Two venture capitalists discuss their investment in Redfin, a Seattle area online real estate brokerage:
- Peter Cochran:
Residential real estate is ripe for disruption. Yes, I understand that Redfin isn't the first VC-backed entrant that is attempting to fix the inefficiencies of the residential real estate industry. But that doesn't change the fact that the current residential real estate model is broken and needs fixing. A recent GAO report to congress on residential real estate competitiveness found that over the past 30 years, "...commission rates for buying & selling a home have remained relatively uniform—regardless of market conditions, home prices or the effort required to sell a home." [my bold]. Let's collectively think about this statement for a second or two and let the economic absurdity sink in. Or let me put it another way: if I'm a Seattle or Bay Area real estate agent (or most anywhere else in the US), in the last five years my average commission check per transaction has doubled, while my average workload per transaction (not including marketing costs) has gone down due to broadband penetration, Internet use (in 2005 78% of home buyers used the Internet for research, up from single digits 10 years ago), and proliferation of online tools and services like Redfin and others (buyers who do research on the web close much faster than those who don't). Does this seem right to anyone? This equation makes no sense and needs to be fixed.
- Steve Hall:
I think this intense interest level in what Redfin is doing mirrors the fact that real estate has emerged as bit of a national sport over the past decade. People watch local real estate listings like they do their local news. Dinner conversations naturally turn to the latest house on the market and “Can you believe they listed it for $XXX?!”
And then there is the subject of real estate broker fees - now this really gets folks talking. Ask anyone who has sold a house recently how they felt about the 6% fee taken off the top of the price – it’s not pleasant. People understand they need the broker to sell their house, but largely view the commission as a necessary evil.
Interestingly, home buyers don’t have the same sense of leaving money on the table as the sellers do and therefore don’t complain as much. But the reality is that money is flowing out of the hands of both sellers AND buyers and into the hands of the broker. It’s basic economics: the commission impact changes the market value at which a seller is willing to sell, and therefore buyers are forced to pay more, etc.