The Heat Is On: A Response to Sam DeBord

I know, I know… another post about Redfin… that isn’t Part 2 which deals with the impact on parts of the industry that aren’t brokerages. But I’ve been busy, and still thinking through the impact on MLS, Associations, tech vendors, etc. In the meantime, my good friend and regular guest contributor to this blog, the Notorious S.A.M. DeBord wrote an excellent post, in which he throws some cold water on what he believes to be my overly optimistic view of Redfin.

I promised to respond, so this is a relatively brief response on his massive and entertaining post. Go read the whole thing if you haven’t already.

His main points are:

• Redfin’s per agent productivity numbers are lies, damn lies, and statistics.
• Redfin’s volume numbers are misleading, and it isn’t anywhere close to being a top 5 brand in real estate.
• Zillow is not a good comparable for Redfin
• If Redfin is an agent team, then other agent teams are better, and brokerages can compete
• Can Redfin grow its agent base enough to deliver high levels of customer service, like a traditional brokerage can?

There are other minor points, like Redfin’s dependence on web traffic, which can be flipped on its head, which is… well… a stretch. I mean, hell, someone could invent a far better search engine tomorrow and kill off Google. That too would be disastrous for Google.

So let’s deal with the major points.

Agent Productivity

Sam starts off by claiming that Redfin’s agent productivity numbers are bunk, because there are “showing agents who are contractors, and transaction coordinators who carry the sales through” and “we don’t know how many licensees touch the transaction.”

Two things about this.

One, it isn’t as if other brokerages include their showing agents (and traditional agent teams and brokers use those all the time) or transaction coordinator numbers in their per-agent productivity numbers.

Two, I will bet my next month’s income that Redfin doesn’t have large number of agents who do ZERO production in a month like so many brokerages do. Ask any MLS CEO and he’ll tell you that somewhere between 50% and 60% of his subscribers do ZERO production in a given year. The reason is simple: traditional brokerages are in the recruiting & retention game for headcount; agents are not a workforce for them — they’re customers, who often have to pay a bunch of monthly fees to remain “employed” by the brokerage.

Redfin is not. They pay their agents a salary, plus a bonus, plus pay their expenses. Of course they’ll have fewer agents, and their per agent productivity number will be higher.

Volume Numbers are Misleading

Actually, Sam confuses categories here in criticizing my analysis.

I use the RealTrends 500 report, compiled by Steve Murray and team at RealTrends for the last 30 years. It’s the only report of its kind in the industry. Those are self-reported numbers from brokerages, not brands or franchises.

So when Sam talks about Coldwell Banker which did $166 billion as a national franchise brand, or Century 21 or Keller Williams or any of the franchise brands, he’s comparing apples to oranges. RealTrends doesn’t compile those numbers. And I didn’t claim that Redfin was the #5 brand, but the #5 brokerage.

Plus, Steve Murray and his team can only publish numbers that brokerages send them. If Windermere refuses to send that information, they can’t do much about it, in exactly the same way that Redfin was never ranked because they never reported.

Based on the information available to us today, Redfin would be the #5 brokerage on the RealTrends 500 by sales volume. That is indisputable.

Zillow Is Not a Comparable

To be frank, I don’t even understand Sam’s refusal to use Zillow as a comp here “because their revenue models are different.”

I mean, sure, Sam’s correct that Wall St. often doesn’t understand intricacies and details in the real estate industry. But what’s that got to do with what I wrote, where I clearly said, “let’s just take one stat: web traffic?”

When it comes to website traffic, as my list of the top 10 websites showed, the business model of the underlying company is completely irrelevant to how many unique visitors go visit that website. Note that Re/Max is #9 on the list of top real estate websites. Surely he’s not suggesting that people shouldn’t use Zillow as a comp for the purpose of web traffic growth?

If Sam is arguing that Wall Street investors should not use Zillow as a comp for Redfin, sure, I can agree with that. They’re smart guys and gals over there making millions of dollars a year to come up with the correct comp for pricing Redfin. They’ll figure it out.

And they might be well-served reading my previous post on Redfin’s revenue growth projections. See how that comps out. (Hint: better than Zillow….)

If Redfin is an Agent Team…

Sam asks why investors wouldn’t pour money into Ben Kinney Companies, which I mentioned in the previous post. I say, I don’t know if Ben’s gone looking for money. Maybe they will if he does?

Furthermore, Sam misses an important point when he asks, “So if Redfin is a team, and investors are willing to keep ponying up cash, is the value of this team actually in its systems and not its agents?”

Because my point is that Redfin is an agent team where the “super agent” is not a human being with deep networks and huge database of past clients, but a website that generates 60 new qualified client leads per 100,000 unique visitors.

Which then leads to the mistake about brokers competing with Redfin the Team:

It’s possible that brokerages aren’t building well-oiled teams quickly enough, and Redfin will catch up with them. So far, though, it looks like brokers who are embracing teams—and paying them hefty commissions splits–have a pretty good idea how to compete. Brokerage margins may be slim, but they’re better than Redfin’s.

First of all, brokerages don’t build well-oiled teams quickly or otherwise. Agents do.

Second, brokers who are embracing teams and paying them hefty commission splits are losing their ass on those same teams. As Brian Boero once put it, “Agent teams are eating the brokerage from within.” In some cases, brokerages lose money with each transaction that an agent team does, but they hold on to them to get ancillary revenues (e.g., title and mortgage) and to get market share numbers to attract less-stellar agents who are on lower splits. Don’t take my word for it — go read the earnings call transcripts from Realogy, the only publicly reporting brokerage in the country.

If that’s competing with Redfin, I think Glenn Kelman will be extraordinarily happy about that.

Third, brokerage margins are better than Redfin’s? Which margin? Net profit margin? Or Gross Profit Margin (aka, Company Dollar)? If the former, well, I guess you can also say brokerage profit margins are better than Uber’s. Ignore the fact that part of the reason is that Redfin is pouring money into things like technology investment and marketing.

If the latter, Redfin’s posting 31% gross profit margin (and that’s including things like cost of home tours and marketing a listing under cost of revenues). What are traditional brokerages posting? The numbers I’ve seen look more like 10-15% gross profit margin (company dollar).

I’d love to know in the comments if your brokerage is posting gross profit (Company Dollar) margins of 31% or better.

Can Redfin Grow Its Agent Base to Provide High Levels of Service?

I get where Sam’s coming from here. Redfin has to employ human beings, who can’t be in two places at once, and can only do so much. But I think he’s barking up the wrong tree. Because Redfin is already beating traditional brokerages at the high levels of service game; their whole company is founded on the principle of providing higher levels of customer service. That they’re not always perfect every time doesn’t change that.

For example, Sam writes:

Can Redfin grow an agent base that keeps customers “just happy enough” because they value its tech and discounts? Call it anecdotal, but in Seattle, we hear repetitive stories about overextended agents and frustrated customers. Redfin is, respectably, open with their agents’ reviews.

I’ll see your anecdote and raise you actual evidence, Sam. From the S-1:

[We] earned a Net Promoter Score, a measure of customer satisfaction, that is 32% higher than competing brokerages’, and a customer repeat rate that is 37% higher than competing brokerages’

How many brokerages even use Net Promoter Score? For that matter, how many even measure customer satisfaction on a regular basis using whatever tool? For that matter squared, how many agents at traditional brokerages are compensated even in part on customer satisfaction ratings?

Furthermore, the idea that traditional brokerages only have great agents who “work with anyone, often even at a loss, because their friends are referrals and eventually they’ll transact again” is contradicted by not only the experience of Realtors and brokers on the ground, by not only the experience of pissed off consumers who hate their crappy real estate agents, but by the DANGER Report commissioned by NAR itself.

You hear repetitive stories about consumers frustrated with Redfin agents in Seattle? Oh boy, you should hear some of the repetitive stories from around the country about consumers (and Realtors!) frustrated with non-Redfin agents….

This is not to say that Redfin won’t have to deal with serious problems in finding and retaining good agents who don’t mind being on a salary. They say as much in their risk factors. But you do get a hint of the future from the S-1 itself:

About 60% of our lead agents were previously real estate agents, with the other 40% largely coming to us from customer-service industries like retail or hospitality. Data guides our hiring and management decisions, as we’ve analyzed which industry hires outperform those new to real estate and what level of prior experience is correlated with long tenure at our company. We measure agent performance in detail and give managers access to this data in real time, so we can quickly intervene when our customer service falls short.

40% of Redfin’s lead agents are coming from outside real estate, like retail and hospitality. Meaning, that amazing shoe salesman at Nordstrom’s might be a Redfin lead agent in a couple of years. As the retail sector continues to get hammered, is it that crazy to think that some of those people who have been trained in world class customer service might migrate over?

Adapt, Or Perish

I do agree 100% with Sam when he says:

Brokers should keep an eye on what’s working in Redfin’s model, and either adapt parts of it to their own businesses, or define themselves with a distinctly different or superior value proposition. If it’s not defensible, it’s susceptible to being replaced.

Yes, brokers interested in remaining in business should absolutely adapt parts of Redfin’s model to their own businesses. Or figure out a superior (or at least differentiated ) value proposition.

The problem is, traditional brokerages are not in Redfin’s business. They’re in the recruiting and retention business. Their agents are in Redfin’s business, of helping people buy and sell homes. Now they have some unique value propositions compared to Redfin, and oftentimes, superior value propositions compared to Redfin. But their brokerage who “employs” them have very little to do with either the unique or the superior value propositions of these agents.

Brokerages can change that. They can evolve. They can adapt. I’ve already spoken to a couple who are taking this seriously and interesting in doing just that.

But it isn’t going to be a painless process, and brokers who are interested in survival need to rethink just about everything.

OK, that’s enough for now. I promise: my next post on Redfin will be about its impact on organized real estate and technology.

-rsh