Deconstructing the Redfin Debate

Almost all of the media attention Redfin has been receiving has been in reaction to their business model. And most of it has come from the Realtor community. I had to ask a few questions to Max Diez, a Redfin agent with a six month pedigree, certain questions about Redfin’s business model that have been talking points

Why would a Realtor join Redfin? When a consumer purchases a home through Redfin, they receive 2/3 of their commission refunded back to them. Redfin agents work on a salary plus approximately 0.5% commission basis. You’re giving up the commission upside for a salary...

Spin: Redfin’s agents haven’t proven themselves as top producers, or they wouldn’t trade their income for a salary.

Max tells me after working as an agent since 2000, he decided he was more interested in closing deals and managing the transactional parts of the business that played more into his expertise and experience as a real estate consultant.

My take is that more than a few Realtors would like to adopt the Redfin model themselves (without Redfin affiliation). Shlepping around home buying clients is a time consuming activity that may not produce results. I think most agents would much rather have the client use internet resources to find their own house and bring it to them, because at that point their client has self-qualified themselves (and especially if it’s still for the 3% cut). If the agent can get these kinds of client leads and can automate the transaction processing, it opens up their time resources to, say, tripling the number of clients they can work with. Instead of the 3% commission, they may get 1% like Redfin, but will do, in theory, many more deals and build their referral network faster.

What Redfin should do: For recruitment, Redfin might emphasize that their model is based on acceleration to lead qualification, and the real opportunity is the chance to complete more transactions with Redfin than with another broker. Furthermore, the agent’s role becomes more akin to a Consultant, a natural evolution for Realtors who are now branding themselves to do more than just realty (loans, financial planning, etc.). The Redfin claim “to offer better service from offer to close than a traditional agent” gets incredulous reactions(noting that most of the pre-offer work is done by the home buyer), but their validation point is to meet if not surpass client expectations , and their stated 95%+ customer satisfaction rate seems to indicate so.

Explain the $125 charge per home tour policy… Redfin will check out a houses with its home buying client the first time free, but will charge $125+ per subsequent tour, cumulatively refundable to the buyer upon purchase.

Spin: Redfin doesn’t provide the customer service a standard agent would, and if asked, will nickel and dime you.

Max explains that about 30% of the SF Bay Area clients attracted to the money saving Redfin model are… surprise… the bottom feeders who make the lowball offers. The charge per look is a deterrent in working with these potential time wasters. The real point is most standard agents also won't devote an extraordinary amount of resources to these same bottom fishers.

What Redfin should do: Emphasize that the actual services provided do reflect the cost of doing business. More to the point, the debate should be about customer satisfaction with the menu of services… get feedback from them and if they like it, the skimping and saving perception will be neutralized.

Finally, the big question that hits to the heart of the efficacy of Redfin’s rebate... (and I understand most agents will say it's not just about the price... all top producers will say they provide top value that may be intangible)

Can a seasoned top producing agent negotiate and purchase a home on a full 3% commission basis that will be financially more rewarding to the buyer than a Redfin agent working on a net 1% commission basis? In other words, will a top producer be able to negotiate a deal that is over 2% better than the Redfin agent?

Unfortunately there’s no empirical data to answer this question. Since it really can’t be proven one way or the other, Realtors have been striking with the same arguments I asked Max about - Redfin agents’ lack of experience, their slimmed down service offering – as potential reasons why the Redfin agent will fail to get a better net deal for their buyer, or even worse. Redfin's reputation would be sullied by one bad deal, and so far, I haven't heard of one yet.

This dialogue, a war of words, has become a polarized marketing debate to win the hearts of consumers and agents.



I understand there's a lot more to the Redfin debate - viability of the business model, marketing bloopers - I'm just pointing out the business model has some concepts that may stick in the future and why there's such a virulent debate around them. And I do see the benefits for working with the best a real estate transaction.

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What did you think of this article?

  • 2/19/2007 11:37 AM Realtio wrote:
    Pat at Transparent Real Estate posted an interesting interview and analysis about RedFin's business model today. One of the reflections Pat made was this: "Furthermore, the agent’s role becomes more akin to a Consultant, a natural evolution for Realtors who...
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  • 2/19/2007 5:29 AM john harper wrote:
    Pat - We have found most buyers, especially younger ones, want to search online and look at the neighborhood before calling an agent to "get in" for a look. Schlepping clients around to houses sight unseen or researched is "old school."
    This is still needed for a certain percentage of clients.
    VALUE - is not all price. Never has been and never will. You can buy your next technological wonder at Costco, but you won't find anyone there that can really explain it to you.
    Reply to this

  • 2/19/2007 8:00 AM jf.sellsius wrote:
    Are you a discount/rebate broker or a traditional broker or a flat fee broker? Why can't you be all three? Take the legal industry, for example-- some cases on taken on a contingency %, others are flat fee or hourly depending on the nature of the case. It's a flexible system. Real estate could operate in a similar fashion. Just a thought.
    Reply to this

  • 2/19/2007 12:07 PM Kevin Boer wrote:
    jf, your idea is great, but you'd have to be an independent player to make it work, since there isn't a major brokerage company in the country that would permit it.

    Pat -- I have some ideas on how Redfin could streamline and expand their business model and become profitable. That will be the subject of an upcoming post.
    Reply to this
    1. 2/19/2007 9:46 PM Pat Kitano wrote:
      I appreciate the direction of all your comments - that is, Redfin is changing their perception of how realty works and is creating new ideas.

      I was at first afraid I would receive some of the Realtor backlash that can occur when Redfin is portrayed in a neutral light, that's why I added some provisos to the article explaining how I understand the detractors' side.

      I expect more new perspectives and ideas to come from the Redfin debate - Kevin, looking forward to your post - and will continue adding to the discussion.

      Reply to this

  • 2/21/2007 5:38 AM Karl Lingenfelder wrote:
    Real change will come from the Buyer/Consumer.

    Buying a home is very emotional and Buyers look first at listings and don't really understand all the rebate/discount scenarios and are even wary of them as they really just want to buy a home.

    Discounting & rebating is easier for Sellers to understand, but most Sellers aren't pursuing that either.

    They just want to sell and go with an agent who feels right for them.
    Most sellers are squeamish about negotiating the Commission. Also if one really wants good service, they want a motivated agent Sellers should not de-motivate their agents.

    6% is still a percent, though the gross seems high with high prices. A good agent can save a client much of that 6% in price negotiations and financing costs.

    As more Buyers and Sellers get more savvy and comfortable with negotiating the Agents costs, change will happen, but slowly.

    Consumers don't negotiate price at Tiffany and most are not good at negotiating the price when buying a car.

    There is a big emotional content to those kinds of purchases, just as with a home.
    Reply to this

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