I can’t say that I’m surprised. The whole premise of the company was built on the idea that real estate agents are overpaid and that technology and automation can streamline the system and reduce costs. High volume and easy sales is what is required to keep the ball in the air, and with the recent slowdown in the housing market, there just aren’t enough closed sales to pay the salaries of the workers.
Individual agents can be more nimble than a corporation with salaries to pay and health insurance to fund. If the market slows down, individual self-employed agents can adjust their spending, perhaps rely a bit on savings or their spouse or partner. Companies that pay a salary will be under-funded in a market downturn.
Traditional real estate firms either collect a desk-fee whether or not their agents make a sale, or they collect a percentage minimum. Even the least-productive agents are going to be able to make their nut in a year and fund the coffers of their brokerage. With a firm such as Redfin, where they pay a base salary whether or not any sales close, will always be at a disadvantage in a down or fluctuating market.
As they’ve discovered the volume of closed sales has to be very high to reach any kind of profitability. And with a high volume, agents and employees can be spread so thin as to compromise competent individualized service.
The money that Redfin refunds to Buyers is not from the Seller. That money is burned up in the salaries of the executives, agents and IT professionals. The money they’ve been refunding is the millions of bucks of venture capital. They’ve been taking money from Madrona Venture Group or Vulcan Capital and giving it to Joe Homebuyer in the form of a “rebate check”. In the backrooms they probably likened it to the old gas station price wars, where two gas stations, side-by-side, would keep lowering their prices and selling at a loss until one of the gas stations went out of business. In this case, I think they may have bet on the wrong station.
As we’ve seen with the airlines, price wars result in low profits and often in bankruptcy. Before launching a price war, the initiator must be sure that it can survive a low price longer than the competitors can. The initiator is best positioned to sustain the low price if the lower price is a reflection of a true cost advantage and if competitive products have no perceived advantages. Strategies available to a competitor forced into a price war, other than matching the lower price, include adding perceived value to its product or targeting the nonprice sensitive segment of the market. As Redfin has stated themselves, their service is likely to appeal to the budget or price-sensitive shopper. If that’s the case, then the luxury home market should remain strong and the prime focus of traditional real estate brokerages.
Since Redfin has been most appealing to those who were price-sensitive above all, then of course it follow suit that their business would suffer significantly when the market takes a dip. Their price-sensitive customers and clients are staying away in droves, sitting out an uncertain market.