If Redfin acted rationally, the high-tech brokerage would charge higher commission fees, according to Redfin CEO Glenn Kelman.
Why?
Because Redfin has found that increasing its commission rate does not impact demand for its services, meaning the brokerage could theoretically boost profits if it charged going rates to match its competitors.
Redfin refunds up to half of the buyer’s agent’s commission split to the buyer. Redfin also charges sellers a lower commission rate than traditional brokerages, which can save the typical seller somewhere between 1 and 1.5 percent of their home’s sales price.
One would think that “when we give people that much money back, it drives more demand and helps us grow the business,” Kelman said in an interview on Greymatter, a video series produced by Redfin investor Greylock Partners.
“But once we did the analysis, we discovered that we’re just giving money away — that if we raise prices — everywhere we’ve done that, people have still flocked to the service,” he said.
Kelman feared Redfin’s below-market fees were on the chopping block when he reluctantly presented that analysis at a board meeting.
“We did the analysis, and we came to the conclusion that the rational thing to do would be to eliminate” the commission refund that Redfin provides to customers, he said.
But the board decided to preserve Redfin’s pricing model, keeping intact Redfin’s mission to put the customer first, according to Kelman.
One board member proclaimed during the meeting: “Name one great brand that was built by someone who was entirely rational,” he said.
In sanctifying its commission discounts, Redfin has, at least for now, put the brakes on its gradual drift towards charging a more conventional buyer’s commission fee.
Redfin has steadily scaled back the average rebate it offers to buyers from about two-thirds of the typical 3 percent buyer’s side commission to about one-third.
But the brokerage has moved in the opposite direction on the listing side. It recently began testing a listing fee of 1 percent in Washington, D.C., well under half the typical listing fee in that market.
In some ways, Redfin has migrated toward a more traditional brokerage model over the years, tweaking its agent compensation model and requiring agents to spend more time working with clients in person.
But the brokerage also remains a trailblazer, continually rolling out innovative products for consumers and its agents, such as online 3-D home tours.
Redfin’s goal has been to take a personal, relationship-driven business and supplement it with on-demand convenience, so that buyers can quickly see a home and get questions answered, Kelman said.
“That’s been our challenge, and it just ran into this buzzsaw of expenses because you never know when people are going to have a question,” Kelman said.
Despite high operating costs, Kelman said, Redfin has decided “to work backward from the customer and say, ‘What’s the service that we would want?’ And then we’ll figure out how to finance it.”
Acknowledging that the sentiment might sound “silly” given that Redfin has been around for a while, Kelman said he believes Redfin’s place in the real estate industry is “just beginning.”
The brokerage is generating hundreds of millions of dollars in revenue, he said, but still only has a 1 or 2 percent share of the U.S. housing market.
“That can be daunting — but it can also be thrilling,” Kelman said, noting that Redfin has an opportunity to capture more of the market. “Holy cow, this is a big enchilada,” he said.
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