Glenn Kelman on Redfin.com’s move into Southern California: “I’ve never had to think so hard in an interview in my life”

Here’s the newspaper news, and we’ll come back to it in due course: Redfin.com today opens three new offices in Southern California: Los Angeles, Orange County and San Diego. The company has expanded its web site to include listings from nine Southern California MLS systems.

Here’s the real news, which emerges from a forty-five-minute podcast interview made by BloodhoundBlog contributor and San Diego-based Realtor Kris Berg with Redfin.com CEO Glenn Kelman: Redfin.com is not profitable at present and may never achieve a reliable state of profitability. Most notably, Kelman’s willingness to reverse himself on unpopular but cost-saving policies may ultimately doom the company, at least in its present configuration as a discount brokerage.

The immediate problem is simply the payroll. As Kelman says in the interview:

What investors worry about with Redfin is the margin in the model. So today we generate about a 50% margin out of real estate operations. So for every dollar we make, we have to pay fifty cents to one of our agents. And we have to pay our agents more than we initially thought, just because we wanted to to get good people.

Redfin’s agents are salaried employees, not the more typical independent contractor paid on some sort of commission sales plan.

A new Realtor in a traditional brokerage offering training would expect to earn from 50% to 90% of the total available commission offered for the sale of a the home — which might be 3% of the purchase price.

A more experienced Realtor working in a brokerage with no training could expect to keep 95% or more of earned commissions.

Redfin concedes two-thirds of the buyer’s agent’s commission to the buyer, with half of the remainder going to compensate its agents. By this we can see that Redfin agents are being paid substantially less than successful Realtors in other types of brokerages. Even so, Kelman concedes, “We’ve got it around fifty cents, and that’s not enough to pay our developers.”

Since launching as a brokerage, Redfin.com has met with considerable criticism for some of its more unorthodox business practices. At first, the company advised buyers to appeal directly to the listing agent of the home for showings. From the listing agent’s point of view, the purpose of the split commission structure — which Realtors call the co-broke or the co-op fee — is to compensate buyer’s agents for the expenses associated with buyer representation. Listing agents felt that Redfin was deflecting its own responsibilities to them, then rebating a commission they felt was substantially unearned.

Redfin’s initial response to criticism of this practice was to attempt to vilify listing agents into bearing its share of the burdens of buyer representation. More recently, the company offers buyers a half-day of showings at no cost, with additional showings paid for on a fee-for-service basis.

This change in policy smoothed ruffled feathers in the real estate industry, but, of course, it increased the company’s cost structure.

Perhaps to extend a policy of mollification, Kelman says this in the podcast:

Just to clarify, I don’t have a beef with agents. I do have a beef with the industry. I don’t think the industry treats agents very well, and I don’t think it always treats consumers very well. Brokerages recruit more agents than a market needs because they want the split or they want the desk fee. And then the way that the agents are paid puts pressure on the agents to do things that aren’t right for the client.

This is a tenable argument, but there is an equally-plausible contrary proposition: Commissioned sales people work harder. At one point in the interview, Kelman offers that agents who are kept late at the office answering phone calls are accorded the privilege of coming to work late the following day. This may sound perfectly normal to salaried employees, but it is not likely to make sense to traditional Realtors, who expect to work at least seventy hours every week.

Interestingly, Kelman seems prepared to walk away from policy after policy in order to court the good opinion of the more-traditional real estate industry. From an outsider’s perspective, this might seem to be a survival strategy, but, in fact, there are many discount brokerages that are much cheaper, much more obnoxious and much more intransigent than Redfin has ever been, yet they manage to persevere unmolested in the real estate marketplace.

It is plausible to me that Redfin’s bad-boy image, carefully crafted with the avid assistance of the company’s faithful amanuensis, New York Times real estate reporter Damon Darlin, is hurting it with its target market — per Kelman, “Nerds living in nice houses” — or with potential clients who might be referred by those nerds.

In any case, Kelman was willing to back away from an off-putting Google Adwords ad first brought to light by real estate weblogger Kevin Boer. This alone may not have a detrimental impact on the Redfin’s bottom line, but, again and again in the podcast, Kelman seems to be saying he will abandon cost-saving policies in order to improve relations with more-traditional Realtors.

The expansion announced today may be more papier m?ch? than pi?ata. “We are expanding to San Diego, Los Angeles and Orange County. It’s the largest market in the United States,” says Kelman. Expanding to what extent? “An agent in Del Mar, an agent in Chino Hills and an agent in Los Angeles area — Sherman Oaks.” Kelman admits that the company’s foray into the San Francisco market was financially disastrous, a strong presence with little business at first. Starting small makes a certain kind of sense, but the costs for an operation like Redfin.com to start small must still be daunting.

This idea cannot be far from Kelman’s mind:

Redfin won’t be self-sustaining, it’ll lay off all of its employees, and it will be a dismal, grisly end, if we don’t find a way to make money.

Even so, Kelman comes across as upbeat and optimistic. Despite repeated probing by Kris Berg, he would not agree that the company’s business model cannot work in lower-priced markets. He did allow that his ambition is to take the company nationwide. In the near term, he said, “We’d like to go to Boston, Washington, D.C., and Chicago.”

And as a testament to the rigors of being interviewed by a thoughtful, informed real estate professional, Kelman said, “I’ve never had to think so hard in an interview in my life, by the way.”

About the podcast

The audio quality of the podcast is less than ideal, but it affords us an opportunity to introduce a new contributor:

Allen Butler is a Phoenix-based Realtor and real estate team leader. In his spare time, Allen maintains a professional-quality recording studio, which he deploys to bring a semblance of audibility to our sometimes crude podcasts.

Kris Berg and Glenn Kelman met in a Starbucks in San Diego, and the background noise in the original recording was sometimes overwhelming. Allen was able to scrub the podcast file to bring the voices out from the background noise.

Complete text of Redfin.com press release

Redfin Launches Real Estate E-Commerce Service
for Southern California

Redfin Simultaneously Opens Local Offices in
Los Angeles, Orange County and San Diego Markets

SEATTLE – Feb. 8, 2007 – Online real estate broker Redfin Corporation today launched a real estate e-commerce service for Los Angeles, Orange County and San Diego, and announced the opening of Redfin offices in each of these markets. With this launch, Redfin increases the number of properties for sale on its site by more than 340 percent.

Southern California consumers now can buy or sell MLS-listed properties online, using the Web to gather basic information and then work with a local, experienced Redfin agent on pricing, negotiations and escrow. The premise of the Redfin service is to use technology to offer better service from offer to close than a traditional agent, and to refund most of the commission.

Redfin’s service now will be available in Los Angeles, Orange, San Bernardino, San Diego, Riverside and Ventura counties. Southern California buyers who work with Redfin get two-thirds of the commission refunded at closing; for a $500,000 house offering a typical three percent commission to the buyer’s agent, the refund would be $10,000. For a $1 million house, the refund would be $20,000. The average Redfin customer in Northern California has received a refund of $13,539.35. Redfin also offers each home-buyer a free afternoon of home tours, scheduled via its Web site.

Sellers pay a flat fee of $2,000, saving $13,000 over a typical seller’s agent commission of three percent on a $500,000 house. Unlike any other brokerage, Redfin pays its agents bonuses based on customer satisfaction, not commissions, and offers a 100 percent customer satisfaction guarantee, refunding all commissions and fees if the customer is dissatisfied.

To support the Southern California market, Redfin has opened offices in Sherman Oaks, Chino Hills and Del Mar, staffed with experienced, local agents. Over the next year, Redfin plans to open more offices in Southern California for better local support. The company also has upgraded its Web site with listings from nine multiple listing services for complete Southern California coverage, and added past sales data and property outlines for most of the properties in the area.

Redfin first entered the California market in the San Francisco Bay Area on May 31, 2006, and served its first Southern California customers last month. “I was impressed that our Redfin agent worked to negotiate a significant discount from the list price on top of a substantial rebate that allowed us to get into a house we may not otherwise have afforded,” said Eric Allsopp, who is scheduled to close on his Redfin-purchased San Diego home later in February.

“The simultaneous opening of Los Angeles, Orange County and San Diego markets inaugurates a new era of expansion for Redfin,” said Redfin CEO Glenn Kelman. “We spent our first year of real estate operations building support infrastructure so we could serve customers on a national scale, and making sure that our first expansion market, San Francisco, could contribute profits. With Dave Wilner now running real estate operations, Microsoft Virtual Earth as a national map platform, and a new customer database coming online just last week, we’re ready to grow nationwide.”

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