Redfin, other discounters bang on real estate industry’s door
August 5, 2017
Updated: August 5, 2017 2:36pm
Investors are betting the time has finally come for real estate agents touting low commissions and high technology to mount a serious challenge to traditional brokerage firms.
How else to explain the success of Redfin’s initial public offering? The Seattle company, which calls itself a “next-generation real estate brokerage,” went public July 28 at $15 per share. It quickly shot through the roof, topping $31 on Wednesday before settling down to close at $25.85 on Friday.
At Friday’s price, Redfin’s market value is just over $2 billion, compared with $4.7 billion for Realogy, the largest publicly traded residential real estate brokerage firm. Re/Max Holdings, the second largest, has a market value of $1.1 billion or $2 billion (depending on how you count its shares outstanding). Yet Redfin is just a fraction of their size.
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Agents working for Realogy brands — Coldwell Banker, Century 21, ERA, Sotheby’s International Realty and Better Homes and Gardens — handled almost 1.5 million transactions for buyers and sellers last year. Re/Max said it handled “more than a million” domestically. Redfin agents handled about 26,000.
Redfin has positioned itself as a tech company and is growing much faster than the big guys, and for some investors that’s more important.
Redfin is often compared to Zillow because both have popular house-hunting websites. But Zillow is not a brokerage firm; it sells premium placement on its sites (Zillow and Trulia) and apps to real estate agents.
Redfin uses its site and app to attract clients for its brokerage business. Yet it differs from traditional brokerage firms in several ways.
In a traditional firm, agents are independent contractors and usually handle the entire deal themselves, with some back-office support.
In a typical transaction, the seller pays a commission equal to 5 to 6 percent of the purchase price, with half going to the seller’s agent and half to the buyer’s. Agents give a percentage of their commission — 30 percent is average — to their firm and keep the rest. Agents must pay their own expenses, including most costs associated with marketing a home, out of their share.
Redfin agents are employees. Website referrals are directed to “lead agents” based on location and workload.
When Redfin represents buyers, it collects the usual 2.5 to 3 percent commission from the seller but refunds part of it — $3,500 on average — to the buyer. When it represents sellers, it charges them only 1 to 1.5 percent of the sales price, but recommends they pay the buyer’s agent the usual 2.5 to 3 percent.
The lead agent works with clients and negotiates the deal, but is assisted by people who might handle showings, photography, marketing and closing paperwork.
Some traditional high-volume agents operate in much the same way. But Redfin says it’s more efficient and productive because all employees must use the same technology.
Redfin pays lead agents a salary, which makes up about a quarter of their pay, plus a bonus based on customer satisfaction, transaction value, benefits and expense reimbursement.
When Redfin can’t help a customer because it’s too busy or doesn’t serve their area, it refers them to outside partner agents who rebate part of their commission to Redfin. It also might refer clients to partners if the home is below its minimum price, which varies by city and time of year. In San Francisco, the cutoff is $600,000.
Redfin is the biggest company challenging the status quo, but hardly the only one.
Reali, based in San Mateo, operates only in the Bay Area. When it represents buyers, it collects the usual commission from the seller, then rebates all but $4,950 to the buyer. When it represents sellers, it charges the standard commission and gives half to the buyer’s agent, then rebates all except $4,950 of the seller’s commission to its client.
“We don’t work harder to sell a $5 million house than a half-million-dollar house,” said Amit Haller, the firm’s CEO. “There’s no reason to pay more for the same service.”
Reali taps technology to lower costs, Haller said. For example, instead of staging a house with real furniture, sellers can use “visual staging” to show buyers what the house would look like with modern, midcentury, traditional or transitional decor.
Haller won’t say how many deals his firm has closed, but it has 25 employees and has raised $6 million.
Srinidhi Thirumala and his wife bought a home in Mountain View through Reali after seeing its ad on Facebook. “There’s quite a bit (of information) out there through Zillow, Redfin,” he said. Thirumala had bought homes before and “didn’t see much value” in a buyer’s agent. “We thought we would have to do all the work,” he said, but he was “really blown away” by the service they got.
Open Listings represents buyers only. It is based in Los Angeles, but also operates in the Bay Area. It’s designed for buyers who are comfortable managing the entire process online. “We do not refer them to an agent,” CEO Judd Schoenholtz said. But the company does have a team of experts who can help value the property, decipher inspection reports and provide other services. It rebates half of the usual 2.5 percent buyer’s agent commission to buyers, subject to a $5,000 minimum fee.
Schoenholtz said his company is closing about two homes per day in California, including one per day in the Bay Area. Most of its clients here work in the tech industry, but “we think that reflects the overall mix of buyers and purchasers” in the Bay Area, he said.
Other startups working to undercut traditional firms include Rex Real Estate of Woodland Hills (Los Angeles County), RezList of San Diego and Purplebricks, a British flat-rate brokerage that plans to enter the U.S. market this year, starting with California.
Whether companies can make money at discounted prices is a big question mark. “Traditional real estate brokerages are a low margin business,” research firm Zelman Associates said in a report.
Redfin, in 10 years of operation, has never turned an annual profit.
Discounters have been challenging traditional brokers for decades, with limited success. Help-U-Sell has been around since 1976 (despite going bankrupt during the recession) and Assist2Sell since 1987.
In 2004, amid the last housing boom, Emeryville’s Zip Realty went public and by December that year its market value was $365 million. But the company suffered during the recession, eliminated its discount and was purchased by Realogy for $166 million in 2014.
Why has this industry been so hard to disrupt?
Consumers understand that buying and selling a home is something they do very infrequently, that it’s complex and getting worse (especially in California), and that if you make a mistake, “it could haunt you for a long time,” said Steve Murray, president of Real Trends, a research company.
Many traditional agents will discount their commissions, he said; they just don’t advertise it. Since 1990, the average commission has fallen from 6.1 to 5.1 percent, but not in a straight line. It goes up when there are lots of homes on the market and down when inventory is tight.
Geoff McIntosh, a broker in Long Beach and president of the California Association of Realtors, said Redfin “has arguably the best technology package on the market.” A lot of his clients use Redfin’s website to find homes, but come to his firm when they are ready to buy. Most people “want more local market expertise, more handholding, someone who has been through the process a bunch of times, a skilled negotiator.”
With some of the new models, “you work with one agent and at a certain point, they hand you off to someone else.” That’s fine for some people, but feels to him like a car dealership. “When I get shifted from sales to the finance manager, I don’t feel so good about it anymore.”
Brandon Dobell, an analyst with William Blair, said companies like Redfin will “change the landscape” for brokers. “People who embrace technology, or work at firms that have the wherewithal to invest in technology, will end up doing all the business,” he said. “The only agents who can avoid embracing technology wholeheartedly are the ones who have been around a long time and get the majority of their business from repeat customers and referrals.”
The incumbent brokerage model could also be upended by companies such as HomeSmart, Realty One and eXp World Holdings, which let agents keep up to 100 percent of their commissions, then charge them a fee for services that can be managed better at scale, such as technology and errors and omission insurance. If structured correctly, high-volume agents can make more money this way than with a traditional split commission structure, Dobell said.
If there is an off-the-fairway threat, Dobell said, it’s Amazon. “Everybody trusts the brand, everybody trusts the technology. What if Amazon tomorrow said, you know what, we are going to be the home buying and selling marketplace? Everyone would say, of course they should.” Dobell called Amazon “the 800-pound gorilla hiding in the closet.”
Kathleen Pender is a San Francisco Chronicle columnist. Email: email@example.com Twitter: @kathpender
David versus Goliath?
Newly public Redfin has nearly half the market value of real estate giant Realogy, but is tiny by other measures.
*Excludes 9,482 transactions referred to outside partner brokers
**By dollar value of transactions