Bloomberg has an article on the traditional real-estate-agent model, and the upstarts trying to change it.
Why has the traditional-agent model been so resilient?
It’s because the upstarts won’t pay the money to attract great agents. A new model could work if the upstart company would hire the great realtors to implement it.
Redfin has an opportunity primarily because they offer the only alternative (no offense to the zippers), and none of the big corporate realty firms seem to mind (you don’t see Prudential or Coldwell Banker going for mega VC money to build a slick website, etc.).
But the Redfin method of having part-timers show houses to the buyers is flawed, and when the market is so intense like it is now, it seems unlikely that enough clients would endure.
They might get away with it though, in a rising market – if they can win the bidding wars, and/or adopt the old Century 21 model and just hire every licensee who can fog a mirror, and hope to make it on sheer numbers. The article points out that Redfin may IPO in 2014, which should put the squeeze on profitability.
Regardless of which upstart poses the threat, traditional agents can always cut a similar commission deal, if necessary, to stay in the game.
The agent’s competency should play a bigger role in who gets hired – these are huge transactions for the consumer, and they want quality help.
An excerpt from the article:
So far, Redfin hasn’t convinced many people that brokers, or their 6 percent take on most deals, are in any real danger. Last October, at a Seattle technology conference, an audience member asked Spencer Rascoff, Zillow’s CEO, if sales commissions were ever going to decline. “There are other startups that are trying to break down those agent commissions, and I think most of them will fail,” he said. Rascoff said later in an interview that “consumers don’t really care about commissions. They say they care, and they talk a big game in the off-season. But when push comes to shove and it comes time to sell their home, the transaction is so infrequent and so highly emotional and expensive—and consumers are so prone to error—that they turn to a professional.”
Economists, like the University of Chicago’s Syverson, watch and wait for a real change in the market. “The Chicagoan in me says there is so much money on the table that someone will figure it out eventually,” he says. “But I will admit, I’ve been impressed with the resilience of the old model.”