The Redfin Advantage: Bigger, Broader, Higher Statistical Confidence

April 24, 2008 addition: Redfin is correcting how it calculates the weighted average in the Redfin Advantage report.
Greg Wharton, the general counsel at my last job, liked to answer questions enigmatically. When I asked him if a software pawnshop in Florida was trying to buy us, he would smile and say, “answering that question now would obligate me to answer that question in the future.”

That can be a heavy burden to bear, especially when the question you’ve answered is a contentious one. Last spring, Redfin analyzed the MLS data available to all brokers to show that our home-buyers negotiated a better deal on a home — saving an extra $4,000 off the list price — over and above our commission refund. We called the total savings, of $14,080, the Redfin Advantage. We promised to make calculating it a regular thing, which meant that saying we saved customers money in one year would obligate us to admit it was a fluke if we didn’t repeat our performance in the next.

So when Redfin set out to evaluate our performance over the last 12 months, in a downturn that has brokers of all stripes competing ferociously at the negotiating table, I was sick to my stomach. As transaction volume grows, we should regress towards the mean. But the numbers came in for both Seattle and the Bay Area, and they only show the Redfin Advantage got bigger, with a smaller range of error (thank goodness!):

  • Redfin home-buyers over the past twelve months paid on average 1.015% below homes’ asking price, while customers of other brokerages paid .087% below asking price.
  • This difference in negotiating results saved Redfin customers nearly 1% of the home’s final price, for an average savings of $5,048.
  • In addition, Redfin refunded each of these customers an average of $10,520 in commissions.
  • The data is statistically significant, with p-values for each of the three counties we evaluated between .00004 and .02. To a statistician, this means there is less than a 2% chance that our results could be the result of chance. The p-value for last year was closer to .03 or 3%.
  • It would be hard for us to exaggerate or fabricate this data, since other brokers can and will challenge the result. There was a huge brouhaha last year. One intrepid broker found an error on one transaction, and we immediately issued a .01% correction.
  • Redfin’s customer satisfaction rate was again 95%, for home-buyers whose offers succeeded or failed. Our demographic broadened, with the number of high-technology customers dropping from 48% to 33% of our total, and the number of first-time home-buyers increasing to 45%. Unlike the negotiating advantage, the satisfaction and demographic results come from our own surveys, which are less reliable.

The report analyzes data from February 6, 2007 – February 5, 2008, based on the anniversary of our launch of our home-buying service, Redfin Direct for Buyers. We didn’t analyze LA, San Diego, Boston or Washington, D.C. because we hadn’t served those markets for the full year, and we didn’t have a statistically significant numbers of sales there either.

Because the negotiating advantage is consistent across different Redfin agents, different customers, different counties, different years, in markets that were healthy and slumping alike, it seems fair to conclude that the advantage stems from the Redfin business model itself. What does that mean?

Customers on the prowl for a deal are a big reason we negotiate effectively. The partnership we try to set up with customers gives them a more active role in negotiations and, because theycomal have the most skin in the game, they come to the negotiating table armed to the teeth with data from our site. Last year we tried to give all the credit to our agents, but now, we think Greg Swann was right: a lot of credit goes to our customers too.

We still think the results validate the skill of our real estate agents too, whom we pay customer satisfaction bonuses rather than commissions to avoid creating any pressure for customers to close on a bad deal. Alone among any national brokerages, we require our agents to have experience with at least 20 transactions before representing a client. Hats off to all our Redfin agents, and thanks for your hard work, now being recognized on TechCrunch, in our favorite real estate blogs and the local papers.

Many thanks to Redfin star Chris Glew for preparing the report, his first big business project. An anthropology M.A., Chris previously studied ancient Mexican turds and fabulous jungle-buried relics. In his interview for the job, he explained that the diameter of an empire’s tortilla-making griddles increased with its ability to enslave people in the fanatical construction of monuments (which in turn prompted us to expand Redfin’s Costco order.)


Discussion

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  • Tewing

    Glen,
    Impressive information. Just curious about one component of your methodology. Namely, did you do a “days on market” comparison on your deals vs. others? That is, how does your negotiating advantage measure out when comparing transactions grouped by days on market? My sense is deals can be had on properties that have been on the market longer and if your transactions “average days on market” is higher than your competition then it would reason that the better deal is due in part to stale listings as opposed to superior negotiations. My guess is that is a combination but I was just curious how you stacked up on this particular metric.

  • http://blog.redfin.com/blog/author/glenn%20kelman Glenn Kelman

    Excellent question!

    We didn’t cut the data by DOM, but did acknowledge in the discussion that one source of selection bias would be the inventory, with our customers selecting properties where the price is more negotiable.

    Maybe we’ll factor this in for next year’s study…

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  • REJunkee

    It seems like Days on Market is the critical variable. Getting a “deal” on a house that’s been listed for six months is much different than a deal on one listed for two days. If you don’t control for DOM, couldn’t it just be that Redfin buyers are more likely to go after old listings, giving the illusion of better negotiating? In fact, that seems the likely answer. You cannot claim a causal relationship between your negotiating prowess and lower relative sales prices without accounting for DOM. It seems so obvious and easy to do, one wonders if you know the answer, but don’t want to sully the “Redfin Advantage” with data that doesn’t support the thesis.

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  • Bruce

    I bought through Redfin last year and I got the house with an under list bid in a multiple bid situation with some bids going over list in a highly sought after area (and still is). DOM there was maybe 2 weeks but I’ll be conservative and say less than 1 month. My point is that I as a redfin customer wasn’t focusing on homes with above average DOM.

  • http://caleb.activerain.com Caleb Mardini

    I didn’t find in your study(and maybe I missed it) an accounting for negotiations that aren’t reflected in the final sales price. There are many things that get negotiated into a deal, and after seeing hundreds of transactions cross my desk, I’ve found that the final sales price is not necessarily indicative of any buyer, or seller, advantage.

    This study is not consistent with my experiences and if I’m reading it right, it demonstrates a fundamental misunderstanding of how common real estate negotiations take place.

  • http://blog.redfin.com/blog/author/glenn%20kelman Glenn Kelman

    @Caleb: there are other factors but many consumers focus on price, for good reason.

  • http://caleb.activerain.com Caleb Mardini

    @Glenn, I’m sorry, but your concession indicates that you know you’re being misleading in your presentation.

    I highly doubt that is what you intended.

    My point was that the data used in the study, at least for the NWMLS, may be flawed.

    I know personally many deals have exceeded the 1% difference you are referencing, but they would not show up in the ultimate sales price because they actually went to credit closing costs, loan fees, or property improvements.

    I could be wrong but I don’t think your NWMLS results can claim the conclusion you are attempting to make.

    If I’m right about that your presentation is either dishonest, or simply due to a lack of understanding.

    If I’m misunderstanding Redfin, or the study, then I apologize and will be glad to be corrected.

  • http://LaneBailey.com Lane Bailey

    Did you take into account seller paid costs, such as seller paid closing costs. I know that I average 2.75% on behalf of my buyers. For a $400,000 house, that equates $11,000 that you say doesn’t matter… only the price matters.

    I would say that the total deal is what matters. Of course, then we need to get into post-inspection negotiations and repairs… those don’t go to seller paids, and without having all of the contracts, I know that you wouldn’t be able to quantify that for any transactions that aren’t yours… and even for your own transactions it might be onerous.

  • Sam

    Caleb’s comments would be amusing if they didn’t include accusations of dishonesty and ignorance. “I highly doubt that you meant to LIE…I’m sure you are just STUPID” is a pathetically transparent rhetorical ploy and it is insulting to imagine that people can’t see through it.

    I’m a homeowner and a potential buyer with no dog in the business model fight– I’ve so far only used Redfin informationally. It isn’t as though the question about the total deal doesn’t matter but a) the question can be raised without intimations of fraud (Lane Bailey ALMOST manages to do this, but alas gets hung up on snide and deliberate misrepresentations of what Glenn said about price) and b) it seems to me that the Redfin model relies on the informed consumer who takes an active role in the hunting and purchasing process. To such a consumer, the price discount is a meaningful data point among others.

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  • http://www.georgia-new-homes.net/Real_Estate_Rebates_-_Atlanta_Georgia_-_GA/page_2030358.html Buyer Rebate – Atlanta

    While a buyer rebate is a nice incentive, there is also a lot more money to be saved with a very versed buyer’s agent. On some transactions, 10% -15% of the asking price.

    • http://www.newhomesteps.com New home building guru

      Your point is right on. Good advice.

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  • http://http//blog.Franklyrealty.com Frank Borges LL0SA= Broker FranklyRealty.com

    Yo Glenn! What up.

    Do you all use the closing price, or do you include the seller subsidy for a more accurate NET price?

    I did a quick spot check and found in Va your average listing had a .5% seller subsidy.

    The average of 100 homes that sold last week (maybe not statistically usable) had a 1.25% seller subsidy.

    So using back of the envelope math (I encourage you all to put the data through your machines) I see your .75% worse (just under 1%) on the seller subsidy.

    Also when I ran numbers last year on average drop from list, I got more like 1.5% (some places 2%) below list being the average. How do you get .087% ? (ie under 1/10th of 1%). I can’t imagine the average Realtor having their customers paying 99.13% of list.
    http://blog.franklyrealty.com/2006/12/mris-data-average-soldlist-ratio-986-or.html

    So based on my math.
    Redfin offers 1.5% rebate
    But .75% worse on seller subsidy
    And .5% worse vs average agent negotiations vs my data.

    Makes the net savings 0.25%.
    Is that right?

    I probably have the math wrong somewhere, but I’m not sure where.

    Big fan, and I know you love a good debate!

    Frank- Broker
    FranklyRealty.com

  • http://blog.Franklyrealty.com Frank Borges LL0SA= Broker FranklyRealty.com

    Also to explain WHY the seller subsidy has to be lower… the lender won’t allow a 1.5% rebate AND a 1.5% seller subsidy in most cases. So they require the offer be adjusted accordingly.

    And that adjustment makes it LOOK like the negotiated price was lower.

    Frank

  • http://twitter.com/mattgoyer Matt Goyer

    Hi Frank,

    Thanks for the interest. However, we did not calculate our Redfin advantage for the Washington, DC market since we had not yet been in the market a year when we did the study and felt the numbers would not be statistically significant.

    Matt

  • http://blog.Franklyrealty.com Frank Borges LL0SA= Broker FranklyRealty.com

    Since Washington DC is the only market that publishing the Seller Subsidy, and DC is off by .75% in the seller subsidy (65 deals). Isn’t that a significant difference that should be disclosed in your stats?

    Again, because you offer rebates, the agents are forced to rearrange the offer accordingly. That rearrangement might appear that your stats are better, when in fact the net is worse.

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  • Intitrani
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    hi, As many of you know, Redfin was featured on 60 Minutes last night. … Not all have that ability or confidence in their ability or the time to do that!

  • http://www.filink.com/zixmail-email-encryption-software.html ZixMail

    This is a great article.

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