Redfin and ‘Disruption’ in the RE Industry

Redfin - Find, Buy, and Sell homes online.

On every third call I do the word “disruption” comes up — meaning the upending of some practice or financial model in the traditional marketing and media world. It’s almost an empty term at this point it’s used so often; much like “Web 2.0″ has been drained of meaning from overuse (“Web 3.0″ has now made its appearance). :)

But in the real-estate industry consumer adoption of the Internet, especially at the high end, combined with the advent and now wider availability of discount brokers (Redfin is the latest to join the group) may put increasing pressure on local realtor commissions and over time change the nature of real-estate transactions. (This is Zillow’s vision too although not yet embodied on the site.)

From today’s NY Times (reg req’d) comes a lengthy article on the subject:

“At that point we became a true pariah to the industry,” said Rob McGarty, Redfin’s director of West Coast operations. Buying a home online is not too different from ordering a book at Amazon.com or a computer at Dell.com. A prospective buyer finds a house on the Redfin site, which populates its maps with homes found on the local M.L.S. A request to see the house can be made with the click of a mouse.

Buyers also enter details of their offers — the price they want to pay, the size of the deposit they are willing to put up and, for example, whether they will pay for the termite inspection. Then they click on “Submit.” A Redfin agent checks everything with the customer before passing along the offer to the seller.

“It took eight minutes,” said Perry Webster of Des Moines, a suburb of Seattle, who bought a new four-bedroom house through Redfin. “But it didn’t really matter that it was online. We just liked the business model.” He asked, “Is it really worth $10,000 to ride in a real estate agent’s Lexus?”

Redfin can also work the seller’s side of a real estate transaction. It uses a disruptive method there, too: it lists homes in the M.L.S. for a flat fee of $2,000. The customer is responsible for showing and advertising the home; Redfin handles paperwork and negotiations. But one part of the old system is steadfastly adhered to: buyer’s agents are offered their full share of the usual commission.

Like many Redfin customers who were interviewed, Mr. Webster and his wife, Robin Meyers, told of encountering hostile selling agents who said their offers would not be competitive if they used Redfin. But other agents’ antagonism only seems to make Redfin customers more loyal.

(My emphasis.)

In several places the article makes reference to agent hostility or resistance to buyers using Redfin. Certainly this reflects that agents are worried and this has struck a nerve. But there may be an early momentum here that becomes very hard to stop – especially in a slowing market where people want to pay less and keep more (whether you’re a buyer or a seller).

Word of mouth referrals and top-performing agents will still exist and still make good commissions over the long term (our agent jumped through some elaborate hoops and really delivered for us). But there will be increasing downward pressure on commissions, especially when — because of the Internet — people feel that they’re doing all the work and the agent is bringing less value to the transaction.

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Related: Results of a Classified Intelligence survey of local realtors’ marketing attitudes and behaviors.

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6 Responses to “Redfin and ‘Disruption’ in the RE Industry”

  1. Ed Says:

    Redfin: Great technology, great PR team, terrible business model. They are no different from ZipRealty and will have a very tough time getting profitable. That said, in the discount business, scale rules (walmart) and if they can get big then they are interesting, but I suspect that ZipRealty are in a far better position than redfin to dominate here.

    As the majority of the agents’ variable cost is in advertising, the route to increased efficiency and lower costs within the Industry are through cheap and focused online ad platforms.
    I believe that Trulia.com and Google Base/Adwords with cost effective or free traffic generation will have a greater positive impact on the commissions, consumers and overall agent/broker profitability than redfin or any other discount model will ever have.

  2. Malcolm Lewis Says:

    I think of the 6% realtor fee like the 1% trade “full service” fee brokers use to charge before Schwab and other discount brokers came along. It’s egregious and generally does not reflect the effort expended by the realtor. IMO the RE industry needs to transition to the same time + materials model used by other professional service providers like accountants and attorneys. We’d all feel more comfortable that we’re getting what we pay for. Plus it would allow buyers/sellers to shop around since not realtors’ hourly rates would vary.

    I like the idea of Redfin representing both sides of the transaction, which is required to get the fee below the industry standard 2.5-3% per side. If we stick with a % transaction model (vs time + materials) I have long thought that an interesting model would be to provide a “reverse auction” in which realtors could pick one side of the transaction and then bid for the business. Their bid would include the lowest % they are willing to take for their service plus bio/track record details that allows the customer to compare bids based on ability to get the job done in addition to price. Maximum savings for the seller occur when buyer and seller are each represented by a realtor that is working for less than 2.5-3%. In this model, the platform provider allows any realtor to bid – basically creating an open market for RE transactions. Just a thought…

  3. Marlow Says:

    There are plenty of discount real estate models out there. I don’t think most traditional agents care about or are concerned about those.

    Redfin can give 100% of the commission back to Buyers, that’s not the point. The problem is when they ask another real estate agent to chauffer their buyers around for them and show their clients listings. That’s the real problem there….. it’s not safe and it’s not good business.

  4. Malcolm Lewis Says:

    I’m no RE expert but it seems to me that the real problem here is the traditional % transaction RE model. It makes it too easy for realtors to provide services without compensation, and too easy for buyers/sellers to pay too much for the services they receive.

    If buyers/sellers each paid a realtor time + materials, then the realtors would always be fairly compensated and buyers/sellers would always get what they pay for.

  5. marc Says:

    I developed and operate a website whose model is exactly as Malcolm described above: Agents bid to represent sellers and/or buyers in a reverse auction format. I’ve received some good feedback from both consumers and agents on the concept.

    Here’s my opinion of what’s going on: like any commission-based sales business, real estate is a numbers game. Agents absorb the risk/cost of a buyer not buying or a seller not selling. But because of the glut of licensees all competing for the same deals, sales opportunities can be quite low. As a result, agents have to swing for the fence on each deal to cover their cost on other non-deals.

    What will lower transaction costs? Take the sting out of representing buyers who don’t buy. I think the trend of doing research up-front using online resources will continue to a point where buyers contact an agent only after they have narrowed their search to a few homes and are ready to make an offer. At that point, the buyer’s agent isn’t a chauffeur, but a consultant on the deal.

  6. Reverse Auction Says:

    buyers and sellers anniversary paid a realtor time materials, again the realtors would consistently be adequately compensated and buyers andsellers would consistently get what they pay for.

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