Business models that profit from providing customers with transparency in an opaque and often frustrating industry like Real Estate are inspiring. One company that I have tremendous respect and admiration for is Redfin, what they are doing is not easy - they are tackling the real estate industry specifically the residential buying process. For entrepreneurs, they provide a great model for how we think about our own businesses and how we are truly providing more value for our customers. Although it remains to be seen what the epilogue will be Redfin, it is energizing to see them go after the market. The web is the great equalizer, it allows entrepreneurs to break old business models that rely on opaqueness for profit and squeeze more value for customers while gaining market share. Here’s my personal story about real estate and my learnings from that process.
Personally, I believe that the real estate model is totally broken especially given what’s happening and what has happened. I’ve worked with several agents on both the buy-side and the sell-side and have several agents that are friends as well (this post is not directed to them, rather to the industry as a whole). Fundamentally, I believe even the most well-intentioned people are motivated by the commissions that are structured. Thus, you are at odds with your agent from day 1. There is no incentive for your buyer’s agent to negotiate a lower price for you as each dollar they negotiate lower, it goes against their bottom-line. The seller’s agent once they receive an offer, don’t push for a higher price generally because they have a “bird-in-hand” offer and don’t want to lose the deal. Freakonomics, the book by the Chicago economist, showed statistically that agents get higher prices for their own home as compared to the homes that they supposedly represent. I saw it firsthand today when I chatted with an agent that was representing his own place who berated me on how I didn’t understand the market on why his home was worth $XX. His home had been sitting on the market for several months, had he been representing his own client I suspect he’d be asking to get an offer, but he’ll hold out for a better price for his own home. What I love about the Redfin model is that they are transparent about how they compensate their agents, it’s not on commissions but on customer service (read more here). Talk about lining up incentives with the buyer. The buyers feel like their best interests are being looked after and buyers worry less about the inherent conflict of interest (it’s still there, but to a much lesser degree than a traditional agent).
In my limited experience, the 6% commissions paid is a terrible structure and held primarily because of the opaqueness of the market. Most, if not all, of my friends have negotiated at least one side of that structure down. I suspect that market rate will have to come down to 2% eventually as most of the information used by agents for comps, contracts, and research are all available online. They will become more like transaction specialists. I won’t downplay all the work traditional agents do, I know many agents that work tirelessly day and night for their clients. I will argue that the most successful agents will have to compete on being able to deliver real bottom-line value for their clients, fighting for “below-market” price on the buy-side and “market price” on the sell-side, rather than being a transaction specialist and an expensive taxi-driver. It’s not about who can go the furthest below market on commissions (if so, most people will just use a real-estate attorney on both sides and the deal can get done even cheaper). The opportunity is there for Redfin (or any other broker for that matter) to capture market share by focusing on transparency (most agents don’t want this) and advocacy (truly fighting for the customer). It’s a bit counterintuitive to think about shrinking the overall market in order to capture more of the market - but, that’s the beauty of the model - much like craigslist has shrunk the dollar size of the classified ads model and now totally own it.
So, what are other transparent models that are working to some degree? In what areas would you like to see a business tackle an industry that is ripe for transparency? How are you using transparency and advocacy in your business to drive more value for your customer? Let ‘em rip in the comments.
Disclosure: Not that I have to mention this, but for those of you who wonder I do not have any personal stake in Redfin although we do share the same venture firm.
Actually, you hit the biggest market that I would love to see this happen to. Not only is the 6% model a load of phooey, it artificially inflates the “value” of the real estate, as that is generall baked into the final price. I will save my RE rant for some other time though.
Another market would the Stock Market Analyst Reports. These things cost a couple hundred, and don’t provide any more information than what can be found in a SEC filing. Also, few of them have Analyst Report Cards - IE how their projections have done vs the actual results. I certainly understand that the economy is a dynamic environment, but even in “stable” environments the consensus is usually off. The sad thing is a lot of the information and projections are given to them by the companies. OK, I will leave it at that.
Hi Andy - just writing to let you know about a new service that encourages transparency among all residential real estate agents - it it agentinvitation.com. The site was built to help consumers better understand how commissions work when you buy or sell a home - who gets paid, how much, by whom, for what, and what parts are negotiable. It then helps consumers build a case for why an agent could charge less than the local customary commission to meet their specific needs in an anonymous Agent Invitation - really a request for proposal. That Invitation is then sent to any (up to) 3 agents the consumer would consider working with. The agents respond with a proposal, the consumer reviews the agents’ proposals and then tells us which agent(s) to release their contact information to - and the consumer and agent(s) take it from there. We check in to find out which agent (if any) was hired and later, when the purchase or sale is complete, ask the client to review their agent’s performance (1-5 Stars). Then new consumers on the site can rely on these unbiased reviews and Star ratings of agent performance - and agents can build a really valuable reputation that should attract new clients to them.
The idea is to bring better transparency to the industry, and help take unproductive cost out of the process (like agents paying for extensive advertising and promotion, paying for unproductive print advertising, paying lead generation companies referral fees etc.). The consumer can pay less and the agents can offset the reduced commission revenue with reduced cost and increased production.
It is a new service so I cannot report it as a huge success (yet). I am just trying to spread the word.
I too have great respect for Redfin and applaud their contribution. We are trying to help change the industry across the board so that consumers are not disadvantaged, intimidated or uncomfortable and do not overpay when they shop for real estate agent services.
We had some issues with the agents when trying to buy our first house. Most agents were just intersted in locking us into the first property we could qualify for to grab a comission. They quickly take over the process and then you have very little control.
After dropping out of escrow, I took the CA Real Estate course at the local college just to become more knowledgeable. A number of students were there for the same reason. It made some agents uneasy, that I knew all of the terms and procedures, even though I’m not licensed. But, it made me feel a lot more confident.
We ended up buying our house directly from the owner, which was a huge improvement. We could just call each other up and discuss the terms. I didn’t have to have my agent call his agent to get something settled. Obviously, the seller and his wife were great people or else it may not have been such a pleasant experience.
And, the seller didn’t have to pay the 6% comission, which allowed for a lower selling price. Even though the comission comes from the seller’s escrow, the buyer still pays for it. And in the O.C. where I live, the 6% comission is a lot of money.
I believe the mortgage and real estate industries have a lot of conflicts of interest, based on the comissions. This can be incredibly unfair to naive consumers, despite the heavy regulation. As far as I am concerned, both of these industries are ripe for disintermediation. (cutting out the middle-men)
Great post and I agree with the Real Estate industry being overly complicated. I work with a couple agents on a regular basis and I can tell for sure that not all of them are created equal. Most of them are old crusty sales men or women who are resisting change.
BTW, whats up with all the cats in your posts?
One area that I think lacks transparency is the financial services sector. Specifically what financial advisers are making off of people’s 401K, IRAs, etc.
At least in the real estate business, there is a little more information about the fees involved. I’ve not seen a statement yet that tells me how much my financial advisers are making and when they’re getting paid.
Financial advisers also have a conflict of interest because, not only do they get paid no matter how my portfolio does, they won’t tell you to pull your money out to invest elsewhere because it hits their pocket book too. So they have no incentive to help you manage your money outside of investments where they get paid.
Wow Andy, what a great post and thanks for the kind words. That is one of the clearest and most compelling case anyone has ever made for Redfin, myself included. I’m sorry I didn’t see it earlier. It has been a wild week at Redfin…
I think what Redfin is doing is, just fixing the problem. You can’t possibly rely too much on commissions alone when paying your employees. That would be a bad “control management system”. Instead there should be combination of other criteria that make up the ‘payout’ for each employee based on their role in the company.
Hi Andy,
Great blog, I really enjoyed reading your other posts but when I scrolled down to this one my hair kind of stood on end. First of all, I do agree with you on the building value through transparency and advocacy, especially in today’s grainy Youtube world - these days polish gets trumped by what seems more real most of the time, which is fine with me.
However, you hit on a few points that I think people get wrong about the real estate industry most of the time, and it boggles my mind every time I see it. Yes, I’m a real estate agent so am speaking from nearly 10 years working in the Seattle area.
You said, in reference to buying situations, “I believe even the most well-intentioned people are motivated by the commissions that are structured. Thus, you are at odds with your agent from day 1.” While technically that might seem logical, there are several reasons that actually doesn’t make sense for most agents (those who are in real estate as a career, not to just make a quick buck and then skip out.)
1. On the ethical side, there are plenty of agents who simply are honest enough to not let the amount of the commission determine how they counsel someone on a home purchase. They simply do the right thing because it’s the right thing. I realize some people reading this will be too jaded to believe that, but plenty of home buyers know from personal experience that this is true.
Misleading someone about the true value of a home is no different than hacking into their bank account and stealing scads of money - ultimately that’s where it comes out of, even if it’s down the road when they sell and get a smaller net proceeds check. If you think of it like that maybe you can understand why agents misleading buyers is not as common as you might think. And seriously, as adults, I think we all know enough to examine whether or not our actions are possibly being influenced by our subconscious.
2. On a completely practical side, even if someone has crummy ethics, what kind of business model is based on making a quick $300 or $600 by letting someone buy a house that’s $10,000 or $20,000 overpriced, when ultimately they then sacrifice tens of thousands of dollars in future sales and referrals? People are not stupid - even if they overpay, they’ll figure it out later. I’ve worked with people who did feel used by their first buying agent, and that’s the reason they were not using that person the second time around. The primary and repeat business I’ve gotten from those people, who do trust me, is enormous - the kind of money businesses do run on.
As far as Redfin goes, I don’t know if their agents are getting out more now, but the idea of sending people out there to get shown the listing by the listing agent (or worse, some other poor sod who has been lied to by the buyers who ‘aren’t working with an agent yet’ - how lame is that) runs completely contrary to what makes a buyer’s agent useful in the first place.
For non-investors, a successful home buyer is someone who buys a place they’ll love to live in and that will have great re-sale when it’s their turn to sell. People never need me to tell them which houses they like, but they often do need me to tell them which houses not to like - especially if they’re switching areas, like moving from Seattle to the Eastside. This goes for repeat home buyers too, not just first timers.
Nothing beats the experience of an agent who shows homes for 10 years and after every SINGLE one, hears from the buyers: ‘Here’s why we’re buying it, here’s why we’re not buying it, here’s why we’re almost buying it… except, or, here’s what we’re not wild about but why this other thing clinched the deal for us anyway’. Do that a couple of thousand times, and you accumulate a critical mass of knowledge about re-sale potential that can’t be learned from anything except that exact experience, and certainly can’t be useful to someone if the agent is sitting at a computer screen instead of walking through the house with the potential buyers.
I once had buyers call me because they were referred by a Seattle agent and wanted to write up a house right away. As soon as I walked in I could tell it was a stinker (a nice-looking, new construction stinker) and I tactfully suggested we go see some other homes to compare it to. They ended buying a much better home that they love, has appreciated extremely well and that they’ve been in for 7 years now. Years later they joked with me that ‘We realized later you were never going to let us buy that first house.’ They’ve also referred me so much business it’s ridiculous - business I would never have gotten if I hadn’t done the right thing, and instead just written up that stinker.
I don’t remember which home was more expensive (I think they were about the same), but here’s the point - I don’t care. It never mattered. The point was, they would have made a terrible investment and lost out on many tens of thousands of dollars that they gained in equity (yes, still) through the purchase of the other home. What kind of sleazeball would let people do that? I realize there are agents like that out there, but way fewer than you probably think - my opinion is more the norm than the exception. And, as I mentioned before, even from a purely practical standpoint it still makes sense for agents to do the right thing.
OK, I have typed FAR too long.
Thanks for your post.
All this is a lot to chew on. I have worked on the legal side of real estate and I know how ridiculous it can get. It really depends on the agent. I can’t tell you how many times he agent has been a royal pain, and they come across as completely self serving. The good ones however get referrals. The the balance can tip either way.
This website is all about real estate model and its conditions in the present time. People will be aware about the commission which has been offered to real estate agents who helped many potential buyers and sellers in order to buy and sell their properties. Moreover many people are looking for affordable properties these days and in order to get that they want to take the help of real estate agents and for them this site will prove to be fruitful and if they have any enquiry then call on 0120-4338222 or 800-232-2343.