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Work the numbers: Redfin.com is not much of a business . . .

If the New York Times devotes 2700 words to a puff piece on Redfin.com, how many of those words would you expect represent the contrary point of view? If you said 1,350, to reflect the chimerical idea of balance, you haven’t spent much time reading the New York Times. If you said zero, you spend too much of your time reading Little Green Footballs. The Times would never, ever present a completely tendentious article without at least a feint at balance. Marlow Harris, whom I admire no end, gets to offer this extensive and comprehensive counter-argument:

Some agents say the biggest problem with Redfin is that it complains too much. “Someone may be trying to manufacture controversy, even going so far as to bait other real estate practitioners, invite ‘war stories’ on their blog and whine to Congress and to newspaper reporters that they’re being treated unfairly,” said Marlow Harris, a Seattle agent with Coldwell Banker Bain Associates who also runs the real estate blog 360digest.com.

I can’t imagine how much of Marlow’s time the Times wasted in order to stuff her mouth with a straw man, but I will bet a very tall dollar this is not all she had to say.

In reality, the piece is Redfin.com PR, but the hook is a couple who were turned away, like Mary and Joseph, by an evil innkeeper of a real estate agent. I’m going to fisk this article a little, not a lot, because it’s interesting.

First, did the Times lack the opportunity to present a contrasting point of view? Of course not:

But the seller’s agent refused to show it to them. Why would she turn away an eager buyer?

How about because she could double her legal liability for no additional compensation? Was that so hard?

“You can find out more on the Internet about an eBay Beanie Baby than you can about a $1 million house,” said Glenn Kelman, chief executive of Redfin, a licensed broker in Washington State and California.

Oh, good grief. I think the “secret” fields in an MLS listing are stupid, but there are damn few of them, and none of them occlude or obscure material facts about the property.

Traditional agents still firmly control the M.L.S., which allows all participating brokers, including Redfin, to view almost every home for sale in a particular area, even those being offered through competitors’ agencies.

This is sly. Traditional agents are distinguished from Redfin because they are… alike and equally members of and participants in the MLS system. Two legs bad. Four legs good.

Happy news, though:

As it turned out, the Wolfs’ offer was the highest of five bids made for the house they wanted, and they were able to buy it despite the balky broker.

But wait. There’s more:

(They toured the house with a friend who is an agent.)

Who does the friend work for? Did he stop to think about his own liability? Are there no real estate regulators in Washington? Right there in the New York Times, the Redfin PR team is trumpeting its success at defaulting on its fiduciary duties to its clients while diverting its legal liability to a (presumably) uninvolved patsy.

What’s wrong with Redfin.com? You would have to work at the New York Times not to be able to figure it out…

BuySideInc.com, an online buyer’s broker in Chicago that offers a 75 percent commission rebate, said that at one point 12 percent of its customers reported that traditional agents had refused to show houses to them.

When you call a listing agent and say, “My Century 21 agent can’t come with me, but I want for you to show me your listing on Griswold Street” — what happens? What happens when you show up at a new home subdivision, telling the sales reps that you want to be represented by your absent Coldwell-Banker agent? Innocence, ignorance, incompetence or malice — who can tell the difference?

The battle by the traditional agents reveals how vulnerable the broker’s 6 percent commission has become. Agents are quick to point out that the average commission may be closer to 5 percent — a 17 percent decline over 10 years, they say — but no one knows for sure because no one collects data on that.

Title companies do. I don’t know if they could or would reveal the information, but I’m sure they have it. HUD and the IRS know, too.

I love this:

Buying a home online is not too different from ordering a book at Amazon.com or a computer at Dell.com.

I can’t wait for that to come out in a negligence lawsuit.

In order to do a little math, we’re going to connect the dots from two different places in this article:

Redfin opened in 2004 as an online real estate listings site for Seattle, and now has 35 employees, including 12 agents in Washington State and California.

and

His agency, he said, has closed 89 transactions and returned $900,000 in customer rebates.

First, a brokerage of 12 agents should have at most 14 people on staff, 13 is better, 12 is best — the broker should be selling, too. Particularly if they’re going to give away two-thirds or more of every gross dollar coming in the door. I would imagine the management burden on each one of those agents is oppressive. That might explain why they’re only doing about one transaction side a month, each, despite their high-tech advantage, their fabulous rebates and their fawning press attention. Work the numbers: 89 sides divided by 12 agents divided by seven months = 1.06 sides per agent per month.

In a traditional real estate brokerage, an agent producing one side a month finds another job. But we can make allowances for the Redfin agents. They work surrounded by a vast horde of managers who think a gross income of $65,000 or less per month — with a head count of 35! — is a business. Work the numbers: If they have rebated $900,000, they kept $450,000 or less. Divide that by seven months and we get… a Chapter 11 filing. Only in the New York Times could a business this inept get this much press. When they fail, you better know it will have been the fault of the big bad bogeyman and not because not a single one of those 35 employees can do arithmetic.

More, just for fun:

Ms. Howard, for example, said that in her first days at Redfin, several agents for sellers said they were too busy to show a house to her clients.

And not only that, they said they were too busy to babysit her kids, too! O, the ignominy! O, the humanity!

When that happens, Redfin agents contact the sellers and let them know that their agent will not show the house.

I would expect that this is a violation of agency law. It would be in Arizona.

When Redfin said it would try to make peace with rival agents by sending them gift cards for coffee, some of them told Redfin that such a move could violate a Department of Housing and Urban Development regulation having to do with transactions between agents.

Do you remember that Kelman touts himself as a broker? He doesn’t know RESPA? He doesn’t know procuring cause? Guess what else he doesn’t know?

Redfin posts pictures of agents on the Web so that customers realize, as Mr. Kelman says, “they won’t be talking to a person in Mumbai, India.”

Right there, in the New York Times, Kelman admits to a bald-faced Federal Fair Housing Violation. But work the numbers: The fine is $11,000 per violation, which puts the fear of god into ordinary brokers — which is why they take the trouble to learn the law. Redfin has $8 million in venture capital, though, which means Kelman can commit this kind of bone-headed mistake 726 more times before he has to dip into his own pockets. Even then he should be fine. Heck, his radically innovative high-tech real estate brokerage is bringing in over $2,000 a day…

Here’s the cute part:

AMID its battles, a funny thing happened to Redfin. It realized it was not primarily a tech company, but a real estate broker. It moved to stylish offices in Pioneer Square in Seattle because many customers wanted to meet agents the old-fashioned way: in person.

This “business” discovered its cost structure only after it had promised to give away most of its income.

Obviously I am a huge fan of innovation in real estate. I’m in a good position to judge what does and does not make sense because I am actually in the real estate business. The first big shake-out among the dot.com players in this industry will come when the companies whose “innovation” consists of whining about persecution hit the auction block. Redfin.com might be an obnoxious cowbird. But it sure isn’t much of a business…

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  • 25 comments

    25 Comments so far

    1. ardell dellaloggia September 3rd, 2006 10:20 am

      Greg,

      The facts are a bit skewed, as you are taking the current number of agents, which has expanded greatly since Redfin’s infusion of venture capital, and dividing the historical number of sales by the current number of agents.

      For a long time, and until recently, Redfin had only 2 or 3 agents.

    2. Greg Swann September 3rd, 2006 11:07 am

      > The facts are a bit skewed, as you are taking the current number of agents, which has expanded greatly since Redfin’s infusion of venture capital, and dividing the historical number of sales by the current number of agents.

      Okay, I’ll give you that. How about this, though: When you think of real estate licensees in general, is “zeal” the first word that leaps to your mind? How much hard-charging effort would you expect from a salaried Realtor? Dave Liniger came up with a business model for recruiting the best agents in a market and helping them get even better. Is it your impression that Redfin’s business model is likely to attract more-talented or less-talented agents, in general?

    3. ardell dellaloggia September 3rd, 2006 11:34 am

      Greg,

      There are two ways to look at it, and the solution lies in looking at it from both ways at the same time.

      Salaried from the consumer perspective frees the agent to being able to think about the client vs. themselves.

      Salaried from the agent perspective, can work only if the person hiring, understands that they do not hire someone to sell something, but to represent someone.

      Speaking as someone who for almost 20 years was a salaried fiduciary, prior to real estate, I know that this is possible…or at least it was prior to 1984. Maybe it is no longer possible anywhere. But it IS possible.

      When looking at Redfin as a business model Greg, try looking at it from “why” the consumer is tempted to use Redfin, as opposed to Zip Realty. Again, I know from where I speak as my clients are “Redfin Candidates”, my being in their marketplace.

      I clue…it really doesn’t have much to do with the amount of the commission at all…and that is why Redfin doesn’t satisfy their needs.

    4. Greg Swann September 3rd, 2006 4:33 pm

      > I clue…it really doesn’t have much to do with the amount of the commission at all…and that is why Redfin doesn’t satisfy their needs.

      Where do you see the nexus then?

    5. Marlow Harris September 3rd, 2006 5:08 pm

      Damon Darlin asked me if Seattle agents were troubled or threatened by Redfin’s model. Here was my complete quote:

      “The only complaints I hear about are those noted on the official Redfin blog or talked about by their CEO in newspapers. As I mentioned in my previous email, they have such a tiny -.00001% of the market, I’m sure no one takes them very seriously.

      However, someone may be trying to manufacture controversy, even going so far as to bait other real estate practitioners, invite “war stories” on their blog, and whine to Congress and to newspaper reporters, that they’re being treated unfairly.

      With such dismal sales, if you’re hearing stories from a certain Redfin CEO, I’d take them all with a grain of salt. He can’t blame all his problems on other real estate brokers.”

      Personally, I have no problem with Redfin’s model. They can refund 100% of their commission to the Buyer if they want. But I do bristle at doing their dirty work, at great personal risk to myself. That is not what I agree to do when I list property for sale.

    6. 360Digest » End of 6%? September 3rd, 2006 5:24 pm

      [...] Work the Numbers: Redfin’s not much of a business by Greg Swann [...]

    7. ardell dellaloggia September 3rd, 2006 7:26 pm

      While I was out staging a house, since I wrote the comment above, I met another couple who thought about using Redfin, and decided it wasn’t their cup of tea.

      Originally Redfin drew a crowd because of the technology of their site. That was the main draw. People who are selling are more attracted to a company called MLS4U that is a FSBO in the MLS. The house I was staging is one of theirs that I am taking over.

      From the buying side, for most it “sounds” like a good idea, but turns out to be the same as a buying a FSBO. Even when they like it, they find they need more assistance than when buying a toaster.

    8. Greg Swann September 3rd, 2006 8:25 pm

      > But I do bristle at doing their dirty work, at great personal risk to myself. That is not what I agree to do when I list property for sale.

      Excellent. Bravo. Beautiful. And congrats on making the NYT, even under these circumstances.

    9. ardell dellaloggia September 3rd, 2006 8:30 pm

      You threw me a little with “where is their ‘nexus’”. I think I answered where there nexus was not.

      Yesterday I received a sign call from a buyer who has been an agent in Georgia and is relocating here. He is going to approach listing agents direct, and find his own house and represent himself. I expect he is quite capable of doing that. If Listing Agents will not accommodate him, I suggested he checkout Redfin. I think there he will find a “nexus”. I further offered him “a Redfin deal” because he sounded fully capable of representing himself.

      Conversely, I had an agent call me on one of my listings saying she wanted to represent herself. I told her no she couldn’t. She worked for a builder for 75 days and had never sold anything and had no lockbox key. In essence I would have to show her the property and continue to go to the inspection, etc…and I could not advise her, my being the seller’s agent, but would have to be with her every step of the way. I asked her if her broker was going to review the resale certificate with her. She said her broker would not have anything to do with it. I said that she needed to find an agent to let her in and “front” the deal for her…and that agent was not me.

      I prefer Redfin to someone coming to me saying that they are “going to represent themselves” who is clearly not capable of doing so.

    10. [...] Of the two “innovative” cowbird brokerages discussed in this morning’s New York Times, the stronger of the two is BuySideInc.com. They’re rebating even more of the buyer’s agent’s commission than is Redfin.com, but their actual profit center is in originating the loan — a well-understood, fast, cheap, office-job function. Even this is not without complicating factors, especially RESPA. But in pure dollars, BuySideInc.com will make more money per buyer than Redfin.com. [...]

    11. [...] From a comment here, here is the full context of Marlow Harris’s remarks to the New York Times: “The only complaints I hear about are those noted on the official Redfin blog or talked about by their CEO in newspapers. As I mentioned in my previous email, they have such a tiny -.00001% of the market, I’m sure no one takes them very seriously. [...]

    12. Simon September 12th, 2006 6:29 pm

      Can’t someone see the house during open house then place a offer through RedFin? Not having lockbox key doesn’t seem to be that big of a deal.

    13. Greg Swann September 13th, 2006 9:14 am

      > Can’t someone see the house during open house then place a offer through RedFin?

      In a procuring cause action, that should be a slam dunk for the listing agent. The question that procuring cause asks is, “Who was the party whose efforts most induced the buyers to purchase the home?” It cannot have been the absent Redfin agent. Cases like this are not always contested, but, until recently at least, the listing agent would have won hands down.

    14. Simon September 13th, 2006 10:12 am

      Interesting, so say I have a buying agent, but I went to an open house on my own. The selling agent is going to sue the buying agent with procuring cause action? Also, do you remember all the people that walk into the open house? I think this is a lame defense.

      Also, which agent has the time/money to sue a deep pocket, well connected company with full time lawyers. Be expect your dues to go up when your realtor assn does file suit. You are standing in the middle of the buyers and the sellers. You don’t have the house, nor the money, so get with the program, you can’t go against a market trend. Even if you are successful in using trial lawyers to stump the will of the buyers & sellers, people will talk to their congressmen to have the law changed.

    15. Greg Swann September 13th, 2006 10:51 am

      > The selling agent is going to sue the buying agent with procuring cause action?

      Can. Doesn’t have to.

      > Also, do you remember all the people that walk into the open house?

      I remember everyone who decides to buy a house, when I see it happen, at the instant they make the decision.

      > which agent has the time/money to sue a deep pocket, well connected company with full time lawyers

      It’s done by arbitration. Very cheap. Very fast.

      > You are standing in the middle of the buyers and the sellers.

      Untrue. A procuring cuase action only happens after the transaction is closed.

      > people will talk to their congressmen to have the law changed.

      These laws are ancient. Enforcement may change, but I don’t see the law changing.

    16. Simon September 17th, 2006 12:40 pm

      Regarding Redfin.com is not much of a business, sorry to burst your bubble Greg. I put up a rebuttal on Marlow’s blog http://360digest.com/2006/01/11/redfin/
      Please reply there if you do, so I don’t need to comment in both places.

      ————–
      # Simon Says: Your comment is awaiting moderation.
      September 17th, 2006 at 11:29 am

      Marlow, Paul Allen just put another $10M into Redfin, got problem with that? VCs are lining up. How big do you think the real estate industry is? HUGE. How many companies like Redfin are out there? Just one.

      There have been tons of internet startups who started with nothing but web traffics, fans, and ad revenues. Amazon didn’t make money for the first 6-7 years. Redfin is actually taking a pretty good cut of your commission. Don’t jump the gun and curse it won’t make it yet, it has just started, give it some time. That $10M may last longer than your job :)

    17. Chris Oliver October 7th, 2006 8:13 pm

      I agree with you. I did the same math eight ways to Sunday and unless I’m missing something Redfin is Deadfin. Their revenue model is hopeless and their burn rate appears to be very very high. Love them or hate them, Realtors will have the last laugh and don’t forget there is a huge amount of new technology and services geared for Realtors as opposed to replacing them. Redfin is kinda like a fly on an elephants rear with rape on its mind. Forget it. Also, what I don’t like about Redfin is this aura or attitude that eminates from their blog, from their photo album and other blogs where some pretty nasty comments about thier realtor peers clearly came from their employees. There really isn’t any humility there which is too bad coming from a company that is loosing money hand over fist. When the well dries out and they are off the nipple, I bet it’ll humble them – back to Microsoft or wherever looking for a job.

    18. Simon October 8th, 2006 11:55 pm

      Don’t know where your math came from. Redfin is in a very high margin business and residential real estate is a multi-trillion dollar business. Remember, Amazon didn’t make money for the first couple years and the real estate industry is probably 50x bigger than the bookselling industry. Think of all the add on service Redfin can refer. Bank loans, inspection, escrow, termite… Redfin is expanding while the market is turning into a buyer market, and Redfin does have very attractive value prop for buyers.

    19. Chris Oliver October 9th, 2006 5:40 am

      I don’t disagree with the fact that the overall real estate business CAN BE high margin with lots of blood sweat and tears. However Redfin has stripped the margin and probably doesn’t have agents quite as incentivised to dole out the blood sweat and tears for what they must be making. Their agents have be licensed etc. and it won’t be long till they calculate what they would have made at another shop….. As far as the other services, well there is nothing new there. The phone book is already full of them.

    20. Simon October 9th, 2006 11:26 am

      Lots of blood sweat and tears is an illusion; you are probably an agent yourself. I am buying my home through Redfin. The service Max provides is on par with the agent I hired when I purchased my condo, and he is handling 6 clients at the same time. In the valley, you don’t hit it big with your salary. Look at YouTube, doesn’t make a dime but Google is buying it for 1.6Billion. Look at it this way, you guys are the shrimp, Redfin is a small fish, but there are much much bigger fish out there… You think guys at Vulcan are stupid? They are the best of the best wall street bankers, do you think their math is better than yours?

      BTW, Max told me their office is hiring, not too late to submit your application ;)

    21. Chris Oliver October 9th, 2006 4:28 pm

      I am not a realtor and have purchased three homes without one. That is because I am more versed in real estate investing than most people just buying a home to live in though. I am really a business model junky. You may be right but I don’t see it. Also, there is 1.4 million realtors out there so Redfin still is the shrimp. Youtube gets 10 million visitors per day with 75 employees running the company so the have a huge customer base that others will pay big money to access and operating costs that are insignificant. They have thier issues though – copyright infringment issues galore. By the way Vulcan has made thier fair share of dud investments. Good luck with RedFin. Are they repping you as a buyer or repping the seller of a home you are buying? If you don’t really just work for them I would love to hear how it goes and how much they make off you. Maybe you could share how much time they spend on your deal, what exactly they do that adds value for you in return for what. It would be a good case study to hear about if you are willing.

    22. Simon October 9th, 2006 7:18 pm

      I am going to reserve my recommendation until I close the house. So far, the service has been great. Max spent 3 hours with me touring the house and comparables. And he offered to accompany me to the inspection. All the transactions are done over the fax and internet. He always picks up the phone when I call or calls me back within an hour.

      I like to work with them, but don’t think they want me. :) Redfin has real revenue but don’t think YouTube does. Although Redfin is not nearly as popular as YouTube, but the word is spreading, just give it some time. Maybe Paul Allen is having dinner with Meg or Eric as we speak…

    23. Chris Oliver October 9th, 2006 7:35 pm

      Look Simon,

      This conversation has entered the twilight zone. YouTube might be the fastest growing internet enterprise in history. They started in February 2005 and sold today for $1.65 BILLION. That is 1,650 stacks of $1 million for 18 months work. The deals they signed during the last couple months alone with CBS, ABC, Cingular and many many others surely far exceed all revenue that RedFin has ever generated in all of it’s years (7years?) in business. Mentioning Redfin in the same conversation is kinda funny. Glad all it going well and keep us informed how your job… er house hunting is going. I’m not sure who “Meg” or “Eric” are. Im on to another topic but enjoyed the discussion. Best, Chris

    24. Robert May 18th, 2007 11:04 am

      Giving people money to buy a home will bite deadfin in the end. At some point, people will factor in the larger house they buy, the more cash deadfin will give them. Recipe for a disaster, folks. In georgia, more and more agents are paying only a third of the selling commission to the buyers agent( which is disclosed in the private remarks in the MLS listing)if the agent does,nt come with the buyer on the initial visit.Hello redfin, goodbye Deadfin.

    25. Darryll Whaley August 2nd, 2007 9:15 pm

      Not Deadfin by any means, perhaps missing the mark, but wouldn’t you agree that this only leaves much room for someone else to come in and do it even better? I think they have a fair business model, maybe te leadership is lacking, I don’t know, but aren’t they making money in a service oriented insustry where the sky is actually the limit? There is so much tat can be done with online realestate transacitons across the globe. We have yet to even touch that! C’mon folks, where is the vision…