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.
Tags: Business models, Consumer, Glenn Kelman, Industry, Redfin, The Innovator's Dilemma
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3 responses so far ↓
1 Thomas Johnson // Apr 9, 2008 at 7:26 am
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.
Kevin: How can they scale up, when they are operating in the highest priced markets already? In ERAHouston, 4th largest city in the US, average sales price = 150,000. Maximum buy side commission is $4500. I can see the VC conference table jaws hit floor. “You mean we have to sell FIVE times the houses to compete and we can’t make make our ten grand per transaction?”
There is an old real estate adage that might apply here: “Listers last.”
2 Kevin Boer, Broker Owner, 3 Oceans Real Estate, Inc. () // Apr 9, 2008 at 12:26 pm
Hi Thomas,
That’s a good question, a very very good question.
I doubt that Redfin’s model would work in markets like Houston, so yes, scaling is definitely an issue.
3 [Housing On Fire] Blogoshere Hose-Down [Matrix] // Apr 22, 2008 at 4:01 am
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