Real Estate Fees June 9, 2013

Redfin – For sellers, the flat fee is gone

It was disruptive, and Kelman relished the chaos. “Real estate, by far, is the most screwed up industry in America,” he told CBS News’s 60 Minutes in 2007. “We feel like things that Amazon or EBay (EBAY) or Yahoo! (YHOO) have done in other industries, we can do for the real estate industry.” Kelman now regards that statement as an error. “The biggest mistake I made in starting out at Redfin was bringing some Silicon Valley swagger into a traditional industry,” he says. “It was unnecessarily provocative.”

Redfin encountered all the forms of industry bias predicted by the Stanford economists. It got angry phone calls and e-mails, and agents steered customers away from its properties. In 2007, Washington’s Northwest Multiple Listing Service determined that one of Redfin’s blogs, which offered frank reviews of properties written by staff journalists, violated its policies against critiquing customer listings. It fined the company $50,000 and threatened to pull its MLS access. Redfin had to shut down the blog. Now it allows only licensed agents to post reviews of properties, and it gives its clients the ability to veto or delay such posts, which seems to have appeased the brokers.

The company also discovered that its customers really did want more hand-holding. As it struggled to make its model work, Redfin had to hire more agents to assist customers in every stage of the buying and selling process. It scrapped the idea of charging for home tours—customers hated that—and because of the increases in service, it overhauled its fee structure. For sellers, the flat fee is gone; they’re now charged 1.5 percent of the sale price of their home. As before, the seller, even if he is using Redfin, must pay the buyer’s broker the usual 3 percent. Buyers are still treated to a refund upon Redfin’s collection of the buyer-side broker commission, though Redfin has gradually lowered that amount as it has added services. “The problem with our original model was that people couldn’t get into houses, they wanted advice. At some point we realized that we had to become a service company,” says Kelman. “We thought we could make the business more virtual than it was.”

Redfin still does a lot of things differently. Apart from the unusual way it pays its agents, it offers a virtual “deal room” that helps customers navigate the maze of complex paperwork and, unlike Zillow and Trulia, draws its listings directly from the MLS. This, Redfin says, allows it to display 20 percent more agent-listed properties than nonbroker websites.

In February the company hired agents and began showing listings in five new markets, including Houston, Raleigh-Durham, and New York City’s Bronx borough (it already operates in Queens, as well as Nassau, Suffolk, and Westchester counties). It also says it plans to double its roster of agents this year to meet rising demand. Kelman says a Redfin IPO is unlikely this year though possible in 2014.

So far, Redfin hasn’t convinced many people that brokers, or their 6 percent take on most deals, are in any real danger. Last October, at a Seattle technology conference, an audience member asked Spencer Rascoff, Zillow’s CEO, if sales commissions were ever going to decline. “There are other startups that are trying to break down those agent commissions, and I think most of them will fail,” he said. Rascoff said later in an interview that “consumers don’t really care about commissions. They say they care, and they talk a big game in the off-season. But when push comes to shove and it comes time to sell their home, the transaction is so infrequent and so highly emotional and expensive—and consumers are so prone to error—that they turn to a professional.”

Economists, like the University of Chicago’s Syverson, watch and wait for a real change in the market. “The Chicagoan in me says there is so much money on the table that someone will figure it out eventually,” he says. “But I will admit, I’ve been impressed with the resilience of the old model.”