Seattle based Redfin, a service that you use in lieu of a buyers broker or agent when buying a house.
We explained their model in detail when they launched in mid 2006. A year later the company was interviewed on 60 Minutes. And all along the way there have been lawsuits and litigation threats against the Redfin model - a home buyer replaces uses the Redfin service instead of a broker or agent. Redfin then refunds 2/3 of the buy side fees back to you. The average reimbursement has been $10,520.
Now, though, based on a report being released by the company tomorrow (the report is embedded at the end of this post), Redfin is able to get a second financial benefit to its buyers. Statistics show that Redfin buyers negotiate a much lower price than their broker competitors. They looked at two markets, San Francisco and Seattle, and gathered data from February 6, 2007 to February 5, 2008.
The data, says Redfin, shows that Redfin buyers paid an average of 1.015% below homes’ asking price, while brokerage customers paid .087%. Translated into dollars, the average Redfin buyer spent $5,048 less to buy a house that they probably would have without Redfin behind them.
So adding those two benefits together, a home buyer will save $10,520 + $5,048, or $15,568.
Digging a little deeper into the data they’ve supplied me, it seems that there are pockets of highly aggressive buyers that are a perfect fit with Redfin. In Santa Clara country the negotiating advantage was $16,107. Redfin also says that their business model, which keeps agents on staff for customer service purposes, are not paid commissions based on sales. They receive bonuses based on customer satisfaction surveys. That means they have to treat their customers well, and make sure they get a good deal.
The model seems to be working. Redfin has been involved in over 1,500 transactions (as of 1/31/08) and had reimbursed around $12 million to very happy home buyers.
As an aside, if anyone remembers a little rant I had last month comparing the working environments in Seattle and Silicon Valley, it was the CEO of Redfin, Glenn Kelman, that I was debating against.
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http://www.tech-exposed.com
In a crazy, slumping real estate market one has to become creative and well informed to stay even keel. Home buyers need every advantage they can get right now. Hopefully we can swing this slump around.
Really wished there was more details given on this
Did the sue or press charges?
Obviously, in the deranged world we live in, some nut might go too far!
The Northwestern US real estate market is an extremely lucrative business.
Umm…This model seems extremely backwards. What’s the need for Redfin to broker the deal at their one 3rd rate. It’s less backwards than the traditional way of going through a broker. But still, the internet’s the best agent (a free one) for buyers and sellers.
James
from
ReelProperties.tv
FaceySpacey.com
wow, the data gathered for a year must be big plus and used for market analysis. Anyone from Redfin reading this comment: do you plan to sell software and data or license to a company who may want to copy your model in other country?
I think the traditional real estate agents are boxing Redfin out of certain deals. I love the concept and wanted to be a success story. I used Redfin to make an above asking price offer on a home in Los Angeles back in January of last year and the offer was not accepted. Instead the seller took an underfunded offer that was $75k less than the asking price. How is that possible? The seller gave up more than $100k because of a “heart warming letter from the buyer”, I don’t think so. I don’t think that real estate agents take kindly to someone exposing their arbitrary value creation model. It is really 50% more difficult to sell a $750k home compared to a $500k home (as if those existed in Los Angeles :).
Arbitrary value creation is dead, long live open informed markets.
I don’t think I’ve ever seen so many typos and bad grammar within one post before. Makes me think you edited the hell out of it later, especially based on comment #2 - that quote is nowhere in your article. Why was it removed? I think it’s an interesting detail to the story. The RE market must be panicking because they know their vastly overpriced service/business model is being threatened.
Another example of technology assisting consumers. It’s a brilliant business, and one that I’d definitely use. I had no idea, or interest in what Redfin did until now.
Michael, I agree with Sean about the typos, but it’s ok, we still love you.
Raza Imam
http://SoftwareSweatshop.com
We still have realtors? They haven’t dropped like flies yet?
There are all kinds of statistical skews possible in this analysis based on the demographics and the sample size of the Redfin customer versus a traditional real estate broker/agent client.
However, it does raise some compelling questions of moral hazards in the traditional real estate transaction. Realtors and mortgage brokers are impeccably linked and motivated by bigger not smaller loan amounts. The home owner/borrower is not.
They need more cities. I don’t even want to try the service because they don’t offer services in any of the cities I’m interested in looking into.
85% of realtors don’t even know what they are doing. I just got an offer this morning on a property I own. Buyer’s agent wrote on the offer that close of escrow will be March 22.
What is the profit margin on each transaction they facilitate?
Anyone can give something away at a loss.
They do have a great website, but this is just empty hype.
LOL, my Realtor negotiates 1.243% better then then average and .023% better then redfin, which equates to $15,876 cash back anytime I make a transaction. AND she types .56% faster then all other agents which saves me .67% of time when I meet with her.
and I have the paperwork to back this up!
You lost to Computer. Play Again?
@Dave G asks: “What is the profit margin on each transaction they facilitate? Anyone can give away something at a loss.”
To Dave’s question, Redfin keeps a third of the traditional fee structure. Head to head with a realtor, I believe this means they’re delivering products & services at 1/3 cost of a traditional realtor.
Whether they can sustain the business inside those revenues is for Redfin to prove. Your question implies they can’t, but provides no information why. What was that again about “empty hype”?
So great, Redfin is goooood for buyers - but who is REALLY saving anything? The idea is laughable. The “money” being saved comes out of the proceeds of the transaction… the proceeds of the transaction comes from the buyers mortgage. So all Redfin is doing is selling the house to a buyer that is paying 1% less than normal, therefore the SELLER is losing 1% costing THEM 1%… and then taking the buy side commission and handing it over to the buyer. So, sure the buyer is receiving liquid cash to use as they please, but they are still paying for it in their mortgage note - no one is “saving”…. aren’t we smarter than that here at Techcrunch?
Not to mention, you can do a seller concession as a unrepresented/represented buyer, and do much better - for both parties. If you worked with a real estate agent who knows what they are doing - Redfin’s service is laughable.
Furthermore, as a seller - why would I want a buyer from Redfin? Knowing that Redfin buyers pay less than other buyers, I would not accept them in the transaction - and that is my LEGAL right as a homeowner. I can sell who I want to sell to.
“hype” is right.
This doesn’t seem unrealistic. In a buyers market, the seller pays the commission. The sellers attracted to Redfin are likely more desperate than average. An interesting comparison would be them vs. re owned foreclosures. I bet they can’t top them.
“And all along the way there have been lawsuits and litigation threats against the Redfin model - a home buyer replaces uses the Redfin service instead of a broker or agent.”
I can’t even read the first paragraph. What the heck is going on?
MOST (I will stay away from saying “all”, becuase unfortunately there are some that have taken advantage of the situation, not done their homework, and just made a few bucks off of people during the boom) agents offer to sell homes for people, so they can guide them through the legalities of a transaction. It’s just like choosing to do your taxes on your own OR paying someone to do it for you; making sure you get it all right so that you (hopefully) don’t have problems in the future. I think overall, whether you go with “for sale by owner”, “for sale by Redfin” or “for sale by agent”, in the end you get what you pay for. The cost of an agent may be a bit higher, but may save you the headaches of dealing with things you aren’t familiar with.
I love it! I wish my state (Oregon) would change their laws to allow Redfin to operate here.
Naysayers are probably realtors affraid that the general public will catch on to the realities of thier industry.
@16 the Redfin model is similar to when you buy a car and get “$1,000 cash back”. Yes, if you as the buyer are paying all closing fee’s then yes you are paying yourself 2/3 back. Better than paying someone else the entire 3/3 and at least this way you are borrowing money from yourself at what is hopefully a low interest rate.
Andre,
Your math is terrible. I hope you’re not a real estate agent.
In a traditional real estate transaction, the seller’s agent gets a 3% commission and the buyer’s agent gets 3 %, for a total of 6%. This 6% commission is paid out of the money that the the buyer pays for the house. If Redfin is the buyer’s agent, they give 2/3 of their 3% commission back to the buyer. So the buyer saves 2% of the cost of his house.
The seller gets paid exactly the same amount regardless of which realtor is representing the buyer because 6% is being skimmed from the sales price by the realtors. But the buyer ends up saving 2% of the home’s price because he gets a refund from the broker representing him.
@jro. My question did imply that redfin cannot sustain their business model.
That was my point. That is what makes this post “empty hype.”
If I open a store next to Best Buy and refund 2/3 of the price on every LCD tv I sell - maybe I can get a “pr” post on some blog explaining how my business is a category killer - saving the consumer thousands of dollars over those retail 1.0 stores.
Profitability is so 2001.
Anyway - I like Glenn Kelman - he is one of the best at what he does (demonstrated by the attention MA gives him) and I wish him luck. I just don’t think the math will add up in the end…
JJ
Thank you for simplifying the math for Andre and whoever else was struggling with it. I am in the middle of using Redfin right now to purchase a house and can confirm what you said. In addition Redfin is a “Buyer’s agent” and buyers use the website just like a buyer’s agent would use the real estate matrix. So sellers are not “desparate” for using Redfin. Redfin just gives them access to the postings available to all real estate agents.
Dave G,
just to straighten out the profitability thing for you. They profit from volume and consolidation. By using Redfin the Buyer uses Redfin’s website to find houses on his own. Only once the buyer has a short list of houses he is interested in making an offer on does he contact a redfin agent who steps in to tour these houses and construct an offer to the seller. By not doing all the legwork of looking at 25 house with their clients they can represent more clients with less employees… therefor they can profit off of 1/3 of the commission.
Anyone who wants coverage in more areas should check out Movoto (at movoto.com). They seem to cover more counties than Redfin, and I’ve been using them for more than a year to look for houses in Silicon Valley. The email notifications I get about newly-listed houses are great. The commission structure I believe is similar to Redfin, except they use experienced agents from reputable real estate firms rather than building their own workforce of potentially novice real estate agents. Techcrunch should really do a writeup on them.
@19 Erika - selling without an agent doesn’t mean you need to do it alone. Hire a lawyer for a few hundred bucks. It’s MUCH MUCH cheaper than hiring an agent. Your lawyer will guide you through the legal stuff which isn’t much anyway. Realtor is a dying profession.
@23 and @21
I don’t even take into account a commission rate - for one reason, 6% is not a standard and for reason #2, there is only ONE check at closing.
UNLESS:
#23 is referring to “buyers” agency, where a buyer actually pays a commission ON TOP of the negotiated commission from a listing agent, then that may be the case - good Redfin refunds a partial fee… why not just charge less?
But in Redfin’s model, they are accounting for the commission that is paid via the MLS transaction - or the “listing agents commission… regardless if the commission is 3% as it can be in some markets - TOTAL - 1.5% for BOTH sides… so stop with the 6% hack talk - you must be in the backwoods where there is no competition, or agents price gouge.
But I digress.
The fact is, that the “mortgage bank” - i.e. the BUYER, PAYS the PRICE of the House… do we agree? Great. So for you simple minded folks:
300,000 @ a TOTAL commission of 6% is $18K, in a NORMAL situation is may be a 50/50 split sell/buy side. So 3% to each side… that $18K does not magically appear from the air - it comes from the SELLER proceeds - by route of the BUYER mortage…. so the seller receives 300K (minus) 18K (minus) closing costs.
So, Redfin refunds money that is being mortgaged upon, and financed over 30 years. If they really wanted to “save” money for people, they would instruct them to put that check right back into the mortgage points and buy down their rate… or they would give the seller 50% of the savings so everyone wins.
The point is = no one is really SAVING - they are merely moving money around the table, packaging it up and putting a sticker on it - welcome to marketing 101. Go Redfin - nothing against them, just trying to call it like it is.
I have to give Glenn credit that he’s really good at marketing his company. Here he is on a tech site, which is their firm’s target demographic, touting numbers that were supplied and developed by his firm. I’ve seen different statistics compiled by other resources and they don’t match Glenn’s so I would consider his a little suspect - much like tobacco companies claiming smoking isn’t bad for you “because they tested it and their science said so”.
When they were interviewed on 60 Minutes it wasn’t because they were really such a great company. The marketing department at Redfin just did a great job of getting a well respected television show to do a story that would create controversy and get them much needed press as they just so happened to be going out to a bigger market than the Bay area and Seattle. That’s not coincidence or serendipity, it’s plain old savvy marketing. How do I know this? I was one of the few Seattle agents 60 Minutes interviewed before choosing one for on air time and I was deemed too smart for the show because I laid out for the producer several laws, marketing tactics, layers of competition within the industry, and more for them to consider. In the end they decided to go with a “traditional agent” to meet the angle they wanted for the segment. Fine. No really, please continue with the usual stereotype of the industry.
Real estate agents aren’t going anywhere. Technology is changing the nature of the job, but automated sites will never replace good old networking and marketing (hint to you SV types: that’s the human touch). That Redfin is doing well in two well-defined and tech savvy markets doesn’t mean the concept can extrapolate across the country. I believe many/most agents earn their money. People predicted the death of stock brokers back during the late 1990’s, too.
The anonymous user experience for Redfin is what I love about it. We used Redfin to find our current home (Kirkland), and then went an found an agent to facilitate the purchase because we had to make it happen extremely fast and we’re sure if we wanted to risk using a Redfin agent for that size of a transaction(looking back, it probably would have been fine). Having Redfin around gave us the negotiating power to have our agent cut her commission in half, and our agent actually told us that she uses Redfin and because it saves her time when buyers already know what they want.
We also have a condo on the market in Seattle, and we use Redfin to monitor the comparable sales in our building and surrounding buildings. This is much easier than getting a monthly email from our agent and gives us access to much more detailed data without needing the MLS.
I actually drive around and see Redfin real estate signs in front of houses here, which I think it really cool.
We’ve paid Redfin $0 to date, but gotten tons of value.
They make a lower offer because there is no agent to pay a commission because they don’t offer the range of services that a commission paid agent does. That is their business model.
What services does an agent provide that is worth 6% commission($30,000 on a $500,000 house)? Open house? Open house is for agents to meet potential customers! Legal work? Hire a lawyer for hundreds of dollars. See, tell me why I need an agent? Don’t tell me they’ll negotiate for me.
The point here is that Redfin is claiming that they consistently make lower offers than competitors. This fact is because they offer a limited range of services in comparison. If you have questions about what those services are worth check out comment #30 and you will deduce that Redfin charges about what you should pay for their services. Also remember that the commission is always negotiable.
Many of you have touched on the real issue here which is value. The question is not whether the Realtor is getting paid too much. It is whether or not the value for fees paid was delivered. The problem lies in the business model of traditional RE Brokerage. In a transaction where there is a buyer agent and a listing agent, there is also the broker for each agent. That’s four parties that have their hands in the consumer’s pocket.
So, what value is the broker providing? Sure they provide infrastructure and branding for the agent, but so what? I know a lot of agents who work for big brand real estate companies who don’t know how to run a real estate deal. So, redfin, along with other companies who are redefining the business model and innovating on behalf of the consumer are the ones who will make it in the long run. The biggest challenge for the new breed of Real Estate Companies is consumer awareness and education.
Other companies such as webdigs ( http://www.webdigs.com) in Minneapolis are adopting a variation of the redfin model. Iggy’s house and Buy-Side Realty out of Chicago are doing something very different as well. The bottom line is that this new model should drive the “agents” who aren’t very good out of the business. Agents who are good, and charge 5, 6 or 7% will surive as long as they can show the value in the fees that they are charging.
So, watch the innovative companies who are streamlining their business practices to execute the transaction of buying a home or selling a home in order to financially benefit the customer. How is this bad? (That is a rhetorical question).
“That means they (Redfin agents) have to treat their customers well, and make sure they get a good deal.”
So does any other real estate agent worth a damn, in any brokerage / business model.
AA,
You’re incorrect about who pays the buyer’s agent. In a standard real estate transaction, the seller’s agent and the buyer’s agent split the real estate commission. The real estate commission is traditionally 6% of the home price. The money to buy the home comes from the buyer. Thus the 6% realty fee is actually paid by the buyer. Every seller knows this and prices accordingly before putting the home on the market.
If the buyer is not represented by a buyer’s agent, the seller’s agent gets to keep all 6%. If Redfin “charged less”, as you suggest, the seller’s agent would just get to keep a larger share of the total commission. By keeping the commission split at 50/50, Redfin is actually able to give the maximum amount back to the buyer.
Not sure where you live but I can confirm from my own experience that 6% is the standard percentage that realtors demand in the following metro areas: Dallas, Seattle, San Francisco, DC, and Richmond. Those aren’t “backwoods” locales.
Also, the 6% commission is due to collusion from realtors. Check out the on-going DOJ anti-trust investigation against the National Association of Realtors if you want more information.
“The model seems to be working. Redfin has been involved in over 1,500 transactions”
There were over 5 million home sales in the US last year.
6% commission is absurd for the services one gets from agents (particularly the buyer’s agent who basically tries to push to sign the deal) - it has to change. In the UK, the rate is 1-2%.
The DOJ has been pushed by politicians who are trying to say that there is little competition in real estate. Oh, but if they actually only worked in the field they would know better. Much like in the world of software development, there are so many different models that it actually could make your head spin. Some of you are already pointing them out by mentioning some of the newer players in the field in the previous posts.
There is no “standard” commission even if some LAME agent tries to tell you so. Commissions are negotiable between a seller and their agent and there are numerous pricing models out there. Some are flat fee, others are what some people call discounters, and then there are the full service folks. Now, what you get for full service will vary from agent to agent because - get this - we’re all independent contractors, or at least the vast majority of us are. We can set our own prices unless a broker dictates otherwise which a broker can only do for their own firm, we can choose to work with whatever type of firm we want (full service, discount, Redfin or otherwise) and we can choose to provide whatever services we want or, more appropriately, fits our business model and client niche.
Personally, I am a full service agent and I’ve negotiated my commissions up and down from my “usual” rate. When I am a listing agent I provide some pretty great services to the client before we even go on market such as: housecleaning service, window washing (inside and out), professional photography, basic staging/consultation, a home warranty for the buyer at closing (to reduce client issues after the sale), and potentially gutter cleaning and/or landscape or mowing services. On top of these we have an Internet marketing program that really is top notch. I’ve seen few other agents reach our levels.
If you, as a buyer or seller, allow yourself to work with a bad agent, take a look in the mirror to figure out who really is the problem. Based on what I’ve seen most people act on impulse when choosing an agent and they don’t comparison shop much. Overall, most people pick the first agent they talk to to represent them and quite frequently they get hosed. Is it just the agent or is it a poor consumer choice and method of choosing representation. Before I became an agent I went out and interviewed 4 agents total and then went back to the one that I liked the best. He ended up working with me on 4 home purchases and sales (total) and now he is my mentor in this industry.
All I can say is - be an informed consumer and you’ll be happier with the services you receive because you’ll be more likely to choose an agent that meets the level of professionalism and conduct that you expect and should demand.
I love how paid reviews are being disguised as articles. Seriously, basing an “honest” review soley on information provided by the reviewee?
Reba -
It sounds like you deliver the value for the fees you and your team charge. That is what any one would ask. If you can deliver that for every client, then you are separated from the rest. But, with companies like redfin and webdigs, which is the company that I work for, it is a matter of scale and volume.
We can provide these services too, however, I refer out the things that are not our core competency - which is valuing, marketing and selling real estate. I realize that staging, landscpaing, cleaning, etc. are critical parts of marketing a home and often the best money that one can spend when selling their home.
But, we see those services as al a carte and have chosen to refer them out at the seller’s expense. It make more sense from a cash flow perspective rather than front those fees and wait until closing to get re-imbursed.
I assume that for 6 or 7% you are picking up the tab there. Correct me if I am wrong. The perception that is created by the marketing of redfin or webdigs that there is a standard listing fee of 6% is actually fairly accurate with regard to the majority of the market. What you are up against is a discount broker who knows how to market for scalability and volume. The one x-factor is that very few companies are offering the rebate.
This should be offered to buyers. It is a ground leveling way to offer “flat fee” service to both sellers and buyers. If you offer a flat fee to sellers, then buyers should be afforded the same value. That is the point of the rebate.
It is true that buyers don’t pay commissions…out of pocket, but they (the commissions) are fees that are part of the total transaction, so they should be able to negotiate for them as a seller would negotiate a lower listing commission.
Stock brokers and travel agents also used to justify their expensive fees by supposedly “delivering value”. As it turns out, the internet through disintermediation has slashed the fees dramatically for the 95% of people who know what they want (whether it’s buying a stock, a plane ticket or a house) and don’t care about all the bells and whistle. Let those who wish to have full service agents work for them, I’m fine with that as long as we are not locked into this system, as is the case with MLS-controlled listings used to enforce respect of the fee structure if you wish to play the game.
The problem, again similar to stock broking and traveling agents, is that a percentage-based fee is hard to justify since few, if any of the actual cost is linked to the price of the house. Does it cost twice as much to mow the lawn of a $500k house than for a $250K one? Do you need twice as many hours from a lawyer? It doesn’t make any sense.
Tom (41), I won’t go into what my personal fees are here because that is for my own company information and our clients. However, I will say that with average commissions nationally at 5.1% you shouldn’t assume that all agents are asking for 6% because other marketplaces may have different levels. I can say pretty confidently that places like the midwest, where companies like Redfin will likely avoid, will oftentimes have lower percentages.
In fact, the national commission average has fallen over the past 10-20 years because of the kinds of competition we’re talking about in this thread, and with the rising number of people that have become agents. NAR went over 1 million members in the past 5 years and is now the largest trade group in America. But, before anyone here blasts us for wielding power only for our own gain, as a person involved regularly in government and public affairs committees locally (and reading national news on the topic), our trade group is often fighting for the rights and pocketbooks of our clients by limiting real estate excise taxes, lobbying for lower capital gains taxes on investment property, and more.
Oh, and Tom, we do provide these kinds of services for all of our clients, regardless of price point.
Scatman and Jason, love your comments (40, 37 respectively)
Refin sold 1500 homes in 18 months and their buyer’s paid an average of 98.9% of listed price.
I am a Realtor and sold 280 homes during that same 18 months and my buyers paid an average of 96.8% of listing price.
So me and my team of four sold about one-fifth of what their company did and “saved” our buyers 2.1% from what they claim is so great.
My average sales price is just over $960,000, which means that my buyers saved over $20,000 by using me instead of Refin, and they received full service and the knowledge and expertise of a very good Realtor.
No wonder Redfin is only popular in tech blogs, and not so much in the real world.
Obviously, disruption is more important to Michael Arrington than business model.
Let’s do the math on Redfin’s business model;
They refunded an average of $10,520, which is 2/3 the total commission, meaning Redfin made $5260 per transaction or ($5260 X 1500) $7,890,000 in total gross revenue during that 18 months.
They have an entry level and mid level staff of no less than 30. Assuming they pay their staff a salary of $40,000/year (they operate in the areas of the highest cost of living in the country)- that means they paid $1,200,000 in salary to entry level or mid level people. They have at least 20 programmers, who, if they are any good, make at least $100,000 year (probably much much more), meaning they paid out $2,000,000 to programmers, and they have a handful of top-level executives whom I would guess make collectively another $650,000. So that makes about $3,850,000 in salary during that time. Now factor in building costs, significant PR, licensing, travel, phone, copies, operations, etc ( I estimate no less than $1,500,000) would mean that Redfin parobably grossed around $2,500,000. Oh wait, they have to pay out the bonuses to the agents, which is probably the biggest cut of the revenue. Traditionally agents make anywhere from 60-90% of the commission, so even if they found people eilling to take 35% (in the form of salary and bonuses) they would have paid out $2,760,000, meaning they LOST over $100,000.
What group of investors would put over $20 Million into a business venture and be pleased with a loss of over $100,000 after two years in business?
Michael Arrington loves to (constantly) cheer for Redfin, but I’ve noticed he hasn’t invested any VC money from his VC group into their company.
I don’t blame him…
Oh, and don’t forget taxes that Redin had to pay from their revenue…. hmmm, can anyone say “sinking ship”?