December 13, 2007

The Real Estate Scientist

Redfin is launching tonight The Real Estate Scientist, an initiative to use empirical techniques to improve the way our agents and clients buy and sell homes. We’re releasing our first report, which provides seven recommendations for home-sellers, and training our agents on the findings, which should allow us to have more informed conversations with our clients.

We developed this research because the housing downturn has made it harder to sell our clients’ homes. This in turn has made us more introspective about how we can use our special powers – our computer science background and our consumer commitment – to be the best brokerage, not just the best real estate website.

This has been a contentious process. At lunch we argue over the practical questions we have to address for our clients, like the best day to debut a listing or whether it’s really worthwhile to post an MLS property on craigslist. But why argue when you can experiment?

There are plenty of excellent academic studies of local real estate markets. And Redfin has data that most academics don’t: access to 17 MLSs with more than 250,000 listings, and a website used by hundreds of thousands of buyers every month.

We’ve tried to put this information to good use. We know that listings that debuted on Friday rather than Thursday drew 7.7% more visitors; that a vacant home increased the odds of a price reduction by 9.5%; that, because of how real estate websites filter on price, a listing priced at $351,001 got as much as 7.1% less traffic than one priced a dollar lower. A team of agents, engineers, statisticians and writers worked together to produce the report. Some of their findings are surprising, while others confirm conventional wisdom, which has value too.

We only worry that the name we’ve given this initiative, “The Real Estate Scientist,” will open us to being mocked. And too, we hesitated to give consumers simple answers due to the complexity of the underlying data. But in the end we chose the name because it was the one we had used all along, it was fun, and it was the simplest way to explain how our approach was different. We strove for conclusive answers because we have houses to sell every week, and customers who need straightforward guidance.

Consumers who have read early drafts of the report overwhelmingly found our recommendations useful and effective. The industry reaction will likely be different. Some will argue that the report substantiates already well-understood tactics, while others will take the exact opposite position, refuting our points one by one.

But the truth is that a discussion of how real estate brokerages can deliver better results, based on data rather than just opinion, is in everyone’s best interests. And the findings aren’t simply a prescription for how we’ll serve our customers, but the starting point for an informed conversation about pricing and marketing our listings. Hopefully you can contribute to this conversation too, suggesting future avenues for research.

And now we are going to be talking about the findings on “Today,” probably around 7:40 Friday morning. What fun! To get ready for the interview I got my first $50-haircut, by a young Albanian in midtown Manhattan who compared my current style to 1989 Depeche Mode, and suggested I try a different color. “Like blonde?” I said, intrigued. “Just not so gray,” she mumbled. Because I had 30 minutes before running for a train, she cut quickly, putting off a very stylish socialite who was demanding that her hair be wrapped for the ice storm.

And then it was exhilarating to run – really run – through the streets as the year’s first flakes fell and pedestrians looked up gratefully into the sky. On the sidewalks at nearly every corner, there was one guy pushing a salt spreader and, this being New York, another to stand there and tell him what to do.

I had a meeting in the coffee shop of a remote, pretty Connecticut town, covered in silence and snow. Now on the train back, a teenager next to me is reading an article entitled “Sex Snafus That Can Send You to the ER”; a culinary school student who cried after being short on the fare has asked if we could stay together through the connection; and a bald salesman has been eavesdropping on my cell phone conversations.

“You can’t live in fear,” he says, repeating what I just said when I hung up on my last call. Then he adds: “Guys like us, we’re not afraid.” I nod, thinking about the next day’s show. If only that were true!

November 19, 2007

Poor (in Tours) No More

Changes at Redfin have made all sorts of headlines this year, but the only change our customers really want from us is more home tours. Historically, the first four-hour home tour has been free, and the rest cost $250 up front.

One isn’t enough. We’ve never had a focus group where customers didn’t bay for more tours, while the interns heedlessly wolfed the catered sushi.

So in yet another mutation from the dainty little web company we originally imagined ourselves to be, we’ve now got a new proposal to run by you: quadrupling the number of home tours customers can get from us before paying any money.

Of course there’s a catch. In fact there’re three:

1. You have to be pre-approved to buy the places we’re touring: it’s ok to look, but let’s at least make sure we’re in the right ballpark.
2. The home tours last two hours, not four: most people want to see three or four homes in one go, not eight or ten.
3. For home tours #3 and #4, we take $250 per tour out of your refund: for someone who took all four tours, this would reduce the average refund from around $10,000 to $9,500, and only if you end up buying through Redfin.

After tour #4, you could still pay $250 up-front for additional tours.

We’re hoping this won’t screw up our per-transaction costs, mostly because the tours will be shorter, and asking for pre-approval letters from a lender will make sure customers getting a free tour meet us halfway.

We were thinking of giving this policy a try at least for the rest of the year, starting after Thanksgiving, but since the topic has been so controversial with customers, we thought we’d see if anyone had any refinements to propose first. Thoughts?

November 14, 2007

The Second Time Isn’t Always a Charm

Michael Arrington just posted onTechCrunch a Redfin essay arguing that venture capitalists put too much stock in an entrepreneur’s experience. Brimming with emotion, we saw that within seconds of publication, someone had already left a comment! What a thrill! We breathlessly opened the page to see what our first reader had to say:

“Stop with the guest posts. We only come here to hear from Mike and Duncan.”

Somewhere in Seattle, a small office became very quiet. Moments later, Michael put the hammer down with his special green font: “do you guys practice at being assholes or does it come naturally?”

Later, Guy Kawasaki posted his own version of the essay, prompting my second-favorite comment: “after 20 years of unfocused attention to my various start ups, I am now relatively broke. I mean the house is paid for, the kids are in private school, but we now fly commercial and sit in the back unless there’s a cheap upgrade.” It was written at 3 a.m.

(The National: Fake Empire.)

November 14, 2007

The Most Optimistic Place on Earth: CEO Camp

Draper Fisher Jurvetson hosted a CEO Conference Monday in Half Moon Bay. Just about all the CEOs in the DFJ portfolio were there, mostly to talk among ourselves about how best to stave off the usual fate, which is to lose a lot of money and then get fired.

And yet we all went into it with the unfounded optimism peculiar to California: as if we might find a new best friend, or start a religion, or get swept up in an apocalypse (fires, earthquakes, Internet bubbles) that no one could previously have been convinced to take seriously.

I went curious to see what CEOs as a group would be like, as if to see what I might become: I imagined a convocation of X-Men, each with her own freakish flaws and special powers, or of business-casual, bloodlessly suave Agent Smiths.

And there were plenty of both, more than can be described here in any organized way. An Israeli entrepreneur working on a top-secret project with Eastern European X-Box hackers complained that investors in his first business wouldn’t let him use the service he built to run porn. “But this time,” he promised, “lots of porn.”

In his keynote speech, Tim Draper made a plausible case for colonizing Mars, showed a photo that may have been of himself standing astride a slaughtered elephant, and asked the crowd to sing along to a song that he composed and performed. (When I later asked a DFJ partner about the song, he said, “Oh, I’m the drummer in Tim’s band.”) It made me wonder if every titan of venture capital is really just a camp counselor on steroids, nudging his little charges along on their projects.

I felt bad for the follow-up acts. A Chinese entrepreneur took the stage to boast that his countrymen were “the Jews of Asia.” A banker dusted off “Internet growth” charts from 1999. But then a CEO in a pastel tie and matching pocket square explained how he evaluated job seekers in terms of the way they made people feel, a leap of empathy and insight that it had never occurred to me to consider.

The folks running ad-driven sites clucked that big advertisers still don’t get it. And we all agreed that the real problem was that nobody can beat Google in direct response ads, while for the zillion-dollar branding campaigns, TV and radio still pack a bigger emotional wallop.

We competed to say how little money we spent and how few people we employed, which climaxed when a San Francisco entrepreneur said he rented industrial space in Potrero Hill for $2 a square foot — ten times less than Redfin pays for its truly vile south-of-Market office. On the phone later that night, Redfin’s HR swami talked me out of cutting everyone’s pay.

Things went downhill from there. Over drinks, a games entrepreneur boasted of receiving letters from men who lost their wives because they couldn’t stop playing his game, MechWarrior. “You have to believe they might be happier alone,” he said. I misheard a young lady complain about the person who “did her nails” and told her “I’d love to have that nose.”

A guy from Los Angeles in a Thriller-style leather coat told me his creative partner was Ashton Kutcher. An Internet media mogul said he moved to LA so he could feel like part of the entertainment industry but discovered that “down there, the bassist in a third-rate bar-band has more street cred than we do.”

Everyone nodded. We knew all about being nobodies. But then we all went to bed that night in a real hotel — not on some friend’s twingey mattress – kings of ridiculously small, ragtag empires that seemed for the moment as unprecarious and boundless as the sea.

(Thanks to DFJ for hosting the conference).

October 6, 2007

$549,999 is A Better Price for Your Home Than $550,001 (5% Better)

With more than 70% of home-buyers looking on the Web for real estate to buy, we wondered if it made sense when pricing a house to take into account the parameters used on most real estate search sites. For example, since every site lets folks filter on price in increments of $25,000 at lower price ranges and increments of $50,000 at higher price ranges, wouldn’t a property priced at $549,999 get seen by more Web shoppers than one priced at $550,001?

The answer is maybe, just a little.

How so? Enter Mose Andre, Redfin’s ace statistician, who analyzed the logs of the Redfin site to determine how often Seattle users of our site see properties in different price ranges, between September 10, 2007 and September 24, 2007. His findings:

• About 30% of searches don’t even filter on price. But the number of searches that don’t filter on price is exaggerated on Redfin’s site because Redfin.com price filters aren’t easy for users to find.
• For most neighborhoods, the maximum percentage of Redfin searches you are likely to lose by moving from one price band to the next is 6.5% . For most Seattle neighborhoods, this band occurs for homes costing more than $550,000.

Based on these findings, we would only recommend taking into account how search sites filter on price in cases where a property is priced very near one of the popular threshold amounts. In other words, if you were going to price a house at $570,000, you shouldn’t price at $549,000 just to have it show up in 6.5% more price-filtered searches; but we would consider it if you you were going to price a house at $551,000.

You can see how this plays out on Mose’s graph of search exposure and listing count for Bridle Trails:

The red line represents the percentage of Redfin’s Bridle Trails searches filtering on price that include Bridle Trails properties at different price points; use the numbers on the left axis to measure the percentage of searches that return a result at the prices appearing along the bottom axis. As you can see, less than 20% of Redfin’s Bridle Trails searches filtering on price include properties costing more than $800,000.

The black line represents the density of listings in the area; more precisely it is a curve fitted to the shape of a histogram representing the number of listings at different prices. You can use the numbers at right to track the number of listings at different price ranges. The most common price is the one where demand becomes scarce: $800,000.

The biggest drop in buyer exposure in Bridle Trails occurs at $550,000. One reason drops tend to occur at this point is that Redfin, like many other real estate search sites, only allows price filtering at $50,000 increments for prices greater than $500,000. So the first $50,000 steps are doozies.

Let’s look at a few more graphs, this one of Capitol Hill:

Here most of the inventory is clustered at a price just below $400,000, probably because there is a glut of condominiums on the market, and most of the price-filtered searches are in that range. There is a little hump around $700,000 for houses and townhouses in the neighborhood.

One more graph, this time for stuffy, old Queen Anne…

And here is a table of the price-points where the biggest drop in search activity occurs, and how large that drop is:

If you want to see how demand compares to inventory for your neighborhood, download a package of all our graphs for the Seattle area. If you want these graphs for another market like San Francisco or Boston, just let us know. Thanks to Mose Andre for the stats and analysis; if there are other analyses you’d like to see us perform, just leave a comment for that too.

Update: Mose cranked out some San Francisco graphs.

October 3, 2007

NOW IT’S PERSONAL… AND WE’RE NOT GOING TO TAKE IT!

Did anyone see today’s Wall Street Journal article by Bob Hagerty about Countrywide’s efforts to battle bad publicity? The cast of characters includes a former San Diego Chargers offensive lineman screaming “NOW IT’S PERSONAL” on a conference call with managers, an executive earning $120 million a year describing himself as a “poor kid from the Bronx,” and a former Clinton White House spokesman having this promise to Countrywide staff show up in the world’s most widely read business newspaper: “I have brought companies through the worst type of publicity.”

Every company has good days and bad, but it is hard to imagine two more different entities colliding than the sales-driven Godzilla of mortgage banking, Countrywide, and the self-effacing former head of the Journal’s London bureau, Bob Hagerty.

Our bonus link, in memory of the audacious Herbert Muschamp, is his review of the Seattle Central Public Library. The New York Times’s architecture critic died today at the age of 59. He describes the library as “a blazing chandelier to swing your dreams upon” (whereas the EMP is “like something that crawled out of the sea, rolled over and died”). You could tell that he must have known when he was writing about the building that it would be the last one he ever reviewed. I thought of his essay all the time during my pre-Redfin days of joblessness, spent mostly on the 9th floor of that library, with its view of the courthouse across the street and the leaves falling down in the middle of a crowded city.

And while we’re on the subject of libraries, a double-bonus link, to photos of the great libraries of the world, from a friend of Redfin.

October 1, 2007

What, Me Worry? Redfin in a Buyer’s Market…

This is shaping up to be the winter of our discontent. High real estate prices were once a threat to the middle class; now low real estate prices are a threat to the middle class.

Reporting last Friday that new homes sales’ hit a seven-year low, USA Today’s Noelle Knox quotes an economist as saying “this is just hideous.” The same day, House Intelligence’s Jonathan Smoke notes that transaction volumes would seem healthy if we could just forget the past five years.

Inman’s Glenn Roberts brings word that discount listing brokerage Foxtons may be filing for bankruptcy. TechCrunch highlights Realtors at each others’ throats. The Wall Street Journal somehow predicts the demise of an entire real estate-mad state. Yet online real estate startups have nonetheless banked $62 million of venture capital in the past four months.

So, are we worried? OF COURSE WE ARE (but hey, we always are). After increasing revenues nearly seven-fold over the first seven months of the year, our top-line is taking its first dip in 2007. It’s too early to tell if it’s the same seasonal lull we saw last year or Apocalypse Now.

Since we pay our agents a salary and a customer satisfaction bonus, real estate’s ups and downs can affect us more than a commission-driven brokerage. So like others in the industry, we probably always wish more people were buying houses.

And yet compared to other brokerages, Redfin’s business may thrive in the coming storm. After all, we’re at the beginning of one of the greatest buyer’s markets in U.S. real estate history, and Redfin is predominantly a service for home buyers.

As inventory piles up in every market, the voodoo promised by traditional agents offering private previews of their buddies’ listings doesn’t matter much to buyers anymore; consumers know that finding a home to buy has gotten easier, even as buyer’s agent commissions have increased.

What does seem to matter to buyers in a market like this are simple services performed very well: the zeal and skill to negotiate for the best home price, an area where Redfin and its clients have outperformed the market; as well as a commitment to making the whole process as well-informed, hassle-free and cost-effective as possible, where we believe our technology can empower customers to feel in control of a transaction they once found bewildering.

So while fewer people overall may be buying a house these days, we expect more of those people to buy through Redfin. And while tougher market conditions may be crunching margins at pure discounters (which we are not), Redfin can thrive as an online broker, using technology to lower our per-transaction costs and improve our service.

Over the longer haul too, the market hasn’t changed the fundamental dynamics driving our business: a generation of home-buyers that grew up with the Internet want data, not a sales pitch, and they feel most comfortable with a real estate agent who gets paid more when they are happy with the service they received, not when they buy a more-expensive house.

This doesn’t mean we can’t screw it all up. We may fail to build the world’s best MLS-powered search site, which is how we first develop a relationship with our customers. Or, as we grow, we may struggle in our mission to use a combination of technology and personal service to generate the best results for our clients, which is the ultimate arbiter of our success.

Startups are risky that way. But it’s comforting to believe that our fate lies not in our stars but in ourselves. If you have an opinion on how the real estate downturn will affect Redfin, leave a comment and let us know.

September 28, 2007

A Business Trip to New York…

Visiting New York always makes me feel like an impostor. Unlike everyone else here, I’m neither gritty nor suave. Yesterday, the subway broke down deep in the Bronx, and I looked so hapless on the street outside the station that a woman drove me over the Henry Hudson bridge to the A train, where a young stocking clerk felt obliged to tell me how to treat subway “predators” who “roam the A” (”like children, like people who are under you… because they ARE under you”).

Today started at a trendy Soho restaurant where all the media and publishing giants, in pink ties and striped shirts, spend an hour with the New York Times over a pastry. I had been waiting 20 minutes for a meeting. Two impeccably dressed men were shown to the adjoining table, and I perked up for some high-powered gossip. They surveyed the situation and murmured in French that they wanted to be moved. Of course, the waiter understood them too.

Somehow I didn’t feel put down until, responding to a welcoming gesture from me, one said in native American English, “We just want to move.”

September 20, 2007

If Craigslist Were Raising Money, What Would It Be Worth?

Zillow announced today that the real estate media company raised $30 million in a round led by private-equity firm Legg Mason. What’s interesting to us is how the world is reacting to one of the biggest venture investments since the 1990’s. Becky Buckman at the Wall Street Journal speculates that the valuation was $350 million, but without mentioning whether this includes the $30 million in cash.

Michael Arrington at TechCrunch is the only one to notice that Legg Mason was the same investor that led the other mammoth Web 2.0 investment this year, the $44 million round in Marc Andressen’s Ning from July 2007. VentureBeat reports the news on the heels of a depressing announcement that a 6^th-grader raised $6.5 million.

Seattle’s John Cook goes deep with a Rich Barton interview in which the Zillow CEO describes a money-raising effort that wasn’t an effort at all. What struck me most about this interview though was Rich’s reaction to Web 2.0 startups, which John described as trying to “build something very cheap with two or three engineers, you test it, you try to build it through a grass roots marketing campaign and then if it is successful, then you sell out, like Flickr.” Rich responds, “That is completely anathema to me.”

And we agree with Rich’s objections to startups that stay small so they can sell out early, having argued before how important it is for entrepreneurs to shoot the moon. But what if John had asked the question slightly differently, about startups that want to do something big, but don’t raise a lot of capital? This is Web 2.0’s $24,000 question. Can community — people selling dressers, taking pictures, arguing over Scientology — take the place that capital — sock puppets, fancy offices, huge financing rounds — once had in the ’90’s?

For all the baloney oozing out of warmed-over Web 2.0 startups, this was the one premise that seems really worthwhile and even precious: that we could combine existing web software to build sites where the people who use them create a lot of the value, all without spending too much money.

This has been on my mind ever since I heard Rich’s comments to a group of entrepreneurs in which he predicted that Wikipedia and Craigslist (first audio clip) would have to make a lot of money or lose to better-funded competitors. It was a fiendishly provocative statement, because those sites have special meaning to any Internet aficionado, which in turn probably explains why they have thus far flourished.

It still seems possible that a small number of committed engineers, supported by an enthused community of people, can change the world (you see this stuff on the back of cars – albeit never very nice cars – all the time). In so doing, the engineers can usually make money.

Zillow may of course have both a community that extends beyond the real estate industry as well as an unusually large amount of capital, but it’s the community — people talking about real estate on Zillow — that will drive their success, not the capital.

September 8, 2007

Redfin Hits The New York Times

The front page of yesterday’s New York Times business section discusses traditional real estate agents who are leaving the industry, those who have stayed, and — woo-hoo! — Redfin’s growth.

The article has been the #1 most-emailed business story, but in the general polls still trails an expose of microwave popcorn’s role in lung disease and a review of the great publisher Knopf’s equally great rejection letters to prominent authors (”This time there’s no point in trying to be kind…”), often written by Alfred A. Knopf or his wife, Blanche.