Mon 13 Oct 2008
October 13th unlucky day for Redfin employees
Posted by Marlow Harris under Real Estate
[20] Comments
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.
Redfin “may yet fail”? Loss of sales cause massive employee layoffs
Hi Marlow,
A tough market to work in becomes that much tougher for both the agent and the client when there isn’t a personal connection established.
On another note, would many of these start-ups get the venture capital today that they got one year ago? I highly doubt it.
There are so many errors in this blog that I don’t know where to begin. First off, many agents think the same way as the author, for selling R.E. is oftentimes their first sales job (outside of maybe being a retail sales clerk) and they know of no other type of selling nor spent time in a professional and complex sales environment (Boeing, Microsoft, GE, IBM, CISCO, etc). RE sales is all based upon emotion, personal networking and is more like a high school popularity contest, together with “vanity” personal advertising, all masquerading as a selling “profession”. In some states, all one needs to do is to take a 24 hour R.E. course and take a multiple choice test and now you are a “R.E. professional” licensed to guide people in the biggest and most important purchase in their lives and one which has huge ramifications. A hairdresser or the person doing your nails has about 40 to 50 times the classwork as a realtor! Being on straight commission, w/o a salary or benefits and funding the costs of what passes for “marketing” a property, and then getting a flat percentage whether or not the goals of the seller has been met (such as the list price to closed price), leads many agents to either do a second rate job (for lack of individual funding and poor training) and/or taking an offer – any offer – for there is no safety net and if a property doesn’t sell or a buyer doesn’t buy, the agent has both fixed and variable costs they’ve just lost.
There is a fantasy that the seller pays the commission. This is not true at all. It is the seller who marks up their house above the price they’d settle for to cover the commission and it is the buyer who brings their borrowed money to the table to do the deal. It is the buyer paying the commission mark up. Selling real estate is too much like tipping in a restaurant. How many times do people leave a 15% or more tip regardless of the service they receive? Just as in real estate, there isn’t any teamwork amongst waitpersons or the fact that a tip/commission is paid going to ensure good and standardized service. Each and every realtor is his/her own individual business, so learning “best practices” from other agents is non-existent, which is why many individual agents pay big, big bucks to go coaches or selling seminars so that they can learn the latest in “objection handling techniques”. Not how to use the latest technology to show the property in the best possible light to a worldwide audience – most agents know little to nothing about technology. It costs money to hire a professional property photographer or videographer, so you most see poorly lighted pictures of rooms full of furniture which the agent took from their digital camera. And for that, and for listing the property in a on-line database (MLS), putting a sign in the yard, printing a cheap brochure and praying it sells with an open house – for that the seller has to pay 5 or 6%? When individual agents go on a listing appointment, in nearly all cases, the one who gives the seller the highest estimated sales price will get the listing and 99.9% of the time, they won’t get that price and worse still, they know they won’t get the price. This has huge ramifications for the seller, who then has to keep dropping their price until it (maybe) will sell, all the stress on the seller and yet the agent still gets their fixed commission rate. There is a reason why real estate selling has the worst reputation and Real estate is the least trusted profession and Marc Davison, writing on his blog in Inman Real Estate News, The Davison Files, wrote an article about this on MARCH 19, 2008.
Real Estate brokerages are so 20th century. Why do the agents, let alone the public, have to fund a brick and mortar building to buy or sell real estate in this hi-tech age? Real estate companies are like landlords. They have high fixed costs (and the manager/broker and their assistants are on a salary, benefits and over-rides, unlike the agents who work for free unless they sell something) so they bring in anyone and everyone who can fog a mirror so that they can pay desk and other associated fees and split their commission to keep the landlord’s lights on. They would rather have 100 agents paying all these costs, together with a 50/50% commission split, (since only 2 or 3% will stay more than 6 to 12 months) rather than having 10 really good agents at a 90% split selling for them.
What benefit is there to the legions of agents who spend all their money and wind up making little or next to no money or to the consumer, who has to work with the majority of agents who live from check to check, all the while calling themselves “professional”. There is something wrong with an industry where 3% of the agents make huge money and the other 97% make little to none, with the only difference (in nearly all cases), the 3% know many more people, are better networkers and through marriage or family ties, make their sales. It is not due to competence, the best marketing, the best sales performance – it is all based upon how many people one has a connection with. I’d like to see how many of these “top real estate producers” would be hired by a Fortune 500 company, be put on a sales quota and solve complex customer issues? Very, very few.
Great comments, Willie, and I agree with most of them. I think there is a huge tussle in the business between the traditionalists — brick and mortar branch networks with lots of smiling men and women with lots of contacts — and a new generation that’s more data driven and internet savvy. I particularly like your point that its ultimately the buyer that pays the commission. I’ve often made that point.
One thing I’m hoping for is that the real estate downturn will also result in a shakeout of real estate agents and offices. Most agents I know have teethed on an easy pickings market and have little idea how to close a tough sale in a rough market.
As a real estate agent, I see nothing wrong (and I believe the author needs to rethink her position on this) with real estate agents being on salary, commission and expenses, just as all other professional selling industries are. That would raise the level of competence of every agent and the brokerage they work at, for the brokerage would be forced to hire “smarter” and have their own “skin in the game”. Right now, it is a one-way street. The agents pay the freight for the office and the office gives very little back to the agent, outside of a place to hang out and waste time.
There is no need (at least for the agents under 60) to go to the office for almost anything, so why do brokerages have to look like a top shelf lawyers office (of course, most real estate offices look like a third rate drop in center). It also would mean that agents would now have to work full time and meet corporate quota and the all important customer satisfaction metrics, in addition to pulling for the other agents as a team for the benefit of all.
Having agents on a salary and commission also means that the many part timers will be out of the business, reference and background checks will be incorporated, brokerages will supply leads to their agents (just as other industries do), utilize CRM programs, and be more concerned with customer satisfaction. Brokers would be forced to work with each agent and not have the present hands off position they’re accustomed to. They are great at looking over contracts once they are signed and hanging out in their offices – now they would actually have to go out on sales calls with their agents and bring some real value.
They would also have fewer, but more successful and productive agents, as they will not have to deal with 50 to 100 or more agents that they presently have nothing invested in and don’t really care what happens to them. Right now, all most brokers want is a sale or two with the agent paying hefty fees and on a low commission split. In the present model, if the agent wants to better themselves, they are forced to seek their own real world sales training out of their own pocket, pay others to instruct them on marketing, business, technology, legal issues, etc. Since most agents haven’t worked in any of these areas, they are dead in the water. In other industries, a salesperson has the ability to call in specialists to help close a sale or to address customer satisfaction issues. If they need a custom tailored marketing plan, a financial person, a legal person – whatever, it is part and parcel of working for such a corporation.
I don’t understand why each agent has to pay to have access to MLS. Why can’t the local MLS just sell a site license to the office? The same with any number of realtor database, web site and other realtor specific software programs. Each agent who works at his/her brokerage should have a “common desktop” with all these programs available to them, along with the training on how to use them. These software companies would lower their costs, increase their market share and generate more revenues. The agents in turn would bring more value to their clients and be more productive.
I believe that the industry has systemic problems and they see no reason to change the present model until it is forced upon them. Why should they, when the NAR has 1.4M agents paying dues without hardly any benefits? Does the consumer really benefit from 1.4M agents when only about 5M homes are sold? Any lobbying group would rather have large numbers of members when they go to Congress as it increases their clout. The recording industry and the distribution model they clung to for decades (remember Tower Records) didn’t see any reason to change until internet downloading changed it. The newspaper industry and the bookselling industry didn’t see any reason to change until Amazon and the internet came along. It is the same with the present day real estate industry. Change is coming to the industry very, very slowly, as the younger generations are not impressed with the present model of doing business. I don’t know if it will happen in my lifetime, but I can dream about it!
Totally agree with Willie and David. There is a serious disconnect b/w the value offered (real estate services) and the price charged (6% fee). If I list my $2M home for sale, how does ANYONE justify a $120K fee? Totally ridiculous!!! Most RE agents I know (and I know many) have failed at everything else they have done professionally.
The beauty of our market system is that we have choices. Who we hire, how we work, how we are compensated, who we choose to work or associate with, these are all personal choices and not mandated by a government agency. I have faith that our market system will allow all of these permeations of the real estate sales business model to exist simultaneously and not have it decided by government mandate.
If the business model is truly broken, then the means and methods will change and we may see more changes in the way real estate is bought and sold and agents are compensated.
Those who are buying or selling property now have many choices on how to do it, by themselves or with the help of a professional, and those professionals have many ways of charging and being paid, from flat-fee to percentage, based on performance or paid on a retainer.
Obviously, if you do not believe that an agent is worth a 6% sales commission, you should not hire them. If you believe they are incompetent or should be doing nails in a salon instead, you should not hire them. If you think that real estate sales is more like a high school popularity contest and not based on hard work, you should not hire them either.
But just because you feel this way, doesn’t mean you have the right to tell me how to run my business or what to charge for my services. At this point in time, I prefer to take a chance and work strictly on commission. As you have the right to hire whom you please, I have the right to decide who I’m going to work with, how much I’m going to charge and how I am to be compensated.
Ain’t America great?
Well said, Marlow, and that’s really the bottom line, isn’t it? It’s about choices for both the agent/broker and the consumer. The market, changing in so many ways, will use its invisible hand to determine what works best.
As your friendly real estate agent back in MA., I’ve known many good, honest and competent agents. However, I would say the vast majority have been dumbed down by the industry, to where most agents are reduced to being little more than order facilitators and filling out paperwork, tying loose ends, attending inspections, etc.. The present method of bringing so many people into the business for the past several decades – not just during the boom years -have made being a realtor into a commodity.
I know that a few agents are good at decorating or home staging or hosting open houses, but to me the real value of a realtor is if they know how to create excitement for the home as it comes onto the market, if they can create both local and national interest in the home (which means knowledge of technology, marketing, public relations and advertizing the home – not the agent as is usually the case!), maintain market momentum and most importantly, have the expertise to negotiate.
I’ve seen so many agents take the easy way out with negotiations, for they don’t have years of prior experience in high level negotiations and more importantly, the courage. Meaning that since agents are on 100% commission and have no safety net or team to call upon for help and expertise, it turns most agents into being very risk adverse and they have a hard time treating their client’s money as their own. Meaning that since the great legions of agents are on a 50/50% or some other poor commission split arrangement (and I’ve seen this happen more times than I can count), they won’t counter offer or do a multiple counter offer for their seller to get them that extra (for example) $10,000.00, as it is easier to take the offer as delivered by the buyer’s agent and get the seller to accept it. In this scenario, the seller looses $10K NET, while the agent loses $150 when all is said and done. If the agent loses $150 it is worth it to him/her, as they are through paying for print ads, free from holding open houses, free from fielding irate calls from the seller, etc.
The title company (or attorney, depending upon the State) handles the title search and escrow, the Fed controls the interest rates, a seller who many have sold one or two homes in their lifetime control the access into the home, the condition of the home and what price they want the house to be listed at – oftentimes at odds with the agent delivering the CMA (which is not an accurate report, as it doesn’t include for sale by owners (FSBO) or foreclosed properties, so the price the report spits out is usually incorrect). Since our friendly NAR makes it so anyone can become an agent and there are millions of us; both licensed and unlicensed; we have been reduced in the eyes of the public to being all the same, which is unfortunately the case. I am not a Socialist (nor do I want or would I want to see Government mandating additional rules and regulations, given their track record), but when I see 95% more or less failing, even in the best of times and being thought of in such a bad light by the general public, there is a problem.
In 1994, I sold a house for a client in a very exclusive area for $600K at 6% commission. I had to run very expensive print ads and do accompanied showings (no lock boxes), so I had to be available all the time. The house was printed in a MLS book which came out every two weeks and if you were a buyer, you have to go to a realtor to see it in the book. In 2006, I resold the house for $1.345M in under 2 weeks at a 5% commission, but this time, I ran ads on the internet using Craig’s List (free), using Postlets templates (free), put it on MLS which automatically places it onto Realtor.Com (free), held an open house (free) to introduce the property to the public but more importantly, to meet the neighbors and hopefully list their houses in the future and to also pick up potential buyers to work with for other properties. Same house, different year, less work and I got more money. Not too shabby.
“But just because you feel this way, doesn’t mean you have the right to tell me how to run my business or what to charge for my services.”
But apparently Marlow, you have a right to blabber on and on about Redfin etc. etc. ?
If they want to operate in that fashion then that’s their “business” right?
Are you really so worried that at some point in time you wont have those extra thousands of dollars worth of commissions that you can blow at some art gallery?
Ha ha.
Actually, I just find the Redfin propaganda machine incredibly irritating, smug, self-important and arrogant. Their management is continually being quoted in the news discussing the superiority of their product, their services, their negotiation abilities, their agents, their data, their website, their statistics and this is my forum to discuss (or blabber) about that.
Glad you like it and hope you keep on reading
What everyone needs to realize is that the Real Estate Industry is a cartel – nothing more, nothing less. Even though I work in it, anyone who is honest and has a pair of eyes can see the byzantine nature of the industry and know that it should change for the betterment of the agents and also for the consumer. I agree on almost every point the statements made by David Pinelli. He seems to have a keen insight into the myriad issues and problems of the industry and is honest enough to stick his head out of the sand and tell the truth.
Marlowe,
Why do you have such a stick up your ass about any real estate business model that fits outside of yours?
Um, because my way’s the best way? Because this is my blog? Because it’s my party and I’ll cry if I want to? Because I want to promote professionalism rather than discounting in the field? Because it’s a lie to pretend that heavy discounts or rebates is profitable or sustainable? Because discounts and rebates cheapen the reputation and image of the entire field? Because I like and want to preserve the status quo? Because the current mainstream method of doing business works and has worked now for many years and I like it? Because I haven’t seen any other method succeed long-term? Because I like the way that stick feels? What do you want from me? Jeez!
Your friendly Massachusetts agent commenting again. Leaving the great Leslie Gore aside for a moment, I can’t understand why so many of my fellow agents don’t find or see or acknowledge any fault with the NAR. If we want to speak to the very real issue of professionalism (or really the overall lack of it, with few exceptions), the problem and the solution is at the feet of the NAR. There is no justifiable need to have so many realtors with the numbers of homes being sold.
Agents should strive to be competent real estate advisors instead of simply competent real estate prospectors. Agents should respect the intelligence of their clients, rather than attempt to insult that intelligence with aggressive closing techniques. I always preach that agents should appreciate the significant commissions paid by their clients, rather than complain that they, themselves, are not appreciated.
At a recent company sponsored training class using MAR and NAR statistics, I heard about a public opinion poll that had rated real estate agents only one spot ahead of used car salesmen in trustworthiness and likeability. At first I wanted to deny the results. “Show me proof of this poll!” I very quickly realized, however, that the existence of this poll was irrelevant. If such an idea could remain alive and circulate freely through the general public without being quashed, it’s clearly not so far-fetched.
I vowed to do whatever I could to separate myself from “them.” I created a slogan that let people know they could trust me to serve them. And I created a mission statement that captured the essence of my business philosophy. “Re-defining the residential real estate experience through integrity, market knowledge, and professionalism.”
Most importantly, I sought to understand precisely which behaviors led to the public’s perception of my chosen path. In any service industry, the best way to learn how to improve one’s performance and one’s image is by understanding where we fall short. I use the term “we” to include all professionals working in a given field, because customers tend to lump various types of professionals together in terms of their characteristics (think “postal employee”), without regard for the natural tendencies that differ from person to person.
Very early on in the relationship I like to have a discussion with my clients about what sorts of experiences they’ve had with Realtors in the past, if any. Have you worked with a Realtor before? To buy or sell? Tell me about your agent. Were you pleased you used them? Why aren’t you using them for this purchase/sale?
I’ve interviewed hundreds of people on this topic and few common complaints surface again and again.
Home buyers most often report that their agent “didn’t listen” to them with regard to property characteristics. “We told him we wanted a house with a large kitchen, but he kept showing us houses with small, galley-style kitchens!” Or “We said our home MUST be in a certain community, but he continued to send us property listings for homes in other areas! He didn’t listen to us!” Many of these buyers ended up ditching their agents to take their searches into their own hands.
Hands-down, the most common complaint among home sellers is, “My agent took my listing and I never heard from her again, except to suggest price reductions! I have no idea what she was doing to sell my house!”
Both buyers and sellers commonly report that their agent didn’t negotiate as strongly as they thought they should have, or that a ‘mistake’ in the contract paperwork caused a negative financial impact (e.g. “He didn’t tell us that our flat-panel big screen TV was considered a fixture and had to convey with the house!”).
Unfortunately, the sales cycle is an emotionally-charged time for all parties, so any problem, either real or perceived, is magnified. Realtors are paid handsomely for their expertise and nobody likes to feel like they’ve overpaid and been underserved.
Back to my original question, why do people hate real estate agents? I believe it boils down to a few key reasons, all centered around consistency and quality:
• Low barriers to entry and perception of ‘easy money’ have flooded the market with agents, resulting in erratic service at best.
• There are no standardized systems for running a real estate business – agents are independent contractors who are responsible for developing their own business and service models. This results in inconsistent (often incompetent!) service because it’s beyond their expertise to build them.
• There are no systematic mechanisms in place to regulate real estate agent performance – we’re free to practice at any level of competence as long as we retain our licenses, which involves 12 hours of continuing education training every 4 years and not running afoul of the law. Only public complaints filed with the Department of Real Estate or legal troubles separate the professionals from the rest. Otherwise, we all look the same.
I welcome any questions, comments or cheap shots to david.pinelli@gmail.com
The NAR is a trade association, simple as that. It’s only as good as its members and if you don’t like their policies, I’m sure you can work locally to get on your local board to try to make changes if you’re unhappy.
To just complain without taking some action is counter-productive.
Personally, I am glad we have NAR lobbyists to monitor what’s going on in Congress. If it wasn’t for the NAR, we probably would have lost the tax deduction for home ownership years ago.
If we didn’t have a professional trade association to belong to, we would not be “professionals”. Professionals have a certain and specific course of education, a set of rules or code of ethics and belong to an organization specifically for their members. That is the definition of “professional”. Just because you don’t agree with certain policies doesn’t make them “bad”. If you were not a member of the NAR, you would not be a “real estate professionals” or REALTOR.
There is no other organization for real estate professionals. So rather than starting a new one, why not try to work from within to make the changes you think are necessary.
Thanks for the article and dialogue. Could you imagine if the banks were in charge of selling houses with strings attached by congress!
I have worked in number of businesses where discounters, direct sellers, and other work around – short cut business models were were going to take over the market and in every instance, companies that focus on: mastering their craft, building strong customer relationships, manage expenses usually come out better off when the “weeing out” caused by a recession or market shift is done.
Salaried agents are costly in any market. When business is slow most businesses look at their payroll as their first (and quickest) means of trimming the fat. Redfin is doing just that.
Just follow up your instinct and people will believe you.
How could we verify the effectiveness of such a possibility?
That\’s the only reason why people don\’t talk about it.