First Freakonomics, Then the Redfin Advantage, Now An Academic Study Spanning Six Years

Last February, when the rain wouldn’t stop and we were bored out of our minds, Redfin released a year of sales records indicating that our buyers on average got a better deal than customers of other brokerages, on top of the commission savings.

Mose Andre, Redfin’s compulsive stats man, has only recently recovered. Hundreds of bloggers, commenters, e-mailers and callers raged against the idea that Redfin customers got a better deal, or that our agents had any part in our customers’ success. But the data held up.

In childish, tearful rants, I defended our agents. Our CTO, Michael Young, poked his head into my office to ask, “Who cares why our customers win, if they win?” And then shrugged (he has a two year-old). Mose nearly had a nervous breakdown calculating and re-calculating the numbers, then slept for two days straight.
24.JPG
But ever the kinky masochist, last week Mose called me out in the hallway to ask why we hadn’t tallied up the Redfin Advantage for our listing customers.

“Too hard,” I said, turning around. “We could intentionally set a low price than claim a big mark-up. What’s the right number to compare ourselves against?”
“The assessed value,” Mose said. “The Zestimate.”
“People would question those numbers, too,” I said.
“It doesn’t even matter if the baseline number is wrong,” Mose said. “As long as it’s consistently wrong for everybody.” He was now surrounded by his math nerds, and I was all alone.
“Try explaining that in a blog post,” I said.
“Just because it’s hard to explain doesn’t mean it isn’t worth doing,” Mose said.
I started to back away. Mose smiled and said he would come back from vacation with a new way to figure out how our listing customers really did.

Well, it turns out that somebody beat him to it (hopefully Mose will realize he should never go on vacation again). A Northwestern economics professor bet his colleague that a traditional listing agent increases the price of a home, and then spent the next three years analyzing Madison, Wisconsin data from 1998 – 2004 to prove his point. Today, that professor is taking his colleague to lunch, because he was wrong. The traditional agent often doesn’t get a higher price, and consumers know what their home is worth better than anyone in traditional real estate has admitted.

According to a review of the study published in this morning’s New York Times, people in Madison, Wisconsin “who sold their homes through real estate agents typically did not get a higher sale price than people who sold their homes themselves.” In fact, the study found, the agent-sold homes actually sold for slightly less (the difference though was within the study’s margin of error).

The study pointed out one bright side for the traditional industry, reporting that Realtor-listed properties sold more quickly (105 days vs 125 days), but we’re not sure this is such a simple advantage. According to another study by Freakonomics professor Steven Levitt, when Realtors list their own properties, the properties are on the market longer because the Realtor is holding out for a better price. Perhaps Madison home-owners took the same approach.

The Northwestern study worked because Madison is a kind real estate of Neverland, where more than 10% of all the homes for sale are available on a single For-Sale-By-Owner — FSBO — site, FSBOMadison.com, which still allowed owners to offer the buyer’s agent a commission. So the data set of FSBO sales in Madison was large enough that the professors could correct for all sorts of skewing factors, like lot size, neighborhood and time of year — and compare it to Realtor-listed sales.

Everywhere else in America, FSBO marketshare has declined (14% to 12% from 2002 to 2006, scattered across many sites) at the same rate as traditional brokerages (74% to 70%), with alternative brokerages like Redfin taking up the slack. One reason for the decline is that through services like Redfin Direct and many others, consumers can now list their home in the MLS without paying their listing agent a traditional commission.

Which brings us to the final twist: we feel kind of weird promoting a FSBO study. It drives us crazy when traditional agents claim we’re a FSBO type of service. Redfin agents work with clients to price and promote their homes, to negotiate a deal and to handle all the paperwork associated with the sale. So it cheered us to see one of the study’s authors, Aviv Nevo, acknowledge that you do of course want to pay a listing agent for the work he does, so long as you don’t give him a piece of the action based instead on the value of your house. Which is how we’ve paid Redfin agents all along.

Discussion

  • http://www.nosnivelling.com Dave Schappell

    Go, Redfin! Love that you keep discovering stats, encouraging stats, and hammering away at the industry we’d all love to see 100% reworked!

    I was discussing Redfin and real estate commissions with a friend the other night, and I said that I was pretty happy with my last home sale because I was able to get it down to a 4.5% commission. He immediately replied and said “that’s what’s so wrong — why are you even TALKING about % commissions?!? Why not negotiate a fixed fee and pay them extra if they exceed an agreed upon sales value?”

    I agree with him, and that’s also why I’m a huge fan of what Redfin’s trying to do — you’re going after a market opportunity so enormous, and an ingrained philosophy that’s so off-base (because of the abuse that we’ve all been subjected to thoughout our lives), that the end result has the potential to be world-changing.

    Onward!

  • Mattb

    I can’t wait to see how the agents try and beat you up on this one? should make for some entertaining reading. I for one am glad you’re pulling the covers off this industry and exposing agents for the fear mongers they are.

  • Max Bell

    Off topic, but you guys need to set up an autoresponder for your job application addresses. Got the impression from the ‘How to get a job at Redfin’ posting that you had one set up.

  • http://www.edynblog.com EDYN Real Estate

    Mattb- Huh? Redfin are agents also, you realize this right?

    I am from Madison. We are liberal, progressive, stick-it-to-the-man-city. We love that we go against the grain. Robert Redford opened the first Sundance Theatre here in Madison because we are so progressive, and inthe midwest no less.

    As far as the article, first, the market was crazy during the time that study was done. Second, a home that costs more will sell for me. If we looked at the numbers of someone who sold a Lexus on their own vs. a Kia dealership, what would be the most expensive car sold? How do you compare the data?
    Third, many of the homes on that website are actually sold by a Realtor and many of the FSBO’s sold by a Realtor get added to the MLS data.

  • Chris C

    hey hey… wait on the analysis busting… here are some facts I believe to be true. The days on market is a function of the price. If you overprice it, its going to be on the market longer… Who doesn’t want to test the market by going out high and seeing what the market will bear. Think of your last car sale… I’m guessing you had an overinflated opinion of what your car was worth and what you actually pocketed post sale was less money… Same with homes. 2nd part is that if it is priced correctly and in the MLS it will sell with no additional advertising…. lets be realistic here, there is no crazy secret sauce to marketing property anymore. Once its in the MLS, it is replicated to all the places that people shop for homes. (except perhaps in Madison… but then again what is the median price in Madison…)

  • http://www.linkedin.com/in/danaus Danaus Chang

    Here’s the study (just in case some of the readers wanted the details).

    http://www.faculty.econ.northwestern.edu/faculty/nevo/research/fsbo.pdf

  • RealStats

    Statistics lie… and if you really want to lie use statistics.

    Here’s what our San Francisco MLS says: Real statistics, NOT Redfin’s cook the books numbers. Odds less than 10% of getting a home sold at market.

    2 years in SF, the real 7×7 San Francisco, not the entire Bay Area show:

    10 Condo Sellers experienced in 2 years:
    5 Expired or Withdrawn
    4 Sold Below Asking
    1 Actually sold for more $500 more to be exact.
    (After 2/3 rebate returned – Sales netted Redfin a little more than $26k over 2 years.)

    7 Home Sellers experienced in 2 years:
    3 Expired or Withdrawn
    2 Sold Below Asking
    2 Sold Above Asking (3% and 5%)
    (After 2/3 rebate returned – Sales netted Redfin less than $25k over 2 years.)

    * All Refin sales as reported by the SF MLS 1/2006 – 10/2008.

    50% failure rate is what real statistics say.
    No ‘cook the books’ numbers here.

    If I were a venture capitalist with money in Redfin, I’d be a jittery right now wondering if I’ll see any return on my VC $$$. $51,000 earned in SF pre-tax $$ over 2 years.

    The market speaks…

    BTW – Watched a buyer over pay by $40k, to get a 2/3 commission rebate. Now that’s determination!