Redfin Expands to Oregon, First of Nine States That Outlaw Our Business Model

PortlandRealEstateSpread the word! Redfin’s finally expanding to Portland, and offering search for most of Western Oregon, which will increase the number of listings on our site by another 8%. We also finally got ‘round to offering x-out, which keeps track of all the properties you don’t want to click on again…

As John Cook recently speculated, Redfin has big plan growth plans. Portland is Redfin’s 11th market overall, and its opening follows closely on the December launch of Atlanta. Jeff Bale, Portland market manager, joins a long line of starry-eyed pied pipers — he is a youth minister — who at one point deep in their past managed a restaurant or small business. What a perfect combo!

So what stopped us from getting to Oregon earlier? Oregon Revised Statute 696.290, which states:
A real estate licensee shall not offer, promise, allow, give, pay or rebate, directly or indirectly, any part or share of the licensee’s commission or compensation arising or accruing from any real estate transaction

Translation: our commission refund is illegal in Oregon, and in eight other states. If a Redfin customer pays $500,000 for a house in Vancouver, Washington, we usually get $15,000 of that as a fee for our service, and give half of that, $7,500, to our customer. A mile across the river in Portland, we can’t give the customer any money directly.Jeff Bale

All we can do in Portland is apply the refund to closing costs, lender permitting. This is usually worth a few thousand bucks. And then we donate the rest to one of four charities chosen by the customer:

Because of the Oregon law, the donation has to be in our name.

The first question people ask is what plausible consumer benefit such Oregon’s anti-rebate law could have. I’d always assumed the law was an artifact of early-20th-century Tammany Hall-style politics, or maybe even 1970’s Serpico-style corruption.

But the Oregon law was amended without comment as recently as 2005. Even better, Tennessee enacted a brand-new anti-rebate law in 2007, giving a Tennessee Association of Realtors spokesperson an opportunity to provide a modern rationale: “Unfortunately, rebates, in too many cases, take the form of cash incentives that could be used to lure consumers into risky real estate transactions.”

What? The money used to “lure” a buyer into a risky transaction comes from the buyer himself. A buyer can’t lure himself into a risky transaction, and certainly not more than a commission-based agent could.

Wait! There’s more: “In some cases,” the spokesperson continues, “you could see a rebate used as part of a down payment, which could amount to mortgage fraud.” It’s also possible to kill someone with a butter knife, but nobody is outlawing flatware. Fraud would only be possible if Redfin inflated the loan amount so as to pay a buyer under the table, prior to closing. In tens of thousands of transactions, Redfin and other brokerages notify the lender of a refund, and don’t allow that money to be used as a down payment. It isn’t fraud to charge a lower price.

Some states have stopped the silliness. In Kentucky, West Virginia, South Dakota and Montana, where real estate commissions created anti-rebate rules, the Department of Justice spent the past five years suing or threatening to sue so as to overturn these rules. But in the remaining nine anti-rebate states, the legislature has given anti-rebate rules the force of law, and the DoJ is powerless.

So that means it’s up you, the Oregon voter. Already in the frozen swamps of New Jersey last January, the legislature ignored the objections of the New Jersey Association of Realtors to pass a law overturning anti-rebate restrictions, which Governor Corzine signed before leaving office.

And then in 2007, Oregon Senator Jackie Winters sponsored an amendment to the anti-rebate law; she argued that since most of the original law was focused  on preventing finder’s fees from going to out-of-state real estate agents, the language outlawing rebates to consumers should be dropped. The text of the amendment in its entirety was:Jackie Winters

Nothing in subsection (1) of this section is intended to prevent an Oregon real estate broker or principal real estate broker from rebating or paying a share of the broker’s or principal broker’s commission resulting from a real estate transaction to a principal of the transaction.

Something so simple could never pass. The amendment died in the Business and Transportation committee, chaired by Rick Metsger. Nobody in Senator Metsger’s office is sure what happened to the amendment. To get it back on the calendar when the legislature meets again in the winter of 2011 – 2012, email your Oregon state senator with one simple message: repeal the anti-rebate law for real estate commissions.

(One final post-script: when we contacted Senator Winters office to ask why the 2007 amendment died, the staffer who answered the phone late on Tuesday night spoke with genuine warmth about Senator Metsger, even though the two senators are from different parties. It gives you hope that, even when they make mistakes, politicians can work things out.)

Credit for photo of Jackie Winters : Celine… on Flickr


Discussion

  • http://agentgenius.com Benn/AG

    So, I’m trying to figure out why you’re not just charging less fee to do the job? Why collect a fee just to give it to charity? Am I missing something here? Do you not simply have the ability to reduce the price of the home by the amount of what you would donate? It appears to me that it’s in the best interest of the buyer anyway to see a reduction of the home by $7500 than to finance your donation?

  • PinkFin

    It’s not a fee they are collecting. When you use Redfin, you split a portion of the commission. In Oregon, based on the article above, you have to use your portion of the Commission to closing cost. If the closing cost is $10,000 and your share of the Commission is $15,000, then $5,000 will be donated by Redfin to a Charity because Oregon doesnt let you directly take a commission from a real estate transaction.

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

    @Benn/AG: if the buyer asks for a reduction in the home price and the seller agrees, that will certainly work. The problem is that you want to negotiate a price irrespective of the fees, then having agreed on the market value, ask for a separate reduction equal in value to the commission Redfin would forgo. Over time, some sellers and their agents may become wary of this approach, even though the net proceeds to the sellers would be unchanged. But on a case-by-case basis, we’ll support this approach. Thanks for the comment!

    @PinkFin you are also correct in your analysis; thanks for the comment!

  • Mike

    I actually agree with the lure idea. Many agents played with this fuzzy math when deciding to buy. Though it still isn’t a reason to have the law. Otherwise they would outlaw credit cards.

    It will be interesting to see what impact you have in this market.

    I’m sure you have good lawyers but your quote of the statute still seemingly holds you accountable for paying closing costs, “directly or indirectly”.

  • http://agentgenius.com Benn/AG

    Glenn, it’s great that Redfin will offer that as an option as in my opinion you’re bringing a ready willing and able buyer to the table and the reduction in your commission brings to bare even more leverage in the transaction. In this economy, I see this as a huge advantage to not only your clients but to Redfin itself. It’s like taking $7,500 off the top when using Redfin which makes for a very powerful marketing campaign imo.

    Thanks again, Glenn

  • John

    I don’t get it either. Lets say the buyer is buying a house for $500,000 and the commission spit is 3% lister 3% seller. The Listing agent gets $15,000 and Redfin gets $15,000 and splits this with the buyer if possible. Right?

    Why not just reduce the price to $492,500 AND the reduce the total commission by $7,500? Redfin then gets $7500 instead of $15,000, the buyer gets the $7500 in the form of a discount and the bank has a REAL LTV to work with.

  • artistx

    I agree with John, Redfin should just charge 1.5% commission in Oregon. That gives the Redfin buyer more leverage with the seller.

    I’m assuming one can still sell through Redfin at the reduced flat rate $5000. Not sure why more sellers aren’t using Redfin, I did and that saved me more money than my potential purchase (downsizing).

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

    @John, @artistx: just to be clear we do offer this option when requested by the buyer. We can’t unilaterally lower our price without a refund though, because the seller sets the commission that is paid to the buyer’s agent. We can negotiate with the seller to lower the commission we get in exchange for a lower price, and have often done this, even in states where the rebate is legal. The problem is that this price reduction, though it doesn’t affect the seller’s net proceeds, sometimes makes the seller less willing to negotiate in areas that would affect his net proceeds (“I already lowered my price once…”). The other problem is that the listing agent has to agree to change the listing agreement, lowering our fee while maintaining his…

  • http://agentgenius.com Benn/AG

    The listing agent doesn’t have to agree with anything if it’s written in the initial offer- it’s up to the seller, and to be quite frank, they would have a very hard time pissing away a buyer based on some notion that that 3% was something he needed added to the sales price in the first place. Also, I’m fairly certain that the seller would want a Redfin agent on his next purchase when he realizes you’re handling the transaction at virtually 1/3 of the price of a traditional agent?

    In this market Glenn, you have to agree that financing a rebate today seems almost ill advised if we’re really looking at the buyers best interest.

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

    @Benn/AG: Excellent points but I have to quibble… The seller will often defer to the listing agent, so trying to go around the listing agent isn’t always a winning approach. When all parties are comfy with a reduced commission to Redfin as the buyer’s agent, we embrace this approach. If not, a refund works just fine, particularly when completely disclosed to the lender, and is certainly in the buyer’s best interests. We have issued thousands of refund checks, with no complaint from the lender. What we wanted to avoid in Oregon was proposing an arrangement that sellers might be wary of, so where rebates are impossible we can always at least go after closing costs and donate the balance to charity. Either way, we don’t keep the money.

  • Brian

    Why do people still use residential brokers anyways?

    Why would you give away cash to a stay at home mom that provides little to no value in the transaction?

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  • Mike

    Because, Brian, agents DO add real value! What, you don’t think “help filling out a form” is worth $40,000? :p

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

      Very funny.

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  • Jeff Bale

    Benn/AG, John, atristx:

    Thought I’d weigh in on this one. The commission paid to a Buyer’s Agent is actually predetermined in a contract between the Seller & their listing agent. B/c of this a buyer’s agent doesn’t set their own compensation initially. As Redfin requires a minimum $5,500 per transaction to cover its operating costs while remaining profitable, simply reducing the commission to 1.5% each time wouldn’t work. As you know, that’s where the rebate vs closing costs vs price reduction decision begins.

    As for taking the shared commission amount directly off the price of the home, that can work, but may not always be in the best interest of the buyer or agreeable to some sellers. In new construction deals, the builder is always concerned about taking a reduced final sales price because it lowers the comps in their community for future sales. One example of why a seller may oppose. As for the buyer, a reduction in sales price usually has limited impact on monthly mortgage payments. Although this may be a good approach over a 30 year loan, the average home owner is driven by monthly expenses and cash flow. By receiving a rebate, or in Oregon’s case, having dollars contributed to closing costs, the cash remains in the buyers pocket. First time home buyers particularly appreciate this since cash flow is often limited.

  • Jeff Bale

    Brian/Mike,

    Being a realtor, I realize I’m walking into the lion’s den on this one so will tread lightly! One value of using a professional agent simply has to do with the likely hood of the property closing. In an awkward lending market, with fluctuating values and buyers & sellers both feeling like they could get a better deal somewhere else, emotions are high. I forget the exact number, but a shocking number of homes sold FSBO fall through before closing (something like 70%). The average buyer or seller is not aware of the details that encompass a real estate transaction & the importance of hitting each milestone on time (home inspection, addendum for repairs, loan stages, final walk-through, etc). On top of that, a lot of folks don’t have the time, market savvy or desire to figure it all out.

    I compare it to this… I was originally from Canada (hoping for a Gold Metal rematch with USA!) and went through the immigration process without a lawyer. The process took me over 3 years, was massively complicated and stressed the heck out of me. At the end of the day, it felt good to get through it, but was a crazy 3 years. A friend of mine is currently in the same process and hired a lawyer. It still is taking the same amount of time, but the lawyer is handling the work, stress and complexity to the tune of $15,000! In hindsight, I’m not sure she isn’t getting a good deal.

    For the person, such as yourself, who enjoys figuring out the process and spending the time to research, go for it. For the average Joe that doesn’t have the patience, Redfin will do a fantastic job, work to get you the best possible price based on the market & all the while, save you money at the end of the day. Good deal, I think.

  • Kripal

    what is the anti-rebate law for real estate commissions in Alabama . I want to contact my senator . Please post a blog with anti-rebate law for all non redfin states .

  • Dan

    RE X-Out Feature: This is great because I have been trying to keep track of the “rejects” on a separate spreadsheet and have to go back and look at it all the time. Now if you could make the map search have a toggle to show or not show the X-outs that would be even better.

  • Patrick

    You know, this notion that somehow realtors are entitled to a certain commission is ridiculous. Hopefully Redfin can figure out how to add the value that a real-estate agent does much more effectively. This is yet another frontier where a relationship-driven, closed market is transitioning to an electronic, free market. This momentum will not be stopped.

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