Thanks to McKinsey-trained Kevin Boer, one of several brokers who reviewed Redfin’s NWMLS data, Redfin has discovered that we screwed up the accounting for one transaction in our analysis of Redfin’s negotiating advantage.
Except for this transaction, Kevin seems to have corroborated our analysis.
We originally reported that our King County buyers got a final price of 99.329% below list, whereas King County customers of other brokerages paid 100.233% above list. This is factually correct. But one transaction should have been adjusted to account for a commission refund applied to the purchase price, so as to isolate the negotiating capabilities of Redfin and its customers. Making this adjustment leads to an average final price 99.340% below list.
With this adjustment, the negotiating advantage we claimed to be .904% is .893%. This reduces Redfin’s negotiating advantage by $54, from 4,474 to $4,420. This advantage is still financially meaningful and statistically significant, but we are nonetheless unhappy with ourselves for the error.
The source of the error was obscure: one, and only one, of our 170 King County customers offered to allow the seller to keep Redfin’s 2% commission refund if the seller would lower the price an additional 2% (on top of the 2% commission savings factored into the price, the house in question still sold for nearly 2% below listing price). The MLS # for the transaction was 26136978.
The NWMLS thus recorded the final price as being nearly 4% below listing price, but roughly half of this advantage came because the seller essentially received Redfin’s commission refund. Had we realized this when performing the initial analysis we would absolutely have added the commission refund on top of the final price.
And we would have identified this transaction earlier but for an error in our customer database indicating that the customer had qualified for a 2% commission refund. Before publishing our analysis, we double-checked this customer database against our financial records, but this only confirmed the amount of the commission refund, not that it was or was not offered to the seller to reduce the final price.
When Kevin inquired about the possibility that a commission refund was applied to the purchase price, we were about to e-mail him that this had not happened. Before we did, we decided to review the official HUD-1 forms for King County deals with exceptionally low prices as compared to list, and then, when we found a problem, for every deal included in the study. While I was wining and dining a college recruit in Berkeley, Rob and Cynthia were in the office Wednesday night pulling every file from last year.
We spent Thursday double-checking and re-calculating the data based on an error in one transaction, e-mailing Kevin later that day to explain the error.
Once we recognized the problem, we could have actually accounted for it in one of two ways, either by lowering our negotiating advantage or lowering our average commission refund. Lowering the commission refund amount would have allowed us to avoid making an adjustment to NWMLS data, which was appealing to us because the NWMLS data is a matter of public record for other brokers and agents.
We decided against this. Since the buyer got an extra 2% reduction in price only by using Redfin’s commission refund in the negotiation, we decided to reflect the change in a lower negotiating advantage. We also thought that lowering the negotiating advantage was the most conservative approach, since the negotiating advantage has been most hotly disputed.
Over the course of the morning, we will update our website, issue a corrected press release, and contact journalists and bloggers to whom we had sent the numbers that included this error.
In other news, the NWMLS report cited by various bloggers as contradicting Redfin’s data turned out to be wrong by a large margin. The NWMLS adjusted the ratio of the median final price vs. the median list price from 81.61% to 99.52%. When the NWMLS realized that a further adjustment upwards seemed to be in order, it re-published the report a second time with the table in question entirely removed.
Thanks again to Kevin Boer for finding Redfin’s error. After a week of intense scrutiny, the basic conclusion that Redfin’s King County customers got a price significantly better than customers of other brokerages still stands, but we are exhausted from having to re-analyze an already exhausting analysis, and apologetic to everyone we let down by making this mistake.