The Impact of Redfin Post-IPO: Part 2 — MLS & Associations

I have to be honest here. I thought this post would be easy to write after Part 1, where I talked about impact on brokerages. Turns out not to be the case.

There are several reasons why, but the biggest is that there are a lot of “if-then” branching scenarios that made me get into some game theory for a while. Plus, organized real estate is really, really complex. It’s not clear how the various players would react.

Nonetheless, in the vein of “crappy product shipped is better than perfect product on the drawing board,” I figured I should just think out loud with everybody and take my lumps where I’m just misguided or wrong.

So let’s do this together, shall we?

A Little Bit of History

Where I began thinking about all this is to look at Redfin’s origins and history.

We know that Redfin began, as so many of these tech companies do, from the frustrations of the founders. This is from Wikipedia:

Redfin was founded in 2004 by David Eraker, Michael Dougherty, and David Selinger. David Eraker, who had dropped out of the University of Washington’s medical school for a career in software design, was inspired by his own real estate misadventures and founded Redfin with hopes of upending the traditional brokerage model.

We also know that in the early days, Redfin was met with immense resistance and outright hatred. To be fair, Redfin’s attitude out the gate was one of confrontation as well, but still, here’s Glenn Kelman testifying before the House Subcommittee on Housing and Community Opportunity in 2006:

Competing agents have threatened us with violence, intimidated our customers and tried to block their offers. Sixty-three percent of our customers report meddling from other agents, who in the absence of clear consumer law make up grade-school legal mumbo-jumbo to scare our clients. One customer was so upset by an unsolicited hostile call from a competing agent that he sat on the kitchen floor and cried. Many agents have told our clients that the sellers would never see their offer because it came from Redfin.

We expected a competitive, even combative, reception from realtors, but the impunity of those in this self-regulated industry has still come as a shock. We’ve drafted complaints to state real estate commissions, only to learn that the commissioners worked for the brokerages we were complaining about. It has been like a Western where the cowboy promises to report the desperadoes to the sheriff, only to have the desperadoes whip out their badges.

We posted the photos of agents hostile to our customers on a Web site we called the Hall of Shame, only to have agents immediately apply to appear there. Perhaps no one is surprised that realtors would damage their own clients’ interests by discouraging Redfin offers, but that agents are proud of this fact makes it plain this industry has failed to regulate itself. [Emphasis added]

Much has changed since 2006 when Glenn begged Congress to pass legislation “to allow consumers to pursue the best deal without fear of realtor retribution, and to protect consumers’ access to data, so they can make free, informed choices.” Redfin played a big role in those changes, including the NAR-DOJ Antitrust settlement.

Congress never passed any legislation in 2006, including calls to make the MLS a public data utility, but the threat of such things (as well as the DOJ lawsuit) brought massive and fundamental changes to the real estate industry.

If the Past is the Past…

Since then, Redfin seems to have settled in a bit, not asking Congress for new legislation (that I know of), and has even become something of a defender of the brokerage against the portals, like Zillow.

And in the S-1, Redfin discusses the MLS as “risk factors” for its business:

Our ability to attract consumers to our website and mobile application is heavily dependent on our timely access to comprehensive and accurate real estate listings data. We get listings data primarily from MLSs in the markets we serve. We also source listings data from public records, other third-party listing providers, and individual homeowners and brokers. Many of our competitors and other real estate websites also have access to MLSs and other listings data, including proprietary data, and may be able to source listings data or other real estate information faster or more efficiently than we can. Since MLS participation is voluntary, brokers and homeowners may decline to post their listings data to their local MLS or may seek to change or limit the way that data is distributed. A competitor or another industry participant could also create an alternative listings data service, which may reduce the relevancy and comprehensive nature of the MLSs. If MLSs cease to be the predominant source of listings data in the markets that we serve, we may be unable to get access to comprehensive listings data on commercially reasonable terms, or at all, and we may be unable to provide timely listings to our customers. [Emphasis added]

So at this point, I think one is completely justified in thinking that Redfin has joined the “brokerage sphere” (to borrow a phrase from Sam DeBord) and doesn’t want anything to change.

If that’s the case, then honestly, I don’t see any changes to MLS and Associations from a supercharged Redfin.

For one thing, there isn’t very much that the MLS/Association can do to Redfin. As unrealistic as the whole “Don’t send our data to Zillow” thing is, it is at least within the realm of possibility for MLS to do. But there’s nothing that the MLS can do to Redfin, a full participant under every definition of the term.

Any rule change that the MLS tries to do can’t apply just to Redfin, but to all brokerages, and I can’t think of one that would hurt Redfin but help traditional brokerages. Get rid of IDX? Maybe — but then, by law, you can’t touch VOW, and Redfin already does more with VOW than just about any other brokerages I can think of.

There are some long-term implications, which I’ll discuss below, but those are all so speculative as to be Black Swan worthy.

That’s if the past is buried in the past.

On the Other Hand…

There is, however, the possibility that the past is not merely the past. It is not forgotten by the people at Redfin, and those battle scars from their early years remain with them. To borrow a phrase from Stephen King — which is going to become a lot more popular when the movie comes out — Redfin has not forgotten the face of its father.

I say this because in the S-1, Redfin included a Letter from the Team. I don’t know how usual this is, but I know I’ve never seen it. In this letter, Redfin writes:

This prospectus will tell you what we do: our company runs a website to show people homes for sale, and employs our own real estate agents to help people buy or sell those homes. This letter tries to explain who we are.

We think of ourselves as idealists, who got into this business to make real estate better for consumers, not just ourselves. Our ideals are important when we want to earn customers’ trust: to take our advice about walking away from an easy sale on the wrong house or about paying more in a bidding war. At a time when our customers are hauling everything they own across the country to start a new family, a new job, a new life, what they most need us to be is completely on their side.

And this is our mission, in a sales-mad, baloney-gorged world, to be the truth-teller, the fee-squeezer, the game-changer. Our idealism may not benefit stockholders over months or quarters, but we believe that over years and decades it will deliver the best results. [Emphasis added]

Huh. So Redfin has held on to its idealism all these years. They call themselves “rabid squirrels” with pride, and talk about being the “truth-teller, the fee-squeezer, the game-changer.”

And then we have this amazing post from Glenn Kelman in 2014, in which he talks about why the real estate industry is taking so long to change. Read the whole thing. But the part that spoke to me is this:

The portals have built a magnificent national destination for real estate data that before was mostly only available on local sites. Their customer however is not the consumer but the traditional real estate agent, who pays as much as several thousand dollars a month to appear on a portal. The technology cavalry has come at last to real estate, but not to lower prices or improve service.

No one can blame the portals for building an audience rather than building a better service for that audience, but we shouldn’t mistake one goal for the other. Rather than eliminating the middle-man from real estate, these portals add a middle-man, coming between traditional real estate agents and their clients. The portals’ impact may be to increase, not decrease, the money spent in real estate on marketing, competing for home-buyer traffic primarily with brokerage sites, not with newspapers or other media companies.

The buyer’s agent the portals recommend is often, understandably, the highest ad bidder not the best agent. The data the portals publish about the homes listed for sale by an agent are often spottier and less comprehensive than what local brokerage sites like Redfin or Windermere publish.

Now as these portals seek to become the face of the market, with a one-year, $110-million advertising blitz unprecedented in real estate, the prospects of fundamental change would seem to dim. At industry conferences, the portals promise never to challenge the business model of their customers, the traditional real estate agent, saying that any company using disruptive technology to offer consumers better value is doomed to fail. [Emphasis added]

Earlier in that same post, Glenn talked about how technology has increased U.S. worker productivity by 35%, but the productivity of real estate agents has fallen by 30%. At the same time, the amount that consumers pay real estate agents has gone up by 34%.

So he concludes that the real estate industry is “the rarest and most persistent of free-market paradoxes: an industry of pure misery, where the consumer overpays, as much as twice the fees of Europe, but the service-provider is underpaid.”

Finally, we have this tantalizing hint from the S-1, which I briefly mentioned in Part-1:

And we’re just getting started. Because we’re one of the only major brokerages building virtually all of our own brokerage software, our gains in efficiency, speed, and quality are proprietary. Because our leadership and engineering teams have come from the technology industry, and have structured the business to invest in software development, we believe those software-driven gains are likely to grow over time. And finally, because we hire our own lead agents as employees, we can set data-driven best practices for selling homes, with our software tailored to those practices, creating a positive feedback loop between software and operational innovations that we believe differentiates us from traditional brokerages. Moreover, we believe listing more homes and drawing more homebuyers to our website and mobile application will let us pair homebuyers and home sellers directly online over time, further improving our service and lowering our costs. [Emphasis added]

Putting all of that together in my Lab of Paranoid Fantasies, I wonder if there really would be no impact.

In the short-term, sure, no impact. Over the long-run? Not so sure.

Let’s get speculative, shall we?

The MLS

The first place I start from is to take Glenn & Team seriously when they say they are idealists, rabid squirrels, and that their whole mission is to be truth-tellers, fee-squeezers, and game-changers.

We all know that Redfin debuted as a tech-enabled discount brokerage, and we all pooh-pooh’ed them. “You get what you pay for!” is a common refrain. We now know that the Redfinians almost take it personally that consumers pay through the nose for real estate brokerage services: “an industry of pure misery, where the consumer overpays, as much as twice the fees of Europe, but the service-provider is underpaid.”

If you’re Redfin, and you’re all about helping consumers not overpay, you have a real problem. You can cut your own fees to 1% to list a home, but you still have to pay the cooperating compensation or your client’s home won’t get shown. And sure, saving 2% is not chump change, but it’s not a game-changer to go from 6% commission to 4% commission. And Redfin doesn’t control that other 3%.

Unless… there is no cooperating compensation to be paid at all.

If Redfin can double-end the deal — that is, bring the buyer as well as the seller — then Redfin can really save the consumer some money.

That’s where that phrase “let us pair homebuyers and home sellers directly online over time” becomes so intriguing.

Imagine you’re a Redfin seller client. You have your house listed for 1%. You have two buyers. One is with Redfin, and the other is with Keller Williams. If you take the Redfin buyer’s offer, your total commission is 2%; take the KW offer, and it’s 4%.

As far as I know, there isn’t a damn thing the MLS can do about this. This isn’t pre-marketing; the listing is in the MLS, active, with a cooperating compensation amount in it. But Redfin’s listing contract specifies a lower commission if the buyer is also a Redfin buyer.

But now, imagine this scales, because Redfin will scale. Instead of 2% of market share, Redfin is at 10% market share. The impact on the MLS will be huge. The pressure from the other Participants, who are now under massive price pressure, to Do Something About This will be enormous.

I suspect that more than one MLS will try all kinds of policy changes to put a stop to this… to little avail, and quite possibly, to serious liability and antitrust inquiries from the authorities.

More long term, check out this passage from Glenn Kelman’s 2006 testimony:

The industry consists of small businesses: the size of the multiple listing service, not of the brokerage, is what matters. Each listing service enjoys a virtual monopoly in its area, and every mom-and-pop brokerage has little choice but to join this monopoly.

The context here is that Glenn was countering the argument from Realtors who oppose additional legislation, that argument being that the real estate industry consists of small businesses.

Today, in 2017, Redfin enjoys a competitive advantage over Zillow and other portals because of that local monopoly. Ten years ago, Redfin wanted to bust up that monopoly and force it to be open to all brokerages.

I do wonder if the rabid squirrel idealists are now happy with the 750 local monopolies, or if they would much rather see something more… ah… governmental in nature.

The Association

There are two things to think about here.

First, I don’t know if Redfin loves the Association of REALTORS. I honestly don’t. Historically speaking, Redfin was fighting the Association, but those days are past. I do know that I rarely see Redfin people volunteering at local Associations. I do know that I haven’t seen Glenn Kelman at NAR events talking about the value of the Code of Ethics. But absence doesn’t necessarily prove anything.

We do know that Redfin agents are Realtors where they need to be in order to access the MLS. We know that Redfin hasn’t challenged that rule. Will they challenge it someday when Redfin is a $6 billion behemoth with 25% market share? I have no idea.

I do imagine that the whole “culture of frugality” that reigns at Redfin combined with the fact that Redfin reimburses their employee agents for things like MLS and Association dues suggest that perhaps they could see a ton more efficiency if their agents didn’t have to pay the $900+ in annual Association dues.

But who knows? Maybe Redfin is different now.

Second, Redfin’s entire model necessarily leads to fewer real estate agents. They have salaried agents who are far more productive, whose expenses are paid for by Redfin, rather than 1099 hope-filled agents who shell out thousands in dues, MLS fees, desk fees, etc. etc. hoping to do one deal to pay for it all.

So if Redfin gains market share — as it must in order to be successful — that market share comes from somewhere. Specifically, it comes from agents at other brokerages who will have to have fewer clients in order for Redfin to have more. (Remember, real estate is a zero sum game where the total market is determined by macroeconomic factors.)

Question is, will those agents who went from doing two deals a year to none… will they stay in the business? Will they keep paying the annual dues of Associations while earning nothing? And if so, for how long?

The 1.2 million REALTORS thing is based on an industry where most of them are unproductive, but still pay various fees and dues to various entities. Does that still hold if Redfin grows and gains significant market share?

Some Small Changes to MLS

Having said all that, I do think that we will soon see changes to the syndication policies of just about every MLS out there. I said as much in Part 1 where I wrote that brokerages will suddenly find that Zillow is their best friend.

Maybe it’ll take some time, because brokerages and MLS leadership have spent the last ten years thinking that Zillow is the devil. Meanwhile, you have Glenn Kelman straight up saying that Redfin wants to disrupt the traditional brokerage and that these portals have sworn “never to challenge the business model of their customers.”

I think brokerages will eventually wake up and realize that they can buy advertising on Zillow’s traffic and get some leads from Zillow, but they can’t buy jack diddly squat on Redfin’s traffic.

And I’m sure Zillow will be doing its level best to go scare the bejesus out of the brokerages with this latest development. (A friend emailed me and asked if I was still working with Zillow, because these posts on Redfin are the best thing ever to happen to Zillow’s industry relations team. I’m no longer working with Zillow, but they’re friends, and if the truth happens to help them, well, so be it. If it hurts them, so be that too.)

I think within the next couple of years, all limitations on syndication are removed, in exchange for some package of goodies to traditional brokerages. Not sure what those goodies would be, but I have to think that they will be something that allows the non-technical traditional brokerages to compete more effectively vs. Redfin, especially after its IPO supercharges them even more.

That has implications for technology vendors, but that’s Part 3.

Project Upstream?

I could also see some really interesting paths for Upstream.

Prior to this development, it was fairly clear that Upstream was always an anti-syndication play. That’s become even more obvious ever since The Pivot, when Upstream became about controlling the distribution of listing data.

So the MLS community was terrified of Upstream, and antagonistic to it. NAR’s involvement was a factor, of course.

Zillow wasn’t happy about Upstream, and built out all kinds of stuff like Bridge and Retsly to help the MLSs defend against the disruption.

But… if Redfin forces the unlikely alliance of MLS, brokerages, and Zillow… well, the calculus changes, doesn’t it?

Especially when Redfin specifically calls out an “alternative to the MLS” as a risk factor in its S-1?

Good Lord, even I can’t fully flesh out all of the possible alliances and battle lines and decision points and choices of all of the players involved. I suppose I could do a whole bunch of scenarios, with divergent storylines and possibilities, but… well, not for a blogpost. 🙂

Let’s just say that I imagine Alex Lange is having strategy meetings with his Board and his leadership. Things are going to change because of Redfin.

In Summary…

This seems as good a place as any to stop. We could literally spend several hours doing all kinds of what-if scenarios and if-then speculations. Maybe we will at some conference in the future.

So, to summarize, I think that in the short-term, the MLS and Association are not dramatically impacted. Sure, syndication policy will change, and Zillow and Realtor.com and other portals will no longer be seen as The Enemy by most of the industry, but that’s a fairly minor change, IMHO.

Over longer terms, however, as Redfin grows in power and reach and market share, all kinds of unexpected developments can and will come to the fore.

The rabid squirrels over there have already forced the industry to change once. I wouldn’t count them out for changing it again to achieve their vision of an industry that is no longer “pure misery” where consumers overpay and service providers are underpaid.

Your views and opinions are particularly welcome on this one.

-rsh