Now this is not the end. It is not even the beginning of the end. But it is, perhaps, the end of the beginning.
- Sir Winston Churchill
One of the true pioneers of the new generation of real estate companies, Redfin, has launched a new partner program:
Redfin released a sprawling, glorious update to our website last night that changes Redfin in two fundamental ways:
- We built data-driven agent profiles, showing every deal our own agents have done and every customer review, even on deals that failed.
- We opened up our business to partner agents and we published all their deals too, surveying old customers for reviews.
How does this change Redfin as a company? Well, when we upgraded our own service last November to offer unlimited home tours and a choice of agents, everyone said we were becoming less virtual. And now that we’re connecting consumers with partner agents, folks will say we’ve become more virtual.
Actually, I think the change to Redfin as a company is far deeper and far more subtle than what folks will say.
The Peanut Gallery
A hint of what’s changed comes from Gregg Swann of the Bloodhound Blog:
If Redfin can make five figures a day on what may not even amount to a single full-time staff line, that’s a killer business.
Maybe even such a killer business that it will replace client-representation altogether. Implausible? One of Redfin’s planned expansion cities is Phoenix — where our numbers are worse than Kitsap’s. Of the RE 2.0 players, only Estately.com does anything like this, but Redfin could go into the referral business virtually anywhere, virtually overnight.
And Louis Cammarosano of HomeGain said with maximum succinctness, over Twitter: “It means they are becoming like Homegain.”
John Cook at TechFlash took Redfin to task:
The concept is not new. In fact, Seattle area companies such as Estately and HouseValues.com also earn money through agent referrals. But the program is a big switch for Redfin, which has always touted the customer service focus of its agents. Kelman said he was “terrified” that the partner program “could screw up the brand.” That’s why the company interviewed all of the partner agents and implemented an agent review system on the Redfin Web site. It also reserves the right to remove partner agents that are not living up to customer service requirements.
Kelman downplayed the possibility that Redfin would move entirely to a partner model. “There is something in Redfin’s blood that we like having direct relationships with the customer,” he said.
This change is a fundamental one. This is not a mere extension of the Redfin model and philosophy. It’s something else.
What Was Actually Done
TechFlash post above actually has a pretty good brief description of what Redfin actually launched:
Starting today, the company has aligned itself with 35 real estate agents from 13 different brokerage firms in nine counties. The agents, which receive a profle page on Redfin and must have completed 15 transactions, pay Redfin a 30 percent referral fee on any completed deals. Redfin then refunds 15 percent of that fee to home buyers, keeping the other 15 percent.
But Redfin has more info on this front:
Every single one of these partners committed to our consumer-friendly values as a prerequisite to joining the program:
- Technology: the partner refunds part of his commission to the client because the client asks for service online using our tools.
- Service: the partner is not allowed to do any of the funny-business around forcing someone to use him when buying a house; the partner earns more when the client is satisfied.
- Transparency: the partner publishes information about all his deals, and all his reviews; the partner provides the service requested by the consumer and nothing more unless asked.
Furthermore, rather than sending the “leads” to the agent (or multiple agents), the Redfin model places that power in the consumer’s hands. The consumer sees the deals, failed deals, activities, etc. of the partner agent, then actively chooses to contact that particular agent.
So, the major differences between Redfin and other models are:
- Power to choose in the hands of consumer
- Transparency on agent quality metrics
- Refund back to the consumer
But all of that, still, fails to address the central, subtle, and fundamental change.
Basically, by going to a ‘partner’ model, Redfin is no longer responsible for the consumer service experience.
Now, Glenn Kelman and others at Redfin vigorously dispute this:
The story said that we had been “terrified” about potential problems in our partners’ customer service without explaining that we said that to introduce the steps we took to avoid those problems. (emphasis added)
We planned for Redfin’s partner program in a financial model built in 2007. We experimented with it earlier than that, canceling the program in 2006 after it became clear that we had no way of being accountable for good service to the client.
We could have offered a year ago the referral programs typical in the industry, selling the client out to multiple unnamed agents for a fee. There was ample financial pressure to do so. We stuck to our guns to create something much better, building an entire accountability system and a set of tools for a client to ask a particular agent to perform a particular service, interviewing every partner agent in person, and checking each agent’s references over a year back, so we could offer a partner program consistent with our values. These values are why we radically cut the profitability of the program by offering half our fee back to the consumer. (Emphasis added)
For what it’s worth, I completely believe Redfin. And furthermore, Redfin might very well be successful.
Redfin's Ambassador of Kwan
However, there is a large gap between “building an entire accountability system” and actually being accountable.
Redfin is a brokerage in the markets in which it is active. The agents who work for Redfin are employees of Redfin, and Redfin as an entity is accountable to the actual consumer for the service experience. In fact, while I don’t know for sure, I’m going to guess that Redfin has a certain “Redfin Way” of “Redfin Service Standards” or whatever that it enforces on its agents.
If I’m a Redfin agent, and I don’t live up to Redfin’s performance standards, then Redfin has a variety of tools and methods at its disposal to enforce standards. With these partner agents, no matter how well Redfin screens ‘em, Redfin only has one way to enforce standards: remove them from the program.
If I pick a partner agent, and have a terrible experience, who do I get to blame?
The Liability Question
A way to crystallize the issue is to consider legal liability.
Suppose that some unhappy consumer sues the partner agent after a deal goes south. (Not saying this would happen, but thinking about lawsuits help clarify some issues.)
I'm blind for a reason...
The agent’s actual broker would be named in the lawsuit, since legally, the agent is just representing the broker. The broker’s E&O insurance would come into play, and the lawsuit would then focus on whether the agent’s acts/omissions rose to the level of professional malpractice. The broker’s processes, standards, training, screening, etc. would all become relevant as to establishing liability under respondeat superior theory.
Where does Redfin fit into this?
On the one hand, the consumer would absolutely sue Redfin. After all, Redfin supposedly screened all of its partners, and built an “entire accountability system”. That a crappy agent slipped through resulting in a big loss for the consumer means that the consumer has a reason to sue Redfin. After all, he went to Redfin to find an agent, and relied upon Redfin’s representation as to quality, professionalism, and ethics.
On the other hand, Redfin’s defense would presumably be along the lines of, “We ain’t the boss”. They would presumably assert that respondeat superior does not apply in their case, because the agent doesn’t work for them. They don’t control the agent’s actions. All they’ve done is made an introduction between the consumer and the partner agent, and the consumer chose to work with that particular agent.
(I suppose, in theory, Redfin could choose NOT to fight liability and embrace it wholeheartedly in order to preserve their ideal of customer service… but I doubt that very much. Lawsuits focus the mind in interesting ways. Plus, does Redfin’s E&O insurance even cover these ‘partner agents’? Would Redfin’s insurer really agree to that without a substantial hike in premiums?)
If the agent’s broker — the actual “boss” in theory — is held liable, would they not consider bringing Redfin in as a third party defendant? Or bring an indemnity claim that goes something like, “Your program caused our otherwise ethical agent to do bad things, so now you owe us money”? I know I would advise the broker to bring such a suit, were I representing them.
With the other lead-gen sites, like Homegain or HouseValues, these issues never arise. All that those sites promise to consumers is that someone will be in touch, and they pass the lead on. They’re merely a marketing conduit.
Redfin’s program goes far, far beyond that… but they’re not ultimately accountable to the consumer client from what I can tell.
The Brand and Ideals Question
That Redfin would disavow responsibility for a poor consumer experience through Redfin is, to say the least, a sea change. As Glenn says quite passionately:
We will always, always fight for the consumer: exposing information about agent performance the world has never seen, offering the best value we can, paying our agents based on customer satisfaction, negotiating with Realtor associations to publish more data.
This is an emotional issue for us. We are less interested in proving TechFlash wrong, or even in convincing you that Redfin will succeed or fail — which is still an open question — than we are in establishing what this company stands for: making the real estate industry better for the consumer. Maybe nobody else cares that this company actually stands for something. But we do. We always will.
Does that include accepting legal liablity for the actions of your ‘partner agents’? If it does, then in what way are those ‘partner agents’ different from your own employees — except that they’re not really subject to discipline/training/enforcement by you?
If it does not, if Redfin’s program stops short of accepting legal liability for the misconduct or negligence by partner agents, then that is a fundamental change in the Redfin brand. And I daresay it represents a change of the Redfin ideals in a subtle, yet profound, way. Sure, Redfin can still work to make the real estate industry better for the consumer. But it won’t do it directly, by training its agents, by implementing its policies and procedures, and by serving the consumer.
That might be fine; might even be great. Maybe Redfin overcomes some of the acrimony built up over the years this way.
But it is a fundamental change. He who pays you is your customer.
This is perhaps the end of the beginning...
The End of the Beginning
For the industry, I think Redfin’s move represents the end of the first wave of Real Estate 2.0. The implication appears to be that new companies cannot implement new business models for real estate. Trulia and Zillow are not real estate companies; they are media companies in the real estate space. They make money from advertising.
Homegain, HouseValues, Estately and so on are also pseudo-media companies, but with a pay-for-performance type of ad model.
Redfin was the pioneer of a new model, centered around a fantastic website, direct consumer engagement, and a novel refund concept. Their obsession with transparency, truly excellent user experience online, and “freakish depth” was the precursor to what the brokerage of the future might look like.
That chapter, I think, now comes to a close. The new real estate companies have found that they cannot make money directly from consumers. Okay, fine. What does the next chapter look like?
No one knows of course. But it does seem to me that the battle lines are getting drawn as follows:
On the one hand, the new entrants must find ways to derive revenues from real estate agents; on the other hand, the existing brokerages must find ways to make consumers happier and provide more value to its agents. The midgame, then, represents a struggle on the one hand over consumer service/experience coupled to value delivery to agents, and a struggle on the other hand over getting money out of agents.
We are living through interesting times in real estate.