Why Redfin Won't be Redflop

By
Real Estate Broker/Owner with J. Philip Faranda (J. Philip R.E. LLC) Westchester County NY License # 49FA1074963

There has been some chatter on the Internet and here on Active Rain about Redfin, and I suppose that any non-traditional firm will attract controversy, especially from the rank and file orthodoxy. We have seen non-traditional firms come and go in the New York market; Foxtons went out of business in 2007, and Zip Realty currently is making a big push. 

I have often been a skeptic of non-traditional brokerage models. I haven't been confident that they are sustainable once the investment capital runs out, and in the case of several, inlcuding Iggy's House, I have been right. The main reason for my skepticism is the fact that people, not gimmick creative business models, determine the success of an enterprise. Simply put, top agents will work where they can make the most money. A top producer will not join a team with lower per-transaction revenue, and you need top producers for market share an oh, um, profit. Think 80/20 rule, and remember that the unorthodox brokers were the flavors of the month in the hot market but went under when things slowed down.  

I have reason to believe that Redfin will be different. I'll give you my rationale:

  • They have figured out a way to recruit high producers.
  • They screen their associates thoroughly.
Redfin has worked out referral association agreements with carefully selected firms with a record of production. This will work well in the slower market, because, in this climate, any source of extra business is gold. I am happy to report that my company made their cut, and it wasn't easy. They vetted me carefully, and every future referral's feedback and rating about me will be public. Those are high standards, but more importantly, their results will be helped by the slow market, not hurt by it.

It is actually a very savvy move- open markets where you don't have a dedicated office by referring business to established producers, and hold them to a high level of consumer satisfaction. There is full disclosure as to who is a Redfin agent and who is a referral agent. There is no ambiguity, and the transparency, both in operations and feedback, is by design. 

Is it sustainable? Consider this: there is virtually no brick and mortar overhead in the referral markets, they get referral fees, and the business grows organically. No salaried pretenders running around in company cars. No expensive ads. No rent. No feaux prosperity fueled by rapidly burning capital. I think it will work, and my contact with the company managment gives me the sense that they know what they are doing. Granted, I am biased toward those who do business with me, but then again, those who do business with me make money (he said humbly). 

Stay tuned. 

____________________________________________________________________ 

  J. Philip Real Estate

 

You can search the MLS like an agent at http://jphilip.listingbook.com.

J. Philip Faranda ranks among New York's premier short sale REALTORS specializing in short sales in Westchester, Rockland, Putnam & Dutchess Counties. www.NYShortSaleTeam.com. Read Phil's short sale blog at http://NewYorkShortSaleBlog.wordpress.com.

J. Philip Serves Briarcliff Manor, Ossining, Croton on Hudson, Pleasantville, Sleepy Hollow, White Plains, Yonkers, Peekskill, Cortlandt, Tarrytown, Yorktown, Montrose, Hawthorne, Thornwood, Valhalla, Hartsdale & all of Westchester County, New York.

Comments (14)

Matt Grohe
RE/MAX Concepts - Des Moines, IA
Serving the metro since 2003

J. Phillip; Interesting discussion. Sounds like you may be a stakeholder in Redfin somehow?

Apr 25, 2009 05:51 PM
Paul S. Henderson, REALTOR®, CRS
Fathom Realty Washington LLC - Tacoma, WA
South Puget Sound Washington Agent/Broker!

J. Phillip; I am amazed at how business models evolve. Traditional models might have to be revamped to take advantage of the Internet and the enhanced productivity from computing. Face it, the traditional model hasn't changed in 50 years...

Apr 25, 2009 06:52 PM
Robert T. Boyer
FHA Loan, VA Loan, Jumbo Loan,FHA Loans,VA Loans,Jumbo Loans - La Jolla, CA
San Diego Real Estate & Mortgage Loans, Ph.D. | VA Home Loan

Paul, the internet strikes into the heart of the information monopoly realtors have preciously guarded over the years.  Business models will have to change.  If not for the massive amount of legal paperwork that has been developed, there would be very little need for realtors at all.  But, as much as I hate all that excessive paperwork, I know that it protects our clients from the slime (people) that would otherwise prey on the unwitting.

Apr 25, 2009 07:38 PM
Lenn Harley
Lenn Harley, Homefinders.com, MD & VA Homes and Real Estate - Leesburg, VA
Real Estate Broker - Virginia & Maryland

You wrote:  "Consider this: there is virtually no brick and mortar overhead in the referral markets, they get referral fees, and the business grows organically. No salaried pretenders running around in company cars. No expensive ads. No rent. No feaux prosperity fueled by rapidly burning capital."

Works for me too.  My referral brokers are carefully selected and vetted. 

The problem is finding good referral partners. 

So many brokers and agents are still stuck in the old business model and are unwilling or unable to change their mindset.  They simply do not understand the world of the Interent. 

 

Apr 25, 2009 09:28 PM
J. Philip Faranda
J. Philip Faranda (J. Philip R.E. LLC) Westchester County NY - Briarcliff Manor, NY
Broker-Owner

Matt, I don't have an equity stake, but I am a referral agent for them in New York now. As for their overall business model, I have always been of the mind that there is room in the pool for everyone. I've never been impressed with the corporate, leveraged re-invetors of the wheel because of the fuindamental flaws I wrote about. This is the first firm that could be doing it right. 

Apr 25, 2009 11:50 PM
Miriam Bernstei
Rochester, NY

DIfferent models will always appeal to a certain segment of the population.  I guess you are comparing Redfin's model to Foxton's "no expensive ads, no rent, no feaux prosperity".   Just curious as to why an agent would need to hook up to them when any agent can form their busness any way they want?

 

 

Apr 25, 2009 11:51 PM
J. Philip Faranda
J. Philip Faranda (J. Philip R.E. LLC) Westchester County NY - Briarcliff Manor, NY
Broker-Owner

Miriam, Foxton's was inded the comparision- neophyte agents running around in company cars, celebrity spokespeople, radio and billboard campaigns, and what did it get them? The whole house of cards fell 18 months after the market cooled. 

They attracted agents who wanted a safety net-real estate without the straight commission risk. But it wasn't sustainable because they never got good agents to generate real revenue. Look at the companies that are growing in this market, Remax, KW etc. They are growing because they are offering a way for good agents toi make more money. That grows organically. It doesn't whither once the investment capital. runs out. 

Apr 26, 2009 12:06 AM
Miriam Bernstei
Rochester, NY

The problem with Foxton's was only part of the issues you mention.  The problem with Foxton's was that they held listings in house trying to sell the listings themselves before sharing and that was how they tried to save the commission.  I had a sale with Foxton's several years ago and did not have a problem with the agents, some of whom had experience.  The frustration came more from a model of doing busines that I was not familiar with.  They have had success in England where they are from.  There collapse if I recall was unrelated to the market falling apart, they went out of favor with the public.  The issue with Redfin is different than Foston's.  Listing agents who in to negotiate commissions will have to change their spiel because of the rebates -- sellers will not be paying for the same things anymore.

Apr 26, 2009 02:24 AM
Eileen Hsu
Douglas Elliman Real Estate - Manhattan, NY
LICENSED REAL ESTATE SALESPERSON

I would be very curious to hear your update on this. Clearly it is harder for Redfin to survive when there is no MLS here in Manhattan New York and someone (the listing agent) actually have to show up for the appointment, so it is hard for a buyer just to call up the listing agent and then say the RedFin will negotiate for them later... Let us know!

Apr 26, 2009 12:08 PM
Fred Doleac
Fred Doleac - Bean Group - Amherst, NH
Real Estate in a Virtual World

J. - Virtual Homes real estate has not had success with a referral model, even with high quality, screened and qualified leads.  We don't get paid for deals.  Lending Tree had the same problem so they opened their own real estate company (Realestate.com).  We do the same under two RE/MAX franchises.  More accountability and profit.  Their model may work in the metro areas and they will have challenges on the listing side, but leads and referrals will attract agents.

Apr 26, 2009 12:53 PM
Anonymous
Geordie Romer | Leavenworth, WA

Do you think it is the referral model or the cash back to buyers that will bring Redfin success?

I applaud their use of technology and their transparency, but the cash back model isn't one that will work. Redfin does have costs - technology, salaries, rent and giving away the amount of money they do is great for PR but bad for the bottom line.

I think Redfin will run out of VC money sooner or later unless they really change their game.

If you like the referral model, my money would be on a company like Estately who has a great search program and isn't focused on the rebate.

Apr 27, 2009 12:40 PM
#11
Anonymous
John Barton

Let me get this straight, you think that a business model based on big referral fees paid to a website will succeed?

If your buyer picks a home for $500,000, you receive a selling commission of $15000 (3%). From this, you give 15% to the buyer ($2250) and another 15% ($2250) to Redfin for sourcing the lead. Why doesn't the buyer simply come to you directly, saving themselves $2250. That seems a hefty fee being paid by the buyer for no work done by Redfin.

Apr 27, 2009 12:51 PM
#12
J. Philip Faranda
J. Philip Faranda (J. Philip R.E. LLC) Westchester County NY - Briarcliff Manor, NY
Broker-Owner

Geordie- I'm a referral agent for Redfin myself, so I am more focused on that aspect of their model. 

John- Getting buyers directly is the trick, isn't it. 

Apr 27, 2009 05:43 PM
Laurie Mindnich
Centennial, CO

Gee- it would be great to have Redfin out on the east end of Long Island.

Apr 29, 2009 10:19 AM