Saturday, June 13, 2015

Redfin Real Estate - What Took So Long?

The Internet has changed the way to buy and sell a lot of things.  Why not houses?

The Internet, despite all the overblown hoopla, really has changed the way we do a lot of things.  How we buy music (or just stream it for free) and watch movies, buy books, shoes, clothes, car parts, or whatever, has changed forever - and for the better.   

I am in the middle of my annual overhaul of our Casita travel trailer.   It is 16 years old and needs a lot of small repairs - a leaky toilet valve, that kind of thing.   In the past, I would have had to go to a "dealer" who would then order the parts, charge me an exorbitant fee and then weeks later, call me to tell me they are in.  Today, I go on Amazon or eBay and boxes show up in a matter of days.

It is a brave new world.

One industry has stubbornly resisted this trend, that is, until now.   And it is the Real Estate industry.   For decades, if you wanted to buy or sell a house, you pretty much had to go to a Real Estate Agent, who belonged to the Realtor(tm) organization, who owned the Multiple Listing Service (MLS).   It was a monopoly (and still is) and yes, they were sued under anti-trust laws at one time.

An like any monopoly, the costs were staggering.  A 6% commission might not seem like a lot, but unlike other businesses, where the manufacturer or retailer has to pay wholesale costs for materials and goods, warehouse them, pay employees and benefits, the Real Estate companies have little in the way of overhead, other than office space.

The "product" (houses) are owned by the customers.  They needn't advance fees or borrow money to pay for inventory, store it, or worry about how long it is has been sitting on the shelves.   The employees only get paid on commission, so you needn't advance them paychecks and hope they perform - you pay them only when there is cash on the table.

And there is a lot of cash on the table.   When housing prices started to skyrocket, 6% became a lot of money.   If you are selling a $500,000 home, you may pay $30,000 to a Real Estate company to list it and sell it.   Of course, this may be split between two companies (the listing company and the company representing the buyer) and the actual agent gets maybe only half of that.   But still, thirty thousand dollars is a lot of dough, just to drive buyers around and fill out some paperwork - most of which is done by the closing attorney or closing company anyway.

So, maybe this archaic model for selling Real Estate is due for an upgrade.   And leave it to the tech sector to take this on.

Redfin Real Estate was founded by some folks from Microsoft.   And they are shaking up the business and frankly, scaring the crap out of traditional agencies.

Unlike traditional Real Estate companies, they actually pay their employees (as independent contractors) based on how many tasks or hours of work they do.  You show a house?  You get paid.  You put up a sign?  You get paid?   You sit for an open house?  You get paid.  You supervise an home inspection?  You get paid.

For novices in the Real Estate business, this is a godsend.   Under the old model, if you wanted to sell Real Estate, you could spend weeks, months, or even years, without getting a paycheck, if you never closed an actual deal.   So you could spend countless hours showing houses and doing all the tasks outlined above, and not make a red cent.

Meanwhile, the senior agent at your company rakes in 3% on every home they list, and everyone lists with Harriet the Hair Helmet Hair Hag, because "her sign is everywhere".   A few people get obscenely rich, most just get buy.  Gee, sort of sounds like a law firm, right?

Redfin also is upsetting the apple cart by charging very low commissions - on the order of 1%.   On top of this, sellers may get a "rebate" on part of this commission.   So not only can this be a better deal for people working at the company, it is a better deal for sellers, too.

But what about buyers?   Well, since the person showing you the house doesn't have a vested interest in selling it to you, they won't pressure you into buying something you don't want to buy.   So as a buyer, it can be a more pleasant experience.   Also, since the seller is paying a smaller commission, the price may be lower than a similar house listed with a traditional agency charging 6%.

The system makes best us of the Internet.  Buyers can go online, get vetted and pre-approved, so they are not wasting anyone's time by looking at houses they cannot afford.   And since they are serious buyers and not tire-kickers, less time is wasted showing houses to people who are not serious about buying.

Sounds like a perfect storm, no?

Well, there are some flaws in the model.  Right now, Redfin is rolling out in very hot and competitive markets, such as Washington DC.   Houses there sell without much hassle, usually within a month or so, as people are coming and going all the time.   And perhaps this is part of their overall market strategy - to cherry-pick the best markets and leave the dregs to the local Real Estate Agents.

It is like Car-Sharing, or Uber.   It might make sense in a big city or near a college campus.  It makes no sense in rural areas where populations are thin.

Simply put, in places like Central New York, a house may sit on the market for months, even years, before being sold.  And as a result, you can't pay people to show houses that may not sell for such a long time.   In such a market, the incentive for fraud would be great, too.  A Redfin employee would encourage their friends and acquaintances to sign up for a home viewing, just so the employee could get the payment for showing the house.

So sadly, while the Redfin model is an interesting one, it isn't something that can be applied nationwide, at least at the present time.   But a lot of Harriet Hair Helmet Hair Hags are pissing in their Guccis right now, as Redfin snags one listing after another, as well as one buyer after another.  The days of putting up crooked rusted signs, drafting up a half-assed MLS listing, and then waiting for the checks to come in, are over.

But this is spilling over even into smaller markets.  Cramming down listing fees is becoming more the norm these days.  And maybe other "mainstream" Real Estate agencies might have to modify their practices for this brave new world.

1 comment:

  1. Note that like other Internet business models, Redfin is "cherry picking" the best locations where volume and prices are high.

    VoIP services do the same thing - offer you cheap phone service. If it works, great. If not, send it back for a refund. They are not obligated to troubleshoot your router, since they are not a regulated utility.

    That perhaps is one "unfair" aspect of Internet businesses - they go after the low-hanging fruit. But that means there is business for traditional retailers who are willing to specialize in more esoteric transactions - and charge accordingly.


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