Redfin Lacks Zillow Hype, But May Ultimately Have More Impact

Zillow is the website with all the hype, but there is another which, in its so-far modest press notices, has been widely hailed as the new way of buying real estate.

Redfin, launched earlier this month, is the baby of a relatively new real estate company in Kings County (Seattle) Washington. Redfin the company, in its scant three years of operation, has used the Internet in at least one attention gathering way before. According to an article in The Seattle Times it was the first in the nation to "overlay for-sale and sold homes onto up-close satellite maps." Now "Redfin Direct" is touted as being the first site that lets buyers actually bid for real estate online.

This new wrinkle is one likely to cause Stephen King-like spontaneous ignitions among traditional -real estate brokers once word about its methods gets wide exposure in the media or the company begins to spread its operations, and it is poised to move into the San Francisco area. But before we get to that, here is how Redfin works.

A buyer logging into Redfin, apparently a totally virtual company - as far as we could determine there are phones and faxes but no real offices - is offered two choices; "Redfin Direct" and "Redfin Connect." The latter merely refers the buyer to traditional agents working for "partner agencies" in the community; the same type of service offered by hundreds of other sites. These Connect agents show properties, offer advice, assist with offers, and undertake all of the steps leading to culmination of the sale.

Redfin Direct, on the other hand, maintains a salaried staff of agents (there is no indication on their website if these are licensed agents nor do we know whether Washington State licensing would require them to be) which will assist buyers in composing, submitting, and negotiating an offer, and if necessary evaluating counter-offers, submitting responses to those counter-offers, and coordinating some, maybe all, of the details prior to closing such as house inspections, appraisals, and so forth. In other words, they start work only when the buyer has actually decided to buy.

The Redfin buyer receives a rebate on two-thirds of the commission share that is typically paid to the agent presenting the successful offer. In Seattle if commissions are still in the 6 percent range as claimed, a selling agent (we are being intentionally careful about using the term "buyer's agent") would receive a commission of perhaps $10,500 and the Redfin buyer would be rewarded with $7,000 of that amount. The prospect of this money, due at closing, can be used, if desired, to sweeten the offer, increase the down payment, or, for that matter, a trip to Hawaii.

What does Redfin not do?

They do not show the house. And this is the first occasion for spontaneous combustion on the part of its competitors.

Redfin advises potential customers to view the property at an open house or by contacting the listing agent for a private showing. While listing brokers are working for the seller and are obligated by Realtor ethics to work in the best interests of that seller, open houses are a marketing tool for the agent as well as the seller. In some parts of the country it is common for buyers to visit open houses and sign in with their agent's name, thus protecting him should they decide to buy but in others it is common still that agents consider anyone walking through the door of an open house to be "their" customers in the sale of that house. This is a tough stance to defend in mediation should it come to that, but still it is an expectation. Most states enforce the rule of "procuring cause," i.e. he who produces the offer gets the commission, but in such disputes ugliness usually prevails and it is the buyer who gets caught in the middle.

And what if that buyer, after viewing the house once and being a reasonable and sensible consumer, decides he must see it a second or even a third time. Again, he is expected to impose, and at this point it is an imposition, on that listing broker. Should there be no open house or the listing broker is "unavailable" then the buyer must find another agent willing to show the house. This agent, whether aware of the fact or not, is working without hope of remuneration. While real estate agents are used to being used, such institutional abuse is hardly likely to promote goodwill toward Redfin.

In order to use Redfin the buyer must be pre-qualified by a mortgage officer for an amount sufficient to finance the property and has to sign the Redfin Buyer's Agency agreement. The latter requirement will probably entitle Redfin to try to collect a commission should a buyer make an offer through another agent or directly to a FSBO without resigning that buyer agency agreement in writing. Rules, however, vary from state to state. The buyer may not have a buyer's agency agreement with any other broker or must resign that in wiring, nor can he have an open offer on another property. Interestingly, the buyer cannot have toured properties with an agent referred by Redfin; that is a Redfin Connect agent. This is worded on the Redfin site to imply that one cannot have toured ANY property with a Redfin Connect agent, not just the property on which one is making the offer. At least they are protecting their own!

How does it work for the consumer?

It will probably be an overall advantage to the seller. It is easy to see listing brokers cutting commissions at the table to make their own offers more competitive with those coming from Redfin, but there are listing agents who will dig in their heels and refuse to show properties to Redfin customers even in violation of Realtor ethics. This removes potential buyers from the pool. More likely listing agents will eventually reduce the split, the portion of the commission they offer to the selling agent. This split is usually 50 percent but there is no rule as long as the percentage is published and the listing agent has a good argument here that he is doing more than his share of the work.

The buyer who opts to use Redfin might make out handsomely with a very generous rebate at closing, particularly if the market is one tipped toward the buyer. However, in the critical initial steps of buying a house he is on his own learning about neighborhoods, getting a handle on the process, and could find himself in some very awkward situations trying to actually see the house. In some states the listing agent would be within his rights for liability reasons to insist that the buyer be accompanied by his buyer's agent on any visit to the listed property.

Once the offer is made, and again this will not be so prevalent in a buyers' market, the listing agent is in the catbird seat. That agent can reduce her commission to favor her own offer, or convince the seller of the "inconvenience" or "danger" of dealing with a virtual site rather than a familiar brick and mortar neighborhood business.

Perhaps the real question is whether real estate, at least on the buyer end, is moving toward a fee for service model with agents paid by salary rather than commission. This is not the first version to be tried. Before DeWolfe Real Estate was bought by Coldwell Banker in 2002 it was experimenting with a model on Cape Cod in which two separate sales staffs were maintained. The first was a selling team that took listings on a traditional commission basis and the second was a sales team which represented buyers on salary (although ultimately that was founded through commissions from the selling end.) The merger came before results of the experiment could be weighed, but there is no question that more and more firms will be playing around with different concepts and bringing real estate into a brave new world.