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.
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.