A Year's Numbers Come in From the MLS: Redfin Agents Negotiate Better

Redfin announced big news today, publishing MLS data that indicates our agents negotiate significantly better than their counterparts at traditional brokerages.

Last month at Brad Inman’s big real estate conference in New York, Realtor.com President Allan Dalton accused Redfin and other critics of a “massive level of disingenuous communication,” because we ignore the likelihood that traditional agents offset higher commissions by negotiating a better price (skip to minute 9:00):

Already our surveys had established that most of our customers get service that they believe is better or much better than what they got from a traditional real estate agent. But forget the touchy-feeley stuff: every day we heard that our customers would lose our commission refund and more at the negotiating table; it is the centerpiece of the traditional industry’s argument against Redfin.

And we agree, that the price of a home fluctuates with market conditions, increasing the importance of a real estate agent’s pricing guidance and negotiating ability.

But our problem with commissions is not simply that they’re too high; our problem is with the commission itself, because it pays the buyer’s agent more when his clients pay more. In other words, rather than being offset by better negotiations, the buyer agent’s commission actually causes worse negotiations.

This is why we decided to pay Redfin agents a salary with a customer satisfaction bonus, not a commission. Agents do what you pay them to do, we reasoned, and we believed our agents would be more likely to get the price our customers wanted.

After a year in the market, we decided to put our theory to the test, by querying the Northwest Multiple Listing Service for data on every home or condominium sold via a brokerage from February 6, 2006 (the date of Redfin Direct’s launch) through February 5, 2007. Since we didn’t offer a service for sellers or support areas outside King County until much later in the year, we limited the data to King County and we only evaluated our capacity as buyers’ agents.

But we still had the problem that Allan highlighted, namely that there is no “set base” price for a home.

So we compared what buyers’ agents negotiate for — the final price — to what the sellers’ agents ask for — the asking or listing price; some sellers’ agents may ask for too much, others for too little, but, since all our customers are all shopping in the same store, looking at the same listings, all King County brokerages are negotiating against the same set of asking prices (note that evaluating a seller’s agent is problematic, since the seller’s agent only competes against the prices she sets herself.)

The results were striking; Redfin customers paid on average under asking price, whereas customers of all other brokerages paid on average over asking price. The difference in negotiations was .9% of the home price, equivalent in King County to over $4,000, on top of a commission refund of nearly $10,000.

What makes this noteworthy is that the data did not come from Redfin, but from the MLS, from the brokers themselves who contribute to the MLS. Any brokerage can validate the data by following the instructions available in the appendix of our report.

Already, the Seattles Times reviewed the report and picked up the story in yesterday’s big Sunday spread.

Perhaps there is another way to evaluate whether traditional agents negotiate better than Redfin agents; until there is, the most likely conclusion is that Redfin agents negotiate better than their more expensive counterparts.

Discussion

  • http://www.mybloglog.com/buzz/members/realivent/ matt

    This is going to open the floodgates of data created from the MLS to justify all the claims that we sell higher, or we negotiate harder.

    bottom line it can’t be done…The levels of data that you will need to incorporate to make these types of responses justifiable, such as the type of buyer, the type of house, the type of agent, etc…

    The last report I ran on MLS data proved that my partner, was the best negotiator on saturday afternoons, for Condos in the Sunset where the owner lived for at least 3 years, and had 3 kids. If you are this type of buyer I guarantee you at least 67% in saving when you buy thru me!!!

  • Jerry

    Great study. Supports my personal experiences as a buyer and seller of houses in King County.

    About two years ago, I sold my house. Our listing agent argued vigorously for a listing price that was $20k less than what we eventually put it on the market for. Our listing agent repeatedly scolded us for asking too high a price and warned that we would never sell our house. You can probably guess what happened next. We had three offers within 12 hours and a signed, full-price contract within 24 hours. We certainly could have asked for, and received, more money, especially if I had encouraged a bidding war (which I didn’t b/c I liked the couple we sold the house to & wanted them to have it).

    Simultaneously, we purchased another house (unfortunately, using the same agent but I was on to her now). She encouraged us to submit a full-price bid to the seller. After our experience selling, I knew our realtor was full of it. The house we were buying had been on the market for months, the sellers were asking top dollar, it had been on and off the MLS three times over the previous two years without selling. In the face of these and other facts weighing in favor of making a lower offer, my realtor still insisted that a full price offer was appropriate. We ignored her, made a lower offer and got the house in a couple of days.

    What this experience taught me was:

    1. My agent was only interested in doing deals as quickly as possible. She had “zero” interest in getting the highest price for the house I sold and even less interest (yes, I think she dipped into negative numbers) in getting the lowest price for the house I bought. Unfortunately, I think this is a very common attitude among agents. (BTW, she was an experienced, senior agent whose husband owns a very large local brokerage. She wasn’t a newbie or otherwise some sort of extreme case. In my experience, she was completely typical as a RE agent.)

    2. When real estate agents on both sides of a transaction are only interested in doing a deal as quickly as possible, neither the buyer nor the seller are getting the agency they’re paying 6% for.

    3. The real estate 6% business model is a racket that is maintained by collusion amongst agents, rather than by true market forces. (My agent made 3% on the sale and another 3% on the purchase (aggregate transaction values of over $1.5M, so she walked away w/ about $45k) even though my agent actively worked against my best interests and was a negative-talking pain in the keister during the entire experience). She actively put her interest in doing deals quickly ahead of my family’s interest in getting the right prices.

    4. Real estate “agent” is often a misnomer. A true agent is someone with a fiduciary duty to the client, in essence someone who looks out for the client’s best interests.

    Anyway, this was back when Redfin only provided housing data, not agent services. I used Redfin maps to find the house I bought. Wish I had the option to use a Redfin agent to buy & sell but Redfin didn’t provide that service back then. Next time I’ll certainly use Redfin.

    By the way, I think Redfin’s innovative salary/bonus model for RE agent compensation should encourage true agency. It’s definitely a big step in the right direction.

  • http://www.mybloglog.com/buzz/members/realivent/ matt

    Jerry, why did you continue to use that agent, especially after you sold your house and were not happy?

  • http://www.redfin.com Glenn Kelman

    Matt, one way of re-stating your argument is that data can be sliced and diced in arbitrary ways, resulting in data sets that are not statistically significant. We’ll try to get to a post soon about the size of the data sample.

  • Steve

    Why can’t you guys sell this house, 3 or 4 other houses have been sold on the same street by real agents why Redfin keeps hosting open houses for this turd

    http://www.redfin.com/stingray/do/printable-listing?listing-id=284393

  • http://www.mybloglog.com/buzz/members/realivent/ matt

    It’s not about “why can’t you sell this house”, or “how we get higher offers”…it’s real estate. It’s emotions, it’s finances, it’s motivation. You cannot create reports based on these numbers variables.

  • http://www.redfin.com Glenn Kelman

    Steve, Matt:
    Some deals take a long time, others don’t (listing agents on average keep their own properties on the market longer than that of their clients).

    Over time, quantitative data is meaningful. Glenn

  • http://www.helpuselleastside.com Dan

    Come to Helpusell.com
    We have been saving our clients money since 1978. We list for as low as $600.00 and 1/2 of our inventory IS NOT on the MLS
    http://www.helpuselleastside.com

  • Adam

    …and 1/2 of our inventory IS NOT on the MLS

    And that’s a good thing for the sellers?

  • http://www.mybloglog.com/buzz/members/realivent/ matt

    Glenn,
    you are right…I’m looking forward to the 2007 numbers, now that will tell a story

  • Jerry

    Matt,
    It’s called a contract. We were foolish enough to agree to use her as a buyer’s agent at the same time we signed to use her for a listing agent. That’s why we continued to use the same agent, even though her performance was crappy. Continuing to use her was easier than firing her and getting in a lawsuit with her later about “procuring cause” or whatever you realtor-lawyers like to call it.

  • http://www.crunchback.com CrunchBack

    Glenn -

    This is great data and ought to give you a club to beat back that bully Dalton at your next joust. As I said in January (http://johntreadway.typepad.com/crunchback/2007/01/redfin_at_real_.html), the rudeness of several of the attendees at Connect was a kind of insecurity. Over time we’ll see if the numbers continue to work in your favor, but for now – congratulations!

  • Jimmy

    I’m a Redfin customer and a HUGE fan. But, you know, there could be some selection bias in those stats. For example, do Redfin customers, on average, go for houses that are below asking? It’s not too far-fetched if you consider that Redfin customers may be biased toward a certain market segment, and that segment might have less-inflated prices than other segments. Just be careful before pushing these numbers too widely — prove that they are significant when controlling for such factors.

  • http://myblog.daltonsazhomes.com Jonathan Dalton
  • http://3oceansrealestate.com/blog Kevin Boer

    To Mr. HelpUSell…and the reason for not putting 50% of your listings on the MLS would be… ?

    Let me give it a try: It improves the odds of you double-ending the deal and getting, say, 4.0% instead of 1.5% in commission.

    Great idea, and will continue to work as long as sellers don’t feel compelled to use the most liquid, most visited property exchange around: the MLS.

  • http://www.ReTrends.com Lucy

    Regarding the “traditional agent” versus the “Internet agent” — agents have long survived and thrived on the being the exclusive providers of houses for sale information. An industry report by Swanepoel also says that the Internet has changed all that. So what does that mean for the “traditional agent”? Do you think that more and more agents will evolve into “Internet agents”, as to keep up with the changing times?

  • http://www.egypt-realestate-agent.com Ahmed Anies

    I read this article and watch the vedio they are wonderful, thanks alot.

    Ahmed Anies
    ( Egyptian Real estate Agent )
    ( Egyptian Real Estate BLOGGER )
    Phone: (002)+ 016 1334420
    Email: info@egypt-realestate-agent.com
    site: http://www.egypt-realestate-agent.com

  • Norm

    So when will Redfin start doing the same for multi-family dwellings? Seems like that marketplace is even more tied up and restrictive than the general home market. Try and get a cap/grm rate without going through an agent – can’t.

  • Kathy

    I am very intrigued about your company. I work in Columbus, OH where the Realtors will almost do anything to be a dual agent. I think it should be against the law. I do have a question, do you ever go to see the property in person with the buyer? I would miss that the most! Also, why don’t you pay the fee to be able to use the MLS? Is it that expensive on the west coast? Thanks and I look forward to seeing your progess!