Redfin to ditch 'paper brokerage' practice in future markets

Redfin, which operates as a brokerage and referral site in 23 markets and exclusively as a referral site in at least three others, says it will no longer temporarily operate as what is commonly referred to as a “paper brokerage” in any of the markets it expands to in the future.

Redfin’s four-year run as a referral-only site in Las Vegas and its current operation as a referral-only site in Tucson, Arizona, has prompted some industry observers to question Redfin’s business model. Redfin began displaying Internet Data Exchange listings and sending referrals to “partner” agents in Las Vegas in 2010 and did not put its first Redfin agent on the ground until late April.

Companies that join a multiple listing service to obtain access to its IDX listing feed without providing brokerage services by directly representing a buyer or a seller in a transaction are sometimes described as paper brokerages. Such firms often use IDX listings to capture consumer leads through websites or mobile apps and then send those consumers to agents at other brokerages for a referral fee.

Redfin markets where site displayed MLS listing data before Redfin had agents on the ground:

Source: Redfin

Discussions regarding Redfin’s business model are especially pertinent given that Redfin — after raising $50 million in a funding round in November — is expected to go public sometime in the near future.

In an April 30 blog post titled “Redfin and the seeds of war,” Brian Boero, founding partner of the real estate design and marketing firm 1000watt, wrote that Redfin’s practice of operating as a paper brokerage in some markets takes advantage of a loophole that allows those not “in the business of real estate” to “tap into the MLS and drink from the cup of data direct from the source, whether or not the practicing brokers in an MLS are OK with it.”

“I believe this issue [firms operating as paper brokerages] to be explosive, divisive and pregnant with the possibility of a war with much collateral damage,” Boero wrote.

Industry consultant Bob Bemis wrote a similar Redfin-inspired blog post titled “Seeds of war bark like dogs” on May 1 and suggested that paper brokers could be further fodder for brokers’ disenchantment with the industry at large, including the MLS, and another incentive for big broker network The Realty Alliance to go forward with its secretive “Upstream” initiative.

‘Overwhelmingly a brokerage’

Redfin is categorically not a paper brokerage, Redfin CEO Glenn Kelman told Inman News.

Kelman says the Redfin business is not optimized to make money from referrals. Redfin receives 95 percent of its revenue from deals on which the more than 1,000 Redfin-employed agents represent buyers and sellers, Kelman said.

“We’re overwhelmingly a brokerage,” Kelman said.

The Seattle-based firm will no longer expand to a new market and start displaying IDX listings and referring business to other agents without first having its own in-house agent on the ground first, Redfin spokeswoman Jani Strand told Inman News.

She said the decision was not a response to the continuing speculation about Redfin’s business model and that the company had been “moving in this direction for quite some time.”

When expanding to a new area, Redfin has a strategy of building a local website and hiring a local in-house agent, Kelman said. Sometimes one happens before the other, but Redfin never operates as a referral site in a location without the intention of hiring in-house agents, he said.

There has been a delay in some markets in hiring an agent after launching the site in that metro because finding the right agent to hire has proved to be a challenging and time-intensive process in some locations, Kelman said.

Redfin has opened many markets with in-house agents and IDX data ready to go on the same day including: Houston; Charlotte, North Carolina; Raleigh, North Carolina; Miami; Palm Beach, Florida; Orlando, Florida; Tampa Bay, Florida; Providence, Rhode Island; and Virginia Beach, Virginia, Strand said.

Redfin markets where MLS data and in-house agents were activated on the same day:

Source: Redfin

Unlike agents at many brokerages, most Redfin agents work as salaried employees, not independent contractors. (Redfin is currently facing a class-action lawsuit from some of its “field agents” — who are paid for work done on behalf of the clients of Redfin agents on a task-by-task basis — alleging that Redfin misclassified them as independent contractors when they should have been employees.)

In areas where it doesn’t have a salaried agent or if a home falls below a Redfin-set minimum price, Redfin refers deals to partner agents, who pay Redfin a referral fee for the business. Redfin vets its partner agents and continues working only with those who receive high marks from clients; in addition, partner agents earn more when Redfin-sourced clients rate them highly, Redfin says.

However — as with other instances where it operated as a paper brokerage for a time before establishing its own agents on the ground, such as Las Vegas — Redfin fully intends, and is actively looking to hire, a Redfin agent in each of those markets, Strand said.

Redfin currently operates as a paper brokerage in three markets: San Antonio, Texas; Tucson, Arizona; and the California side of Lake Tahoe, California. The firm has in-house agents in all other markets where it has IDX listings, Strand said.

Redfin launched its San Antonio site and began referring business to other agents in July 2013 and has yet to hire an in-house agent. It currently refers buyers and sellers to 11 agents affiliated with other brokerages in the area.

The delay in San Antonio has to do with finding the right team leader to build out and help manage the stable of in-house agents Redfin eventually wants to have in the metro, Kelman said.

Redfin launched its IDX site in Tucson in March 2014 and has hired Sara Fischer — previously a Redfin agent in San Diego — to be the first in-house agent in the area. She starts in July. Currently, Redfin is referring business to five partner Redfin agents in Tucson.

Kelman said Las Vegas is an outlier. In most other markets it has expanded to, Redfin operated as a referral-only site for a limited amount of time, he said.

“We weren’t paying attention to Las Vegas like we should have,” Kelman said.

Kelman said it took so long to hire an agent in Las Vegas because the MLS there, the Greater Las Vegas Association of Realtors, is one of the few MLSs in the country that doesn’t require a firm to directly represent buyers and sellers to get an IDX feed.

So, Kelman said, the firm decided to build traffic to its website first in that market before hiring an agent. Traffic was slow to build, and then finding the right person proved to be a difficult and lengthy process and four years passed, he said.

Movoto, a real estate brokerage and referral site with a model similar to Redfin’s and that also appears to operate as a paper brokerage in some markets, became the eighth most popular real estate site in April, surpassing Redfin’s No. 10 spot.

Editor’s note: This story has been updated to note that Redfin says it did not make the decision to end its paper brokerage practice in future markets in response to continuing speculation about Redfin’s business model, but rather that the company had been “moving in this direction” for awhile. Redfin turned on its IDX website in Tucson, Arizona, in March 2014, not in July 2013 as a chart in a previous version of this story stated.