From Inspired Startup

Business models that profit from providing customers with transparency in an opaque and often frustrating industry like Real Estate are inspiring. One company that I have tremendous respect and admiration for is Redfin, what they are doing is not easy - they are tackling the real estate industry specifically the residential buying process. For entrepreneurs, they provide a great model for how we think about our own businesses and how we are truly providing more value for our customers. Although it remains to be seen what the epilogue will be Redfin, it is energizing to see them go after the market. The web is the great equalizer, it allows entrepreneurs to break old business models that rely on opaqueness for profit and squeeze more value for customers while gaining market share. Here’s my personal story about real estate and my learnings from that process.

Personally, I believe that the real estate model is totally broken especially given what’s happening and what has happened. I’ve worked with several agents on both the buy-side and the sell-side and have several agents that are friends as well (this post is not directed to them, rather to the industry as a whole). Fundamentally, I believe even the most well-intentioned people are motivated by the commissions that are structured. Thus, you are at odds with your agent from day 1. There is no incentive for your buyer’s agent to negotiate a lower price for you as each dollar they negotiate lower, it goes against their bottom-line. The seller’s agent once they receive an offer, don’t push for a higher price generally because they have a “bird-in-hand” offer and don’t want to lose the deal. Freakonomics, the book by the Chicago economist, showed statistically that agents get higher prices for their own home as compared to the homes that they supposedly represent. I saw it firsthand today when I chatted with an agent that was representing his own place who berated me on how I didn’t understand the market on why his home was worth $XX. His home had been sitting on the market for several months, had he been representing his own client I suspect he’d be asking to get an offer, but he’ll hold out for a better price for his own home. What I love about the Redfin model is that they are transparent about how they compensate their agents, it’s not on commissions but on customer service (read more here). Talk about lining up incentives with the buyer. The buyers feel like their best interests are being looked after and buyers worry less about the inherent conflict of interest (it’s still there, but to a much lesser degree than a traditional agent).

In my limited experience, the 6% commissions paid is a terrible structure and held primarily because of the opaqueness of the market. Most, if not all, of my friends have negotiated at least one side of that structure down. I suspect that market rate will have to come down to 2% eventually as most of the information used by agents for comps, contracts, and research are all available online. They will become more like transaction specialists. I won’t downplay all the work traditional agents do, I know many agents that work tirelessly day and night for their clients. I will argue that the most successful agents will have to compete on being able to deliver real bottom-line value for their clients, fighting for “below-market” price on the buy-side and “market price” on the sell-side, rather than being a transaction specialist and an expensive taxi-driver. It’s not about who can go the furthest below market on commissions (if so, most people will just use a real-estate attorney on both sides and the deal can get done even cheaper). The opportunity is there for Redfin (or any other broker for that matter) to capture market share by focusing on transparency (most agents don’t want this) and advocacy (truly fighting for the customer). It’s a bit counterintuitive to think about shrinking the overall market in order to capture more of the market - but, that’s the beauty of the model - much like craigslist has shrunk the dollar size of the classified ads model and now totally own it.

So, what are other transparent models that are working to some degree? In what areas would you like to see a business tackle an industry that is ripe for transparency? How are you using transparency and advocacy in your business to drive more value for your customer? Let ‘em rip in the comments.

Disclosure: Not that I have to mention this, but for those of you who wonder I do not have any personal stake in Redfin although we do share the same venture firm.

This entry was posted on Tuesday, April 21st, 2009 at 8:05 am and is filed under Entrepreneurship, Syndicated, business model. You can follow any responses to this entry through the RSS 2.0 feed. You can skip to the end and leave a response. Pinging is currently not allowed.