The Changing Face Of Real Estate
How Redfin Is Disrupting A 2.8 Trillion Dollar Industry
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How many times have you heard the phrase ‘real estate’ in the last year? While most conversations have been complaints about soaring prices, the reality is that the American homebuyer hasn’t slowed down. There were 5.64 million existing homes sold last year with this year is on track to break 7 million, the highest since 2007. I need you to hold that thought for a minute while I take a brief trip down memory lane.
Since 2007, we’ve experienced exponential change in some areas of our lives but somehow managed to stay exactly the same in others. In January 2007, Apple announced the release of the very first iPhone. Apple has released 28 iterations of the iPhone since then and currently has north of 900 million users worldwide. That year also marked a historic launch for the Phoenix spacecraft which later landed on Mars in 2008. In February of this year, the Perseverance landed on Mars and continues to push exploration further than we ever thought possible. All of that innovation in 14 years and we still conduct real estate transactions exactly the same.
If you’ve bought or sold a home since 2007, you more than likely started your process by approaching a friend or family member who ‘knows a guy’. This guy isn’t anyone unique, just someone who provided a good experience in the past. There’s a company on the rise that’s looking to remove the ‘know a guy’ phrase from people’s vocabulary. This new way real estate is bought and sold may be the innovation we’ve been looking for to change this painful process forever.
Redfin
Buying and selling homes is an arduous, expensive process. Finding something you want to buy only marks the beginning of the work to be done. You then find yourself dealing with more people than necessary, paying fees you don’t understand, and carrying a constant worry that no one is acting on your behalf.
Enter Redfin. Redfin is the real estate brokerage of the 21st century. Founded in 2004, the company is looking to redefine how real estate is conducted. The mission statement of the company is to “redefine real estate in the consumer’s favor”. What it does is combine a brokerage, mortgage company, title company, and homebuyer into one end-to-end solution. This combination not only cuts the involved parties by half but also reduces fees for everyone involved. It also streamlines the process for buyers and sellers while creating opportunities for agents that didn’t exist before.
Buyers
The Search
Traditionally when you buy a home, you get a rough idea of what you’re looking for in terms of square footage, beds and baths, and lot size. You then communicate that to your agent who begins the hunt for you. Not with Redfin.
Searching for a home on Redfin all begins with you and removes the agent from that process entirely. You begin by downloading the mobile app to your phone and searching for the city you’re looking to buy in.
From there, you’re able to dial in your searches with advanced filters like property type, square footage, and last sold date.
Here’s where it gets interesting. Once you find something that’d you’d like to see, you’re given the option to “Schedule A Tour”.
When you select this button, you’re immediately put in contact with a Redfin agent through the app to set up a time when it’s convenient for you both to see the home. You are able to use this functionality to build a list of homes you’d like to see and that same agent will take you to tour each house.
This process is unique because it puts the buyer, not the agent, in the driver's seat in the home search process. You’ll never have the problem seeing a home you aren’t interested in because you control exactly what you see.
$$$
After finding something you’re interested in buying, all business is then conducted through the app. The Redfin agent walks you through options for financing, arranges the inspection, and performs any communication with external parties. In some areas, Redfin can actually offer you a mortgage directly without involving a third party which speeds up the process even further. Business is all performed electronically or over the phone, leveraging services like electronic signatures which makes the process quicker and is easier on your hand.
Normally when you buy a home there is are additional fees that get tacked onto the purchase price of the home that includes commission, closing fees, and others. Because of the operational leverage, Redfin is actually able to refund the buyer a portion of the commission. The amount depends on the size and details of the sale, but the 2020 average returned to the buyer was $1720.
Sellers
On the other side of the transaction, Redfin is able to offer extremely competitive terms when it comes to listing your home. Traditional listing costs typically range from 2.5 - 3%. Redfin walks away with that price offering a 1% listing fee. On a $200,000 home, that could be the difference of $4000 that stays in your pocket.
When you list your home, you also reap the benefits of the streamlined search and buy process. There aren’t awkward home showings or agents you need to deal with. If you’re still in the home, a Redfin agent will reach out to you to arrange a time that suits you for buyers to view it. If you aren’t in the home, agents still reach out to you through the app to unlock an electronic lock placed on the home. This gives you verification as the seller of what agent entered your home and at what time.
Depending on the area you live in, another option may be extended to you as a seller and that is Redfin buying your home directly. Redfin gives instant cash offers on homes they believe they can resell. This can benefit both Redfin and the seller; Redfin can use its knowledge of the market to make appropriately priced offers while the seller can close in under a month without the typical rigmarole.
Agents
What I find to be the most interesting about Redfin is how they handle the agent relationship. Typically real estate agents are commission positions that offer a big upside but also a scary downside if the market turns unfavorable. Redfin takes the opposite approach offering all agents a salary with full benefits that also receive a commission on each sale. Those commissions are not as high as a traditional agent, but it gives the agents a solid earnings floor while offering substantial upside.
It was the knowledge of how Redfin pays their employees that put me at ease going through the homebuying process recently. I’ve always carried a fear of real estate agents similar to that of used car salesmen; they want your money.
My girlfriend and I decided to use Redfin almost exclusively because the selection of homes was different than that on other sites and the process was simple and easy. I distinctly remember the first home we looked at my guard was up to being swayed by this unknown agent. As we began looking through the home, the agent pointed out a cracking foundation we never would have caught. He said that the house wouldn’t be a good fit for us and brought us to our next showing.
I pondered that interaction for several showings before striking up a conversation about why he would talk us out of a home. He explained the pay structure that showed he was getting paid whether we bought the home or not. He further explained it was his job to make sure we got into a good home that suited our needs. It was incredibly comforting knowing we actually had someone on our side and wasn’t after our wallets.
Final Thoughts
The proof is in the pudding when it comes to Redfin disrupting the real estate industry. The company boasted an average listing time of 35 days versus the 40-day industry average. It takes that a step further to say that 91% of homes are sold within 90 days versus the 78% average. Despite the impressive results, Redfin only facilitated the buying and selling of 310,000 homes in 2020, a fraction of the 5.6 million sold.
I’m not a real estate expert, but I am impressed with not only the easy customer experience Redfin has created but also with how it operates as a business including treating its employees. I believe Redfin will be a disruptive force in the real estate industry and should be on your personal and investment radar.
Thanks for reading, talk next week.
~Brock