For the 410th episode of Mail-Right Show, Robert Newman and Jonathan Denwood discussed how Redfin operates and dived into how the lawsuit that NAR lost will affect real estate commissions and Redfin’s future. Robert Newman is the CEO of Inbound REM, an inbound marketing firm, and has been in the real estate SEO business for over a decade. Meanwhile, Jonathan Denwood is the joint-founder of Mail-Right, a CRM lead generative platform providing a great website solution.
Redfin Has Existed For 20 Years But Has Yet To Be Profitable
Redfin has decided to leave NAR before the lawsuits hit the public media. Redfin and the founder may have been dealing with a broken business model for a long time. They might be thinking that the monopoly practices of the NAR and the more traditional national franchise brokerages contributed to Redfin’s broken business model. Regardless, Glenn Kelman, its CEO, gives 20 good years.
Furthermore, one thing to learn about being an investor is that many companies do nothing but track how much stock the company’s leaders are keeping or selling. And Glenn Kelman has been selling him for a long time. He’s been selling and selling and not rebuying. And that tells everything you need to know about Redfin. That’s the company’s CEO divesting himself of his stock, which sold the largest percentage that he’s ever sold on November 2 of this year.
The Web Technology of Redfin
Regarding web technology, Redfin has a unique spin on lead flow and lead assignment from the beginning. They used to have a much better job at landing pages and hyperlocal presence.
One of the challenges that Redfin has faced is that from the beginning, they focused on the small, long-tail searches and stayed away from competing against the major, like homes for sale in a specific city. Redfin understood that Trulia and Zillow focused on that and didn’t put as many of their resources in them; they did neighborhood or subdivision searches instead and did a good job on that aspect. However, the competition changed, and now Redfin has become more known for its commission model. They also failed to produce anything unique inside the website space. In other words, their website looks and operates very similarly to what Trulia does.
Another thing that Redfin is good at is the data points presented on their page, which are slightly different. Redfin does a slightly better job at doing the details and guiding users toward Redfin real estate agents, which is interpreted in the digital age of what Century 21 did in the ’70s and the ’80s. However, they also did fall short on this aspect as they couldn’t keep up with all the technological advances on the website.
The Commission Rate For Redfin’s Over 2000 Agents is a Sobering Reality
One of the reasons that Redfin makes the news so frequently is because it does not follow the traditional model. Charging customers a flat 1% commission rate contributes to their lower commission structure. With over 2,000 agents, Redfin has been shifting away from discounting, and a growing number of agents are now compensated through the more traditional commission model. However, there are fundamental weaknesses in Redfin’s business model.
A generous bonus compensation is essential when considering compensating agents with a salary. The idea of offering a competitive wage is a good thought. However, paying an agent a fixed 1% doesn’t necessarily streamline the real estate process. Sometimes, real estate agents may receive excessive compensation for their efforts. This high pay is primarily justified by the occasional need to invest weeks or months in a client as a full-time commitment. In these cases, agents find themselves entirely dedicated to relocating a client. Despite doing the same work, a Redfin agent receives only a third of what somebody else would get paid. Competent agents providing exemplary service may eventually realize they earn significantly less, especially in challenging situations with high-maintenance clients.
Many regional and national brokerages heavily depend on having many agents, and many of these agents are part-time or sell only a handful of houses annually. Despite their limited sales, these agents contribute a disproportionately high percentage of their earnings to the brokerage. Redfin’s business model may thrive in a robust market but proves less effective in more stable or slightly declining markets.
For instance, Redfin has 2,000 agents, while Keller Williams and eXp have significantly more agents, with 187,000 and 30,000, respectively. Keller Williams is one of the largest brokerages by agent count due to its successful value proposition in the recruitment process. The brokerage also provides extensive training materials, guiding new agents toward affiliating with Keller Williams. This strategic approach creates substantial success. The described model is undoubtedly sought after by brokerages like Keller Williams. The rationale is clear—having a model capable of attracting 100,000 agents, each potentially generating two deals, results in an impressive annual transaction volume of 200,000 deals.
Naturally, complications arise. The most prolific agents, who yield the highest production levels, exert pressure on brokerages to operate with slim profit margins. These agents negotiate for competitive salaries, creating challenges for the brokerage. Additionally, the prevalence of no-commission agencies adds to the complexity, requiring an agent to sell many properties annually to establish a solid footing in the industry.
Keller Williams is probably doing their marketing. They understand how to do transaction coordination. You have to work hard to provide them with a service they can’t do themselves. So, do companies like Keller Williams seek out these part-time agents? Absolutely. Is it a model that being sustained in a shaky economy? Not as much.
What is the Future for Redfin
Redfin’s entire business model is broken down from top to bottom, and has been dealing with it for a long time. So, where will Redfin in the industry go in the next 2-3 years?
All the national companies are in trouble, except Realty One and eXp, which are going to virtual models. We will probably see fewer and fewer real estate offices with physical locations, more branching out, and more hyper-local brands becoming more and more relevant in the real estate industry.
During major lawsuits, it is the big brands that are often targeted, not the small local businesses. In the next three years, challenges will be posed for big brands like Refin, with an increasing number of affordable digital service companies emerging and following the eXp model.
It is also linked to the shift to traditional commission splits, influenced by the cyclical nature of the industry – a factor that Redfin doesn’t take into account. This model seems impractical when considering the fluctuating nature of the US real estate market, characterized by periods of intense activity followed by rapid declines.
So, how does one navigate this unpredictability? Maintaining a large staff of 2,000 isn’t a feasible solution. Instead, it makes more sense to disperse the risk through a pay-for-play compensation structure. For those selling properties, the key is to create a compelling incentive for agents to choose your commission split. Currently, the primary concern for most agents is obtaining qualified leads. However, this may become challenging in a down market.
What is needed to maintain a strong foothold in local places? There are exceptions, but they usually are office-to-office and center around a very small handful of agents that have been with the same brokerage for a long time, which adds prestige.
The Coldwell Banker office in Beverly Hills is an incredibly strong example of a traditional brand falling out of step in many places. Still, it maintains a lock on Beverly Hills because the agents that work out of that office feel like they’ve been there for 20 or 30 years. So you still go to them regardless of where the shingle is outside the door. But other than that, Beverly Hills Realty has been on the upswing and is competing quite handily against Tilton and Highland, and the Agency RE is doing the same thing.
Agents Are Becoming Digital Savvy
Agents are also going to be more and more digitally savvy. Their skills are evolving quickly as they adapt to the fast-paced digital environment. Now, talking about the marketing side, there’s a rapid change in how real estate agents do marketing, including their marketing strategies and deal processing. The way that commissions are dispersed, the way that transactions are coordinated and it is becoming digital.
Agents that are super established often have two or three assistants to keep up with all of that for them. However, essential skills for those not in a position to hire assistants include being a quick learner, embracing digital technology, and having a forward-thinking mindset. These skills are becoming increasingly crucial for agents, and this aspect is not emphasized enough.
If you were an agent, it would be good to examine small parts of AI for any mundane issues that could be addressed with autonomous learning or intelligence as the focus. The aim is to streamline the process using AI, utilizing it if it proves beneficial.