Notorious R.O.B.

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:

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

Louis Cammarosano is a really smart dude. I know you might think you know that. But, really. He’s a smart smart guy. In this interview he briefly mentions his history prior to HomeGain:

Upon graduation from the Fordham University School of Law, I worked at Cravath Swaine and Moore in New York and London. I spent most of the 1990’s as a corporate Mergers and Acquisition and securities attorney working in London, Paris and Warsaw.

Cravath, Swaine & Moore is one of a half dozen law firms in the world that routinely goes by a single name: “Cravath”. Everyone in the legal industry knows who you’re talking about. (The others, incidentally, are Wachtel, Skadden, Sully, Cleary, and Latham. Granted, there are firms that use two names and are as well-known, such as Paul, Weiss or Davis, Polk… but I digress!) In every survey I have ever read, as well as personal conversations, Cravath is generally considered the best law firm in the country (and therefore the world). Certain firms are stronger in some practice areas (e.g., Weil, Gotshal is generally conceded as having the top bankruptcy department), and Wachtel would give Cravath a run for its money in overall prestige, but all-around, Cravath is simply the best law firm in the world. It equates to McKinsey & Co in management consulting and to Goldman Sachs in investment banking.

Cravath lawyers are known for their incredible brilliance combined with an incredible fortitude. A friend of mine worked at Cravath for a couple of years, until after a particularly brutal two week period of work, he came home to find a strange woman in his bed. Naturally, he asked her who she was. Whereupon she replied, “I’m your *#@$()&% wife, and you’re quitting that (#@&)(%@ firm.” You simply do not spend ten years working at Cravath unless you’re very very smart, very very hardworking, and very very dedicated.

Louis is such a man.

Therefore, it is no surprise that the latest offering from HomeGain — AgentView — reflects those smarts. Others have written about what’s good about it already, and as I tend to agree generally, I want to focus on something else. (Oh fine, I’ll quibble and nitpick later on.)

As I see it, with AgentView, HomeGain throws down the gauntlet to the major brands in real estate brokerage.

This may not have been their intent, but it is the impact.

Consider what services a brand provides to a real estate agent:

• a logo (or “flag”)
• national advertising
• national website
• marketing tools & materials
• training
• leads

Except for the “flag”, AgentView and HomeGain now provides everything else. If HomeGain starts to pick up brokerage licenses, it can provide a “flag” as well. I see no reason why a HomeGain yard sign would be any less effective than any other yard sign.

In terms of national advertising, Brian Brady rightly points out that HomeGain is a Google Rank 7/10 site that is going to be funneling traffic to these AgentView pages. Should I point out that Coldwell Banker is only 6/10? That Remax is only 6/10?

In fact, AgentView is also something larger brokers ought to be concerned about. It seems we’re in the age of brokers treating their agents like independent businesses. If that’s how your business works, then great. But then you’re going to have to do some serious thinking about the price those independent businesses are willing to pay for your services.

HomeGain is charging $29/month per zip code. Brian thinks the average cost for an agent will be $40-$50 a month. Let’s go with Brian and call it $600 per year for the agent.

What does the brokerage charge the agent? 30% of the commission on each transaction as a split? 40%? Some charge desk costs plus expenses. Some charge agents referral fees for each lead sent to them.

For that matter, what does a brand charge the agent? The broker isn’t going to eat the whole cost of the royalty fee — not for long anyhow. 6% of the GCI?

Yes, I know — you need a broker’s license and take on liability and all those fun things to become independent. Honestly, I have to ask… is that hard to do? If an agent’s only need is to have a broker’s license and buy liability insurance, since she will have no employees, and work out of her home, and use HomeGain for all her marketing needs… well, you do the math.

This is a great move by Louis and the HomeGain people. It is also a challenge to the entrenched powers in real estate.

Resist the temptation to dismiss HomeGain’s transformation. After all, Trulia and Zillow have agent profile pages with listings. Trulia has Trulia Voices and the new blogging platform. What’s the big deal?

The difference between the three companies lies in how they see themselves, and how they view their relationship with agents.

Trulia and Zillow see themselves fundamentally as real estate media plays. They have home search and content and AVM’s and such, but their business model is all about advertising. Their customers are advertisers — consumers are but eyeballs, and agents are but free content producers. Again, I know the good people at Trulia/Zillow (and they’re all good people, at least the ones I’ve met) don’t think of things that way — but I do, because I tend to focus on essentials.

In contrast, HomeGain sees their customers as the real estate agent. In that comment I linked to, Louis wrote:

Key metric here is not top of funnel visits but delivered visits to agents. If our click through rate goes up 50% we can make the same money on 1/2 the traffic. If that happens we can cut out non profitable sources of traffic and make the same money at a higher margin.

This, ladies and gents, is not how a media company thinks. It is how a brokerage thinks. It is how national franchises think.

Nitpicking

Okay, so I promised a bit of quibbling and nitpicking. Keep in mind that I think AgentView is really solid; it’s a great extension of the HomeGain platform. I expect it will be successful.

Nit #1 to Pick: Buy a zip code? How… charmingly antique! Louis — call me at my dayjob if you guys need neighborhood boundaries. I know realtors tend to know zip codes really well, but I would think that a company with the technical competence of HomeGain would let agents buy neighborhoods (like “Soho” and “Greenwich Village”) that cut across Zip Codes (or are a small part of one zip code), as well as MSA’s, parts of towns, etc. Relatedly… where’s the map?

Nit #2 to Pick: The agent profile box at the top of the AgentView page (click here) strikes me as rather ‘undesigned’. Considering the importance of that information to the whole value proposition, I think it might merit a slight redesign to emphasize the information. Maybe leverage Flex or other technologies to sex it up a bit. Or just throw a designer at it.

Nit #3 to Pick: I love that the Agent Profile mentions how many HomeGain clients the Agent had. It would be awesome (for consumers, and for good agents) to add an Ebay-style feedback section here. Nothing works better than testimonials from actual clients — and if you were horrible, you deserve the black marks.

So… About that Gauntlet

For what it’s worth, I’m glad to see HomeGain throw down the gauntlet. This is a challenge that the big brokers and major brands can’t afford to ignore for long. I hope, I believe, that it will spur another round of innovation from companies that aren’t thought to be particularly innovative. Will they pick up the gauntlet and finally start flexing?

It’s a fun time to be in real estate technology.

-rsh

An exchange with Mike Farmer in the comments section of this post over on Homegain triggered some thinking on my part.  The Reader’s Digest version of what went on before:

• Louis thought there was too much hype about marketing, and not enough attention on the craft of being a realtor.
• I responded that one reason was that there isn’t much of a craft to being a real estate broker, and that the ones I respect were more of a consultant than a realtor.
• Mike thought it presumptuous of someone who has never brokered real estate to reduce the job of a realtor down into only brokering deals, adding:

The advent of the information age doesn’t make agents and brokers less useful, but more useful in a more sophisticated market where information needs to be filtered through specialized knowledge to create a competitive edge for consumers. Not only as consultants do we earn our money, but through all the actions taken to create profitable and hassle-free transactions. However, I wouldn’t mind sitting in a cozy office and giving advice all day.

• Whereupon, I responded that filtering information through specialized knowledge is the essence of consulting, and clarified that pure brokerage — matching buyers to properties — is not valuable in the Internet era.

But that raises a related set of questions.

1. If “brokerage” (herein defined as “matching buyers to properties”) is the business that realtors are in, then what are their future prospects, if any?
2. On the other hand, if “brokerage” (herein defined as “matching buyers to properties”) is no longer the business that realtors are in, then what is?

As to the first question, in my mind there is no doubt that the purely transactional brokerage is going the way of Republicans in academia: rare, despised and getting hounded out of existence.  The one thing that the computer is insanely good at doing is matching things up by a whole matrix of qualitative and quantitative metrics.  Really, when you think about it, a realtor even in the pre-Internet era derived much of her value from being the human operator of a computer network — the MLS. (Well, at least starting in the Computer Era — I know some folks still remember the Book.)

The analogy I drew was to the travel industry.  There is little doubt that the traditional travel agency business of booking tickets for consumers was decimated by the Internet.  This little study (PDF) by the Small Business Administration was written back in 2001, but remains illustrative, since that industry was getting hammered right from the start of the Internet era.  (A funny stat: the SBA study in 2001 estimated that only 30% of travel will be booked online through 2005; according to this article, quoting Forrester Research, 68% of travel was booked online in 2005.)

I think Mike agrees with that big picture statement: if you are in real estate, but all you’re doing is putting listings into websites, and putting up yard signs… your future looks dim indeed.

But I don’t believe the future looks dim for real estate, and for realtors.  If anything, I think the future looks bright.  It requires a fundamental shift in thinking about what service a realtor actually provides, but that shift has been ongoing for at least a few years.

Go pick any random agent website and read about their self-description.  It usually says something like, “I’m an expert on the market.  I can help you understand what to do, what not to do, avoid mistakes, and maximize your sale price.  Or, if you’re a buyer, I can help you get the best deal possible with the minimum of hassle.”  (That the last two statements are in conflict is another matter for another day.)

So let’s agree that pure transactional brokerage is probably not the business that most realtors are in today, shall we?  (There is an exception for ultra high end real estate, by the way, as there is in any brokerage type of industry — see, for example, private placements.)

Because that still leaves the more interesting question.  If brokerage is not the actual business, then what is?

Is it Sales & Marketing?

A good argument can be made that it is — but what do you do about buyer representation then?

Is it Project Management?

Many agents I’ve personally spoken to over the years thought this was one of their biggest jobs — making sure the transaction goes through smoothly.  That requires coordinating a whole bunch of people, most of whom don’t work for the realtor, like attorneys, appraisers, inspectors, mortgage brokers, etc. etc. to get the transaction done.  That sounds an awful lot like project management.

Is it Psychological Counseling?

A few agents talk about how their value is in making clients feel better about the process.  Assuaging their fears, having tough talks with them to bring them back down to earth, instilling sanity, etc.  Buying a home is a pretty stressful process — selling one, even more so.

Is it Financial Planner?

The purchase of a home is usually the largest investment any family makes — a strong argument could be made that the realtor’s actual business is financial planning.

Is it Consulting?

While the term “consulting” is often too-broad, in this case, I mean specifically that the realtor has specialized knowledge and training unavailable to otherwise intelligent and highly accomplished laymen.  For example, a heart surgeon is probably pretty darn smart and knows a lot of things.  But he doesn’t know squat about land use regulations, mortgage financing, and the effect of termites.  Nor does he know much about what’s going on with the market, what is and is not a fair price, and so forth.  The realtor does (or should).

Never having been a real estate broker myself, I really don’t know the answer.  I can prognosticate and opine, but that isn’t the same thing as an answer.  If you are a realtor, I would love to get your take on this, and perhaps I can formulate an answer at the end of the learning process.

-rsh

In my little prognostication about the upcoming Trulia Blog Platform vs. ActiveRain, I neglected to include HomeGain in the mix. Louis Cammarosano of HomeGain pointed out over on the followup OnBlog thread that HomeGain had launched an Agent Blogging Network earlier this year, and that they were even conducting blogging schools for agents on HomeGain. It’s an excellent idea all around.

Very interestingly, Louis wrote this in the comments:

HomeGain continues to be one of the top visited sites on the interenet-with a difference-listings are not the main attraction-realtors are.

So now we have three distinct models to compare in a way: Trulia as the listings-centric consumer site, ActiveRain as the content-centric consumer site, and HomeGain as the realtor-centric site. As the industry continues to evolve, I think we’ll see how the different approaches play out. But where are they now?

Naturally, I got curious and started digging around a bit more.

I don’t know that using third-party traffic analyzers, such as Compete.com, is necessarily proof of anything. At the same time, I do think comparing different sites on the same analytics platform could lead to interesting insights and things to talk about. So I ran a quick and dirty analysis comparing the three abovementioned sites. This is the tale of the tape. Read the rest of this entry »

Over on Homegain’s blog, his new home, Joe Ferrara has a set of excellent advice for real estate agents:

As in any profession, you get pigeon-holed, often unflatteringly and marketing yourself becomes an uphill battle to overcome a stereotype.

There’s a better way. Elevate yourself to “expert” in your field. It does not matter how small your specialty because as an expert you will automatically stand out from the crowd of other like professionals.

People feel more comfortable dealing with someone who they know is a specialist. They will seek out experts. Just make yourself known as one.

Then he goes on to discuss five ways you can be an expert.  Contributing to newspapers, holding a seminar, etc.  It’s really good stuff.  Go check it out.

I have one thing to add to his list:

6.  Actually, you know, BE an Expert.

Joe addresses this right at the beginning, but then kinda glosses over it.

You are a professional. You possess specialized knowledge. You may have devoted yourself to extensive education. You may have several decades of experience. But when you introduce yourself or hand out a business card you’re just one of the crowd of that profession.

The implication is that anyone can become an expert by following Joe’s Five Step Program to Guruness.  That ain’t the case.  The precondition of using Joe’s Five Step Program is the highlighted part above.  If you are not a professional, if you possess no specialized knowledge, if your idea of extensive education is attending NAR conference once a year, then no matter how many years of experience you’ve got, do not hold forth as an expert.  If you think you know everything, do not hold forth as an expert — seems to me that more I learn, more I know about something, more I realize that I really don’t know jack.  This is not to say that I don’t know more than this guy, or that guy, or even the vast majority of humans on the planet.  Just that I realize there’s so much more I need to know.

I’m sure Joe would agree with me, but I wanted to make sure that message resonated.

-rsh