Requiem for a Dream: Redfin

I hold it true, whate’er befall;
I feel it, when I sorrow most;
‘Tis better to have loved and lost
Than never to have loved at all.

– Alfred, Lord Tennyson, “In Memoriam”

In my writeup of Redfin’s Q1 results, I wondered what happened to Redfin’s North Star:

It used to be very clear: the consumer was Redfin’s North Star. Everything it did, whether popular or not, whether successful or not, was directly connected to Redfin’s clear and obsessive focus on the consumer. Redfin was the first real estate company to really embrace NetPromoter Score and to tie agent compensation to consumer satisfaction. It was the first major company to jump on the iBuyer train as soon as Opendoor pioneered the category, not because it saw dollar signs everywhere, but because it saw the consumer benefit of speed, certainty, and liquidity.

But now? Nary a mention of what’s best for the consumer. Instead, it’s all profitability, revenue, making lower offers, shorter holding periods, higher margins. It’s “sell as many houses as possible while holding as few as possible.”

Thanks to a wonderful series of posts by Glenn Kelman on the Redfin Blog (Part 1, Part 2, and Part 3), I have an answer. Well, at least a partial answer.

Hence, this post. I struggled with the idea of writing it, but in the end, I thought Redfin — or at least my love for Redfin-that-was — deserved it. I take no joy in writing it; in fact, it is more of an elegy in memoriam to an idea, to an ideal, that Redfin pioneered in the real estate brokerage space.

But now, that torch passes to others.

‘Tis Better to Have Loved and Lost…

Let me begin by noting that it is hardly a secret that I have long thought of Redfin as the most important brokerage in the industry. Even as I criticized them from time to time about some small thing here or there — something my friends know I will do in print, because that’s my unique role in the industry — I had nothing but love for Redfin.

There are a lot of reasons why. I think the ultimate future of the industry is the W-2 agent that Redfin didn’t pioneer, but made successful. The real, serious and sustained investment into technology through good times and bad was a game-changer. The innovations that sometimes skirted on the edge of various rules spoken and unspoken were fantastic if for no other reason than the fact that Redfin was willing to push the envelope. But the real reason I have been in love with Redfin for so long is that Redfin had always been Consumer First in everything it did, said, and thought.

An example comes from a 2009 post by Glenn Kelman titled “We’re No Sell-Outs” in which he explains the Redfin Partner Agent program and responds to an article from TechFlash. In it, he says:

What surprised us most about the post was that TechFlash knew who it was dealing with when it published the post. It was on TechFlash that we published only last month an essay saying that even in hard times, ideals are as important as money. They are. We will always, always fight for the consumer: exposing information about agent performance the world has never seen, offering the best value we can, paying our agents based on customer satisfaction, negotiating with Realtor associations to publish more data.

This is an emotional issue for us. We are less interested in proving TechFlash wrong, or even in convincing you that Redfin will succeed or fail — which is still an open question — than we are in establishing what this company stands for: making the real estate industry better for the consumer. Maybe nobody else cares that this company actually stands for something. But we do. We always will. [Emphasis added]

That “ideals are as important as money” thing is why I loved Redfin so much. Redfin was always a bit of a crusade masquerading as a company, and I am (beneath my aged-and-experienced blackened, cold, dead heart) an idealist.

I could understand and forgive just about everything Redfin did, good or bad, because everything Redfin did was based on its ideals: always, always fight for the consumer.

…Than Never to Have Loved at All

That idealism, that this company actually stands for something, was and is so refreshing in an industry as old as real estate. Because this industry is filled with idealistic individuals who always, always fight for the consumer… but just about every company in the industry is realistic to their bones.

Consider, for example, the central feature of Redfin’s model: W-2 agents.

The criticism of that from the industry was never “W-2 agents provide crappy service to the consumer.” It was always, “You can’t make any money doing that. They won’t be motivated to put a deal together if they get paid regardless.” Sure, there was talk about how 1099 independent contractors were eager go-getters, where as having a paycheck meant you were lazy and didn’t work hard… but a lot of that came from brokerage managers and executives who had a paycheck, company health plans, and a 401(k).

Brokers and REALTOR Associations did not spend millions defending various lawsuits about independent contractor status of real estate agents because they were idealists who were always fighting for the consumer. They did it because having to take on the costs of having W-2 employees was onerous as fuck and economically problematic.

For that matter, think about the development of buyer agency. Today, we pretend that buyer agency exists because each buyer deserves a fiduciary champion fighting for him and only him. Truth is, buyer agency did not even exist until the 1990s. And this 2012 Inman article cites former NAR General Counsel William North:

According to North, the ability to represent sellers on an exclusive basis and offer compensation to cooperating brokers acting as subagents was the foundation upon which the MLS system was built.

As a rule, MLSs required that offers of compensation be contingent on the cooperating broker acting as a subagent of the listing broker, rather than an agent of the buyer.

It wasn’t until the courts started finding brokerages liable to buyers they had advised as sub-agents of the listing broker that buyer agency came into existence. Read the Inman article for a fascinating history lesson, the takeaway of which is that the industry tends to always, always fight for the agent, the broker and the REALTOR, rather than for the consumer.

Individual agents might love the consumer, and always fight for them. Most of the companies in the industry do not.

Thing is, as a born-again capitalist disciple of St. Milton Friedman, I have no problems with that. A business should fight for itself, and try to maximize profits for its owners. That’s the whole point of a business. As a consultant, I would always advocate for strategies and tactics that are best for my business clients. I respect the hell out of organizations and businesses that defend themselves, shift costs to others, and maximize profits.

But I do not love them. No one does. Not even the owners love businesses that just make money.

Do you love Exxon-Mobil? They make money hand over fist for their owners, and provide a valuable — an essential, even — product to everybody.

What about Apple? They make wonderful products and services that we all want, and Apple is stacking cash that makes El Chapo look like a piker, but do we really think that even diehard fanbois of Apple love the company?

The Thrill Is Gone

That’s why when a company appears that is trying to do more than just make money, we all stop and take notice. There is a part of us that recognizes socially important companies.

Tesla is a great example. Whatever you think of Elon Musk, or of the cars themselves (I find them unspeakably ugly), or the names of his kids, we all recognize that if Tesla is successful, it will change the world.

Netscape was such a company. It ultimately died, because Microsoft did all kinds of illegal shit to put them out of business, but the world that it birthed is the world we live in today.

There are hundreds of other examples, particularly in the startup scene, of companies that are trying to change the world. Of course, they want to make money hand over fist, and they try very hard to grow, make more money, and generate extraordinary profits… but money was never the goal.

Redfin was such a company. It set out to change the world.

Then… I guess it grew up. It went through the teenage rebellion years of testifying in front of Congress, picking fights with everybody, then through young adulthood of going public, making money… and has arrived where just about everyone else in the industry appears to be, best exemplified by the urban clothing brand FUBU: For Us, By Us.

The Pandemic Diaries

I say this because of the three-part Diary of a Pandemic, written by Kelman. I read through all of it, re-reading parts of it to make sure I understood them.

It’s a marvelous document. In some cases, it is a blow-by-blow accounting of the hard decisions that Kelman and the team at Redfin faced as the pandemic hit the United States. It is touching in many places, and Kelman tells wonderful stories written beautifully. The people he describes, from employees to agents to board members and investors come to life.

But tell me where in this three part series you see “always, always fight for the consumer?” You tell me where you see the company standing for something beyond itself, beyond its employees, beyond its balance sheet and its P&L statement.

Maybe I’m misreading that, because the diary is about Kelman’s experience trying to navigate a publicly traded company with 3,900 employees through a never-before-seen crisis. So it’s natural to be more inwardly focused.

But even if that’s true, Part 2 is extremely troubling. There are parts of this that I could not believe I was reading from the same guy who wrote that ideals are as important as money:

On Monday, March 16, Redfin was near our $100 million in the homes we owned, and there were still more we had offered to buy. The week prior, we’d drastically lowered the price we were willing to pay for most homes, thinking that fewer people would take us up on it. But more did. Our customers had even more anxiety about the market than we did. By Monday, our chairman, Bob Mylod, called with a simple message: “get out.”

This is when I learned how hard it is for a company to stop doing anything completely. Redfin employed people whose only job was to buy houses. Before telling them to stop, I felt careful about saying what that would mean for their careers. So I said we needed to limit risk, and then was dismayed that on Tuesday, March 17, we finished up a few offers already in progress. “Why won’t they stop?” I said on a call with Adam Wiener. It was at that point that he stepped in with a simpler message: “The next person who signs an offer for Redfin to buy a house will be fired.” [Emphasis added]

The consumer was even more anxious about the market than Redfin was, which is understandable since the consumer is not a publicly traded company with $336 million in cash and $750 million in annual revenues. So fighting for the consumer means canceling deals and pulling the rug out from under them?

Kelman was dismayed that Redfin finished up a few offers already in progress? Really? What about the families who had accepted Redfin’s offer, and had already started dreaming about their next home because this wasn’t some run-of-the-mill buyer whose loan might get denied but a giant public corporation paying cash? Does he care about them at all?

He then portrays the decision to “get out” as a positive one:

We were the first major i-buyer to stop buying houses, but now the challenge was to get as many homes off our books as possible. People in our i-buying business, who had to know their jobs depended on a business they were now dismantling, worked night and day to cancel offers on homes we hadn’t yet bought, and to renovate every home we needed to sell. Any contract that still had a cancellation option was canceled; the only exception we made was for homeowners in a jam. [Emphasis added]

It was a smart business decision, no doubt. Redfin “clawed back millions in cash” by all of that night-and-day effort. No CFO anywhere would find fault with what Redfin did. No investor anywhere would resent that Redfin clawed back millions.

I see it differently. I see it as Redfin forgetting what they actually stand for: making the real estate industry better for consumers.

Because I have to imagine that the various sellers who had accepted Redfin’s offer to have them pulled did not think that the real estate industry was better.

Then Kelman tells a story about how he got hoodwinked by a real estate investor who sold them a Southern California condo:

She was crying. She said she couldn’t sleep. She said she couldn’t afford two mortgages. I could tell that English wasn’t her first language; she said she’d made a mistake when describing herself as an investor in our online forms. I found myself asking for her “word of honor” that her condo wasn’t an investment.

She gave me her word. I told her we’d buy her home, then had to call my colleagues so we could send her a check. Her Redfin contact knew her well, and had already confirmed she’d been renting the place out, as an investor. I’d been played.

Redfin spent $430K on that investor’s condo.

In Part 3, we learn that Redfin sold that same condo for $450K. If that’s getting played, then Redfin ought to get played a whole lot more while saving the consumer buckets of tears, nights of sleep, or the need to make up bullshit stories about crying and not sleeping.

I get that I’m holding Redfin to a higher standard than Opendoor and Zillow and Offerpad, all of whom also canceled offers. But none of those companies spent years declaring that they stand for the ideal of making the real estate industry better for consumers, and that it’s emotional, and they care, and they always will. None of those companies went directly into real estate brokerage and spent a decade battling REALTOR Associations and MLSs in order to make the industry better for consumers. Redfin did.

The same theme appears when Kelman is talking about the decision to keep Redfin doing brokerage after it was classified as an essential service. The story that emerges is that Kelman’s foremost thought was agent safety, not the needs of consumers. It took others, especially those closer to the ground, to convince Kelman to keep the doors open:

We expected [the senior field leaders] to argue for eliminating customer meetings, but their argument was the opposite: other brokerages were already cleaning our clocks, flouting the rules that we followed. Overwhelmingly, they said, agents wanted to work, and they knew safe ways to let a customer into a house or to photograph a house.

I said that classifying real estate as an essential service was “such a crock.” I’d been on tours with customers dreaming about a fancy pool; what did that matter now? Have you been on a tour lately, Scott [Nagel, Redfin’s President of Field Operations] asked? “The people we’re serving now aren’t the ones who want to sell a house. They’re the ones who have to, because someone got sick or lost a job. They need the money; they need to move on with their lives.” We’d have to call to tell them we’d no longer list their home.

This is… I don’t know the right word. But let me say that what Scott Nagel said is what I would have expected to be the first thought in Kelman’s own mind. If anything, the Redfin that would always, always fight for the consumer should be the first company to flout government rules if those rules hurt consumers… or at the very least lobby strenuously to have them lifted or modified for the sake of the consumer.

Nope, Redfin was enthusiastically following those rules, threatening to fire anyone who kept showing homes. Even if that home belonged to this lady, pictured in Kelman’s blogpost:

She’s an elderly woman in a long-term care facility, who Kelman says “cried tears of relief when her home sold.” Good thing Redfin didn’t go all-virtual for her.

I get that I’m holding Redfin to a higher standard than Realogy and HomeServices of America and eXp Realty. But none of those companies spent years declaring that they stand for the ideal of making the real estate industry better for consumers, and that it’s emotional, and they care, and they always will. None of those companies did anything other than what was best for them, for their agents, and for their employees. Redfin did.

If anything, I’m being unfair by holding Redfin to its own higher standard. Because I loved Redfin, and now, I am composing an elegy.

Redfin: For Us, By Us

I won’t end this on just a down note. It isn’t as if Redfin committed some crime or some unforgivable sin. Redfin did everything correct, everything right. Like I said, there isn’t a business executive or an investor on the planet who would blame Redfin for what it did.

And Redfin does have people who love it: its employees. If the Diaries reveal nothing else, it reveals the extraordinary concern that Kelman and his team have for Redfin employees. Kelman writes about offering hardship pay for agents, even at the cost of canceling executive bonuses and eliminating his own salary for the year. That’s special leadership and shows the love that Redfin has… for its own people.

Then we get the heartbreak that Kelman went through with the furloughs and the layoffs, and the inspiring stories of Redfin agents banding together.

The remaining people of Redfin are going to work their asses off to bring sales up sufficiently to bring their furloughed and laid off colleagues back.

That appears to be Redfin’s new mission now: Bring them Back, complete with iconography.

Let’s at least acknowledge that Redfin looks like a wonderful place to work. You have bosses who really give a shit, and colleagues who care deeply about your welfare. That’s a rarity, and Redfin employees have every right to be proud of and love the company they work for.

And I know if I were a Redfin employee, I would be moved by what Kelman writes in the Epilogue, in Part 3:

But the most important development from yesterday was the return of 131 employees from furlough. The Saturday before, on May 2, we brought back our first 139. That’s a total of 270 down, and 745 to go before the furlough ends on August 31.

Think about that. The most important development for the CEO of a publicly-traded company that was making $750 million a year is the return of 131 employees from furlough.

That’s special. Give credit where credit is due.

Redfin is Redfin’s North Star Now

And yet, what becomes clear now is that Redfin has a new North Star: Redfin employees.

The general theme of the Diaries, once you read them and re-read them, is that every decision was made for the benefit of Redfin employees. The decision to shut-down, the decision to get out of i-buying, the decision for hardship pay, the decision to furlough then bring back — every decision was based on what was best for Redfin’s people.

In that, Redfin is no different from all of the other great companies in real estate and no different from REALTOR Associations. You can’t tell me that great companies like Realogy and RE/MAX and others were just thrilled at laying people off, furloughing them, cutting bonuses and pay, and all of the other hardships. I know most of those executives, and they are some of the nicest, most caring people you will ever meet. It’s just that they are nice and care most about their own people, not the consumer. REALTOR Associations are full of staff and leadership who are fighting every day for the welfare of their own members. Every decision they make is based on what is best for their own people, not the consumer.

For that matter, Redfin is likely no different from all other great companies in every industry, whether they be giant oil and gas companies who don’t want to lay people off or small neighborhood restaurants who are trying like crazy with takeout service and whatever not to lay people off. They all care about their own people and do what’s best for their own people, not necessarily the consumer.

But that’s just the point, isn’t it, of this elegy, this in memoriam? Redfin is likely no different from all other great companies.

Congratulations, and welcome to adulthood, Redfin. You are now a business, not a crusade. Turns out, ideals are not as important as money. Turns out, you stand for something and you care and it’s emotional and it’s important… until the chips are down. Then you do what you have to do, just like the rest of us.

Here’s the Thing…

There is a catch, however. Isn’t there always? That’s one of the small cynicisms that make a young man into an old man yelling at the kids to get off his lawn.

Kelman ends his Diaries with this:

There’ll be plenty of work for Allie and everyone else here to do. When this pandemic ends, America will be on the move again, as many folks get leeway from employers to leave big cities for smaller, more affordable towns, in what could be a historic migration. Homebuyers won’t have to tour homes on phones anymore, but many will anyway, because it’s so easy, and the online experience is now so immersive. That means plenty of homes are going to change hands, and the technology Redfin’s now building can make those exchanges easier and less expensive than ever before.

I wish you could meet the people for whom those changes have already begun: the customers we’re serving now aren’t waiting on this pandemic to move on with their lives. So much has gotten less important over the past two months, but maybe homes have gotten moreso. The pictures below are from folks who closed with Redfin agents Shelby Weaver and Jordan Hammond in just the last few weeks.

I think Redfin’s going to be OK.

There never was any doubt that Redfin was going to be OK, with the balance sheet it had, and the ability to tap capital markets that other brokerages lack.

The catch is that Redfin is going to be OK, but it may never be great. It may never be socially important, and be the kind of company that the rest of us secretly and not-so-secretly root for, because if it wins, the world changes.

Redfin had the chance to become the Tesla of real estate; it chose to try to become the Ford of real estate. It will end up as the Mini of real estate.

Because consumers will come to realize that they are not your North Star anymore. Turns out all of the “we put consumers first” is so much marketing and PR, just like most companies in and out of real estate.

America will be on the move again; the markets are coming back faster than many had expected. Buyers don’t have to tour every single home; virtual tours and 3D tours are here to stay. Digital closings can happen going forward, because we have set the precedents during the time of cholera. Consumers are ready to move on with their lives.

And they can do all of that with every other brokerage in North America with individual agents who care about them deeply, and will always always fight for them. It didn’t matter to them before that Coldwell Banker doesn’t give two craps about them, because their agent at Coldwell Banker did. It won’t matter to them now that Redfin doesn’t care about them (when the chips are down), as long as their agent at Redfin does.

If Redfin is simply counting on “easier and less expensive” as its competitive advantage… well… there are hundreds of companies out there who are going to make it easier (with Zillow as the most obvious leader of that group) and less expensive (e.g., REX, Houwzer, and dozens of other “discount brokerages”). When agents start cutting their commissions, and permissive brokerages not dependent on sales price (see, e.g., HomeSmart, Realty One Group, Benchmark Realty, etc.) allow it, then what?

From where I stand, now that I’m done mourning the Redfin-that-was and looking at the Redfin-that-is, you can adjust, make smart business decisions, do what you need to do to compete with much larger companies with orders of magnitude more agents, more offices, and more market share. You’ll still be an important brokerage, a top ten brokerage on all of the rankings, and have better gross margins than your competition (for now), and help thousands of homes change hands.

But now, you’re competing on their turf, with their ideals of For Us, By Us. The rest of us have no dog in that fight. The thrill is gone. Turns out, what made Redfin special and socially important was a victim of Coronavirus.

I think Redfin is going to be OK.

-rsh