Seattle Times 02/25/07 Article: Redfin Revolution

Elizabeth Rhodes went way over the top with this article about Seattle based Redfin Real Estate. It’s not that reporting about such a company isn’t important. It is the unbridled optimism with little analysis from a business model perspective that is missing. Let me explain:

1. Redfin started as a pure internet interface without a phone number when it began. The result was frustrated clients that couldn’t compete with buyers using the services of full service real estate agents.

2. As complaints mounted, Redfin decided that it had better start providing some service to its clients, so they hired some agents that work for salary.

3. If Redfin couldn’t make money without agents, how are they going to make moeny while paying agents? In spite of the several million venture capital dollars behind it, companies can only bleed red for so long before they land on the scrap heap of failed dot coms, e.g. Home Grocer.com. In the case of Redfin, I predict that it is not a matter of if, but when, it will fail. And when it does, there will be those buyers that will find their rebate checks frozen in time when the doors at Redfin are locked for the last time. If you doubt that anyone will be hurt see the Merit Financial article on this site.

Serious misconceptions: It should be noted that no one, not one person, that runs Redfin has ever had a real estate career. They think they know how the business works, but it is apparent that there is little understanding of how people make a full time, long term career out of brokering residential real estate. The clear message in Ms. Rhodes article that points to the naivete of both Redfin and its clients is where it is observed that

“if the industry doesn’t reform itself it’s in trouble. People resent the commission structure.” AND “I like that better than someone’s compensation being tied directly to their commission on the house,” Gerking said. “It put us in a better position.” AND “There’s no incentive on the part of a buyer’s agent to negotiate a lesser sales price.”

Presumably, the idea is that selling agents have no incentive to get buyers the best price because the higher the price, the higher the commission the selling agent earns. If that were the case, there would be no professional Realtors, or stock brokers either. Professional Realtors make their living based on the successes of their respective clients. Satisfied clients share their successes with friends and colleagues, and then refer them to the Realtor that enabled them to succeed. Without referrals from happy clients, professional Realtors would largely disappear. This is the business model that works.

Ask any Realtor: given the choice of selling your client a $500,000 house that suits them and a $525,000 that does not, is it worth the extra $750 to push them into the more expensive house? From a professional, you will get an emphatic no every time.

Ask any Realtor: given the possibility of negotiating a $25,000 reduction in price on a $500,000 home for your buyer, would you risk losing future referral business from that buyer for the sake of $750 in commission? Again, you will get a NO every time.

Referrals are the lifeblood of the real estate business, not nano-commissions won or lost on a per transaction basis.

Finally, the most amusing part of the article is to be found in the graphics around the bottom of the first page at the lower right. I’ll recreate it because it does not appear with the on-line article:

“99.573 percent-is average final price as a percentage of list price Redfin buyers pay”

AND

“100.186 percent-is average final price as a percentage of list price clients of all other brokerages pay.

While it may appear that this represents a savings for Redfin buyers, it is actually the precise source of the complaints that compelled Redfin to start hiring agents: Their buyers were not competitive, i.e., they were never in the running when it came to hot, or underpriced, properties that sold for more than list price. They didn’t know how to structure escalator clauses, how to conduct a pre-inspection, etc. I also don’t believe their salaried agents will be much help. Pursuing hot properties can be a logistical nightmare, even for a full time Realtor. If I’m a salaried agent, I would find it much easier to advise my buyer that “this property is overpriced” whether it is or not, “let’s look for something else” (that is not as much work). How would the buyer ever know?

Notice that I use the term Realtor rather than agent for much of this writing. It is important to be aware that there are no small differences between “licensed agents” and Realtors. Realtors adhere to a strict “code of ethics” and “standards of practice” that distinguish their committment level from other agents that are merely licensed to practice real estate.

 For the “do-it-yourselfers” out there, I offer this bit of advice. Real estate is a full time job.  Diana and I are disciples of the principle, “the more you learn, the less you know”. And so it has been throughout my 22 years in this business. Every single transaction has been an education, and it is this education that we bring to every new transaction.

Homes will never be a commodity. If pork bellies, barrels of oil, or Microsoft stock had to be inspected, would they ever be traded as commodities? No. And so it is for houses. As less land is available for new homes, the existing housing stock will be ever more subject to the value nuances of maintenance, condition and improvements. It is our job to work harder, and smarter, every day to discern what the values are for the sake of the trust of our clients and friends.