Redfin Abandoning Failed Model and Moving Toward Traditional Services

The discount Broker Redfin, which I follow with interest even though it doesn’t serve Austin, looks like it’s making yet another move toward traditional real estate services. Rather than facilitating the wholesale disintermediation of the traditional Realtor, Redfin instead continues to adopt more and more of the traditional Realtor approach and offer smaller rebates to its clients, while still bashing the old real estate business model that economic reality is pushing them toward.

What does this mean? If you want to list your house for sale in a Redfin city, the Redfin Agent will actually come view your home first. Pretty cool, I know. Turns out that seeing a house before you list it is helpful after all. But it gets better…if you are a buyer, and want to be shown a house, your Redfin agent will now actually set a time to meet you there and let you in. Are you feeling goose bumps yet? Again, this is nifty stuff, having an agent treat you like you are important.

The Redfin business model at first required buyers to figure out how to get inside homes themselves, either by waiting for an open house, or getting the listing agent to come show it, or more notoriously, duping a dumb unsuspecting agent into thinking they are going to work with them, and using that agent to see homes without disclosing that they are a Redfin client.

When that model ultimately proved less than ideal, the idea of “showing tours” was introduced, which allowed a buyer to purchase “a 3 hour tour, a 3 hour tour” of homes for $250 each. But the weather started getting rough, and that concept failed to vanquish the traditional Realtor as well. So now what?

A couple of days ago, I received the announcement that Redfin now offers “unlimited buyer tours”. Uh, that sounds like what we do as traditional Realtors. We show our buyers homes until the right one is located.

From the Redfin blog Nov 6, 2008.

Unlimited Tours, Agent Choice
To hit the mass market, we’re upgrading today our home-buying service to offer free unlimited tours, and a choice of agent, and support from that agent all along the way.

Sound familiar? Pick the agent you want, see as many homes as required before making a purchase decision, and have “support” from the agent involved in the process “all along the way”.

And do you still get rebated 2/3 of the buyer agent commission? Nope.

50% Commission Refund
And we’re raising prices. Tours are now free — we used to charge $250 per tour – but we’re changing the commission refund for buyers from 66% to 50% (existing customers relax, you pay the old price). The average refund should drop from $10,000+ to nearly $8,000. If people use Redfin to sell one house and buy another, the total savings should still in most cases be about $20,000.

Then, in true “me thinketh thou doth protest too much” fashion, we are reassured that vast differences remain between the new Redfin Services and the Old Realtor.

Redfin says:

The difference between Redfin and traditional brokers is obvious and simple and huge and it has nothing to do with offering more tours.

So why the change?

In focus group after focus group, customers said they wanted more tours, they wanted to be able to call their agent.

You needed a focus group to know that? Buyers need guidance, and that’s hard to provide if you are not there with them viewing homes and providing knowledge, experience and context to the pros and cons of each home. And I agree with the focus group, buyers want to be able to call their agent.

OK, so where am I headed here? Am I trying to say “told you so” to Redfin? No, I’m still intrigued by their setup, especially the great website and search tools, which really should embarrass most of the big traditional real estate brokerages. I admire people and business who make a fuss, challenge the staus quo, and seek out better and more innovative ways to accomplish an end result.

But I could have provided all of the “focus group” information to the Redfin CEO over a 1 hour lunch at Texas Land and Cattle. There are some hard numbers that one runs into if contemplating the upending of the traditional real estate model.

The average successful Realtor keeps 43% of gross commissions earned as net income. This 43% number is a result of mass surveys by Keller Williams, and it’s the number we use in our budget forecasting as individual agents. So, that $18,000 commission a seller sees on the closing statement, which becomes $9,000 for the listing agent, eventually shrinks to $3,870 on the Realtor’s bottom line. From the remaining bottom line each year must still come self-employment taxes and health insurance costs.

Sylvia and I beat the 43% by a tad, but not by much. If we worked only with buyers, the ratio would be lower, because the success rate with buyers is much lower than with listings. We’ve sold all of our listings this year (except those still Active, but none have expired or been withdrawn), but not all of our buyers have bought a home. Many got spooked by the economy. Some can’t qualify anymore. So with buyers, one must necessarily accept the reality that there will always be a great amount of uncompensated time and effort included in the business model. It’s simply part of the real estate business.

So, knowing this, when I see a company that seeks to get buyers over the finish line with a home purchase, and give back 65% of the gross commission at the closing table, it only takes a bit of 8th grade math to determine that this is a money losing business model. It can’t work. The numbers simply won’t add up. $9,000 minus $6,000 rebate to the buyer, minus – $5,130 in operating costs = a $2,130 loss.

And if you’re a reader who scoffs at the math, get your real estate license and prove me wrong. Unless one figures out a new way to get a higher percentage of buyers to make offers and get to the closing table, real estate will remain a business in which the “closers” pay extra for the time and efforts created by the “non-closers”.

Consumers can complain about paying real estate commissions that are “too high”, but those same consumers, if changing their mind after 4 weekends viewing dozens of homes with an agent, would scream with even louder outrage if they opened their mail and found an invoice from their Realtor for the time and expense of showing homes. They’d scream “I’m not paying this! This is ridiculous!!”

And Redfin has now learned what the rest of us already knew. Realtors do a lot for free. A whole lot. And the massive amount uncompensated time and effort dispensed by our industry is rarely plugged into the conversations or complaints about the commission and structure.

I’ve written about Discount Broker models here before, and I have nothing against discounters or the consumers who choose them, but I do find it interesting that, despite the relentless negative media sentiment toward the traditional real estate business models, and the “new darling” status that Redfin and others enjoyed via positive press a couple of years ago during the real estate bubble, that these attempts to dispose of the traditional Realtor continue to fail. In Austin, no Discounter has more than 1% of market share. Why is that? It’s because consumers by and large want things done the old way, which is that Realtors and our services are absolutely 100% FREE, right up until the deal closes and the transaction funds.

In the case of Redfin, and its brash CEO Glen Kelman, we see a macrocosm of why so many Realtors fail in the real estate business. Companies like Redfin, much like clueless newbie agents, can gain moderate market share and win customers in a sellers market, when market inertia guarantees that a certain volume of homes will sell no matter the skill level of the practitioners involved. But when markets turn tough, consumers flock back toward the old school full service agents with experience and a track record, and the newbie agents as well as the discount companies are left with a business model that inspires not enough consumer confidence to attract sufficient serious buyers and sellers. It takes more than a discount to inspire confidence and trust, and you can’t sell three hours of showings for $250 and make a profit.

Maybe someday this will change, but I doubt it. Buyers will always want to see homes for free before buying. They will always want to know whether the price they are offering is right, and they will always need an experienced agent, one who knows the market from a perspective that includes more than viewing stats on a computer, to help guide the process.

It was the Borg in Star Trek who stated bluntly, “resistance is futile, you will be assimilated”. Looks to me like the economy and consumer reality are saying that to the Redfin Discount model, and we slowly see them turning into that which they pledged to destroy.

Posted by Steve
7 years ago
Steve

Steve is a Real Estate Blogger, Husband and Dad, UT Austin Grad, Runner, Real Estate Broker and owner of Crossland Team and Crossland Real Estate in Austin TX.

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Marlow - 7 years ago

All that wasted effort and venture capital. What a shame.

Experienced real estate professionals kept trying to tell them they were wrong and the numbers wouldn’t work, but the management team didn’t listen and now they’re in a pickle.

Their product was excellent (if you consider their product information and the website) and they didn’t have to sell themselves short by not charging enough to cover expenses. They could have charged what it cost to provide all the services (that would be around 6%~), but they decided that was too much and instead offered a “discount” commission that wouldn’t cover their nut.

Now the market will decide if this was a good move or not.

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Jim - 7 years ago

Great post, especially the second half! The public needs to know just how little we sometimes make and how much time (and liability) goes into this work.

I think that buyer’s agents charging by the hour is not a bad idea, especially for clients who want cheaper homes where the commission often doesn’t make up for all the other lost opportunities.

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David Hoffman - 7 years ago

Steve,

I am what you may call a potential client – looking for a home in the next 6 months, and I have no agent, and I am considering using a discount realtor. Here is the reason. I respect the fact that a full service realtor can make the experience better, but that benefit is in no way tied to what I pay you.

8 years ago, I bought a house for $142,000 after looking at probably 50 homes, and I (or at least the seller, which translates into less bargaining power for me) paid a commission of roughly $9000 – $4500 to each realtor. That seemed quite fair. 4 years ago, I bought a house for $270,000 after being shown about 15 homes, because we had a better idea of what we wanted the second time around. This time paying a commission of roughly $16,000 – $8000 to each realtor. This seemed less fair. I did the math, and that is about $400 an hour. I don’t know how your 43% works into that, but that ain’t bad.

Now, we are on to home number three. This time looking around at something even more expensive. How much per hour is reasonable? If I came to you to buy a 140K house, I get exactly the same service as I would buying a 400K house. In your posting, you knock the discounts because they “only” now discount 50%, but 50% can be a lot of money.

Tell you what – if you want a new client. Charge me like you would if I bought a 250K house and kick back the rest to me. Otherwise, don’t be shocked if I look elsewhere for someone who wants less than $600 an hour.

David

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Steve - 7 years ago

Marlow: Agreed, but I don’t think RF is dead yet. They are adapting.

Jim: Thanks.

David: What I hear you saying is you think Realtor fees should be either on a sliding scale or by the hour, because the effort required to sell more expensive homes is not more than what is required to sell cheaper homes.

I disagree with the premise. The risk, effort and time required to sell more expensive homes does increase as the price range moves up. It’s not always obvious to a casual observer, and there are certainly exceptions to the rule. In fact, at some point, the very cheapest homes are actually more difficult deals to complete than the mid to high range.

But if you believe in the power of free markets, one must wonder why the Discount Model doesn’t go straight for the high end market, where all the supposed commission fat is waiting to be cut, for reasons you’ve outlined.

With regard to you wanting an Austin buyer agent to represent you and provide a partial rebate of commission, you’ll have no trouble in Austin finding an agent willing to do so. Some companies advertise that as their niche in fact.

We (Crossland Team) don’t offer such an arrangement, except for move-up buyers who also list a home for sale. I won’t go into the entire rationale in this response as to why we are willing to pass on such opportunities, but the bottom line is that before any agent gives away a portion of the upside of a client relationship, there should be a clear and definable reduction of the downside risks as well.

Which brings us back to that very notion, as tried by Redfin in offering 3 hours of showing for $250. The 3 hours placed a defined limit on their downside risk (opportunity cost of time), yet the real estate consumer market rejected that limitation.

Buyers want unlimited effort from their agents, not a restricted effort. You and others like you may be the exception, but there are not enough of you out there for a Realtor to be profitable finding and serving others like you. It sounds like a good and reasonable idea, but the execution of it is full of problems, as most recently acknowledged by Redfin.

Steve

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Peter - 7 years ago

If your biggest knock on Redfin is that you think their margins are negative for the services that they provide, it seems like you should be recommending them as a good deal for the consumer.

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Steve - 7 years ago

Hi Peter,

If the consumer received great service as a result of the money losing efforts, I would recommend them, but as it is, it’s a lose/lose because the client gets less than full service from inexperienced salaried agents working for a company that is running out of money.

Steve

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James - 7 years ago

Wow, have you ever talked to anyone over there? Your comment:

“…the client gets less than full service from inexperienced salaried agents…”

would indicate that you have personal experience with these agents. Some how, I find that extremely hard to believe. Just glancing at their website, it looks like almost all of their agents have closed over 50 deals and have excellent ratings.

So, Steve, do you in fact have first hand knowledge of these agents?

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Steve - 7 years ago

Hi James,

No, like you, I only know what I read on the website, and it’s not full service. And I know that the service offered is that of a “Functionary” vs. a “Fiduciary”.

That is, even one of their agents who has “closed 50 deals” is functioning more like a transaction coordinator, on the phone and in front of a computer, shuffling paper.

Full service agents serve as Fiduciaries (if they are doing their job right) and are involved at a much deeper consultative level in the transaction, doing more than just taking orders and processing paperwork.

I’m sure the Redfin concept has worked well for a lot of customers, but the point is that there are not enough real estate consumers who want to buy the services they were selling. That’s a hard fact. Thus the move toward a more traditional real estate agent role.

That doesn’t mean the services were not a good value and a perfect fit for a niche group of consumers, but the company is obviously not able to produce enough revenue to continue with that business model.

Steve

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anonymous - 7 years ago

If the real-estate model didn’t require indentured servitude to the broker holder licenses, then costs would come down. The broker is taking some risks holding licenses and being “responsible” for their realtors, but there is a lot to cover their butts if things go wrong.

I think David has my consumer sentiment down. $400 an hour?! Do I get a surgery with my new home? Now, granted, realtors may only close a few sales any given month (or maybe none some months and lots others), but I believe the reward/effort ratio is out of wack. I might spend some time look at a few houses, but after I think I know what I might like, my realtor can setup a custom MLS search and only send over hits that match. Then, I only request time seeing the homes that might actually interest me. Plus, with the MLS map search that most agents have, consumers should get a pretty good idea of neighborhood after viewing the first few houses scattered around the city.

-Anon

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Steve - 7 years ago

Hi Anon,

You just described the business model that has failed Redfin. As I keep saying, it sounds good on paper, but there is more to it than simply showing a few houses. It’s a vastly more complicated job than that.

Steve

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Peter S - 7 years ago

To me it seems that the problem in the RE models (either discount or full-fee) is the overhead costs. A buyer’s agent can barely survive on the 1.5% commission they make off a sale, but the buyer gawks at the price of his house being 3% higher with an agent. Both consumers and agents should be scrutinizing at where that _other_ 1.5% goes.

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Jim - 7 years ago

If buyers (and sellers) knew exactly what they wanted and none of them wasted their agents time before saying “Thanks, but we changed our mind” then everyone would pay less.

People don’t value the “free” service of an agent, but those that do end up paying for it complain that it’s too much. Next time, don’t even bother contacting an agent unless you know EXACTLY what you want to buy and have the money ready. Then, you’ll be justified in asking for a discount.

The problem is that consumers don’t see all the back-end dirty work of real estate. It’s not just driving in the car showing houses. It’s answering questions on the phone, sending emails, etc. Out of 100 emails I send to various “customers” probably 99 are a total waste of time. The 1 that leads to a sale…that client pays for the others.

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Jim - 7 years ago

By the way, everyone who reads this blog on a daily basis, but then goes to a discount realtor because they think Steve charges too much, ask yourself: “Who pays for the information on this blog?”

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Steve - 7 years ago

Hi Jim, you’re right about the uncompensated efforts being covered by the closers. I addressed that earlier and won’t rehash it now.

I disagree with your semantics about the uncompensated efforts representing a “waste of time” though. The real estate business is a numbers game, like any sales profession. I never view a buyer who changes their mind as a waste of time, but rather as just one more “no deal” out of the way and therefore closer to the next closing.

Sylvia just had a buyer drop this morning, after having an offer accepted, and we had this discussion, as she was feeling down. “Your just that much closer to the next real buyer”, I told her. To which she replies “Yeah, I know, but it still sucks”. And it does suck when you work so long and hard with someone and they simply get cold feet and can’t move forward. But that’s normal and expected, and you move on and stay happy and just keep going.

We don’t get to send a bill for time spent though, and I doubt the industry will ever adopt that, which is the point of this blog article and discussion. It’s OK and it’s allowed that those buyers get get feet, and they owe us nothing at all. It’s ok, really it is.

Steve.

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tony - 7 years ago

<>

This is the essence of the point. The good customers, the people who do buy, are subsidizing the bad customers, the people that dont buy.

Why shouldnt real estate agents charge hourly rates?

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Steve - 7 years ago

> Why shouldnt real estate agents charge hourly rates?

Hi Tony, Redfin just answered that question for us. Real Estate Consumers do NOT want to pay hourly rates up front, period. Some might say they do, but as a whole, they simply don’t.

Steve

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Thomas Heimann - 7 years ago

Interesting post… of course the author misses the point that the fact he is wasting a lot of time with tire kickers does not change the fact that for those buyers who actually ARE buying there is a huge disconnect between the fees paid and the service received.

If a buyer purchases a $300K home and the agent makes $9K (or make that even $4,500 on a traditional commission split) in exchange for working maybe 10 or 20 ours on THAT transaction, i.e. $225 to $450/hour, then that makes no sense.

Our company has successfully employed exclusive buyer agency agreements combined with a retainer that is refundable only at closing. We eliminate 90% of the tire kickes and can focus on working with BUYERS who will buy.

We provide GREAT service AND pay a rebate of up to 75% of the commission we receive. The reason we can do this is part a much more efficient business model that utiizes salaried agents, and part making the full rebate (hence the up to) contingent on the Buyer using our affiliated services (Title/Lending/Insurance to be added soon)

With respect to Redfin, as it stands today, their business model certainly is far from perfect, however they DO save home buyers a big chunk of money, and are providing the service buyers are requesting.

If you think that the traditional, commission based, agent-centric business model that relies on inefficient one wo/man operators working as 1099 reps will still be the norm 5 years form now then you better think again. Change is certain and I think it is much better to be proactive and try something new.

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Steve - 7 years ago

Hi Thomas,

Thanks for your comment.

> … does not change the fact that for those buyers who actually ARE buying there is a huge disconnect between the fees paid and the service received.

The same could be said for home insurance. Has your house burned down in the past year or two? If not, are you paying too much? If not, why not?

Many businesses, most maybe, factor in uncompensated time and effort. Stores factor “shrinkage” into the price you pay for groceries and consumables. We all pay for, in one way or another, for losses and ineffeciencies caused by other unprofitable customers.

The phenomenon is simply more plain to see in real estate and elicits a more visceral response than is the case in less apparent models.

But I’m open to being shown the model that produces the best choices for consumers and allows professional agents to earn incomes commensurate with expertise. At present, I think consumers have ample choices as there are plenty of discount agents out there.

Steve

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Thomas Heimann - 7 years ago

Steve, you wrote:
“But I’m open to being shown the model that produces the best choices for consumers and allows professional agents to earn incomes commensurate with expertise.”

and therein lies the problem….

The problem is that there are way too many agents chasing way too few deals. Companies with more efficient business models will be able to offer services at a lower cost and pay their agents more. I am certain that Redfin agents make a lot more than the average agent.

Truth to be told, the current system of paying all agents, regardless of experience the same thing (3%) makes no sense. Let’s face it there are many fully paid agents that cannot find their way out of a paper bag and consumers take a crap shoot when they decide to work with an agent.

As a top notch professional it should pi$$ you off to no end that some unprofessional rookie idiot gets paid the same as you do, just because that’s the way it is and that’s whats being offered in the MLS.

I don’t have all the answers Steve, what I do know for sure however is that the current status quo does not make sense and must give way to a better – consumer centric – way of doing business.

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Steve - 7 years ago

> The problem is that there are way too many agents chasing way too few deals.

That will never change unless severe barriers are placed on entry into the real estate profession. Until then, droves of people will continue to mistakenly think it’s an easy way to make money.

> I am certain that Redfin agents make a lot more than the average agent.

The “average” agent doesn’t make much, so it wouldn’t be a noteworthy accomplishment if true. Redfin agents are paid a salary, plus a small commission for each sale. I don’t know what the salary is, but I doubt it’s much. After all, they only have 1.5% to work with, and that has to cover the non-producing agent’s salaries as well.

> As a top notch professional it should pi$$ you off to no end that some unprofessional rookie idiot gets paid the same as you do.

Well, they don’t get paid the same as me because they probably close only 1 or 2 deals before they wash out of the business. But on a per deal basis, no, it doesn’t bother me at all. It’s the consumer’s choice to hire whomever they please at whatever commission they can negotiate. If they want to hire a newbie agent and pay full commission, that’s their choice and I can’t control that.

> the current status quo does not make sense and must give way to a better – consumer centric – way of doing business.

I can’t think of anything more consumer-centric than the vast array of choices available currently to real estate consumers.

Steve

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callyboy - 7 years ago

Redfin agents don’t make much – maybe that’s why their turnover is so high. Also, I wish I had deals that only took 20 hours of my time. Granted, homes cost more out here in California, but most of my deals take closer to 100 hours (and some a lot more than that). Most consumers have no idea how much a good agent spends making sure the transaction is smooth.

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Rick - 7 years ago

Very interesting comments indeed! Here are my questions”

Why would a buyer CARE how much their agent makes? They don’t pay the commission- the seller does.When you go to your local Doctor do you question how much he charged you? Do you try to get your attorney down when you need a divorce?? Well ok I understand some would….

I am not arguing the fact that some agents probably Don’t earn what they make but that is not the fault of the Professional Full Time agents and Brokers. If the Consumer chooses the wrong agent for what ever reason that is the buyers deal.Unless there is a buyer/broker agreement the buyer can use whom every they want to help them purchase.

My point is, if you have a Wonderful Stress free (as much as can happen) experience then you probably wouldn’t be so wrapped up in the price tag? Are not we really saying here -“I don’ t think I got my Money’s worth???

On the Selling side of the equation, yes there are agents that probably don’t deserve that $8,000 check for taking a listing and then selling it a day later, BUT there are indeed so many things that the typical seller doesn’t see behind the scenes. If they knew-they wouldn’t be so Offended by the price tag! There are the sellers that change their minds and stay instead of move,there are the ones in this market that change their minds and put a renter in the home etc.

>>>Sounds to me that there needs to be a local website in each city where real live consumers can RATE the last agent that they used and with this information then other consumers can pick out the best agents that give the best service etc??<<<

Of course service is subjective so the fact that Sally and Harry loved Bonnie the agent doesn’t mean that they next consumer will.

The problem as I see it is that there are not enough agents that are RELATIONAL in real estate….if you get a TRANSACTIONAL agent to sell your home don’t be too shocked when you don’t hear from him or her during the entire transaction! After all there are only two fundamental agents in the world…Transactional and Relational….The transactional agent really doesn’t give a rip about you the seller or buyer…he has number to make…The relational agent wants to know your kids names and birthdays and sends you cards and Actually cares….To me it sounds like there are plenty of consumers out there that were hoping to get a relational agent but ended up with a transactional one?

I just had a listing canceled recently.The Seller agreed to certain terms in our listing agreement (employment contract). The seller then changed his mind after 4 months and wanted out.He demanded out and said “provide me with a complete list of what Exactly you did”. I want to see just how few hours you put into this! When presented a complete list of EVERY hour spend in that 4+ months and every single expenditure and my hourly rate he FLIPPED OUT…There is no way I am paying you all this he said….You see the part that he didn’t get was that If I have to drive over and put a lock box on the home that is 15 miles a way and spend an hour to do that, this is just ONE of Many things that go into Actually Getting the home sold…no one see’s the hours of time it takes to have the listing exposed across the Internet…the hour to make fliers and Brochures, the time to take pictures,videos etc…When presented with a DETAILED list of every activity and every cost advertising etc…they wouldn’t be so quick to shoot down that “sky high” commission!

It’s the lost opportunity cost that has to be factored in…or there won’t be too many agents making it through a long down market.If I spent 40 hours trying to sell your home in good faith and you change your mind and don’t want to pay me a cent for my time and efforts is that fair? Obviously to some it is….but then they either have never been in the business or really are just out for themselves…plain and simple…

Regards

Rick

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