Cross-examination: Has Redfin lost it’s religion?

Redfin_BiddingWar

Excellent article by VOX on the evolution of Redfin, but it would be improved by a critical cross-examination of statements like this from Redfin’s CEO Glenn Kelman:

EXCERPT:  Redfin set out to change real estate. Then real estate changed Redfin.

“…the original, bare-bones [Redfin] brokerage model would never appeal to a mass audience. So in November 2008, as the real estate market was imploding, Redfin took the plunge.

‘Redfin started life as a cult,’ Kelman wrote on the Redfin blog. ‘But our goal has always been to become a religion.””

CROSS-EXAMINATION:

Discussion point #1:

The article goes on to talk about how Redfin reduced it’s commission and began taking listings which from my perspective as an believer in the Common Law of Agency, is the equivalent of losing their religion.

Is that too critical an assessment, or do others share that perspective?

Discussion point #2:

No doubt Redfin’s brand has loyal followers — an estimated 6 million unique site visitors each month:

http://www.ebizmba.com/articles/real-estate-websites

But like other Mega-Brokers, does their desire to build market share undermine their capacity to act as a fiduciary for individual homebuyers, when there are fundamental conflicts of interest?

1. Dual agency / Designated Agency
It’s impossible to simultaneously try to get the highest price for home sellers and the lowest price for homebuyers, and

2. Competing buyers in-house
How does an individual homebuyer benefit when their brokerage is representing competing buyers interested in the same property?

Discussion point #3:

To what extend does the mainstreaming of Redfin’s business process and reduction of their rebates reflect pressure from outside investors who together have put $165 million into the company over the past decade?

Does their desire to become a national brand leave them vulnerable to more nimble network of independent brokers who can offer both deeper discounts / larger rebates without conflicts of interest?

CREDIBILITY CHECK:

To underscore the benefit of working with small independent brokers or “indie” agents and Redfin’s lack of credibility as a a religion one simply needs to question two assertions on their home page:

1.  Can you really tell competing buyers you are going to put them first when you’re submitting competing bids on the same property?

2.  If I am a buyer, particularly one who has been burned repeatedly by bidding wars, do I really want to work with a buyer agent who’s website boasts, “Turn one offer on your home into a bidding war?”

OUR CRUSADE:

From our perspective as consumer advocates over the past 20 years, those questions expose some of Redfin’s conflicted beliefs.  If you’ve lost faith in their brand, you’re not alone and we invite you to learn more about our crusade — #RE2020. Our mission is to raise awareness about money-saving real estate business models who collectively could empower homebuyers and sellers to save $30 billion dollars annually by the year 2020.

Redfin set out to change real estate. Then real estate changed Redfin.  Real Estate Cafe has remained true to it’s original mission and our DIY homebuyer clients.  And we’re not alone.  There are other money-saving business models who still walk their talk, plus some impressive new start-ups who have responded to calls to disrupt real estate.

Follow #RE2020 on Twitter to learn more.

Related Articles

Redfin’s conflict of interest

Redfin rebates a portion of its commission
back to home buyers in exchange for buyers doing most of the research
themselves, and on the sell-side offers to list homes for a flat rate.
The company claims to have saved home buyers nearly $6 million in
commissions since its last round of financing in May 2006.

Critics within the industry say that this type of business model in
which consumers do much of the work themselves in exchange for a
discount comes at the expense of the agent working the opposite side of
the deal. In addition to Redfin, many companies have begun offering
discounted commissions to consumers who prefer to handle some aspects
of the sale without the help of an agent.

Billion dollar break-up: Protecting rebates vs divorcing two-sided real estate commissions

Stupidtax_1
Redfin’s corporate blog is cheering because an "Anti-Rebate Bill" introduced in Illinois that would have banned real estate rebates has apparently died in committee, or in Redfin’s words, been "crushed."  Other sources report that the bill has changed focus, and as The Black Knight in Monte Python’s Holy Grail famously said, may not be dead yet.  According to sources, there may still be an attempt to morph the anti-rebate bill into a procuring cause bill before Friday’s deadline, which could be extended.  What’s at stake is the definition of procuring cause, a legal concept which Realtors use to decide who procured the buyer, and therefore who is entitled to collect the buyer agency fee under their guidelines.  Although the exact language has not been shared, Redfin and other sources allege that the reworded bill would require a buyer agent to accompany their client to property showings to collect the buyer agency fee offered through the multiple listing service (MLS).

Buyer agency compensation is an old family fight in the residential real estate industry, one the consumer has been dragged into because a growing generation of discount business model use rebates to hook home buyers.  What most home buyers don’t realize is the two-sided real estate commission is obsolete, and some critics have likened it to a real estate transfer tax (hence our photo above).  So, IMHO, firms discount business models like Redfin are actually propping up an artificial pricing structure and reinforcing a barrier to competition and consumer savings.  While a recent Redfin blog post called the 3% buyer agency fee "boring," it did not challenge it or call it unnecessary or anti-competitive.  In fact, the blog post says "Redfin has always been careful when listing a home to encourage our clients to offer the buyer’s agent 3%…"

I agree with Redfin, the proposed IL bill is not the answer, neither in it’s original form, which sought to ban rebates; nor it’s amended form, which may seek to define procuring cause.  However, there is a long overdue reform that would reduce real estate commissions by billions of dollars annually:  separate fees for listing agents and buyer agents.  Think of it as a real estate version of BYOB: Bring your own broker.  That’s the only way to create an open, competitive market place in residential brokerage, where as one attorney wrote:   "the ability to freely price one’s service is a pretty basic, bread and butter tenet of competition." The Consumer Federation of America first proposed that reform 16 years ago, and there is growing interest in "divorcing" the commission even within the Realtor community.  You can learn more by viewing this 90 second slide show:

Uncoupling the traditional two-sided real estate commission:  10 Mega-trends leading towards a tipping point (click to see video)

As the real estate industry transitions to a more competitive marketplace, The Real Estate Cafe’s will continue to offer a menu of hourly and flat fees plus rebates, including a 100% rebate option.  However, we’d prefer to work with other change agents to unlock billions of dollars of consumer savings annually by compensating buyer and seller agents independently.  If you are interested, please use this wiki to brainstorm about building a coalition and action plan to divorce real estate commissions.  If you’d like to meet in person in Boston, no need to BYOB — we’ll buy the beer.

Will real estate consumers begin comparing hourly fees to savings?

What’s a familiar story about agents vs "for sale by owner" properties doing "above the fold" on page one of the New York Times?  Because:

"The
findings [– that "One City’€™s Home Sellers Do Better on Their Own –] fly in the face of studies by the National Association of
Realtors. The group has said that houses sold via its members’ local
multiple listing services get a 16 percent premium over homes sold by
their owners."

The timing of the story is also important because it echoes a Wall Street Journal headline this week cautioning
"What You Don’t Know About Real Estate May Cost You."

One of the stunning findings in research conducted by the AARP and
Consumer Federation of America is that "Only about one-quarter of
respondents knew that they can negotiate broker commissions."
Apparently another WSJ story three years ago which advised consumers
that "It Pays to Negotiate Your Agent’s Commission," has had little impact (despite a reference to The Real Estate Cafe’s 100% rebate model 😉

So how can an enlightened homebuyer or seller compare the
value added by real estate agents versus their level of effort and cost of doing
business?  One of the researchers in the NYTimes article concludes that
real estate consumers will begin asking for time sheets:

"…sellers [and homebuyers?]
will begin to examine more closely the cost of all the small tasks
handled by agents. To justify a $12,000 fee on a $200,000 house, he
said, "you’d have to have a very high hourly rate" for an agent’s work."

Another industry critic, Mark Nadel, says that kind of disclosure could help deliver an
estimated $30 billion annually in consumer savings.  Yes, existing
fee-for-service business models like The Real Estate Cafe would benefit
greatly from such a regulation, but if "unit pricing" is now commonplace in
supermarkets why not require similar transparency in real estate so
homebuyers and sellers can compare effective hourly rates? 

Want to see time sheets for our past clients and compare their total hourly fees to savings last year?  Ask our competitors — traditional full commissions or competing rebate business models like Redfin — for the same information so you can compare hourly fees and savings side-by-side.  (Our goal is to help you save so much money, you’re GLAD to help save a life as well.)

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