Notorious R.O.B.

It’s a chilly, rainy day here in New Jersey under iron grey skies.  If where you are is sunny, and you’re feeling happy and optimistic, and you want to stay that way, let me strongly suggest that you not finish reading this post.  This is where I engage in paranoid fearmongering speculation.

You have been warned.

Actual post continues after the jump.

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If you’re responsible for real estate brokerage operations, you owe it to yourself and to your company to read this post by Glenn Kelman at Redfin.  I have said for a while now that I believe Redfin to be one of few viable models for real estate brokerage of the future, and this post helps confirm that belief.  It’s a long post, and worth reading in full, but here’s the money graf:

But outside of calling one agent after another, the CB CEO has no way of knowing what his agents are doing; most work as contractors, for franchises, recording their deals in spreadsheets and notepads. Redfin on the other hand has a system for scheduling home tours and writing offers, which means we also have a system for storing data about every tour & offer. Months before the numbers are recorded at county courthouses or by federal agencies, we know when bidding wars are back, or when tire-kickers have taken over the market. We can see the whole elephant, and we’re minutely sensitive to when he’s about to roll on top of us or stampede through the jungle. [Emphasis added]

Fact is, far too many real estate brokerages pay lip service to the importance of technology.  Even the ones who do invest are putting money and resources towards marketing technology rather than information technology.  In the long run, I think the companies that survive the Great Recession will be ones who invested in information technology, rather than just another pretty website. Read the rest of this entry »

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

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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:

1. We built data-driven agent profiles, showing every deal our own agents have done and every customer review, even on deals that failed.
2. 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:

1. Technology: the partner refunds part of his commission to the client because the client asks for service online using our tools.
2. 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.
3. 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.

The 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)

And

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.

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.)

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.

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.

-rsh

As most denizens of the Re.net know, there was a recent kettlestorm (tempest in a teapot) around some mean and nasty things said by some blogger at Redfin. Glenn Kelman, the CEO of Redfin, took immediate action and posted an eloquent appeal for harmony and peace.

Glenn — you’re a class act, and a brilliant guy.

So when you write:

We all know that Redfin’s business model is different than yours: we try to get customers via our search site, we pay our agents salaries and customer-satisfaction bonuses, we want to put the escrow process online to avoid talking so much to our customers, and we refund part of our commission. This makes us freaks perhaps, or even fools if you like, but not an enemy.

I know you mean it. And I believe your appeal for understanding and peace is genuine:

So maybe there’s hope that we can work things out. This isn’t a promise to be boring. But at least we can be civil. We weren’t today. We are sorry for the post about Kris Berg. We wanted to say to everyone else in real estate talking about this post that we hope there can be peace between us.

But because you’re such a smart guy, I know that you will understand when I invoke Thucydides:

The real cause I consider to be the one which was formally most kept out of sight. The growth of the power of Athens, and the alarm which this inspired in Lacedaemon, made war inevitable.

There can be no peace between Redfin and traditional brokerage. Like the Lacedaemonians of old, the traditional brokers have cause for alarm at the growth of the power of Redfin. That makes war inevitable.

It’s great that Glenn and the folks at Redfin are so civil and open to working with others and so on. But Redfin has embarked down a path that represents a serious threat to traditional brokerages. It has done so effectively, and should be applauded for its execution. Consumers have and may continue to benefit from Redfin’s model. But calls for peace strike me as a bit… I don’t know… naive perhaps.

Just a bit further down on the Redfin blog, you find the post entitled, “The Redfin Advantage“:

Last spring, Redfin analyzed the MLS data available to all brokers to show that our home-buyers negotiated a better deal on a home — saving an extra $4,000 off the list price — over and above our commission refund. We called the total savings, of $14,080, the Redfin Advantage.

The post then goes on to detail how the Redfin Advantage has widened since then.

Unlike other traditional competitors who like to boast some advantage or another (“We have the best agents” or “We care about you like no one else!” or some such), Redin can boast numbers. $14,080 as a matter of fact.

If I’m a competitor of yours — and all brokerages in the areas where Redfin is active are competitors — and you’re offering the same service I am for $14K less… well…. On the one hand, kudos to you and your team, and we can be civil to each other and make nice and go have a beer. But let’s not pretend like you’re not taking bread off my table, and doing it in a way that I haven’t yet found a way to combat.

Since I’m not a competitor of Glenn’s, as a neutral observer, I can only marvel at the job that Redfin has done and is doing. It’s innovative, and so far, extremely well-executed. Every traditional brokerage company has reason to be afraid of Redfin, and reason to be hostile to Redfin. I don’t see co-existence as a possibility here: either Redfin’s model and method of salaried agents + web-based self-service + refunds will win and dominate the industry, or the traditional model and method of commissioned agents will. Consumers want choice, but when one choice offers $14K… that ain’t much of a choice.

None of this, of course, excuses She-Who-Shall-Not-Be-Named’s behavior toward a fellow agent and blogger. None of this takes anything away from Glenn’s apology or his sincere appeal for civility and peace. But what it does do, I believe, is to expose the fact that what Glenn should be asking for is not peace with his peers, but civilized combat with honor.

-rsh

Redfin has one of the best corporate blogs not just in real estate, but in…well, business.  Posts like this are the reason why.  Glenn Kelman takes the Freakonomics guys to task (gently, as is his wont) for relying on bad sample set to conclude that brokers have little to no value.

Stephen Dubner and Steven Levitt renew their argument that real estate brokers aren’t worth 6%, citing a study (PDF) conducted by Stanford economist B. Douglas Bernheim and one of his graduate students, Jonathan Meer, which shows that using a broker has no effect on a home’s average selling price.

We are an (online) broker ourselves, but have argued that consumers should be able to choose the real estate services for which they pay, so I’m not sure we have a dog in this fight. In the past, we have welcomed studies showing that buyers and sellers can get along without a broker, and argued that a client working with an online broker negotiates a better price. But in this case I was surprised that the Freakonomics team didn’t evaluate the Stanford economists’ methodology.

The Stanford study only evaluated 800 homes sold on the Stanford campus, “the ownership of which is limited to Stanford faculty and a limited number of senior staff.” In such an environment, marketing is much easier because of the small number of potential buyers, trust is high because of the buyers’ affiliations with one another, and supply is extremely limited: many academics would kill, or even teach an extra freshman survey course, to live on the Stanford campus.

It’s worth reading the whole thing for Glenn’s take on it.  He is, after all, the CEO of a fairly unique brokerage proposition.

As usual, Glenn is much nicer than I am.   One has to be willfully blind to the flaws of the Stanford study to make any conclusions about the value of real estate brokers based on that sample set.  That’s like drawing conclusions about commercial real estate based on a study of Class-A buildings in midtown Manhattan — the city that breaks the laws of physics.  (Did you know that Manhattan office buildings routinely have more rentable square footage than physical square footage?)  Neither place has much resemblance to other places, like say… planet Earth.

One of the biggest flaws of the Stanford study is the severe restriction not just on supply, but on demand.  These 800 houses are limited to Stanford faculty and limited staff (presumably, university brahmins).  Maybe I’m a wealthy VC in the area and would like to own a house right on Stanford campus — sorry, no can do.  And we’re going to make conclusions about pricing based on that?  It’s a neat trick to make statements about the free market once you’ve eliminated the free market from the analysis, no?

Glenn thinks college towns may be a signpost to the future:

In real estate and in life, college is a smaller, more perfect vision of how the rest of the world could be. We thought it was interesting that the previous academic study on brokers’ effectiveness focused on Madison, Wisconsin, because this is also a small college community where alternative approaches to real estate have reached critical mass. Maybe these communities point the way to a post-brokerage world waiting for all us, where both sides abandon their brokers, where we can access information for ourselves online, where we can come to terms more easily and economically.

I seriously, seriously doubt it.  For one thing, college housing may be immune to cyclical downturns.  For another, I’d imagine only military bases have higher turnover in population than college towns, even amongst the faculty.

This is not to say that real estate brokerage will survive in its current form.  There are enough broken things about how real estate works today that some change is inevitable.  It remains to be seen how things will evolve, and what the value of brokerage services will be in the future.

It may not be, as the Freakonomics team tells us, based on the idea that using a broker can get you higher prices on your home.  On the other hand, it may be that using a broker makes it easier to get you higher prices.  Huh?

I mean that presumably there’s a set of activities that one has to do in order to maximize price on a house.  Listing and marketing are a part of it, but so is something like staging a house.  The homeowner himself can stage the house, but maybe he’s a Professor of Economics and knows as much about proper staging as a real estate agent knows about the Black-Scholes theorem.  If there is some finite set of activities, then someone has to do them — otherwise, the price of the house will not be maximized.  A buyer will offer less simply because the homeowner forgot to clean his bathroom.

Real Estate agents may end up becoming something like a specialist in house staging, and extract value for that service.

Or it may be (as the Stanford authors admit) that using an agent results in faster sales, although not necessarily higher price.  There’s value in that.

Heck, there’s value in not having to be around to show my damn house to some damn couple.  It’s a convenience thing.

Now, none of those things may be worth 6%.  That’s a different kettle of fish.

For what it’s worth, I believe the future holds variable pricing for real estate brokerage services.  Rather than trying to enforce a one-price-fits-all model on consumers who don’t want all those services, brokers may end up offering a buffet-style set of choices.  Want me to show your house?  That’ll be 1%. Want flyers made up?  That’ll be 0.5%.  Want me to make a website for your house?  That’ll be $500.  That provides flexibility and choice to both consumers and professionals, allowing both to feel that they’re getting what was bargained for.

But even that model may not work on the Stanford campus with its restriction on supply and demand.

-rsh