Redfin revolution: In competitive real-estate industry, Redfin model is working

If it's true that revolutions are built one person at a time, then Scott Davis is a revolutionary.

However he prefers to think of himself as a doting new father — which is why when his wife, Shufen, was expecting last fall, he began searching for a home where they could raise their son, Hunter.

The revolutionary part is the real-estate company the Davises chose to help them buy their first house: Seattle upstart Redfin.

A year ago Redfin launched the nation's first online brokerage.

Its site gives buyers the tools to research neighborhoods, find a house (and lots of information about it, like how long it's been for sale) and make an offer, all over the Internet.

A Redfin agent, whom buyers don't necessarily meet, then helps them refine the offer and negotiates it on their behalf.

The payoff: Redfin-represented buyers get a rebate for doing much of what real-estate agents traditionally consider their work. Sellers who use Redfin pay a flat $2,000 fee, rather than the customary 6 percent sales commission.

"I'm used to doing all my own research already," reasoned Davis, a 38-year-old Microsoft marketing manager. "If I'm going on holiday, I search the Internet for airfare, for the cheapest hotel rooms. So when searching for a house we were OK doing that, and Redfin made it easy."

Their Redfin agent helped them shave $12,000 off a Woodinville home's $440,000 asking price. The agent even negotiated the home's couch into the deal.

The final flourish was receiving Redfin's $9,000 rebate, which the couple used to pay closing costs. That amount was based on the sale price of the home and represented a portion of the commission Redfin earned for representing them.

"If ever there was one thing that I needed as a tipping point, that was it," Davis said.

In the year since it began its crusade to revolutionize the way real-estate companies operate, Redfin has caused concern, bordering on backlash, within the highly competitive real-estate industry as it demonstrated its model can work.

Ironically, much of that success has been built on adopting the same "customer service" mantra that's the mainstay of mainline firms.

Redfin is now poised to go national, positioning the scrappy, 49-employee firm to follow Expedia, Amazon and Blue Nile as Seattle-based Internet-sales innovators. Already it's in San Francisco and Los Angeles; soon offices will open in Boston, Chicago and Washington, D.C. A similar online brokerage, Chicago-based BuySide Realty, is also racing to go national

Expansion plans

To Redfin CEO Glenn Kelman, the real-estate business is ripe for revolution, and he doesn't mind ruffling feathers in the process. A feisty Bellevue native who cut his competitive teeth in the high-tech world, Kelman isn't shy about saying things like:

"Traditional real-estate brokerage has a screwed-up compensation system. It pays its agents to close [sales] regardless of whether it's a good price [for the buyer]."

And "if the industry doesn't reform itself it's in trouble. People resent the commission structure."

Redfin's agents receive salaries instead of commission income. Bonuses, which can equal 50 percent of their base pay, are based on customer satisfaction, which appealed to Erik Gerking, a geologist who used the firm to buy a vintage Lake Forest Park home.

"I like that better than someone's compensation being tied directly to their commission on the house," Gerking said. "It put us in a better position."

When big Northwest companies dismiss Redfin, as they do, as an insignificant player in a multibillion-dollar industry, Kelman counters:

"They're right. Our numbers have gone from zero percent market share to about 2 percent [in the Seattle area]. That's insignificant, but time is on our side."

The privately held firm, which has yet to turn a profit, is financed with $8 million in venture capital raised from several sources, including Vulcan Capital. Kelman says half that amount is still in the kitty.

So far most of Redfin's customers have been buyers, which is fine with him.

"That's where we feel the system is the most screwed up," Kelman said, explaining he thinks most buyers don't realize they indirectly pay an agent's commission. "There's no incentive on the part of a buyer's agent to negotiate a lesser sales price."

In 2002, fewer than 2 percent of home sellers used "alternative" brokers, according to a survey by the consulting firm Real Trends. By 2005 that had grown to 11 percent.

At the same time, the Internet has proved to be a boon to home shoppers.

Almost 80 percent use the Web to scope out for-sale properties, the National Association of Realtors has found. And most are online long before they hook up with an agent — positioning firms with data-rich, technologically savvy sites to capture them as clients.

Commission pie

At stake is a lucrative piece of the commission pie. Generally 6 percent of the home's sales price is paid by the seller. Half goes to the seller's agent, half to the buyer's agent.

Last year sellers paid roughly $100 million in commissions in King County alone. That's based on $17.3 billion in home sales reported by the Northwest Multiple Listing Service.

On a $430,000 house — King County's current median price — that's almost $26,000.

Large, experienced firms defend their commissions.

"We have new technology, but we're not just sitting behind a computer screen," said Lennox Scott, CEO of John L. Scott. "We know the neighborhoods. We're in the houses. We know the nuances."

"We really hold our buyers' and sellers' hands through the entire process," added Jill Jacobi Wood, owner of Windermere Real Estate. "It's the biggest transaction they do, and every single transaction is totally different because of the buyers, the sellers, the financing."

Do-it-yourselfers

Initially Redfin was heavily committed to a self-service model. Buyers would be responsible for finding houses and gaining entry themselves, either at an open house or by calling the seller's agent and requesting a tour.

Meanwhile Redfin's agents would be in-office only, working 9 to 6 and communicating mostly by e-mail and fax. Competing agents soon voiced fears that dealing with Redfin would force them to do all the work; one even refused to consider an offer from a Redfin client.

"There was prejudice against us," recounted Redfin agent Allie Howard. "But by summer word was out that Redfin was a player and they [other agents] realized we wouldn't leave them doing all the work."

One agent who's worked across from Redfin on a recent home sale is Windermere's Debra Sinick.

"I was pleasantly surprised," Sinick said of the way Redfin handled the transaction.

As other agents began softening toward the new firm, Redfin itself began operating more like a traditional brokerage, Kelman confessed from the firm's Pioneer Square offices. Employee bicycles are propped against walls in a warren of offices that have a casual, just-moved-in look.

Prodded by their own customers, "We've really had to embrace the personal side of the business," he said. "We've had to scrub up because clients wanted to drop by. We've put the phone number on the site. We didn't used to do this."

And customers let the firm know that they wanted home tours. They're now available in a limited way.

Moving to 24/7

Redfin's agents are moving closer to the 24/7 work-till-the-deal's-done model, too.

"Just because the Web site says we stop at 6 doesn't mean that's when we stop," confided Redfin agent Rob McGarty. "I've worked past 10, 11 at night on deals; many agents here have, too."

They help their buyers and sellers with negotiations, contingencies, inspections, all the way to escrow closing.

In the beginning, the firm figured its customers overwhelmingly would be young, Internet-savvy first-time buyers. But as Howard discovered, "everyone is Internet-savvy."

Among her clients are a retired professor, an architect, a doctor; the deals she's worked range from modest starter town houses to million-dollar properties.

"Some of the customers are really on board with our business model," Howard said. "They love it because we're not just starting a new business; we're starting a revolution. It's very invigorating in that sense."

Tim Wissner is one such customer. He and his wife, Tiffany, recently purchased a $900,000 home in Bellevue's Bridle Trails neighborhood and got a $20,000 Redfin rebate.

"We're very, very happy with the experience with Redfin," Wissner said. "But that's not to say there's not a place for traditional real-estate agents. I can still see there's value there."

That's especially true for clients who want a full-service agent to advise them on every step of what can be a long and emotionally charged experience.

But "for a lot of people in today's market, you do all the heavy lifting searching for houses," Wissner said. He did and was compensated for it.

That's why Wissner said Redfin's "business model makes sense."

Elizabeth Rhodes: erhodes@seattletimes.com