shaken out of the club if they can’t cut it because ANY self-employed contractor can tell you it’s hard work (not easy money as many in the public perceive).
Redfin has a business model that I don’t particularly agree with but I think has a chance at succeeding in their niche- the 1% of buyers/sellers who are WoW (World of Warcraft) webdorks who wear witey tighteys, don’t want to wear shoes, and prefer their translucent skin tone over a tan due to not leaving their house other than mandatory migration to their cubicle at Apple.
In short (yeah, right), I personally would support a slightly modified version of the current system because it benefits the greater whole while the division (or lack) of labor seems to benefit SO FEW buyers/sellers.
I just have a couple of points:
Lani is correct that there is a very tiny fragment of the market that wants nothing to do with actually touching the house first. It does tailor to those who would prefer to sit at their computers or hide within four walls from the world. Knowing that, a great bunch of folks tried to open grocery stores online- they’ve all but failed here- horrible deaths. I can think of a few other types of markets that tried to go the online way and they crashed and burned too. I do believe Redfin will capture attention with rebates, but NOT with the idea of doing it all online- that will fail in the long run as well.
So to answer your question: The industry (being what it is) works. Regardless of how you begin, I believe the real estate industry would evolve to exactly where it is today- again and again. Why? Because it’s practical- no one can control real estate or markets, nor will they ever be able to reduce it all to an item on a shelf.
Kevin et all,
It is funny you should have this topic come up today. I’m not trying to steal any of your traffic to my site, but we have a very interesting post/comment session going on along the same lines of this. The topic is “Why are Realtors so arrogant and such a$$holes”. A reader sent a letter to me, the editor, and I posted it, hoping to get a good response and learn about what it is we (Realtors) can do to clean up our image. I’m trying to stay out of the comments as much as possible, but one Realtor, Greg Angilly is rising to the occasion with some great points. The readers are making great points too.
As for starting the industry from scratch, there are way too many variables to take into consideration. I have no idea what the market or structure is like where you are, but in San Francisco is comes down to local knowledge. Even though we are all in the Bay Area, there is no way in hell that I would ever try to represent a client in your town. I’d be a complete fool. I don’t think Redfin takes that into consideration. Focus has to be on the free and open exchange of information amongst Realtors, and clients, so that all parties involved are on the same page. The internet has helped this discrepancy by giving principals much more information, and it is a great thing. So some sort of combination of the Redfins, the Trulias, heaven forbid the Zillows, and the CBs is, in my opinion, the best answer.
10 years ago I was convinced that the real estate industry was broken and that anyone that charged 6% was crazy or an old goat. But 10 years later and after serving in the C suite of 3 different flat fee / discount companies. I think that this market is the product of evolution.
The real problem with the situation is that buyers and sellers expect realtor to work for free, UNTIL they sell their house. Realtor must assume all of the risks associated with selling the house. Buyers are a horse of a different color and have zero agent loyalty, unless they’ve signed some type of exclusive buyer agreement. So why should a realtor provide services and not get compensated?
This model has evolved out of the sellers desire not to have to pay for marketing their home or assuming any of the risks associated with selling it. It’s not the industry that must change, but the consumer’s attitude toward mitigating the realtor’s risk. Once they are willing to do that… then hey we should be willing to lower our prices.
Redfin is charging an upfront cost (not in CA, although I don’t know why, there is a workaround the law) They are training the next generation of consumers to “pay upfront” which is great for everyone!
Kevin -
Touche’ on the poaching comment. I didn’t go into details on what agency agreements were signed, and did note that I’m getting the information on the buyers’ Redfin experience second-hand. My understanding is that they had decided the Redfin model wasn’t working for them.
Please also note that the buyers were looking in Redwood City, which is a different market from supercharged Palo Alto. While we received three offers on the house, they were over a 30 day period.
I think the biggest change the real estate industry needs to make is to raise the bar for new licensees (coming soon), which will hopefully result in an improvement in the public’s perception of realtors, which is currently somewhere between ambulance chasing lawyers and used car dealers.
I’m encouraged to see an increasing number of trained professionals like yourself (MBA and consulting background) entering the industry who have the education and business skills to represent and serve the interests of our clients in these high-dollar, complex transactions.
Kevin,
I truly believe that separating the roles has been helpful to our clients. Many of our Field Agents are neighborhood fanatics, viewing 3-8 homes a day. This makes them extremely knowledgeable about neighborhoods and regional markets. Our transaction coordinators have great organizational and detail skills making the deal roll along smoothly, and our agents are able to primarily focus on negotiations, contracts, and communication. Having come from a traditional brokerage to Redfin, it took me a while to take off my previous hats - after I did it and saw the results, I will never put them all back on.
Hi everyone who left a comment. Some follow-up thoughts:
Chris: this Redfin faq indicates that Redfin makes it pretty easy for clients to sever their relationship and move on. Provided the ex-Redfin clients did indeed notify Redfin, your colleague was probably not guilty of poaching them.
Austin Realtor’s wife: While you’re right that wearing multiple hats is necessary for anyone running their own business, my question would be: Does it make sense for nearly everyone in real estate to actually be running their own business? Many other service industries — law, medicine — leverage scale. Sure, there are doctors and lawyers who run one-person shops, but there are, I believe, many more who team up with others. That’s rare in this business. Is there something intrinsic about real estate that necessitates the sole proprietorship model? There may well be, I just can’t think of it.
Secondly, I love your description of the average Redfin client…but I think their market appeal is much, much broader than that. I don’t think Redfin in its current manifestation would ever appeal to, say, 75% of the market, but it certainly could appeal to 20% to 30% of the market over time. I would characterize their client as being the real estate equivalent of Home Depot weekend warriors: those with enough time on their hands, and the desire, to do much of the up-front work themselves. That’s a much broader audience than uber-introverted ultra-geek coders.
Responses for the others coming shortly…gotta run to a lunch appointment.
Further responses:
BR: I disagree about Redfin’s business model being only for those who want “nothing to do with actually touching the house first.” I suspect that the vast majority of Redfin buyers — just like the vast majority of clients of traditional brokerages — are very keen on getting to know the product they’re buying, going to open houses, seeing the home, and inspecting it. Where they differ from clients of traditional brokerages — at least how we perceive our clients — is that they want to and indeed prefer going to see these homes themselves without a Realtor in tow.
Frontsteps That is indeed a very interesting discussion going on over at your blog. We all know that there is a portion of the population who are inveterate Realtor-haters. It’s actually kind of fun to watch them work themselves up into a tizzy.
Agent Scoreboard You hit it on the head: With the current model, agents take a huge upfront risk when they take on a buyer or seller. We’ve all done deals where we made $2000 an hour…but we’ve all also done deals — and way more of them — where we made $25/hr, or even $0/hr. Redfin’s business model, at least on the buy side, is essentially a clever risk arbitrage: If you, the client, are willing to take on the additional time to hunt for properties on your own, or pay us $x/hr to chauffeur you around, then we’ll happily pass on a portion of the commission to you.
Trevor Smith Interesting to get the insider perspective. I think a ton of agents would be happy to offload a portion of the regular work cycle to somebody else, whether that’s chauffeuring clients around, writing up offers, attending inspections, dealing with the paperwork, etc. One issue I see with the division of labor you describe, however, is that while the field agents appear to spend a lot of time viewing homes and getting to know the market, they do not appear to be the ones writing and negotiating the offers. I’m not sure that those two parts of the process can be realistically split apart.
[...] Comment on Three Oceans, If You Were Designing The Real Estate Industry From Scratch, Would It Look More Like Coldwell Banker Or Redfin?: Redfin has a business model that I don’t particularly agree with but I think has a chance at succeeding in their niche- the 1% of buyers/sellers who are WoW (World of Warcraft) webdorks who wear witey tighteys, don’t want to wear shoes, and prefer their translucent skin tone over a tan due to not leaving their house other than mandatory migration to their cubicle at Apple. [...]
I think the Internet is going to be the increasingly major force in all industries, and certainly the real estate market. Sure, there will be the need for person to person help and advice, but new sites will come along with features that make information more transparent to all parties involved. However, I do think quality people win over clients in the long term, and they will build a base and have success. Am I saying two things at once, maybe a bit, but I do like how the Internet and easy access to information levels the playing field.
[...] If You Were Designing The Real Estate Industry From Scratch, Would It Look More Like Coldwell Banker Or Redfin? by Kevin Boer at 3oceansrealestate.com [...]
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