Real Estate Agent: “6% of the sales price.”
Homeowner: “That’s $60,000?!”
Real Estate Agent: “Yup 🙂”
The race is on to disintermediate an overly paid job function in America. Historically, real estate agents were valued tremendously by customers who did not have access to the information necessary to buy and sell their homes. In the last 10 years, digitization of the industry has changed everything. With companies like Redfin innovating the way customers buy homes through digitization, realtor duties are diminishing. So, will real estate agents become obsolete?
This is the same question Glenn Kelman asked himself when he founded Redfin in 2005 and additionally stated, “Real estate is the most screwed up industry in the world.”1 Based on the premise that the digitization of data flow through the medium of the internet could provide buyers with everything they needed to find their own home to purchase, Redfin is on its way to disrupting the industry.
A TRADITIONAL INDUSTRY BUILT FROM THE GROUND UP
Image: Kelly Englar discussing how she felt when she sold homes as a traditional agent
Historically, real estate brokerages have operated in a de-centralized model, working with clients 1-on-1. Redfin has centralized the model and digitized the information process flow. The firm uses the internet to sell homes to its customers and only uses human capital when absolutely necessary- mostly to negotiate terms with other human realtors4. Thus, partially dis-intermediating the real estate agent and moving towards making the profession obsolete. The result, less realtors and more deal flow.
Traditional real estate brokerage operational approach:
REDFIN: FLIPPING THE OPERATION MODEL
The Redfin digitization approach to operations:
Redfin’s operational model requires less human capital, allowing it’s real estate agents to do a high volume of deals. Additionally, Redfin agents are on salary while traditional agents are paid on commission. The average Redfin agent closes eight deals a week while the average traditional agent takes a year to close the same amount4. The end result is a new distribution of value between the real estate brokerage and the client.
By taking advantage of digitization, Redfin has been able to capture traditional real estate agents’ sacrosanct commissions and put more money back in the pockets of its clients.2 For example, on a $1 million home purchase, the average Redfin client gets a kick-back of $10,000 when they sell with Redfin and $6,250 when they buy with the company- a savings of $16,250 if you are selling your existing home and buying a new one!3
BLUEPRINT FOR REMODELING THE HOUSE THAT REDFIN BUILT
With competitors looming, Redfin must take an aggressive approach and be the first real estate company to fully disintermediate traditional real estate agents. They can achieve this by:
Sourcing User Contributed Information: Redfin should consider incentivizing home owners to provide additional information regarding their homes that cannot be inferred by an algorithm (i.e. repairs or remodels, maintenance costs, neighbors).
Fully Digitalized Contracts: Reading through a contract for the purchase of a home can be an arduous process. Digitalizing and making the process simple for clients to read and understand will be essential for the Redfin model to continue to real estate agents.
Automated Auctions: Bidding on homes should be handled by an online digitized automated system that includes legally-binding documents that would be instantly accessible to clients’ attorneys for review.
As the world changes, and digitization further pushes the real estate industry past the status quo, Redfin is in a strategic position to continue to change the way people purchase homes.
1 Geekwire. What keeps Redfin CEO Glenn Kelman Up at Night. http://www.geekwire.com/2015/what-keeps-redfin-ceo-glenn-kelman-up-at-night/. Accessed 16 Nov. 2016.
2 CBS News. Chipping away at the Six Percent. http://www.cbsnews.com/news/chipping-away-at-realtors-six-percent-11-05-2007/. Accessed 16 Nov. 2016.
3 Redfin. https://www.redfin.com/. Accessed 16 Nov 2016.
4 CBS News. Hi-Tech Real Estate Moves In. http://www.cbsnews.com/videos/hi-tech-real-estate-moves-in/.Accessed 16 Nov 2016.
5Wall Street Journal. http://blogs.wsj.com/cio/2014/11/12/what-the-heck-is-digitization-anyway/P;. Accessed 17 Nov 2016.
6Suzuki, Takeshi, and Yu Meng. “System and method for evaluating real estate and the surrounding environment and visualizing the evaluation results.” U.S. Patent Application No. 10/304,510.
7Gelman, Irit Askira, and Ningning Wu. “Combining structured and unstructured information sources for a study of data quality: a case study of Zillow. com.” System Sciences (HICSS), 2011 44th Hawaii International Conference on. IEEE, 2011.
8The Economist. http://www.economist.com/news/technology-quarterly/21615067-more-and-more-devices-are-becoming-connected-will-they-speak-same. Accessed 16 Nov. 2016.
9Realtor.http://www.realtor.org/topics/nar-doj-settlement/multiple-listing-service-mls-what-is-it. Accessed 16 Nov 2016.
10 Dginger, David. Personal Interview. 15 Nov 2016.
11 Anderson, Craig. Personal interview.16 Nov 2016.