Thinking skeptically to rain on Redfin.com’s parade . . .

by Greg Swann

Suburban Phoenix Real Estate Broker

Author website

I’m not a Jesuit, but I play one on BloodhoundBlog. The real truth is, I’m a roll-your-own Jesuit, more auto-didact than anything. I didn’t have Brian Brady’s inestimable advantage of having had the gift of reason literally pounded into me. Instead, I had to stuff it between my own ears by hand. But one way or another, lay student or Brother, if you walk in the path of Ignatius Loyola, you learn to think skeptically. Any affirmative claim is far more likely to be false than true.

This morning, Redfin.com posted a claim that MLS results “prove” that Redfin agents are better negotiators than other agents in the Seattle area. If CEO Glenn Kelman had made a claim like this in Brother Paul’s class, he’d be up late tonight writing a paper, striving either to prove or disprove it.

The problem is not that the claim is necessarily false. The problem is that that there are so many ways that it might be false that, to call it true without eliminating each one of these canards and false paths is an inherently tendentious statement — suasion, not persuasion.

Before I begin work on my much shorter paper on why the claim is dubious, I want to raise three meta-issues. First, I do not have access to the underlying data. If I did, I might write a much longer and much more conclusive paper. Second, I would have much greater faith in the mainstream media if more reporters were tuned to a Jesuitical tenor of skepticism. And third, the tabbed browser window is an excellent tool for organizing the resources to be used in an exercise like this.

First, Redfin claims that its results rebut the claim that a salaried (and possibly inexperienced) agent will not negotiate as aggressively as a traditional real estate agent working on a straight commission compensation plan:

After a year in the market, we decided to put our theory to the test, by querying the Northwest Multiple Listing Service for data on every home or condominium sold via a brokerage from February 6, 2006 (the date of Redfin Direct’s launch) through February 5, 2007. Since we didn’t offer a service for sellers or support areas outside King County until much later in the year, we limited the data to King County and we only evaluated our capacity as buyers’ agents.

But we still had the problem that Allan highlighted, namely that there is no “set base” price for a home.

So we compared what buyers’ agents negotiate for — the final price — to what the sellers’ agents ask for — the asking or listing price; some sellers’ agents may ask for too much, others for too little, but all King County brokerages are negotiating against the same set of asking prices (note that evaluating a seller’s agent is problematic, since the seller’s agent only competes against the prices she sets herself.)

The results were striking; Redfin customers paid on average under asking price, whereas customers of all other brokerages paid on average over asking price. The difference in negotiations was .9% of the home price, equivalent in King County to over $4,000, on top of a commission refund of nearly $10,000.

In greater detail:

• Redfin King County customers paid on average 99.329% of the listing price while buyers with other brokerages paid 100.233% of listing price for a difference of .904%, for an average savings of $4,474;
• The total Redfin Advantage, combining the negotiating advantage and an average Washington commission refund of 1.952%, was 2.856%. The total savings for an average Washington customer was $14,134;
• 170 customers in King County bought a home through Redfin, 200 across Washington state;

The Seattle Times bought it, as did Inman News to a lesser degree. The Future of Real Estate Marketing weighed in, as did TransparentRE. There was coverage at Inman Blog and the Redfin cheerleader delegation was represented by Matt Goyer.

When Redfin’s post appeared this morning, I passed it along to Marlow Harris of 360 Digest for comment — she being a mathematically-adept agent with access to the NWMLS database. She sent back a PDF file from NWMLS showing numbers radically different from those claimed by Redfin. These were the figures cited in the Inman coverage. (More from Marlow.)

The first discouraging word was issued by Freakonomics Blog:

Of course, it is hard to know exactly what to make of these results. Redfin would like you to believe it is that they have crack negotiators doing the bargaining. Another possibility is that the home buyer that seeks out a discount broker is cheaper and more savvy than the typical home buyer to begin with. It is possible (although there is no direct evidence to support such a claim) that these homebuyers could have made even better deals if they had worked with a full-service agent.

It is not easy doing data-driven research that is completely convincing. This research is not completely convincing. I do think it is sensible and interesting, at least, so hats off to Redfin.

Although the data here do not show it, one of the legitimate fears a client should have when using a discount broker is that lower fees translate into even weaker incentives to do well for the client. This is why I think that the real-estate market is more likely to move towards a flat-fee system (where a fee is paid to list houses and then agent compensation is based on an hourly wage as opposed to a share of the sale price), rather than to a discount system which is still tied to sales price.

Glenn Kelman offers his demurrers to these concerns in the comments to this post.

With all that as introduction, let’s go through some reasons why Redfin.com’s claims to superior negotiating skills might be called into question by thoughtful Jesuits — and those who aspire to be thoughtful Jesuits:

• Redfin agents may not be negotiating at all. The business model is based on the buyer driving the process. The lowball negotiators may be the buyers, not their Redfin agents.
• Lowball offers tend to fail far more often than market-price offers. Redfin is measuring only closed transactions, not all those that might have failed due to failed lowball offers — and which might not have failed in the hands of better agents.
• A salaried Redfin agent will have less incentive to keep difficult transactions alive, again skewing the results of closed transactions.
• Redfin’s actual claim is that it “beat the field” in gambling terms. That is, its performance was better than average, which average would have been weighed down by the worst performers. “We’re better than the worst!” is not a persuasive boast.
• By comparing itself to the field, Redfin avoids two more apposite comparisons: Against other discounting buyer’s agents (if there are any in Seattle) and against very experienced or very successful agents (which may not be possible, since experienced and successful agents tend to be listers, not buyer’s agents).
• As Freakonomics notes, that Redfin might have done well with its clients does not imply that other agents might not have done even better.
• The subset of clients attracted to Redfin may be so delighted by the idea of lowballing that no other consideration — e.g., getting the perfect house rather than the perfect price — compares in importance.
• To my knowledge, there is no provision made for more complex terms and conditions. A complicated negotiation might result in a higher reported sales price but a better overall deal for the buyers — for example, repairs or even remodeling, seller concessions, no out-of-pocket costs, etc. These are the types of arrangements more likely to be made by more-experienced agents.
• The data deployed by Redfin.com runs from 02/06/05 to 02/05/07. In that span of time, Redfin.com was ramping up production, so it is reasonable to surmise that its claimed production of 170 transactions was back-loaded into the latter half of the year. Unlike other markets, to the extent that Seattle has experienced a housing slowdown, it started much later, perhaps as late as July or August 2006. In other words, Redfin is very probably comparing its results in six buyer’s market months against what was for the market as a whole still largely a seller’s market.
• In King County in 2006, 27,834 homes sold. Of those, something less than 170 were sold to Redfin.com buyers. Whatever claims Redfin might want to make from its results, at 0.6% of the Seattle market, Redfin’s results are statistical noise.

A controlled apples to apples comparison might yield more information. What Redfin has so far is a press release — one which does not bear up to thoughtful scrutiny…

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