“The Internet-Empowered Consumer.”
There were lots of people throwing that one around in the late ‘90s. It was a thing.
Real estate leaders who “got it” would drop this on conference panels and such. We would all nod.
We were told that this newly-powerful person craved transparency and access, and once they got it, well… anything could happen — up to and including another term of the time: “disintermediation.”
Many thought these internet people wanted a deal. Because if they were doing all the work online, why should they pay 6%? It seemed like an obvious question with, for many, an obvious answer.
So we saw a bunch of fee-to-list and buyer rebate companies launch in the early 2000s based on this notion — YHD, eRealty, and others — and then, in 2005…
Redfin had (and has) killer tech. But what they really hung their hat on was lower prices — a low listing fee and a rebate to buyers. Their mission was (and is) to get consumers a better deal.
The industry’s reaction to this was ham-fisted and self-harming, ultimately provoking the ire of the Department of Justice, which filed suit against the NAR for policies that allowed MLSs to exclude “internet-based” brokers.
Nonetheless, eRealty and YHD went out of business, along with innumerable smaller players. Not enough internet-empowered consumers were taking the better deal.
OK. Whatever. It’s all history. But it places Redfin’s announcement on its Q2 earnings call last month that it is in the process of eliminating its buyer rebate in some context, and highlights a larger disconnect I’ve been thinking about lately.
Here’s how Redfin CEO Glenn Kelman explained it:
“On July 26, we eliminated the commission refund we offered homebuyers in 22 markets with few objections from customers or agents. If this pilot continues to be successful, we will eliminate the refund entirely as early as January 2023, improving full year gross margins in our core business by more than 500 basis points. In the nine small markets that already eliminated the refund in 2019, we kept taking share.”
This is a big deal. Redfin is eliminating a foundational element of its business and ethos. They are making this move out of financial necessity, which one can understand. If you’re losing money, stop giving money away.
But it’s the “with few objections from customers and agents” and “…kept taking share” parts that are interesting.
In essence, no one cares. Redfin was just leaving money on the table.
What gives? People don’t want to save money in a real estate transaction? They don’t find the amount real estate agents get paid repugnant?
Well, no, actually, they kinda don’t.
Over the past year, 1000watt has done a lot of consumer research — large nationwide surveys and small focus groups. We’ve explored the cost of real estate services from many angles.
Here’s what we’ve found: Very few people have a problem with how much real estate agents get paid. In fact, when we surveyed 1,000 recent buyers this year, only 46% “understood clearly” how their agent got paid at all. 10% (again these were recent buyers) had “no idea” how their agent was paid.
This pattern repeats itself over and over. Most people — who are now, in 2022, Internet-saturated — don’t think much about the cost of buying and selling. They have plenty of other concerns that rank higher.
But still. Very smart people are still making the case for a better deal. If you’ve never watched venture capitalist Alex Rampell’s 2018 talk, “When Software Eats the Real Estate World,” you should. The argument, made by a guy who’s likely got 50 IQ points on me, is withering. It makes sense.
But today, there are more Realtors than ever, FSBOs have never been lower, and — if historical patterns persist — commission rates will likely increase if we move into a true buyer’s market.
So what’s going on here? Why the disconnect?
Well, first of all, I think there’s always been a lot of foolish projection onto this consumer person we all talk about. Smart investors and entrepreneurs don’t seem to realize that when Dick and Jane, the first-time homebuyers, decide to go for it, they’re not interested in disrupting an industry. They just want a freaking home. And the well-worn path is the easiest way to get there.
I also think part of it is positioning and marketing. Redfin is keeping its listing discount, and Glenn Kelman talked about that in the Q2 call too:
“In the markets where we came back to advertising the 1% listing fee we charge our move-up customers, new Redfin listings in July grew ten points faster than the market overall.”
Redfin started this campaign a few years back and it moved the needle. “1% listing fee” billboards are all over my town. It hasn’t taken low-fee brokerage truly mainstream (Redfin reported .82% national market share in Q2, 17 years in), but it does land relatively well with prospective sellers.
Why? Because it’s simple.
I tend to think marketing is everything. It’s not, of course. But it can make or kill ideas.
Redfin may be throwing in the towel on the better buy-side deal, but I don’t expect that new entrants won’t keep trying.
One of them may yet get The Consumer to care.
Have a nice weekend.