Value or Exploitation?

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Kris and I were sitting around last night discussing her upcoming meeting with Glenn Kelman, CEO of Redfin, one of the newer discount/rebate real estate models, this week. You should understand that Kris is much more “enlightened” than I with regard to the future direction of our industry. I guess I’m old-fashioned in my thinking that the sale or purchase of your home is a somewhat-to-extremely emotional and personal experience for many; one that inhibits ones ability to be objective. Kris, always trying to play the devil’s advocate, suggests that we are headed for a much more transparent model; that a greater and growing segment (Gen Y?) of our population are becoming so empowered by the internet that their reliance upon agents, in the traditional sense, will continue to diminish over time.

In particular, we were evaluating the Redfin model, one of encouraging the buyer to find their home of choice on their own, then contacting Redfin on-line to submit an offer (with, of course, a rebate to the buyer) and whether it will gain popularity. As I try to catch up to Kris’ vision of the future, I start to think more globally. This is important as we are incubated in San Diego, a market that has, until recently, had a phenomenal run up in home prices for many years, as have other markets on the west coast, such as Seattle, Portland, San Francisco, Los Angeles, etc.

So it may not be a coincidence that Redfin launched their low price/rebate, buy-your-home-online model in Seattle and are now in the process of expanding into California. I acknowledge that there will always be a market for the “for sale by owner” or “listing agent buyer” mentality. A certain segment of buyers and/or sellers are always looking for “a deal” and some may be legitimately capable of representing themselves. The National Association of Realtors has, in their 2006 Profile of Home Buyers and Sellers, pegged this segment at about 12% of total annual home sales nationally.

But what about other markets across the nation? Think about Dallas or St. Louis or Pittsburgh or Wichita or Topeka or Oklahoma City or Memphis or the hundreds of other markets where the average annual home value appreciation may be measured in the low single digits for decades. An old friend of mine recently sold his home in a mddile income suburb of St. Louis that he had lived in for 15 years for $115,000. When we were discussing his agent selection I asked what the commissions were back there and his answer was that he was lucky to only have to pay 6% (not 7%). When I asked him if there were any “discount brokerage” alternatives, he wasn’t sure what I was talking about. For Redfin, their take for providing a buyer for my old buddy’s home would have been $1,000. Peanuts! In San Diego, their average take would be $5,000 per home sale. They don’t appear, at least at the moment, to want to waste their time in St. Louis.

So, why isn’t Redfin where people may need them the most?? The answer is, in my opinion, that they have made the conscious decision to exploit the markets that have had recent and significant price appreciation, hoping for a backlash of sorts from buyers and sellers who believe that commissions are built into and, therefore increasing the sales price (that debate is hereby tabled to another post). Now I’m not suggesting that there isn’t a cost of a purchase or sale. Of course there is. But what concerns me is that Redfin and other similar competitiors are trying to take advantage of selected markets. What’s wrong with that? I guess nothing if you enjoy a one-night stand. Ahhh, free enterprise!

See, I guess the difference in my thinking is that while we in SoCal have enjoyed this great run up of home prices, nothing lasts forever. As we have seen over the past year, all good things come to an end. Interestingly, about the same time it became more difficult to sell a home here, I started noticing, at least in my neck of the woods, that the earlier discount models that popped up so quickly over the past few years, such as Help U Sell, Assist 2 Sell, I Pay One, etc., are now seemingly almost absent from the markets I focus on. Are they becoming irrelevant? Not quite. But a key question is; When the markets starts to get a little dicey, are buyers and sellers maybe a little more concerned about the level and quality of service they expect and receive (i.e., Value)?

So what “value” will Redfin bring to the table? Or are they just trying to exploit markets they know find many homes with a significant amount of equity?

Coincidentally, Kris and I took a listing earlier this week. It will be the fifth time we will have had the honor of representing this particular client. Last year, almost 40% of our transactions were with repeat or referral clients. Most established and successful agents attribute their success to the many years they have spent building a loyal client base through hard work and consistently exceptional results.These results are not quantified in the context of discounts or rebates, but in “value”. I will be interested to know what the Redfin client retention rate is or will be. Nothing personal…   

See our related post at the Bloodhound Blog.

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