OK, We Can Be Moved .01%

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.

Discussion

  • Jerry

    That’s not much of a mistake. Certainly not one that you should apologize for.

    On the other hand, Marlow rushed to attack Redfin in several blogs based on her wildly erroneous calculations. Even a moment’s reflection would have shown her to be wrong. She apparently didn’t care. Has Marlow apologized to Redfin for her “mistake”? Or is she just going to slink away?

  • Chris

    Agreed–not much of a mistake at all, but certainly appreciate your integrity for pointing it out.

    Excellent job at the MIT EF Venture Lab event–you knocked it out of the park.

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

    The only mistake that was made was Redfin saying that their agents are better then all other agents…

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

    Matt, that is certainly an overstatement. Where did you see us make that claim?

  • http://www.360Digest.com Marlow Harris

    I do not recall making “wildly erroneous calculations”. I do recall conceding that Redfin’s calculations were probably correct but then offering a link to the NWMLS site which printed conflicting data, and pointing this out.

    My lack of response is not “slinking”. I was waiting for the NWMLS to repost, correct or corroborate its data.

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

    For the record, Glenn never said his agents are better then all other agents.

    It was an overstatement, but not by much.

  • Jerry

    Marlow,
    Stating that on average, every house sold in the Seattle area sold for 81% of its original asking price is a wildly erroneous calculation. Even a moment’s consideration of your personal experiences in selling homes would have warned you that the number was wrong. Yet you rushed out to a number of blogs to badmouth Redfin based on a number that you apparently didn’t care was wrong.

  • lady

    when are you coming to the northern virginia area (dc)
    would you hire newly licensed agents?

  • neophyte

    Glenn,

    What about your client that paid 123% of the listing price. Did you not represent them very well or did they just want a home that other people were very interested in. I would assume the latter. Maybe your company is selling homes that people aren’t interested in. That would explain the lower List price/Sale Price ratio. Is it going to be difficult for those people you represented to sell their undesirable homes in the future?

    Isn’t the real story here that you only did 173 buyer side transactions in King county. Basing that number on the 8 agents you list in the Seattle area that is 1.8 transactions per agent per month. With a total sales volume of $90,483,890 that is an annual operating income of $904,483 which is $75,403 a month. I believe you quoted you have 25 employees plus programmers. Since I don’t know the total number of employees I will just use the 25 I believe you quoted. That would make $3,016.12 per employee. What about Rent, E&0, technology, accounting, and attorney fees?

    What happens when your employees get confidence and experience and figure out they don’t need to discount and can go work for a full service company and make a lot more money. Heck they could still discount 1% and even if they only sold 1 home a month (averaging 500k) working for a traditional office charging 2% they would net almost $100,000 a year after expenses. I don’t think you are paying them 100k a year.

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

    The number of agents we have on board today is a reflection of current deal volume; we spent most of 2006 with two or three agents.

    The premise of the business is that can we can grow revenues more quickly than costs, particularly as most of our costs are fixed costs (developers). We’ve been pretty clear about the risks of this approach, but this has always been our plan. It’s similar to that of most high-technology startups, who take a few years to reach profits, best case.

  • neophyte

    How much income does a Redfin agent make?

  • neophyte

    Quote “It’s similar to that of most high-technology startups, who take a few years to reach profits, best case.”

    Glen don?t most high-tech startups fail?

  • questions

    Do you think the Developers as in (developers) agree that there salaries are “fixed costs?” These folks don’t get raises and bonuses?

  • questions

    Do you think the Developers as in (developers) agree that their salaries are “fixed costs?” These folks don’t get raises and bonuses?

  • neophyte

    Where on your magic spread sheets do you show that you will be profitable under your current business model? Are there enough columns in excel?

  • neophyte

    If your primary source of business is off you website alexa shows that your traffic is stagnant or declining.

    http://alexa.com/data/details/traffic_details?url=redfin.com

  • unconvinced

    I don?t see how your statistics can take into account that many traditional agents, have been negotiating seller paid closing costs into the purchase price. This has the effect of a reduction in the true purchase price for the buyer. An example might be one agent has the seller reduce the price $10,000, and in another transaction the seller may keep the price at full price and pay $10,000 in closing costs. Your statistics would show one of the agents is a better negotiator than the other, but both agents have achieved the same thing a reduction in the price for the purchaser. As prices have increased in the Puget Sound area more and more buyers are including seller paid closing costs at all price levels.

    How does your data take that into account? And if it doesn?t then what good is your data?

    Call me unconvinced?

  • Jerry

    The Unconvinced Neophyte with Questions is obviously a really, really scared 6% realtor. Keep posting UNQ, everybody who reads these blogs needs the laughs.

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

    Very simple title …but a very concentrated article and so good!

    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

  • neophyte

    Jerry,

    Sorry to say not only am I not a Realtor Im also not a real estate agent or broker. I am however very interested in the industry. I have been using and watching redfin since they went live. I feel their technology was cutting edge but their business logic is very flawed IMMHO. I do however know what it takes to run a real estate brokerage and also what it takes to keep the doors open. One of the biggest challenges in a real estate brokerage industry is trying to retain your top producers. This is one factor I feel is very flawed with Redfin. Their agent offering may be very attractive for a new agent. But once that agent gets a few deals under their belt and learns how to deal with online buyers they will quickly realize for the same effort they could easily have a much larger income working in a traditional situation. As I said in an earlier post they could still discount but no need to discount at the Redfin level. It is human nature to want to succeed especially in sales people.

    The reason I posted here was when I read the press release in the PI it made me do a double take. My first thought was that’s ridiculous and that continues to be my thought. Since the Redfin program has the buyer make the offer and the agent just presents it how much skill do the redfin agents currently have or need?

  • anonymous

    neophyte — is it possible you’re missing the point?

    redfin is (apparently) not a real estate brokerage firm, and thus, does not live or die by the success benchmarks you know and use to judge with.

    redfin is appears to be a virtual sales nexus with a low-cost service component.

    most of the real value will go to the seller and that is the hook. when folks figure out they can stage, list and sell their properties and save tens-of-thousands, they will.

    buyers can still use their trusted agents or cruise the mls online or via redfin or other cool listing sites.

    but when the buyer walks in the door, they are looking at a redfin listing.

    and what is a redfin listing?

    it’s a SELLER listing.

    and what is a SELLER listing? one that can save both parties lots of money and cut down on agent-generated sales voodoo — (i.e., agents can and do hike up and pull down on closing costs through untoward influence over the buyer/seller — nobody doubts this and redfin offers a clear option that avoids it).

    the real estate brokerage industry has long been in need of an enema. too much opacity, too little honesty across the board and too few market restrictions to benefit the average home owner and buyer. who doesn’t know of the anecdotal case where a property is bought up “cheap” buy an agent in the same office as the listing agent, only to be flipped in 4 months…?

    real estate for the investor, the developer, speculator and so forth is one thing — and it is a place for the capable middle-man to make some commission-based revenue.

    but home owner sales and the residential housing market should not be primarily for the benefit of lenders, investors, agents and the like; the market and all of the product is really for the user and they are tired of insane prices and fees.

    your criticisms of the redfin business model seem to be about “will you make your model work?” — fine.

    but the point is that your criteria for “working” are based on making x% commissions as a brokerage firm and not about serving the customer.

    it looks like the key to the whole redfin thing is that sellers and buyers will GLADLY work with a partner company that is trusted, seems to do what it claims and apparently saves money. that’s all they need to come in droves.

    it doesn’t look like the word-of-mouth has really started with redfin – but when and if it does kick in, it seems obvious that folks will jump on it like they did with TiVO (no middle men on TV), with Netflix (why go to a video store again?) and with iPods (record shop??).

    the local real estate agent that can deal with the transition is here to stay – but they will be listing with redfin or a second gen version of redfin (the word on the street is Google is moving into Ebay-like sales listing and soon real estate too).

    so don’t worry your little head neophyte — instead why don’t you instead try to find out when redfin goes public so we can all get in on that IPO, huh?

  • neophyte

    Anonymous,

    Thanks for you in-depth insight on Redfin. However it was you that missed the point here! This article was about them representing buyers not sellers. The reason they don’t mention sellers is because there numbers are far below average when it comes to listings.

    As far as the IPO goes this is one I will pass on. You have zip realty struggling and other discounters struggling plus entering into a slower market in 6 months lets review Redfins numbers. Remember that buyer acquisition cost increase dramatically when there are fewer buyers. As I see it the last thing Redfin needs is more costs.

  • anonymous

    neo — that you or perhaps I might be “missing the point” is maybe not that important…

    …what might be important is if the redfin product and concept will float as a business.

    your criticisms are apparently based on your experience as a broker and running a brokerage firm.

    thus your comment(s) about retaining agents and so forth.

    my experience is as a home buyer/seller.

    if redfin steps up to the plate and moves into more of a web 2.0 service, allowing for more openness and user-generated data, then it it has more than a shot at making it.

    and not because it’s a discount broker (as you continue to refer to them as — despite Glenn pointing out that marketing and business philosophy are not the same thing)…but because they help to revolutionize a business that has a terrible service element; namely real estate agents.

    agents don’t all suck – but the rates we home buyers/sellers pay generally do. and by suck i mean that the commission cost is way out of step with the service.

    note that you brokers NEVER pay full commission if you can avoid it…and would balk if you had to…so you can sympathize.

    or maybe you can’t.

    anyway, the question is not will redfin make it, but why wouldn’t it?

    if they can increase openness in the real estate market, they will succeed.

    the next step for redin is publishing the closing sales price.

    then we can all see how much the products are listed for, how long they’re on the market and what they sell for — the holy of holies that is kept secret by the whole profession as established by the NAR.

    redfin WILL pickup sellers like i said — by word-of-mouth. all they need is for their product to work like they say it does most of the time and the sellers will come.

    why? because nobody wants to pay the brokerage fee for opaque services. they want transactional agents and that’s all — and anyone would pay for that, especially when the other option (of working with a conventional broker) is so much more costly.

  • Pilgrim

    Just so I get my 2 cents in …. I am for anybody that is willing to step up, and stand up, to the “good ‘ol boys” club of RE Agents and Brokers.I have bought and sold 3 houses in 8 years, and can honestly say I never felt any one involved was on my side,agents, brokers or lenders. The “you scratch my back and i’ll scratch yours” mentality of the industry needa a solid right cross.
    if Redfin is here to change the status quo, i’m all for it……

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  • Broker

    Nicely said Pilgrim. And I’m a broker.

  • http://www.markmalave.com Mark Malave

    My clients have paid 90.3% of asking price over the last 12 months. Does that mean I am better than all Redfin agents? What a stupid number to base the claim that Redfin’s agents are better negotiators. Does this number take into account seller givebacks? Who the hell is paying asking price in this market?