Home Brokers & Agents Context Goes Both Ways: Numbers, Buyers, Sellers, and Agents

Context Goes Both Ways: Numbers, Buyers, Sellers, and Agents

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Matthew Rathburn puts the NAR Profile of Home Buyers and Sellers 2008 into context. I think it’s worth reading the whole thing, including the cool graphs he’s put together.

Matthew’s got some useful insights from the realtor’s perspective:

Whereas some agents are dwelling on the issue that the Buyer is finding their home on the internet 32% of the time and only 33% of the time by the agent; I prefer to look at the fact that consumers are only find the home they buy in the newspaper less than 3% of the time. Knowing this should help agents save some money. To me, fear of the “future” is less productive than knowledge of the present.

If the seller is demanding expensive newspaper marketing, I can show them this report and then show them all the marketing I can do, just by using Postlets.com. You can show that you’re covering 80% of the most useful marketing venues, just by being an agent, putting a sign in the yard and using MLS with IDX, Postlets, Realtor.com, Zillow, Trulia, Craigslist, etc…

This sounds right to me. But there’s an angle here that Matthew isn’t thinking about.

If the Buyer is finding the home on the Internet 32% of the time, then the price charged by the Agent has to go lower. By how much? Who knows. Even if the total price charged to the Buyer/Seller remains the same, the percentage of that price that goes to the Agent for his labor has to go down, to reflect the investment made in the capital asset of the website by the Agent, or the Broker, or whomever.

The 33% of the buyers found by the Agent directly –> the Agent in that case is bringing more value to the Seller, as compared to the 32% who found the property on the Web.

If the seller is demanding expensive newspaper marketing, but you can show them that just by using Postlets.com, you can cover 80% of the most useful marketing venues, then you also have to be prepared for the seller demanding that you cut your commissions. After all, if you have to do less work, then you should be able to charge less and still make the same profit.

The assumption that technology simply lets an agent make more money is wishful thinking. Consumers also recognize that technology makes your productivity higher, and accordingly, can expect that your price will go down. This is one of the big disconnects in the market today: brokers and agents seem to expect that all of the economic value created by technology will be captured entirely by them, while consumers expect that they will get that value. (Might be useful here to look at Redfin and any of the other rebaters.)

The real outcome is likely in between Agents capture it all, and Consumers capture it all. But rest assured that at least some part of the savings will be passed on to the consumers, like it or not.

-rsh

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Rob Hahn
Managing Partner of 7DS Associates, and the grand poobah of this here blog. Once called "a revolutionary in a really nice suit", people often wonder what I do for a living because I have the temerity to not talk about my clients and my work for clients. Suffice to say that I do strategy work for some of the largest organizations and companies in real estate, as well as some of the smallest startups and agent teams, but usually only on projects that interest me with big implications for reforming this wonderful, crazy, lovable yet frustrating real estate industry of ours.

24 COMMENTS

  1. I think this is a prime opportunity for a hybrid model – marketing is X (less) and representation is X per hour.

    Marketing is a relatively fixed cost; the negotiating/managing/sorting out/reputation are where the bulk of the real work is now done.

    And … this is a perfect opportunity to address the divorcing of the commissions as well. The same percentage (as is often the case) to both sides of a transaction is now seen as a hair silly. Buyers’ Agents tend to do (in my experience) far more legwork and spend much more time with buyers than sellers agents need to spend with their clients.

    Change is going to come from adaptable Realtors and consumers driving the shift.

    Just my two cents.

  2. I think this is a prime opportunity for a hybrid model – marketing is X (less) and representation is X per hour.

    Marketing is a relatively fixed cost; the negotiating/managing/sorting out/reputation are where the bulk of the real work is now done.

    And … this is a perfect opportunity to address the divorcing of the commissions as well. The same percentage (as is often the case) to both sides of a transaction is now seen as a hair silly. Buyers’ Agents tend to do (in my experience) far more legwork and spend much more time with buyers than sellers agents need to spend with their clients.

    Change is going to come from adaptable Realtors and consumers driving the shift.

    Just my two cents.

  3. I think this is a prime opportunity for a hybrid model – marketing is X (less) and representation is X per hour.

    Marketing is a relatively fixed cost; the negotiating/managing/sorting out/reputation are where the bulk of the real work is now done.

    And … this is a perfect opportunity to address the divorcing of the commissions as well. The same percentage (as is often the case) to both sides of a transaction is now seen as a hair silly. Buyers’ Agents tend to do (in my experience) far more legwork and spend much more time with buyers than sellers agents need to spend with their clients.

    Change is going to come from adaptable Realtors and consumers driving the shift.

    Just my two cents.

  4. I think you’re missing a big point here.

    The buyer THINKS they’re just finding their own home “on the internet”.

    But how did those homes get there? Except for the small percentage of FSBO’s, most homes for sale that are on the internet were put there by agents and brokerages. The house didn’t just “appear” there on the internet to wait for some buyer to stumble upon it. It was put their specifically to market the home.

    So it is specious to say that the Buyer “found” the house on the internet. The home was specifically marketed to make it EASY for the home to be seen by the Buyer. That is MARKETING.

    I have spent years working on my website and marketing materials. I have spent years developing networks of agents and buyers and sellers. And I have spent years selling real estate.

    Now why should I reduce my commissions?

  5. I think you’re missing a big point here.

    The buyer THINKS they’re just finding their own home “on the internet”.

    But how did those homes get there? Except for the small percentage of FSBO’s, most homes for sale that are on the internet were put there by agents and brokerages. The house didn’t just “appear” there on the internet to wait for some buyer to stumble upon it. It was put their specifically to market the home.

    So it is specious to say that the Buyer “found” the house on the internet. The home was specifically marketed to make it EASY for the home to be seen by the Buyer. That is MARKETING.

    I have spent years working on my website and marketing materials. I have spent years developing networks of agents and buyers and sellers. And I have spent years selling real estate.

    Now why should I reduce my commissions?

  6. @Marlow –

    I think you make a good point, but there are layers of depth involved here.

    You can make the argument that the buyer found the home on the Internet because you put it there. But in fact, the split between your labor and the capital invested is really large. You didn’t program the code, didn’t buy the computers, don’t own the fiber trunks that make up the Internet backbone, didn’t develop the router, etc. You probably didn’t even program the website yourself.

    When value (aka, productivity) is capital + labor, and the capital involved is owned by someone other than the agent, then the question becomes what % of the overall value is being delivered by the tool (i.e., the web, i.e., ‘capital’) and what % is delivered by the worker (i.e., the agent).

    When the “work” involved in putting a listing online (i.e., entering the data into some sort of a computer system, such as an MLS) is comparatively speaking a very, very small part of the value, I maintain that price pressure is inevitable. Specifically, I maintain that price pressure on labor — compensation to the worker — is inevitable as the importance of capital rises.

    In plainer speak, when the difference between one agent’s MARKETING of a property and another agent’s MARKETING of the same property is minute because you both use the same MLS, same tools, same aggregators, then whoever comes in with the lower price wins. In order to really differentiate, you have to have superior tools, or superior skills/knowledge.

    Look at things from the consumer’s point of view. They’re being told about all these cool websites out there, like Trulia, Zillow, Realtor.com, the local MLS site, etc. Your competitors are going to the seller saying, “I have access to all of those same tools that Marlow has; but I will charge you 1% less.” (Or, “I’ll refund you part of the commission” which amounts to the same thing.) What argument is available to you to charge a higher price?

    Note even what you said: “I have spent years working on my website and marketing materials. I have spent years developing networks of agents and buyers and sellers. And I have spent years selling real estate.”

    You’re charging extra for (a) better capital assets (website and marketing materials); (b) better intangible assets (network of agents; goodwill); and (c) knowledge assets (years selling real estate). That is how you compete.

    But claims of advantage that do not translate into actual effectiveness are ignored by consumers. For you to avoid having to cut commissions, you will need one of three things:

    1. Your competitors do not compete on price;
    2. You can show that your investment in capital, your intangible assets, and your experience results in better performance;
    3. Your consumers are totally ignorant.

    My thought is that counting on #1 or #3 makes for poor business strategy.

    -rsh

  7. @Marlow –

    I think you make a good point, but there are layers of depth involved here.

    You can make the argument that the buyer found the home on the Internet because you put it there. But in fact, the split between your labor and the capital invested is really large. You didn’t program the code, didn’t buy the computers, don’t own the fiber trunks that make up the Internet backbone, didn’t develop the router, etc. You probably didn’t even program the website yourself.

    When value (aka, productivity) is capital + labor, and the capital involved is owned by someone other than the agent, then the question becomes what % of the overall value is being delivered by the tool (i.e., the web, i.e., ‘capital’) and what % is delivered by the worker (i.e., the agent).

    When the “work” involved in putting a listing online (i.e., entering the data into some sort of a computer system, such as an MLS) is comparatively speaking a very, very small part of the value, I maintain that price pressure is inevitable. Specifically, I maintain that price pressure on labor — compensation to the worker — is inevitable as the importance of capital rises.

    In plainer speak, when the difference between one agent’s MARKETING of a property and another agent’s MARKETING of the same property is minute because you both use the same MLS, same tools, same aggregators, then whoever comes in with the lower price wins. In order to really differentiate, you have to have superior tools, or superior skills/knowledge.

    Look at things from the consumer’s point of view. They’re being told about all these cool websites out there, like Trulia, Zillow, Realtor.com, the local MLS site, etc. Your competitors are going to the seller saying, “I have access to all of those same tools that Marlow has; but I will charge you 1% less.” (Or, “I’ll refund you part of the commission” which amounts to the same thing.) What argument is available to you to charge a higher price?

    Note even what you said: “I have spent years working on my website and marketing materials. I have spent years developing networks of agents and buyers and sellers. And I have spent years selling real estate.”

    You’re charging extra for (a) better capital assets (website and marketing materials); (b) better intangible assets (network of agents; goodwill); and (c) knowledge assets (years selling real estate). That is how you compete.

    But claims of advantage that do not translate into actual effectiveness are ignored by consumers. For you to avoid having to cut commissions, you will need one of three things:

    1. Your competitors do not compete on price;
    2. You can show that your investment in capital, your intangible assets, and your experience results in better performance;
    3. Your consumers are totally ignorant.

    My thought is that counting on #1 or #3 makes for poor business strategy.

    -rsh

  8. Rob,

    Brilliant.

    I do think, though, that there is another possibility here. As an agent, I’m not necessarily looking for a way to simply reduce my costs. I dislike print advertising not because it is expensive, I dislike it because it is expensive AND ineffective.

    I have no issue with the expenditure in terms of dollars and cents, I just want to spend it in a way that is better for the client (and therefore, for myself).

    For us, our marketing budget is our marketing budget. If we take away from print, we are going to move it to something else that is more effective, whether that is syndication, ppc ads, web resources, whatever. We’re not just going to pocket the money saved. That is exactly what we tell our clients.

    In doing so, we are trying to increase the number and frequency of successful transactions, and thereby increase revenue. The method you seem to be concentrating on is taking a greater profit from the same amount of transactions.

    I want increased market share. I want more clients. Hell, I want all the clients. If others want to simply increase the profit margin and maintain the status quo, go for it. I want to reinvest the money that I can save in ways that will help my clients.

    I think of my beloved (and currently pathetic) NY Knicks. The Knicks just made some trades in an attempt to clear tons of salary cap space for the 2010 crop of free agents, especially LeBron James. Now, when 2010 rolls around, and the Knicks have the opportunity to save all that money. They can do one of two things:

    1) Bank all that money and keep charging the same ticket prices (people pay it for what is currently a sub-par product, right?)

    2) Reinvest all that money in some REALLY good players, make the team better, (Can you imagine what folks will pay in NYC to see LeBron 40x a season?)

    I’m pretty sure they are going to choose option 2, and I imagine there will be little downward pressure on ticket prices if they succeed.

  9. Rob,

    Brilliant.

    I do think, though, that there is another possibility here. As an agent, I’m not necessarily looking for a way to simply reduce my costs. I dislike print advertising not because it is expensive, I dislike it because it is expensive AND ineffective.

    I have no issue with the expenditure in terms of dollars and cents, I just want to spend it in a way that is better for the client (and therefore, for myself).

    For us, our marketing budget is our marketing budget. If we take away from print, we are going to move it to something else that is more effective, whether that is syndication, ppc ads, web resources, whatever. We’re not just going to pocket the money saved. That is exactly what we tell our clients.

    In doing so, we are trying to increase the number and frequency of successful transactions, and thereby increase revenue. The method you seem to be concentrating on is taking a greater profit from the same amount of transactions.

    I want increased market share. I want more clients. Hell, I want all the clients. If others want to simply increase the profit margin and maintain the status quo, go for it. I want to reinvest the money that I can save in ways that will help my clients.

    I think of my beloved (and currently pathetic) NY Knicks. The Knicks just made some trades in an attempt to clear tons of salary cap space for the 2010 crop of free agents, especially LeBron James. Now, when 2010 rolls around, and the Knicks have the opportunity to save all that money. They can do one of two things:

    1) Bank all that money and keep charging the same ticket prices (people pay it for what is currently a sub-par product, right?)

    2) Reinvest all that money in some REALLY good players, make the team better, (Can you imagine what folks will pay in NYC to see LeBron 40x a season?)

    I’m pretty sure they are going to choose option 2, and I imagine there will be little downward pressure on ticket prices if they succeed.

  10. Rob,

    Brilliant.

    I do think, though, that there is another possibility here. As an agent, I’m not necessarily looking for a way to simply reduce my costs. I dislike print advertising not because it is expensive, I dislike it because it is expensive AND ineffective.

    I have no issue with the expenditure in terms of dollars and cents, I just want to spend it in a way that is better for the client (and therefore, for myself).

    For us, our marketing budget is our marketing budget. If we take away from print, we are going to move it to something else that is more effective, whether that is syndication, ppc ads, web resources, whatever. We’re not just going to pocket the money saved. That is exactly what we tell our clients.

    In doing so, we are trying to increase the number and frequency of successful transactions, and thereby increase revenue. The method you seem to be concentrating on is taking a greater profit from the same amount of transactions.

    I want increased market share. I want more clients. Hell, I want all the clients. If others want to simply increase the profit margin and maintain the status quo, go for it. I want to reinvest the money that I can save in ways that will help my clients.

    I think of my beloved (and currently pathetic) NY Knicks. The Knicks just made some trades in an attempt to clear tons of salary cap space for the 2010 crop of free agents, especially LeBron James. Now, when 2010 rolls around, and the Knicks have the opportunity to save all that money. They can do one of two things:

    1) Bank all that money and keep charging the same ticket prices (people pay it for what is currently a sub-par product, right?)

    2) Reinvest all that money in some REALLY good players, make the team better, (Can you imagine what folks will pay in NYC to see LeBron 40x a season?)

    I’m pretty sure they are going to choose option 2, and I imagine there will be little downward pressure on ticket prices if they succeed.

  11. @The Zebra –

    I think this area is a bit confusing.

    Imagine a world without the Internet. Not that hard to do, since it was only 10 years ago or so.

    At that point, to “list a home” and bring buyers to a seller, the agent had to do a fair amount of work. It wasn’t simply a matter of entering things into a MLS computer database. Consumers never did online searches, because those things didn’t really exist in 1998.

    So you, the agent, have walkins or phone calls from people who are like, “Yeah… so we’re looking for a house… not really sure what we want….” However you handled that, fact was that you spent time handling those inquiries, helping buyers figure out their needs, then looking through your MLS book (or private database, via 1200-baud modems or whatnot), locating possible matches, faxing them, corresponding with them, showing them around, etc. etc. Let’s say that took X hours.

    After the Internet revolution, however, you have customers who show up saying something like, “We found these five houses on your website: ID#78221, 78651, 78901, 97112, and 61224. We’d like to see them please.” You don’t have to talk them through a needs analysis, nor do you conduct a MLS search for them, nor do you do very much else with them. You just make an appointment, show them those five houses, and off you go.

    Let’s say that took Y hours.

    What is the chance that Y > X? I’m thinking ‘slim to none’.

    All that I’m pointing out — as per the original post by Matt Rathburn — is that when a third of the buyers are saying they found the property online (i.e., they showed up with listing ID#78221, 78651, 78901, 97112, and 61224), meaning you the agent spent Y hours with them instead of X hours, then there is a cost savings here. There is a productivity gain here.

    You the agent gain a number of hours thanks to the productivity gain granted by the Internet. With those hours, you can list more homes, do more marketing, play more golf, whatever. But the consumer also knows that you spent fewer hours working on his listing, and knows that you gained productivity.

    My point, simply, is that consumers typically want the value of that gain in productivity. Even where they remain ignorant of the gain in productivity, your competitors are sure to illuminate them by competing with you on the basis of price.

    You’re thinking in terms of marketing budget. I’m talking in terms of hours spent, in terms of productivity.

    I just don’t think there’s a real argument here that advances in technology has not resulted in greater realtor productivity. There clearly has been greater productivity. The study Rathburn described is just one illustration.

    But has there been a corresponding decrease in cost to sellers for agent services? Maybe, maybe not. The principles of economics, however, suggest that with increased productivity on the part of the service provider, the cost of such services will go down over time. This has been true throughout human history, and I see no reason why real estate would be exempt from the trend.

    Indeed, the emergence of refund models (such as Redfin) or discount brokerages suggests that yes, in fact, there is significant pricing pressure on realtors today as consumers realize that technology (and the Internet especially) creates productivity gains in which they should share.

    It’s a technical point, perhaps, but no less true because of it.

    -rsh

  12. @The Zebra –

    I think this area is a bit confusing.

    Imagine a world without the Internet. Not that hard to do, since it was only 10 years ago or so.

    At that point, to “list a home” and bring buyers to a seller, the agent had to do a fair amount of work. It wasn’t simply a matter of entering things into a MLS computer database. Consumers never did online searches, because those things didn’t really exist in 1998.

    So you, the agent, have walkins or phone calls from people who are like, “Yeah… so we’re looking for a house… not really sure what we want….” However you handled that, fact was that you spent time handling those inquiries, helping buyers figure out their needs, then looking through your MLS book (or private database, via 1200-baud modems or whatnot), locating possible matches, faxing them, corresponding with them, showing them around, etc. etc. Let’s say that took X hours.

    After the Internet revolution, however, you have customers who show up saying something like, “We found these five houses on your website: ID#78221, 78651, 78901, 97112, and 61224. We’d like to see them please.” You don’t have to talk them through a needs analysis, nor do you conduct a MLS search for them, nor do you do very much else with them. You just make an appointment, show them those five houses, and off you go.

    Let’s say that took Y hours.

    What is the chance that Y > X? I’m thinking ‘slim to none’.

    All that I’m pointing out — as per the original post by Matt Rathburn — is that when a third of the buyers are saying they found the property online (i.e., they showed up with listing ID#78221, 78651, 78901, 97112, and 61224), meaning you the agent spent Y hours with them instead of X hours, then there is a cost savings here. There is a productivity gain here.

    You the agent gain a number of hours thanks to the productivity gain granted by the Internet. With those hours, you can list more homes, do more marketing, play more golf, whatever. But the consumer also knows that you spent fewer hours working on his listing, and knows that you gained productivity.

    My point, simply, is that consumers typically want the value of that gain in productivity. Even where they remain ignorant of the gain in productivity, your competitors are sure to illuminate them by competing with you on the basis of price.

    You’re thinking in terms of marketing budget. I’m talking in terms of hours spent, in terms of productivity.

    I just don’t think there’s a real argument here that advances in technology has not resulted in greater realtor productivity. There clearly has been greater productivity. The study Rathburn described is just one illustration.

    But has there been a corresponding decrease in cost to sellers for agent services? Maybe, maybe not. The principles of economics, however, suggest that with increased productivity on the part of the service provider, the cost of such services will go down over time. This has been true throughout human history, and I see no reason why real estate would be exempt from the trend.

    Indeed, the emergence of refund models (such as Redfin) or discount brokerages suggests that yes, in fact, there is significant pricing pressure on realtors today as consumers realize that technology (and the Internet especially) creates productivity gains in which they should share.

    It’s a technical point, perhaps, but no less true because of it.

    -rsh

  13. Ah, I see where you are going. But I think you are making a bit of an incorrect assumption. Interestingly, it is the same incorrect assumption that Redfin has made, leading them to have to modify their business model: technology does not eliminate the consultative function of the real estate professional.

    In my 5 years in real estate, I have only had ONE, count ’em ONE, client who came to me, said, “I want to see x,” and then actually bought “X.” Seriously.

    I have worked with the vast majority of my clients for weeks (at least) in order to help them buy (or sell) a home. Heck, we work with many of our 2nd home clients for a year or more.

    The fact that people can FIND real estate online doesn’t mean that they can BUY real estate online. It doesn’t eliminate the need for the agent to offer advice, insight, information, and expertise that will assist the client in making the best possible decisions.

    I think that the increase in agent productivity is somewhat misleading because it came about as a result of a real estate market condition that this country had never seen before. EVEY agent was more productive, but it didn’t necessarily have anything to do with technology. If you had a real estate license and a heartbeat, it was pretty tough NOT to be (or at least appear) productive from 2002-2006.

    As I said in the beginning of this post, this is something that Redfin has slowly been discovering. As much as we want to hope that technology can replace a lot of the tasks that agents have traditionally performed, it just doesn’t work that way in the real world.

  14. Ah, I see where you are going. But I think you are making a bit of an incorrect assumption. Interestingly, it is the same incorrect assumption that Redfin has made, leading them to have to modify their business model: technology does not eliminate the consultative function of the real estate professional.

    In my 5 years in real estate, I have only had ONE, count ’em ONE, client who came to me, said, “I want to see x,” and then actually bought “X.” Seriously.

    I have worked with the vast majority of my clients for weeks (at least) in order to help them buy (or sell) a home. Heck, we work with many of our 2nd home clients for a year or more.

    The fact that people can FIND real estate online doesn’t mean that they can BUY real estate online. It doesn’t eliminate the need for the agent to offer advice, insight, information, and expertise that will assist the client in making the best possible decisions.

    I think that the increase in agent productivity is somewhat misleading because it came about as a result of a real estate market condition that this country had never seen before. EVEY agent was more productive, but it didn’t necessarily have anything to do with technology. If you had a real estate license and a heartbeat, it was pretty tough NOT to be (or at least appear) productive from 2002-2006.

    As I said in the beginning of this post, this is something that Redfin has slowly been discovering. As much as we want to hope that technology can replace a lot of the tasks that agents have traditionally performed, it just doesn’t work that way in the real world.

  15. Just because some brokerages are refunding commission dollars does not mean that costs have come down because of the internet and they can afford to do so.

    They’re refunding dollars to try to buy market share.

    The reality is that the companies that are involved in these price wars are out of business (Foxton’s, Iggy’s House, Buy Side Realty, etc.) or about to be (Redfin) or bleeding money but still able to stay in business because of investor capital (HouseValues, Zip Realty).

    The cost of business to these “discounters” is the same cost of business to full-service traditional brokerage houses because, as you’ve pointed out we all have the same tools to assist us.

    The difference is the discounters are refunding their profits back to the customer. They can only continue to do this until they run out of money. In a good market, this may take a long time to run out of dough but in an extended slow market, these companies may be out of business sooner rather than later.

  16. Just because some brokerages are refunding commission dollars does not mean that costs have come down because of the internet and they can afford to do so.

    They’re refunding dollars to try to buy market share.

    The reality is that the companies that are involved in these price wars are out of business (Foxton’s, Iggy’s House, Buy Side Realty, etc.) or about to be (Redfin) or bleeding money but still able to stay in business because of investor capital (HouseValues, Zip Realty).

    The cost of business to these “discounters” is the same cost of business to full-service traditional brokerage houses because, as you’ve pointed out we all have the same tools to assist us.

    The difference is the discounters are refunding their profits back to the customer. They can only continue to do this until they run out of money. In a good market, this may take a long time to run out of dough but in an extended slow market, these companies may be out of business sooner rather than later.

  17. I disagree that we have all the same tools or have the same business processes or the same cost structure.

    At Redfin we’ve worked hard to build a killer website so that customer acquisition is a fixed capital cost instead of a variable spend. Our advertising spend is measured in the thousands of dollars a month and not the tens or hundreds of thousands that the larger brokerages spend.

    We’ve also worked hard to restructure how our agents work together. From using junior agents to show homes, to experienced ones who focus solely on negotiations to transaction coordinators who focus on the paper work, all our positions are highly specialized enabling each position to do more transactions. We’ve also centralized a number of functions in Seattle for increased efficiency in certain roles. Overall we really can do more with less and the customer relationship software we use to co-ordinate deals over the Internet has played a central role in this.

    I know everyone likes to position us as a discounter but we offer a discount because our cost structure really is different. We also don’t compete solely on price. If we did we would have cut our prices instead of recently raising them.

  18. I disagree that we have all the same tools or have the same business processes or the same cost structure.

    At Redfin we’ve worked hard to build a killer website so that customer acquisition is a fixed capital cost instead of a variable spend. Our advertising spend is measured in the thousands of dollars a month and not the tens or hundreds of thousands that the larger brokerages spend.

    We’ve also worked hard to restructure how our agents work together. From using junior agents to show homes, to experienced ones who focus solely on negotiations to transaction coordinators who focus on the paper work, all our positions are highly specialized enabling each position to do more transactions. We’ve also centralized a number of functions in Seattle for increased efficiency in certain roles. Overall we really can do more with less and the customer relationship software we use to co-ordinate deals over the Internet has played a central role in this.

    I know everyone likes to position us as a discounter but we offer a discount because our cost structure really is different. We also don’t compete solely on price. If we did we would have cut our prices instead of recently raising them.

  19. I disagree that we have all the same tools or have the same business processes or the same cost structure.

    At Redfin we’ve worked hard to build a killer website so that customer acquisition is a fixed capital cost instead of a variable spend. Our advertising spend is measured in the thousands of dollars a month and not the tens or hundreds of thousands that the larger brokerages spend.

    We’ve also worked hard to restructure how our agents work together. From using junior agents to show homes, to experienced ones who focus solely on negotiations to transaction coordinators who focus on the paper work, all our positions are highly specialized enabling each position to do more transactions. We’ve also centralized a number of functions in Seattle for increased efficiency in certain roles. Overall we really can do more with less and the customer relationship software we use to co-ordinate deals over the Internet has played a central role in this.

    I know everyone likes to position us as a discounter but we offer a discount because our cost structure really is different. We also don’t compete solely on price. If we did we would have cut our prices instead of recently raising them.

  20. I love the discussion going on in the comments here. Let me try and summarize my take.

    Daniel — of course you’re right about the work an agent has to do to actually get the transaction done. Finding and buying are two different things. At the same time, if I was paying 6% in 1990 when the agent had to do more work on the Finding as they do today, then shouldn’t I pay less in 2008 when he doesn’t? Some part of the commission accounts for the advice, work, negotiations, etc. etc. but surely some part accounts for the Finding aspect which we agree is easier today than before, no?

    The conversation between Marlow and Matt from Redfin is a classic. Basically, Marlow’s thesis appears to be that the discounters are burning through profits to buy marketshare. But Redfin says that their cost structure really is different, giving them the ability to provide the same level of service (and indeed, generate same profits or more profits) at lower cost.

    To me, Redfin represents the prototype of the future model of brokerage I think is most interesting to think about: capital-intensive, web-centric models, that leverage large investments in technology to increase productivity and margins both.

    Is it sustainable, though? Certainly the recent layoffs and bad news coming out of Redfin provides ammunition to the skeptics. But no one (besides Redfin insiders) knows the true picture.

    Foxton’s and such are not good comparisons: they were promising fewer services at lower cost. That’s a very different thing that same services at lower cost.

    Just my thoughts right now.

    -rsh

  21. I love the discussion going on in the comments here. Let me try and summarize my take.

    Daniel — of course you’re right about the work an agent has to do to actually get the transaction done. Finding and buying are two different things. At the same time, if I was paying 6% in 1990 when the agent had to do more work on the Finding as they do today, then shouldn’t I pay less in 2008 when he doesn’t? Some part of the commission accounts for the advice, work, negotiations, etc. etc. but surely some part accounts for the Finding aspect which we agree is easier today than before, no?

    The conversation between Marlow and Matt from Redfin is a classic. Basically, Marlow’s thesis appears to be that the discounters are burning through profits to buy marketshare. But Redfin says that their cost structure really is different, giving them the ability to provide the same level of service (and indeed, generate same profits or more profits) at lower cost.

    To me, Redfin represents the prototype of the future model of brokerage I think is most interesting to think about: capital-intensive, web-centric models, that leverage large investments in technology to increase productivity and margins both.

    Is it sustainable, though? Certainly the recent layoffs and bad news coming out of Redfin provides ammunition to the skeptics. But no one (besides Redfin insiders) knows the true picture.

    Foxton’s and such are not good comparisons: they were promising fewer services at lower cost. That’s a very different thing that same services at lower cost.

    Just my thoughts right now.

    -rsh

  22. I love the discussion going on in the comments here. Let me try and summarize my take.

    Daniel — of course you’re right about the work an agent has to do to actually get the transaction done. Finding and buying are two different things. At the same time, if I was paying 6% in 1990 when the agent had to do more work on the Finding as they do today, then shouldn’t I pay less in 2008 when he doesn’t? Some part of the commission accounts for the advice, work, negotiations, etc. etc. but surely some part accounts for the Finding aspect which we agree is easier today than before, no?

    The conversation between Marlow and Matt from Redfin is a classic. Basically, Marlow’s thesis appears to be that the discounters are burning through profits to buy marketshare. But Redfin says that their cost structure really is different, giving them the ability to provide the same level of service (and indeed, generate same profits or more profits) at lower cost.

    To me, Redfin represents the prototype of the future model of brokerage I think is most interesting to think about: capital-intensive, web-centric models, that leverage large investments in technology to increase productivity and margins both.

    Is it sustainable, though? Certainly the recent layoffs and bad news coming out of Redfin provides ammunition to the skeptics. But no one (besides Redfin insiders) knows the true picture.

    Foxton’s and such are not good comparisons: they were promising fewer services at lower cost. That’s a very different thing that same services at lower cost.

    Just my thoughts right now.

    -rsh

  23. Been meaning to comment on the last few posts regarding the same/similar topic: Real Estate Economics…

    Companies that employ ‘Alternative Commission Models’ are (were) quickly dismissed and unfairly stereotyped as ‘Discounters’, in a ‘you get what you pay for’ and other far more grievous statements/practices by the status-quo in the industry to steer consumers away from such choices…IMHO

    What will (continue) to emerge are viable models for both consumer and business as the walled garden that was ‘real estate listing and local information’ is further opened for the masses to share and syndicate. In this bear market, innovation and cost cutting are required for survival.
    If it’s not Redfin, it will be one of the 15 new models/options that are sure to pop-up over the next 12-18 months…IMHO

    Real Estate is currently undergoing a double whammy. There were already well funded ‘disintermediators’ in the space (more are coming) before the heavy downward pressure of this soft (and getting softer) market…compounding current industry attrition and the necessity of continued innovation, evolution and subsequent adoption of ‘Alternative Models’. Ideally the trusted brands and franchises begin to more nimbly move with the paradigm shift rather than fight it at a greater expense…IMHO

    The ‘6%’ model has endured because the above information as a commodity was highly controllable. Simple economics of supply and demand allowed professionals to mandate pricing, even if technically doing so was/is ‘illegal’.
    Nonetheless, there is portion of the ‘typical 6%’ revenue model vested in human services, which has substantial value…IMHO

    What is that amount? Not sure yet.

    What is the best model? Probably some combination of what currently exists, with a little pixie dust sprinkled on top.

    Agents (and franchises/brands) who position themselves with or ahead of this curve are the ones likely to come out alive on the other end of this wild ride…In My Not So Humble Opinion :-p

  24. Been meaning to comment on the last few posts regarding the same/similar topic: Real Estate Economics…

    Companies that employ ‘Alternative Commission Models’ are (were) quickly dismissed and unfairly stereotyped as ‘Discounters’, in a ‘you get what you pay for’ and other far more grievous statements/practices by the status-quo in the industry to steer consumers away from such choices…IMHO

    What will (continue) to emerge are viable models for both consumer and business as the walled garden that was ‘real estate listing and local information’ is further opened for the masses to share and syndicate. In this bear market, innovation and cost cutting are required for survival.
    If it’s not Redfin, it will be one of the 15 new models/options that are sure to pop-up over the next 12-18 months…IMHO

    Real Estate is currently undergoing a double whammy. There were already well funded ‘disintermediators’ in the space (more are coming) before the heavy downward pressure of this soft (and getting softer) market…compounding current industry attrition and the necessity of continued innovation, evolution and subsequent adoption of ‘Alternative Models’. Ideally the trusted brands and franchises begin to more nimbly move with the paradigm shift rather than fight it at a greater expense…IMHO

    The ‘6%’ model has endured because the above information as a commodity was highly controllable. Simple economics of supply and demand allowed professionals to mandate pricing, even if technically doing so was/is ‘illegal’.
    Nonetheless, there is portion of the ‘typical 6%’ revenue model vested in human services, which has substantial value…IMHO

    What is that amount? Not sure yet.

    What is the best model? Probably some combination of what currently exists, with a little pixie dust sprinkled on top.

    Agents (and franchises/brands) who position themselves with or ahead of this curve are the ones likely to come out alive on the other end of this wild ride…In My Not So Humble Opinion :-p

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