Life on a Short Street

On the empty sidewalk opposite my house, I was toodling along on my bike recently — and yes, I was also talking on a cell phone with my brother — when I heard a driver yell, “HEY BUDDY, WHY DON’T YOU WATCH WHERE YOU’RE GOING?”

Before even looking up, I responded: “WHY DON’T YOU GO F*** YOURSELF?” Then I saw my neighbor, still so stunned he hadn’t quite erased the jolly, just-joking expression from his face, sitting behind the wheel.

My wife later reminded me that since our street diverts cars one block to the north and two to the south, I didn’t even have to look up to know that the only possible target for my bizarre spasm of aggression was someone I’d see every week for the next decade.

When you think about it, your whole life is like that street, much shorter than you once imagined, almost entirely populated by people you’ll meet over and over again.

But for a long time, I didn’t think about it. Until I was 15, my twin brother and I began every fall term by apologizing to our assembled friends for the way we were the year before, as if the coming year could make everyone forget the fleas we occasionally picked up from our dogs, or our tendency to yank on one another’s headgear in tussles.

It wasn’t until I was a hiring manager who called job applicants’ references that I considered how long people would remember all the ways you act up as an adult. I began to reflect on my greatest hits. It was like hearing your own voice on an answering machine, except instead of taking 30 seconds it seemed to take 30 years.

I now see amazing job candidates, some better qualified to run a business than I am, dismissed with the slightest gesture by some dude we dug up from LinkedIn. “Can you send us a few thoughts about working with Jerry?” we ask in a note. The message back makes the rest a formality: “Can I call you instead?”

When you’re younger, you never wonder what would be said about you in such a phone call. The whole world is a vast frontier, a life without consequences. You rage through it like an instinctive animal. If you think you’re good at something, especially at a software start-up, you let everyone know it.

But then you get to the end of the street and have to double back again.

All According to Plan: Redfin Launches Austin Service

Hooray! Eighteen months after launching our website and mobile tools for Austin, Redfin has begun offering Austin service from our own Austin-based agents. Now Austinites can buy or sell a home via a Redfin agent paid based on customer satisfaction, and armed with the latest technology for scheduling tours, pricing homes, optimizing listing traffic and collaborating throughout escrow. Working with Redfin, Austinites can also save as much as half the commission charged by traditional agents.

Austin should be a perfect market for us, with plenty of real estate innovators, lots of progressive consumers, lots of weirdness, and plenty of technology to boot. We like Austin’s size too, as Redfin has already thrived in places like Portland and Boston, where the territory is a little easier to cover.

Redfin’s Austin business is led by superstar Cyndy Stewart, who has eight years of local experience. Cyndy is building a team of four folks to serve Austin, covering all of Travis and Williamson counties, as well as the towns of Wimberley and Dripping Springs in Hays County, south of Austin.

In all of these places, we’ll continue to give customers a choice of partner agents, too, especially where we still aren’t local or when we get too busy. For most of Hays County as well as Bastrop County, we’ll rely exclusively on partners.

For us, combining direct and partner service is the only way to build a balanced business, able to serve new customers in any neighborhood at the drop of a hat, without hiring more agents than we can support year-round, through thick and thin. That hasn’t changed.

What is new with Austin is that we waited 18 months to hire our own agents. Waiting is much better for customers than the old Redfin model. For example, when we launched Atlanta the old way in December 2009, we hired one guy to scramble around central Georgia, which is about seven times larger than Austin.

That one Atlanta guy spent his life driving and hoping for more business. Since it took time for Redfin’s traffic to grow, we didn’t have enough customers to justify a larger team. But almost nobody wanted to work with an agent trying to cover all of Atlanta, so customers were hard to come by too. It was a classic chicken-and-egg problem.

The solution we developed for Austin is the chicken then the eggs, launching a website and monitoring the traffic before deciding to hire agents in force. We’ve always been clear about this plan in Austin, yet beginning first as a website that referred customers to partners naturally raised a ruckus among real estate brokers. It’s a privilege to be a broker in Austin, and to participate in the local Multiple Listing Service used to share listing data.

At a conference in Austin just a few months ago, some of Austin’s thought leaders asked me how can we claim to make real estate better if we’re just another online middle-man, coming between the agent and his customer? Everyone in technology worries Redfin  will simply be a service business, and everyone in real estate worries we’ll simply be a web business. The truth is that we go back and forth, not because we can’t make up our mind, but because it’s the best way for us to serve our customers.

We’ll see how it works out in Austin. I bet it’ll be a smash hit. If you’d like to meet the new Redfin agents or our long-standing Austin partners, we’re having everyone from the local real estate scene over for a little party on May 2, with lots of Redfin execs flying into Austin from Seattle, and an engineer or two as well. Welcome Cyndy and howdy Austin!

Never Tell Me the Odds

In a board call last month, I finally told everyone that the commission savings that Redfin offers home sellers and buyers dramatically lowers our profits margins and there is no evidence that it drives more revenue.

We have, I told our investors, given away $100 million because of my irrational belief that

1. Redfin was put on this earth to make real estate better, and that
2. One of the simplest ways to make real estate better is to give consumers more value.

The problem with the refund is that it’s like the tooth fairy: nobody really believes in it until a gift shows up under the pillow. The first act of a rational CEO,  I said, would be to keep the service exactly the same and eliminate the refund entirely.

The line was silent. Then Austin Ligon, the founder and former CEO of CarMax, asked an unexpected question: “Can you name a great consumer brand that was built by someone completely rational?”

I thought about one of my heroes, Ted Turner, who once broke through a stalemate with stunned Japanese businessmen by removing his clothes one article at a time. He publicly described TimeWarner’s decision to shut down CNN’s cash-hemorrhaging foreign offices as a clitorectomy.

I remembered that Nike was so committed to its athletes that it paid for Tonya Harding’s legal defense after her goons clubbed a competing figure-skater in the knee. I thought about Whole Foods’s concupiscent piles of fruit, which are, like someone you fall in love with, so much better than they have to be.

Wouldn’t a more calculating business skimp on the strawberries?

The problem with rational decision-making is that you can’t ask consumers to have an emotional connection to your company if you yourself aren’t guided by emotions. When the only basis of your identity is an elaborate calculation of self-interest, you have no identity at all.

Nobody cared about Han Solo until he rode after Luke into a snow-storm yelling “Never tell me the odds!” And nobody will care about your company if you don’t take a similar stand. This is why Steve Jobs hated the word “brand,” because Apple’s identity was an authentic expression of himself, not a calculated construction of the marketing department.

What this cynical, jaded, spun-out, over-hyped world is still famished for after all these years is a reason to believe. Belief is such a deep need that we find ourselves developing tearful, fierce relationships with silly little products and then feeling like dupes when we find out how cynical their manufacturers can be.

Our need to believe is why investment bankers, who are so good at making money as investors, are almost always terrible at making money as the CEOs of consumer companies. They always do the math.

The problem is, that I do too. It’s easy to be crazy, but not after you know you’re crazy. Why did Redfin go to the trouble of figuring out how many people the refund put off, and how many it drew in, if we were just going to ignore the result?

I don’t know. What’s really hard about this job is knowing when to be crazy and when to be calculating, because you can’t just be one or the other. It’s certainly easier to be calculating. It takes confidence to ignore numbers, to set aside focus groups and advisers, and do what you believe in, because then the only person you’ll have to blame for your craziness is yourself.

But if I met my old self, the one just starting out in a consumer Internet business, the first advice I’d give him would be: have the courage of your convictions.

We do this all the time outside of business, without thinking a thing of it. A lovely friend of mine once broke up with someone because he wasn’t a little crazy. How, she asked, could she be crazy around someone who was always totally, maddeningly normal? Then she said, “That’s crazy right?”

I told her it was the only completely sane thing she’d ever said.

You’re Invited! Atlassian Founder Speaks at Redfin on Starting a Company

Big news! Scott Farquhar, CEO of Atlassian, is coming by Redfin’s San Francisco office next Thursday, April 12, as the latest speaker in our series of brown-bag talks about how to start your own business.

Atlassian is the maker of JIRA and Confluence, software for teams building products. Scott and I got to know each other years ago, just before Atlassian started getting noticed as the most exciting company in enterprise software, with jaw-dropping performance:

• 47% compound annual growth rate for the last five years
• 40 straight quarters of profitability
• $100 million in bookings in calendar-year 2011

Scott’s story is unusual because he has had the guts to create a bizarre & wonderful culture, the endurance to keep at it for ten years almost entirely boot-strapped, as well as the courage to drive revenue through better products rather than by hiring salespeople — Atlassiann still hasn’t hired a single one.

What’s interesting to me about Atlassian is that Scott and his partner Mike were able to build one of the world’s best software companies from Australia, which is like trying to put together an Olympic ice-hockey team from Jamaica. There is plenty of amazing talent in Oz, but many are wrestling crocodiles or working for a bank, not joining startups.

On Thursday at 4:30, Scott is going to sit down with Redfin’s San Francisco engineering team for an informal chat. The public is invited, but please leave a comment on this post at least a day in advance to let us know you’re coming:

• Date: Thursday, April 12, 2012
• Time: 4:30 p.m. Pacific Standard Time
• Location: 88 Kearny Street, 13th Floor, San Francisco

Dial-in number: 866-625-9936
Participant code: 7809241#

We told Scott not to prepare any remarks, but the topics we’re likely to cover include:

• Where Scott and his partner Mike got the idea for Atlassian
• What they’ve learned along the way about starting and running a business
• How customers found out about the company, in the early days and even now
• What Scott likes best about Atlassian’s culture of innovation and how it has changed over time
• How the company has extended that sense of community out to its customers
• How Atlassian works together across continents and time-zones
• Why the company went so long without investor capital and what Atlassian gained or lost when it finally did raise money
• Any and all questions from the audience
• The difference between a wallaby and a ‘roo.

It’ll be a lot of fun! Like every Australian I’ve ever known, Scott is pithy, understated and kind. He is also unusually thoughtful about the whole process of coding software and building a business, so hopefully you can come out to hear what he has to say!

Multiple Offers: How to Win, When to Lose

It’s a jungle out there. In California last month, 74% of the offers submitted by Redfin agents on a property met with competition. In Washington DC, 51% of offers faced a bidding war.

The problem is inventory, with the number of homes for sale down 43% in California and 27% nationwide compared to last year, even as the number of new customers contacting Redfin in March is up 108%. The supply of houses for sale is now below six months – the threshold between a buyer’s and a seller’s market — in 13 of the 17 markets we could measure.

And the numbers for the overall market don’t even begin to capture how fierce the competition is for the most sought-after properties: houses between $300,000 – $500,000, and bank-owned homes that the listing agent has intentionally under-priced to create a bidding war. Small in-town constructions projects are also in high demand, even six months before anyone can move in.

This has created a new problem for Redfin and our home-buying clients, many of whom began the year assuming the market was on their side. The number of offers being signed by our customers in March was up 50% from this time last year, but our closings were up only 17%. The space between those two numbers is filled with a lot of heartbreak and frustration.

Since Redfin’s customer-satisfaction and profit targets depend on our being top-dogs in competitive deals, we’ve had to hustle together a 35-point agent training program for winning bidding wars. Now of course to have an advantage, you have to keep that advantage to yourself, so we won’t share everything we’ve got.

But since we also need to educate our customers as partners in the fight, and we hope to learn new tactics from this community’s comments, we are sharing our agents’ top-six tactics with everyone in Redfindia:

1. Data: arm yourself with information, about sale-to-list ratios for area homes and how many parties have bid on recent transactions. Be prepared for setbacks; in competitive situations, almost nobody wins his first offer – it’ll feel like the end of the world – but if you did win the first time, you’d just wonder if you overpaid. Just make the best offer you can without pushing yourself into an uncomfortable place. Sometimes that first offer will surprise you. But mostly, losing on the first or second offer is just an experience you have to go through for yourself.
2. Relationships: Research the listing agent by asking your agent to query Redfin’s Scouting Report or the local Multiple Listing Service for her deal history, just to understand how the listing agent prices homes – some use a low price to create an auction and others ask for top-dollar. Consider touring the home when the seller’s around, so you can charm her in person. If your agent doesn’t know the listing agent, try to get the two to meet at a broker’s open house. Your agent definitely needs to find out how the listing agent prefers to communicate, by telephone, in person or by email, so you and your agent can be Johnny-on-the-spot without being a pest.
3. Communication: Don’t guess which terms matter to the seller. Your agent can just ask the listing agent what it will take to win the deal. Sometimes sellers will take a lower price if the buyer can be flexible about the closing date, or promises an immediate inspection with no follow-on repair requests. And even if you can’t afford a high overall price, let your money talk, offering up as much earnest money as you can afford, to underscore that you’ll follow through on the terms you offered.
4. Offer presentation: Your agent should deliver the offer in person when time allows, although sometimes bidding wars happen so fast it’s more important to get the offer on top of the pile (sometimes this means going first, sometimes it means going last). It helps to have your agent summarize key terms as bullets in a term sheet, then present the purchase & sale agreement in a package with the term sheet as the first page. The terms that favor the seller should jump out. Include a cover letter about your personal history, with a family photo; if you plan to live in the home, say so. Conclude with your agent’s deal history, to demonstrate that the escrow process will come off without a hitch.
5. Financing: For the pre-approval letter, use a local lender who understands neighborhood price trends, preferably one recommended by the listing agent. You can even ask your lender to call the listing agent, to testify personally that your money is good. Address appraisal concerns up-front: many bidding wars result in a price higher than the appraisal value of the property, leading the seller to worry that the buyer’s bank will balk at the price. Get a pre-approval letter for the highest-possible amount you can borrow and, if you have the money for a larger down-payment, make it clear that you are willing in a pinch to borrow less and pay more to offset a low appraisal.
6. Planning ahead: Arrange an inspection in advance if that is customary in your market, just so you can reduce the number of contingencies in the offer. Think through how you’ll feel if you win or lose an offer, calculating what different prices mean for your monthly payment. On one hand, don’t pick a price so high you’ll wish you hadn’t won the deal. On the other hand, don’t pick a price so low you’ll wish you’d bid more. Ideally, you want to have no regrets if you get out-bid, secure in the knowledge that the other buyer paid a price that doesn’t make sense for you. And you want to be ready for any outcome, able to respond to a counter-offer confidently and quickly, guided by discipline rather than emotion.

That’s our list. What tactics have worked for other buyers and other agents? We’d love to hear your thoughts on what you’ve learned from wins and losses. And if you’d like to learn more about the competitive dynamics in your local market, especially for first-time home-buyers and investors, sign up for our new class, “Winning Against Multiple Offers.” If you don’t see a class offered for your area and you’d like to check one out, leave a comment below and we’ll hook you up as soon as we can get something scheduled.

How Much Does a Redfin Agent Earn?

To be the best brokerage, you have to hire and train the best agents. This is Redfin’s goal. In our mind, the best agent is the one who gives the best service, not gets the most clients. This is why we survey the past clients of every agent who wants to work here, to ask about his or her service. We only hire one out of every 25 agents we interview.

But how much do we pay the 25^th guy? If you give the best service, you should get the most money. So every year, we compare pay between the average Redfin agent and top-producing agents everywhere else. Here’s how:

• Full-timers only: We take all the agents in a market, and exclude anyone who only closed one or two deals as part-timers, dabblers, newcomers. In 2011, this was 43% of the work-force.
• Top 15%: Then we look at what an agent in the 85% percentile of the remaining full-timers earned in 2011 gross commissions before paying a desk fee or commission split to a broker like Century 21 or Coldwell Banker.
• 20% split: We assume each agent paid 20% of gross commissions to the broker and kept 80%. We call the 80% left to the agent his net commission. The last time we did this analysis, we assumed the agent kept only 70% but that was too low: top producers usually do better than that.
• Costs: Then, to calculate net pay, we subtract costs for health-care, gas, payroll tax, dues, phone bills and computer equipment. Redfin pays for all of this for our own agents. We assume that top producers do not have an assistant or a transaction coordinator, even though most do, and virtually all Redfin agents do. We assume that top producers buy mobile service and health-care at our rates, even though they can’t even come close, and we hold annual equipment costs at $1,000 even though this is less than the cost of a phone and an iPad, let alone a computer and a printer — all of which we provide to our agents.
• Compared to Redfin employees: Then we compare this to the earnings for agents who worked at Redfin for all of 2011, as reported by Redfin to the IRS. We include agents who led local teams, but not our field agents. Team leads still represent customers directly but field agents mostly work part-time to host customers on home tours and inspections when the customer’s agent is out of town or busy — a field agent doesn’t represent Redfin customers in a sale.

On Average, Redfin Pays 31% More Than the 85^th Percentile of Full-Time Agents
The results show that in 2011 Redfin paid well in many markets, and fell short in one or two.

Table 1: Pay for Full-Time Agents in the 85^th Percentile of 2011 Gross Commissions

To calculate a traditional agent’s net pay, we assume the agent had to bear the following annual costs:

Table 2: Expenses Borne by Traditional Agents

After analyzing these data, Redfin last month significantly increased base pay for our San Francisco Bay Area agents, as this market is more expensive to live in, and traditional agents there have recently made more money. My bad, Bay Area team.

And across California, DC and elsewhere, we expect that Redfin’s customer-satisfaction bonuses will be much higher in 2012, because 2012’s bonus for a happy customer is now much higher for agents serving high-end neighborhoods. My guess is that Redfin agent pay for 2012 will significantly increase in our most lucrative markets.

Forget the 85^th Percentile. What About the Typical Agent? How Much Does He Earn?
Comparing average Redfin pay to what traditional full-time agents earned in the top 15^th percentile is useful, but what about traditional agents in the 50th percentile? If you take all the agents who closed at least three deals in 2011 and line them up from highest to lowest gross commissions, the agent at the 50th percentile would be right in the middle.

We aren’t calculating net pay for this guy because he barely earns enough after his commission split to offset basic tax, health-care and transportation costs. Here are his commissions after his 20% split with the broker but before any other expenses:

Table 3: Net Commissions at 50% Percentile of Agents With 3+ Deals in 2011

The truth is that it’s tough to make a good living as a full-time real estate agent.

Most agents remember their best month and multiply it by twelve to calculate their annual pay, excluding all sorts of expenses. They remember their best year and assume the next will be even better.

In reality, real estate is such a hit-driven business that the top 15% changes significantly from year to year. If Redfin had looked at the top 15% of agents in gross commissions over several years, their average earnings would have been lower, for the same reason even a great baseball player’s lifetime batting average is worse than the best batting averages in the majors for any given season.

Redfin agents on the other hand do not prospect for business and so their earnings are less hit-driven. We tend to earn the same amount of money month in and month out, and year in and year out, with increases as we become more productive and the business becomes more profitable. It’s hard work, but it’s steady too.

What About Redfin’s Top Performers?
But even though every Redfin agent gets plenty of opportunities, some really stand out. Having compared the pay for an average Redfin agent with the pay for full-time agents in the 85th percentile and the 50th percentile, let’s account for the perks and promotions earned by some of our top performers. What do we pay our top 15%?

Our best folks lead teams, which boosts their pay on average by more than $20,000. Many folks who started as agents or field agents go even further, earning promotions to manage an entire market like Maryland or Washington DC. The guy who represented our first customers in Chicago now runs the whole Midwest. A transaction coordinator in Seattle now runs a $5-million business.

As Redfin grows, these opportunities will keep cropping up.

And every six months, we also distribute options to buy Redfin stock to the top 15% of our agents and other real estate staff, as measured by their customer satisfaction and productivity. For years, Redfin gave every real estate agent stock options, but as we’ve grown to hundreds of agents, we’ve limited the options to the top performers.

We hope that one day these options will be worth tens of thousands of dollars, becoming a significant form of compensation not accounted for in the table above, and taxed at a favorable rate.

Redfin is Hiring
But it’s not all about the Benjamins is it? I hope not.

Redfin is a mission-driven company. Our first value is that you have to work for more than just a paycheck, and you have to care about more than just yourself. In the dog-eat-dog world of real estate, Redfin wants to reflect the values of our best agents, and help everyone reach his full potential.

For now, we’ll continue to look out for the most talented agents, and we won’t settle for less. Redfin is certainly hiring fast — in the first three months of this year, Redfin hired 158 employees — but our revenues and profits would be much higher if we could hire even faster. As my old freshman roommate once solemnly explained to me, “I’d be getting a lot more action if I didn’t have such high standards.”

We’ll refer more business to partners than we’d planned until we can recruit the right agents to handle the load. My expectation is that we’ll hire at least 100 more agents by year-end, and maybe more. If you’d like to throw your hat in the ring, just apply here.

Roske Speaks: Redfin Should Be More Like Costco

Chris Roske, Redfin’s director of finance, recently sent me a letter explaining how Redfin should be more like Costco. I think the letter’s pretty good even though I disagree with a few points (Costco does send a ton of direct mail and I think its overhead costs for website development should actually be higher because this will deliver more customer value over time).

I asked Chris if we could publish his letter and he said yes. With his permission, we are removing one sentence about Redfin’s high-end listing business just because it has a lot of inside baseball, and another sentence about Costco’s supplier relationships that is probably sensitive to Costco.

When I asked for a picture of Chris to accompany this post, he said he doesn’t have one of just himself, without the kids. So you’ll have to take my word for it that he’s a very handsome man. Other facts to know about Chris:

• He told me when my first child was born that I should get pictures of him with Santa every year until we are 18. When my second child was born, he made a comment about the child’s name that persuaded us to change it.
• Even though Chris is our top dog in finance, he reviews phone bills, expense reports, invoices for unreasonable charges.
• Chris makes 100 suggestions per month about how Redfin could be better, and just about all of them are right on. He travels around the office with binders of materials that have every known fact about our business since inception, and shuffles through them to make his points. Often, the first premonition that I have said something wrong in a board meeting is the sound of Chris rifling through his binders. Do you know how rare it is to find someone nitty-gritty and strategic at the same time?

In short, we would be lost without Chris! I hope you enjoy hearing what he has to say about Redfin’s strategy.

*~*~*~*~*

From: Chris Roske

Sent: Wednesday, March 21, 2012 4:43 PM
To: Glenn Kelman
Subject: FW: Costco note

Glenn, I enjoyed your blog on Costco. I am somewhat passionate about Costco (my wife would not use the word somewhat) and feel in many ways that the more Redfin is like is Costco the greater our ultimate success will be. I think Costco goes beyond the customer experience. I think the key to their success is value and the trust that is developed by putting the customers interests first. I think Redfin shares many of these same traits and certainly is the standout leader in the Real Estate Industry and can be just as successful as Costco. I think the market value of both Redfin and Costco is based on the customers trust that has been earned and potential to earn it in the future. I apologize if this rambles but I love the fact we have a lot in common with Costco and I think we can still learn from them. I also appreciate the opportunity to share my thoughts with you and take this with a grain of salt as I have a bias (likely irrational bias) to how Costco operates. You do not have to reply.

My passion for Costco:  We own some Costco stock, first buying more than 20 years ago, and are a loyal customer. Because their value proposition is so strong they have insulated their business from the competition by keeping their business simple and their focus on value for the customer, I am confident the business will continue to create great value for shareholders.

Value: The reason I do not sell Costco stock is exactly the same reason I bought it back then.  It’s simple.  There is simply not a more efficient way to sell goods than their model and other retailers cannot match their ability to provide superior value to their customers.

Costco’s profit is basically its membership fees, as it essentially breaks even on the sale of goods. Thus, competitors who make their profit on the sale of goods always have to charge more in aggregate. Costco also has great purchasing power in that it limits the number of goods in a store.  This provides greater  leverage with supplier pricing as there is competition to get products into a warehouse.

Redfin perspective: We offer great value with the team approach and agents spending time working with customers, not marketing. This is a core value proposition and it is clearly a huge differentiator. The team approach is more efficient and gives us a huge advantage in the market.  Our ability to make our agents much more productive is the same advantage Costco has with its efficient warehouses. Redfin Open Book is another great opportunity to leverage our buying power with service providers to provide a benefit for our customers from both a quality and pricing perspective.

Trust: Costco strives to earn customers’ trust and all actions align with this goal. Costco does not sell anything unless it can offer a better value. It never markups any national brand more than 14% and limits the private label markup to 15%. Customers also can return anything. This provides customers with great confidence in purchasing at Costco. They may find an individual item less expensive somewhere else, but on a cart full of items, you are almost always going to be better off buying at Costco. Costco values customers’ trust so much that it is incredibly resistant to raising prices. If it raised prices just 2.5%, its profits would double and result in short-term increases in the stock price. However, if Costco had done this 20 years ago, I doubt the company would have the market value it has today.

Redfin perspective: Our 100% guarantee and no-commitment stance on working with us is similar to Costco. Our incentive pay does align the agents’ interest with the customer. However, our ability to create trust is much more difficult than Costco’s because it depends on individuals providing a service that is personal in nature. Our employee model gives us a great opportunity to be better than our competition by our ability to standardize best practices and not accept anything less to create this trust.  You have recognized that this can be a huge differentiator for us and the emphasis on training will help.  However , we need to commit to consistency of quality service across all markets. On the pricing aspect, no business is as disciplined as Costco and long-term Costco has certainly benefited by keeping price increases to a minimum. Costco also benefits from a pricing philosophy that is simple, consistent and transparent and it is important that Redfin remain committed to this.

Marketing: Advertising does not provide any benefit to the customer so Costco does not do it. It is a cost that needs to be passed onto the customer. Costco’s  marketing is usually limited to contacting employers to encourage employees to sign up for Costco memberships.

Redfin Perspective: This is a hard one because we originally adopted this stance but competition has forced us to use marketing and it makes sense for us. The event marketing is incredibly consistent with Costco because it does provide a benefit for our customers. I understand we need to let marketing do what marketing does but it is a different philosophy than Costco’s and can even reduce the customer or potential customer’s trust if this is abused.

High-end Customer: I think it has been very key to Costco’s success that it  was accepted by the high-end customer first. Costco got lucky in that they originally appealed to small business owners and once it was acceptable for them to shop for values in warehouse, it was acceptable for everybody and even became trendy.

Redfin Perspective: We have made some inroads but in my opinion, Redfin could learn from what I think has been a key part of Costco’s success. I know Redfin wants a standard level of service that is high for all customers, but let’s make it higher for higher-end buyers. A home-run customer experience gets shared and the power of our brand grows. If it can be cool amongst high-end buyers to use Redfin, we will find it easier for moderate-priced buyers to follow suit. It is much harder to go from the low-end market to the high-end. As you know, the Japanese auto companies created different brands because this is such a challenge and Windermere’s local significant market share can at least partially be attributed to the fact they started off serving expensive neighborhoods.

Expansion: Costco has always had a conservative approach to physical expansion. It typically owns rather than leases, looks at demographics and has a bias toward lower-risk infill over new markets. It also only goes into markets where the cost of building a warehouse is low enough to support its business model. It also often goes in to new markets with more than one warehouse or at least plans for more than one, to leverage its marketing efforts. Finally, when Costco goes into a market, it engages in pre-marketing with free memberships. It has also had success introducing ancillary businesses like travel, pharmacies and gas that encourage more visits and are consistent with its value proposition

Redfin Perspective: Redfin has followed Costco’s strategy of selecting markets and done a good job in going after more desirable markets first. The new strategy of ramping up our PR and Marketing campaigns as we enter new markets in order to make a bigger splash is consistent with what Costco has done. Redfin’s consistent value approach into ancillary businesses is similar to Costco’s.

Perspective on Overhead: Costco focuses on keeping costs to a minimum. It has modest headquarters, low marketing and basically tries to minimize costs that do not directly benefit the customer.

Redfin Perspective: Redfin does a good job on this  because you think it is important, however it is becoming more difficult as we grow. I am conservative and am concerned as overhead costs increase more than transaction growth.  I believe Costco would argue that despite its size ($89B), the business  is pretty simple and does not require huge overhead to manage.

Perspective on Customers, Employees and Investors: Costco values its customers first, followed by employees.  Its strives to deliver stockholders a attractive but not fantastic return. Everything flows from the customer value proposition. It takes care of its employees with higher pay and benefits, but expects more out of them than other employers. This higher pay makes it a desirable place to work. Further, there is a culture of hard work that permeates the organization and it rewards that hard work. Also, the lack of turnover is a huge competitive advantage in an industry that has high turnover. Finally, the goal for stockholders is a strong, consistent annual return which Costco achieves by growing profitability and revenue.  Given the loyalty of Costco’s customers, I am confident they will continue to deliver a strong return.

Redfin Perspective:  Redfin leads the industry in watching out for our customers. Our customers recognize that. I do get concerned when we spend time and resources on initiatives that don’t deliver value to our customers. As far as employees, like Costco, Redfin does a great job of providing benefits to a class of employees who normally don’t get them, of promoting from within and you clearly have the employees’ best interests at heart. The stockholder comparison is irrelevant because of our maturity, investors… but I think the fact the value of the company is based on customers trust that has been earned and potential to earn it in the future is a common trait between Costco and Redfin.

Thanks again,

Chris

Dang. That’s Fast.

In a real estate world suddenly frenzied with competition, Redfin just released Instant Updates, the first* major service for immediately alerting home-buyers about new listings and price drops. Now, 15 – 30 minutes after a real estate agent lists a home for sale, folks using Redfin to search for listings in that area will get an email alert. Users of any other major real estate website have to wait until the next day.

What does a day matter? Well, 17% of the homes that debuted and sold since the beginning of this year went under contract within three days of their debut. Giving our customers an extra day to get into the home and decide about an offer is a crucial competitive advantage, particularly when we now see home-buyers going door to door to ask if anyone in the neighborhood might be willing to sell.

To get instant updates, just click Email me new listings in the results box that appears on the left whenever Redfin presents search results in a map:

If you’re already getting daily listing updates, you can switch over to Instant Updates by opening the menu under your name at the top right of every page on Redfin.com. From there, just choose My Alerts & Emails:

Then scroll about halfway down the page, and change all your alerts from Daily to Instant:

And then brace yourself. New listings will start coming fast and furious:

You can always unsubscribe once you find a home.

You can get Instant Updates on individual properties too. If you mark a home as a favorite, you’ll get an Instant Update when the price changes, when it first goes under contract, and when it finally sells or comes back on market. We’ll also alert you if a Redfin agent tours the home and then shares her first-hand observations. Folks who are already using Redfin to track their favorite homes from day to day can switch to Instant Updates by accessing the My Alerts & Emails page.

How did we get so fast? Redfin was able to develop Instant Updates because we’ve made a massive investment over the past five years in direct, high-frequency integration with the local Multiple Listing Services real estate agents use to list properties and record sales. While other websites get partial or indirect access to some MLSs, only companies with real estate agents get full, immediate access to all the broker-listed homes for sale. As part of our commitment to getting data faster than just about anyone else, we tell the world exactly how often we refresh our listings, for every market we serve.

And as the web shifts from periodically updated pages to a continuous stream of new listings, prices and photos, the near-real-time data access Redfin enjoys as a market-maker is becoming more important. We expect over the coming year to deliver Instant Alerts through iPhone and Android alerting systems, and Facebook and Twitter timelines. I’m sure more real-time services will emerge over the next few years.

But as Redfin becomes a more frequent guest in your online life, we have to make sure we mind our manners.  Already, 264 customers have spent the past month helping  us design and test Instant Updates. One was able to beat out other bidders on a hot property because she heard about it first through Redfin. But mostly, we’ve been the ones who benefited: our customers helped us change up the subject line so that each update didn’t get bunched under one email thread, and asked us to allow different searches to send email alerts on different schedules.

The one request we didn’t address: a link that opens the listing in our iPhone and iPad apps, rather than in a web browser. That’s coming later this month.

For now, what I’m excited about is how Instant Updates change the speed of the game. In a world where a Las Vegas chef can now buy a fish from the Adriatic before the fisherman has even returned to harbor, it’s crazy to think that real estate updates have appeared like a 1950′s newspaper, queuing information into a new edition that shows up once a morning rather than in real time. Over the next few years, we hope that Redfin and other technology-powered brokers can help to make the whole real estate market better-informed, and faster too.

*Update: Sawbuck offered real-time alerts before Redfin did, as Sawbuck CEO Guy Wolcott kindly pointed out in the comments. When we get excited about being the first to offer a feature, we’ll check the Sawbuck site out first, just as we do the other big sites out there.

What’s Your Home Worth? Well, See For Yourself

For the past five years, Redfin has sought to build the perfect site for folks to preview, visit and ultimately buy homes for sale. But in 2012, we have opened a second major front, to serve owners and sellers of homes.

In just the past three months, Redfin launched Home Report, a personalized monthly email monitoring sales near your home, and Open Book, a reviews site for Redfin’s trusted real estate partners that will one day include handymen, general contractors and stagers. Not coincidentally, our listing business has shot up 81% year over year and we expect it grow even faster as we add more agents focused on listings, and provide better exposure for our listings on our own site.

The most important initiative on that front just became available on Redfin.com this morning: the revolutionary, beautiful Home Price Tool, which gives you as the customer the same information used by real estate agents to develop a comparative market analysis. Our hope is that you will be able to price homes more accurately and with greater confidence than ever before, in an open process that can involve your spouse or real estate agent.

For any home, the new online tool automatically assembles a list of potentially comparable recent sales, drawn directly from the Multiple Listing Service (MLS) databases used by agents to record sales. By reviewing pictures of each home sold, you as the customer can decide which are actually comparable, adding and removing sales to and from the list.

The Home Price Tool then calculates a likely price range for the home you want to buy or sell, allowing you to share your analysis with your mom, your Redfin agent, even with the other side in a negotiation. We just posted a YouTube video to guide customers through the entire process.

Sometimes, the price range will be broad, because the home in question is one of a kind. Other times, especially when the home is part of a larger development, the price range will be narrow. If your house includes, as mine someday will, a giant ping-pong pleasure dome, the comparables will be sparse and the price range will be very broad. This isn’t a limitation of the Home Price Tool; it is a limitation of life itself, and one serious buyers and sellers can’t ignore. You have to buy the ping-pong pleasure dome on faith.

We do not pretend that Redfin’s valuation tool is as simple or as immediately gratifying as seeing a price-tag on every property in America, a feature that Zillow has long had, and which Trulia — by some freak coincidence — also launched today.

Zestimates, restimates and testimates are popular and cool, and will always be included in our site for fun, but it’s a way we at Redfin can never go as real estate agents. Our goal is to be credible and transparent rather than provocative or easy, explaining exactly when our pricing is likely to be accurate and well-informed — and when it isn’t. If we think a home is worth $300,000 instead of $350,000, we should we be able to say exactly why, using the same Home Price Tool to show our work to our client.

Since we have a fiduciary responsibility as agents to get it right, we can’t embrace a purely algorithmic approach to pricing. A computer using a secret formula to price your home doesn’t have eyes and so it can’t see that one property looks nothing like another. You can say what you like about its estimate but you can’t really see what it’s thinking.

The truth is that pricing a home is not a science reserved for the high priests of mathematics. If you’ve walked through all the houses in the neighborhood and noticed what each sold for, you can price a home far more accurately than a computer simply because you have much, much better information.

This is the experience Redfin has tried to bring to the web, because in fact we have much, much better information. Only real estate agents have full and complete access to the local MLSs agents use to list properties and record sales. And only Redfin has incorporated that sales data, with all the pictures used to market the property, into an online tool for pricing a home.

Whereas public records takes weeks and usually months to record a sale, we know within 15 – 30 minutes of the property going off market what it looks like and how much it sold for. That we even have this information is because of a seismic turn of events in 2008, when the National Association of Realtors and the Department of Justice agreed that a real estate agent can publish any information on the web that she can share in person with her customers.

It took the MLSs a year or two to share all the data, and then Redfin a year or two more to incorporate that data from each MLS, but now that we’ve done it, customers on the web have access to the same prices and pictures that agents do, and we can all work together in a more informed way. Revolutions sometimes occur so slowly they hardly seem like revolutions, but this is exactly what the Home Pricing Tool is.

Over the coming years, we will work just as hard on perfecting the experience of pricing a home as we have at previewing listings. For now, take the Home Price Tool  for a spin and see what your home might be worth!

Growing, Fast and Slow

“Greed,” Gordon Gekko once declared, “is good.” Oliver Stone’s private-equity titan was referring to the process of creative destruction, in which ravenous corporate raiders strip a businesses to its bones in three months flat.

Venture capitalists have the same simple attitude toward growth: growth is good. Their fish of choice is not a piranha but a mola mola, a fish whose only defense against predators is becoming, within a year of birth, too large to swallow.

If the mola mola were a startup, its competitive advantage would be its business model, which is simply to grow faster than any other fish in the sea. This is what I’ve spent my whole professional life trying to do: hit $100 million in revenue within five years of founding.

But now I wonder if the fastest-growing business is the best business. Growth, to be sure, is still good and the time it takes a business to grow matters. But it still matters less than what you ultimately become.

In my experience, venture capitalists tend to focus on business models that can grow quickly. But for entrepreneurs, all the talk about business models — economies of scale, time-to-market, stock-price multiples, gross margins, network effects and expansion rates — is mostly a distraction from the long, lonely task of perfecting the customer experience.

Microsoft, for example, grew faster by building software that could run on a wide range of cheap computers, but Apple won by controlling every aspect of the customer’s experience, from the hardware to the software to the retail store.

Amazon beat eBay in the same way. Rather than hosting a purely digital marketplace with purely digital margins, Amazon selected, priced, packed and shipped most of the items for sales on its site.

While eBay sold everything from beanie babies to BMWs, Amazon launched one product category at a time, sometimes losing hundreds of millions on electronics or clothes.

Investors initially loved the network effects, financial performance and scalability of an auction site, with no warehouses, and no employees working as buyers and merchandisers. For five years, eBay’s stock surged past Amazon’s, giving Benchmark Capital a far better return on eBay than Madrona Venture Group got on Amazon:

But it turned out that customers preferred a well-run online store, with a wide selection of high-quality products that arrived on time. Amazon eventually pulverized eBay:

It is almost cruel to make the same comparison between Apple and Microsoft, but doing so just reminds us how permanent Microsoft’s advantage over Apple once seemed to be. The market initially loved Microsoft for its model of making software for a wide range of devices:

Microsoft’s model scaled better, but customers struggled to get Microsoft’s software to work with a wide range of hardware, a problem no one has had with Microsoft’s singular win over the past few years, the X-Box. And once the innovations shifted to the devices themselves, with new phones and tablets, the ability to pair hardware and software into a perfect customer experience propelled Apple past Microsoft.

The results have been shocking. In a graph comparing any other stock with Apple’s over the past decade, the other stock just looks like the x-axis:

Microsoft just has the misfortune of most often being the comparison stock.

Many people say Microsoft couldn’t keep up because it stopped developing innovative software after Bill Gates left, but the real problem has been that Microsoft’s software hasn’t been running on innovative hardware, because Microsoft lost control of half the customer experience. Whoever leads Microsoft back to greatness will need a mandate to use all of the company’s capital to start building its own computers, phones and tablets alongside an operating system

The moral of the story is clear. Seven years ago, any investor seeking to catch the nearest way would have cited the “business model” as the primary advantage that Microsoft had over poor proprietary Apple, or that eBay had over the laggards at Amazon’s merchandising groups and distribution centers. But entrepreneurs like Jeff Bezos and Steve Jobs only talked about the customer experience.

This focus on customer experience, not business model, was a lesson I first learned from a retailer. When I moved back to Seattle in 2004, investors loved to talk about Wal-Mart’s business model, which was open to every consumer and which sold everything. Wal-Mart was the mola mola of retail, with terrifying economies of scale.

That was the year I met Costco’s chief financial officer, to ask him about a company my friend and I wanted to start. The CFO graciously dismissed the idea in two or three minutes. As I prepared to go, I asked about Wal-Mart, and suddenly had the surreal experience of hearing a very conservative, middle-aged man explain to me how all that is solid could melt into air.

“Wait right there,” he said. “How do you feel when you shop at Wal-Mart?” Then he answered his own question. “Terrible.”

“What do you think it’s like to work there?” he asked. “Terrible.”

“And what do you think it’s like to be Wal-Mart’s supplier? Terrible.”

He talked about how many Costco stores have employees who worked there twenty years. He said that Costco sells the best products at the best value, which is a lot different than selling the cheapest stuff for even cheaper prices.

I later learned that Costco never likes to account for more than 20% of a supplier’s sales, to ensure that stocking decisions never jeopardize a supplier’s business.

“The Costco experience is a better customer experience,” he said. “And the better customer experience always wins in the end.” His focus on how a shopper felt in a store seemed painfully naive at the time; I’d just read a Business 2.0 article about Wal-Mart’s leverage over a pickle company’s pricing, about its technology for tracking every grape, its data on who buys carrots and kettle chips together. But this guy was talking about the shirt-pins Costco employees wear, the ones that say “Associate since 1992.”

All the same, the CFO’s conviction unsettled me. It was the first time I’d heard an adult insist that everything that seemed so permanent could change, and I’ve often reminded myself since what an essential quality of leadership this is.

So the next day I bought Costco’s stock. I held it for a few weeks, then lost track of why I ever thought Costco could beat Wal-Mart, and sold. This turned out to be a terrible mistake. Yes, Wal-Mart had been crushing Costco:

But now look at what Costco, with a bizarre business model that limited selection and required membership, did in the past seven years to Wal-Mart:

Businesses focused on the best customer experience rather than the best business model may appeal to investors less, because they take longer to perfect. But usually they win.

The same dynamic is why Facebook, which once grew a single college campus at a time, overtook the growth-by-spam model of MySpace. It’s why Twitter developed its own mobile clients, creating a better customer experience at the expense of the open model that drove its initial proliferation.

And it’s why the New York Times will beat content aggregators and link farms, why Uber will beat Taxi Magic, and why I hope Redfin, in the end, will be one of the most valuable technology-powered companies in our industry.