Redfin Invades Boulder

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by Osman Parvez

Why are people afraid to talk about commission?   I suppose that when talk turns to money, people often feel uncomfortable.  Over my 15 years of professional experience,  both in the financial investment community and the real estate industry,   it's all too common.    It's also unfortunate.

If you're buying or selling a house, talking about money should happen early and often.   Just be sure you understand the relationship between value and price.    They're not the same thing.     And remember, there is no inappropriate question.

Redfin Invades Boulder

I heard Redfin was building a presence in Denver, but I hadn't seen any Boulder listings (or agents) - until yesterday.   In the spirit of helping you evaluate your options, have a seat.   Let's talk about it.  

Redfin's value proposition: Buyer's agents are paid salary, not commission and listings are offered at a 25% discount to "traditional" fees.     Sounds attractive, right?

 Let's look closer at each side of the coin.

Buying 

So you've decided to buy a house or condo in Boulder.   It's a large investment decision, likely one of the largest you'll make.   You'll probably own the asset for years and selling it, sometime down the road, will include significant transaction costs.   What sort of professional advice do you want?   What will you get with Redfin?    

Realtors get into the business because it offers flexibility and it's an entrepreneurial playground.    The dropout rate is atrocious, but if you can survive 2 to 5 years of eating Ramen, it's a good business.  Work smart (and survive), you can earn a decent income (median =$65,266) and you control your time.   If you're good, the friendships you create with your clients are even better and more meaningful than the income.   Frankly,  the money is the gravy.  

Who else but a rookie would take a low, fixed rate salary or work on an hourly basis?

Realtors are almost always independent contractors - even if they hang their license with the most well known brands in the business.    Redfin's model, on the other hand, is for employees.   They claim to pay their agents a salary.   What does this mean for you?

The pitch is that you'll get no-pressure and a rebate for an unspecified portion of the buyer's agent commission.   I'm not a high-pressure agent, but others in this business might be.    So while the no-pressure pitch may be true, here's the rub.  It also means you're likely to get an inexperienced rookie.    In short, you're paying for someone's training because experienced agents want to have the flexibility of being independent and the higher potential income (and risk) of running their own business. 

What does an experienced agent bring?    Deep market knowledge, negotiation expertise, a wealth of vetted third party relationships (lenders, insurance, contractors), and most importantly - trust.   That's what you're paying for.   In my case, I'm also bringing my analytical skills honed from years in the investment analysis community.    Let me know when your Redfin agent is willing or even if they're capable of doing a regression based analysis to help you see the appreciation rates between Boulder and Louisville.    

As for the risk of dealing with a salesy agent, for now it still exists with some Realtors but it's also going away fast.   Online reviews are prolific (my reviews) and a single bad one can cause catastrophic damage to your business.   If I even sense that a client is not satisfied, at any point, I'll stop everything to resolve the underlying problem.   I can't afford to have unhappy clients.   Not a single one.

People often ask me how to get into real estate.  I tell them to become an assistant to a busy Realtor.    You can then learn from their systems for success, and you can learn from their mistakes too. Meanwhile,  you take little to no personal risk.    Now I have a second option.     Get your license and become a Redfin agent.  

Who else but a rookie would take a low, fixed rate salary or work on an hourly basis?   Realtors work nights, weekends, and holidays.     Redfin meanwhile sounds like a paid internship or residency program.   It's a good place to learn and get paid a minimal salary at the same time.  As a buyer, I'd be very cautious about accepting that deal, even if means you save a few grand on the purchase price.    You're getting less value. 

Remember, real estate investments tend to be long ones and the asset itself is relatively illiquid.   This means you're likely in it for the long haul.    You're spending big bucks.  Always get the best possible advice you can find.

Selling

Commissions are usually paid by the seller.   Let's talk about money.   Here's Redfin's value proposition for listings.

They recommend keeping the buyer's agent at 2.8%, but reduce their commission to 1.5%.    This means the seller's total commission paid is 4.3% instead of 5.6%.   Redfin is shaving 1.3% off the cost.   Here's their pitch, if you want to check it out.

The dollars in the example shown above is for a hypothetical $500,000 listing.    1.3% saves you $6,500.    
The table above is their pitch in a nutshell (source).   Let's go through one bullet at a time.

Every Agent Reviewed, Published Online    

This is not a competitive advantage.  It's no different than the typical scenario these days.    Buyers and sellers can review any agent at any time on dozens of different websites.    I don't know about others, but I actively go out of my way to encourage it.     If something isn't right, my goal is to fix it before the review stage but even unhappy clients have an opportunity to give a review.       All agents are review driven, or will be soon.  

Paid on Your Satisfaction 

I'm not sure what compensation a Redfin agent will get from unhappy clients who close a deal.   Redfin's website doesn't make it clear.     Even if we assume that a salaried agent loses 100% of their income if they screw up a deal,  it really doesn't matter because agents can't survive in this business for long without satisfied clients.   Online reviews have radically changed the business and I'm glad for it.     One of the benefits is that I don't have to pay for as much advertising, it's all word of mouth.     It also mandates a feedback loop.  

In the full service (not Redfin) model,  your agent may not be paid directly on your satisfaction but their ongoing business is deeply dependent on it.    In a small community like Boulder, this satisfaction is even more critical.    Crappy agents don't last long.

More Experience:  Average Deals/Month

I've outlined the reasons above why this doesn't pass the sniff test.    Experienced agents won't go for a salaried position, no way.   I could download all the sales from last year and I bet you'll find fewer than a handful of Redfin listings or agent closings.   They're not doing more deals per month, not even close.    See the Who is the Best Realtor in Boulder, my last analysis on my competition in Boulder.  As soon as an agent achieves sustainability (2-5 years, typically), they'll move on to a brokerage where they can earn more money and control their schedule.

Data-Driven Pricing, Insights and Reports 

I've written about bad research from Zillow and Trulia, do you think Redfin is any different?     It takes human intelligence to analyze the market closely.    It also takes experience and skills.  Anything else is a 10,000ft level view of market conditions.   Even my obsessive research reports, based on my experience and skills in investment analysis,  isn't specific enough to satisfy my client's needs.   Every client is a new research and analysis project because that is what it takes to provide good advice.   

The biggest risk to buyers and sellers is mispricing and bad market timing.    Sellers want to maximize price and minimize time on market, buyers want to make sure they're not overpaying and if possible, get a deal.   Buyers also want someone to assist them with complete and thorough due diligence.  Relying on generic reports, even from my own MLS or Realtor Association, is a big mistake.    Real estate is not like the stock market, the data is not ubiquitous and the assets are far from uniform.   Trading data is challenging to find and information is not free or transparent. 

Accurate and market data driven pricing is crucial, whether you're buying or selling.   It's one of the highest value-adds your Realtor brings and you can't automate it.  Don't be fooled.    

A few years ago, I started doing work sessions with clients.   Lugging my gigantic 18" laptop to meetings is a chore, but I want my clients to see everything I see.    We do the analysis in real time, pursuing answers to their questions.  I don't provide generic, high level reports using stale market data.  

Free Professional Photos 

It's embarrassing, but a surprising number of agents still use craptastic photos for their listings.   It's shocking and a breach of duty.  Yes, Redfin scores a point here... but only against lousy agents.   If you list with me, I  include professional quality photography in every one of my listings, no additional charge. I also include a staging consultation, free.  If you're not happy with the photography, I'll come back with lighting and do it again.    Professional, high-quality photography and staging consultations are not an option with my listings, they're mandatory because it's the only way I can maximize the sale price for my sellers.    

Proven Marketing Techniques 

What Realtor uses disproven techniques?     While some Realtor marketing is inefficient (the newspaper and open houses), they still gather eyeballs.   In the case of open houses, they sometimes will result in a sale. I don't think Redfin has any advantage here, but I should also mention that neither does any Realtor when it comes to getting listings inserted on the MLS.  Co-marketing agreements mean your listing will also appear on Yahoo, Zillow, Redfin, Trulia, Realtor.com, Coloproperties, and dozens of other websites - small or large.   Individual agents and brokerages don't have a competitive advantage to distribution of the listing information. 

While we're on this topic, let me hop on a soapbox.   Don't let your Realtor do an in-house or pocket deal without letting the market get a good look at your listing.    Pocket listings should only be accepted if you feel extremely confident about your market knowledge.   Your risk, especially in the current market, is leaving money on the table.   Remember, set your pricing to slightly lead the market but not too far ahead and closely track the competition from other listings.

No Strings Attached    

I assume Redfin is referring to listing or buyer agency agreements because they don't go into any detail.    As I've mentioned before, Realtors are deathly afraid of bad reviews.    It would be a very bad strategic decision to continue a business relationship with an unhappy client, contract or otherwise.    What other strings are they talking about?    Are they doing listings without a contract?   I doubt it.

This bullet preys on the perception of Realtors as shady salesmen, not the reality of how the business actually works.     If you're worried about it, ask your prospective Realtors about how you will be tied to using them.   The conversation should give you confidence, if not, choose another Realtor.    By the way, if you're interviewing me for the job, feel free to record the conversation.   My word is my reputation and my future business.   There is no room for anything less than the highest integrity and honesty. 

Discount Realty -  A History of Failure

Redfin is not the first discount realty company to try to change the industry.  Nor will it be the last.    The industry is fragmented and there's a HUGE opportunity for consolidation.    The trouble is that it's difficult to automate the services of a Realtor.  

Help-U-Sell was the most recent discount brokerage to make a splash and then largely exit the Boulder market.   After picking up a lot of listings in a short period, they virtually disappear overnight.     In 2007 and 2008, Help-U-Sell listings seemed quite common.    Now they're almost entirely gone.   Ask yourself why.   

Understanding what happened to Help-U-Sell will make the pros and cons of Redfin's value proposition clear.    One of the reasons they disappeared is because the company couldn't support the services that sellers need at the price they were offering.   The other reason is that a discount mentality is a difficult one for negotiation and marketing purposes.     Having an agent in between, one that is experienced and savvy, can make for smooth sailing when things go wrong.    I can't prove this with market data, but I suspect that agents and buyers were actively turned off by Help-U-Sell's branding.    It became sort of like putting a Blue Light Special on the front of your house, the opposite of the cache that the auction house brands are trying to achieve (Sotheby, Christie's, etc).  When a brand develops a reputation for being difficult, or for having unrealistic overpriced listings, for example - it won't last long.   

Conclusions

If nothing else, Redfin brings some much needed transparency to how real estate commissions work.   They've introduced the subject in a large and public way.   

As a buyer or seller, you need to understand not just the price but the value of the services you're getting.     Because people buy and sell real estate so infrequently, it can be difficult to understand that value.   

If I were buying or selling a house, I'd consider Redfin  - but only as one choice among a range of other options.    You should interview a Redfin agent, but you should also interview experienced and reputable full service agents.      Then, make your decision.

We'll see how (and if) Redfin gains traction in Boulder.   Stay tuned..

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Please note:  My goal is to provide exceptional service to our clients. The ideas and strategies in this blog post are the opinion of the writer at the time of publication. Careful and complete due diligence is strongly advised before buying or selling real estate or other investments. Consult with your professional advisers before making financial decisions. This article is not intended as legal, tax, or investment advice. Silver Fern Homes will not be held liable for investment choices derived from this article.