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Jonathan Dalton
REALTOR
ePro, SFR
602-502-9693

Redfin and Real Estate Blogs: An Examination

Redfin and Real Estate Blogs: An Examination

AvatarSixteen years ago this fall, I was at Sun Devil Stadium when Arizona State’s football team beat the University of Arizona for the first time in nine years. Students (and alumni, such as myself) stormed the field.

After wandering aimlessly, I went over to the stands in front of the band and had a friend lift me to the top rung of the bleachers’ guardrail. There, looking out upon hundreds of people on the field, I took my free gold pom-pom provided at the gate, waved it three times and watched as everyone erupted in an A-S-U cheer. It was pretty cool, watching the reaction to a random act in front of the band and feeling a sense of power because of it.

Redfin’s much the same way. Glenn says something or the company issues a press release and the real estate blogs jump too, reporting whatever happened with varying degrees of cynicism or admiration, depending on one’s point of view. Sometimes it’s tempting to think we, the real estate blogging community, aid Redfin’s struggle for existence in that all that we right adds to the company’s public relations monster.

Why do we as a group spend so much time writing about Redfin? Maybe it’s an effort to reverse the spin and present the truth to those willing to look at the company with a critical eye.

Make no mistake. Despite the hype, Redfin is struggling by nearly any measure. For all the bold talk of expansion into additional markets, progress has been extremely slow. Greg compared the total sales for Redfin to those of local real estate god Russell Shaw. It’s no contest. True, Russell has been doing this longer than Redfin but he also hasn’t had the benefit of $20 million in venture capital (though his ever-present face on my television makes me think he does have a printing press stowed away.)

Russell Shaw clearly is in a different category so perhaps it would be best to compare Redfin’s results to one of us mere mortals. Take me, for example. (Or as my wife would say in her most Youngman-esque voice, “take my husband, please!)

According to the data from our most recent sales meeting, I currently rank 99th among local Century 21 agents in total closed units where each buy or sale is one unit. Looking at the roster in the Arizona Regional Multiple Listing Service, the Phoenix area’s MLS, there are 1,750 Century 21 agents in varying states of activity. So I rank among the top 5% of Century 21 agents locally, not including the three closings coming in the next 10 days.

In 17 months of existence, Redfin has closed approximately 500 sides. Current estimates are Redfin has 75 total employees – it’s unclear if all of them are agents. If this total is for agents and not total employees, each Redfin agent has closed six transactions over the past 17 months. Even if only 50 of those employees are agents, that still is only 10 closed transactions per agent over a 17-month span. And this is with the backing of eight figures of venture capital and with a 13-minute infomercial on 60 Minutes.

Over the same span, I’ve personally closed 21 transactions with another three about to be completed in the next 10 days. (Why disclose the number? Why not? Most of us tend to have a little bit of the Great Oz in them, especially in markets such as this … when talking about our sales figures, we’re all sound and fury signifying nothing. I’ll take top 5% among Century 21 agents locally. That’s not bad at all.)

In short, little ol’ me is outproducing Redfin’s average per employee. Unless only 21 of the 75ish employees are real estate agents, at which point someone may want to take a look at the company’s organizational chart. Do I need to add that I only work here in the Phoenix market and have not expanded to the East and West Coasts?

As I write this, I already can envision the Redfin defenders gearing up to defend blindly the so-called slayer of the “traditional” real estate market. Except the numbers indicate there’s remarkably little to defend. Despite all of the venture capital and all of the buzz, Redfin is just another real estate company trying to gain a foothold.

From what was written in the Seattle Post-Intelligencer, much of this latest round of venture capital will be used to hire developers and software engineers. If this truly is the case, Redfin and its backers truly don’t have any idea about Real Estate 2.0. Online glitz is all well and good, but it doesn’t help in finding the right house any more than a basic IDX search. Redfin’s not adding value – it’s not providing anything technologically that can’t be found elsewhere. Redfin’s just repackaging it and hoping no one pulls back the curtain.

Lastly, it’s no coincidence that Redfin has been expanding into markets with some of the higher median home prices in the country. To say Redfin won’t play in Peoria (Arizona, at least) is an understatement. With the median sales price here down to around $250,000 and change, and with Redfin rebating two-thirds of the commission back to the buyer, that means Redfin brings in all of $2,500 when helping a buyer. Take it from someone working corporate relocations for that same 1 percent – that’s not a split that makes for early retirement.

But don’t settle for my anecdotal evidence. Look at the basic math involved. If we assume that a Redfin agent receives $40,000 annually in salary – I’m borrowing Marlow’s figure for this one – an agent would need to close 16 transactions a year simply for the company to break even. And the average Redfin agent isn’t there. The average Redfin agent isn’t even close. It’s a scenario born to hemorrhage money.

Do I fear Redfin? Like Jay, not whatsoever. There’s no reason to fear a company being kept afloat by venture capital since, at some point, the investors will want to see a return.

Rather, I feel sorry for those who view Redfin as the catalyst for the revolution against the prevailing real estate business model. Because it’s not. It’s simply a company trying to live on the thinnest of margins, blissfully unaware that those who race to reduce price only are racing to zero. And then there’s nowhere left to go.

[tags]Redfin, real estate marketing, real estate commissions[/tags]

Comments

  • Jonathan: Thank you for the analysis. Now I understand why Redfin will not come to my sandbox in Houston anytime soon. With our average sales price at $180,000 they couldn’t even rent office space and hire agents for $1800/side after rebate. Redfin loses money on every deal and make it up in volume.

    There really is a reason that Real Estate commissions across the country are stuck around 6%. No one has figured out how to assume the risk of the transaction on a contingency basis and stay in business for less.

  • Greg Swann says:

    Nicely done. I love the peroration.

  • Thanks, Greg …

    Thomas – lower-cost models are viable, as proven by the existence of Help-U-Sell, Assist-2-Sell, etc. Keep overhead low (read – hire agents as independent contractors working on commission, not salaried employees) and it works.

    Technology in and of itself isn’t the answer. But that seems to be the message coming out of that area of Seattle.

  • Jonathan: Agreed the low cost models can work, albeit on razor thin margins and uncanny recruiting by the broker franchisee. From what I have seen, the lower cost models almost always shift the transaction risk in some way back to the consumer while lowering price. It may be in the form of fee for service or a la carte, or simply an up front payment. Some folks can replace their own transmission and save money, too. My car would look like Fred Flintstone’s with a hole for your feet.

    In Houston, with our low average sales price (180,000), and 29,000 Realtors, the discount flat fees are not hugely lower than a full freight listing, and rebates abound for buyers. Having nibbled on some Russell Shaw podcast kibble(thanks, Greg), the consumer wants a house or a result and does not really want to parse commission models. In higher priced markets the discount models can get some traction, but it seems that most of those markets are in a bit of a buyer’s market at the moment.

    Here, we have a By Owner fee for service bait and switch model, where the seller pays up front for unbundled listing services which can exceed what a full service broker would have charged.

    Every week or so, I go to the grocery store and pick up their magazine er, my prospecting and zestifarm list (Thanks, By Owner!).

  • Sandy says:

    Three words:

    Homegrocer dot com

    The VC’s like them for now, but you don’t need to look any farther than Homegrocer for an example of a Seattle-based start-up that was a VC favorite until the money guys got tired of throwing cash down the rabbit hole.

    Someone will come along and revolutionize our industry. But it won’t be Redfin. They haven’t built the better mousetrap, they’re just competing on price and that’s not revolutionary in any way.

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