Redfin announced big news today, publishing MLS data that indicates our agents negotiate significantly better than their counterparts at traditional brokerages.
Last month at Brad Inman’s big real estate conference in New York, Realtor.com President Allan Dalton accused Redfin and other critics of a “massive level of disingenuous communication,” because we ignore the likelihood that traditional agents offset higher commissions by negotiating a better price (skip to minute 9:00):
Already our surveys had established that most of our customers get service that they believe is better or much better than what they got from a traditional real estate agent. But forget the touchy-feeley stuff: every day we heard that our customers would lose our commission refund and more at the negotiating table; it is the centerpiece of the traditional industry’s argument against Redfin.
And we agree, that the price of a home fluctuates with market conditions, increasing the importance of a real estate agent’s pricing guidance and negotiating ability.
But our problem with commissions is not simply that they’re too high; our problem is with the commission itself, because it pays the buyer’s agent more when his clients pay more. In other words, rather than being offset by better negotiations, the buyer agent’s commission actually causes worse negotiations.
This is why we decided to pay Redfin agents a salary with a customer satisfaction bonus, not a commission. Agents do what you pay them to do, we reasoned, and we believed our agents would be more likely to get the price our customers wanted.
After a year in the market, we decided to put our theory to the test, by querying the Northwest Multiple Listing Service for data on every home or condominium sold via a brokerage from February 6, 2006 (the date of Redfin Direct’s launch) through February 5, 2007. Since we didn’t offer a service for sellers or support areas outside King County until much later in the year, we limited the data to King County and we only evaluated our capacity as buyers’ agents.
But we still had the problem that Allan highlighted, namely that there is no “set base” price for a home.
So we compared what buyers’ agents negotiate for — the final price — to what the sellers’ agents ask for — the asking or listing price; some sellers’ agents may ask for too much, others for too little, but, since all our customers are all shopping in the same store, looking at the same listings, all King County brokerages are negotiating against the same set of asking prices (note that evaluating a seller’s agent is problematic, since the seller’s agent only competes against the prices she sets herself.)
The results were striking; Redfin customers paid on average under asking price, whereas customers of all other brokerages paid on average over asking price. The difference in negotiations was .9% of the home price, equivalent in King County to over $4,000, on top of a commission refund of nearly $10,000.
What makes this noteworthy is that the data did not come from Redfin, but from the MLS, from the brokers themselves who contribute to the MLS. Any brokerage can validate the data by following the instructions available in the appendix of our report.
Already, the Seattles Times reviewed the report and picked up the story in yesterday’s big Sunday spread.
Perhaps there is another way to evaluate whether traditional agents negotiate better than Redfin agents; until there is, the most likely conclusion is that Redfin agents negotiate better than their more expensive counterparts.