This is a 2 part story. 1) Redfin Increases rates and 2) Fuzzy Math on Redfin’s “Advantage” calculation.

Part 1:
Many people might not know, Redfin two months ago increased their buyer agent commissions by 50% (now receiving 1.5% vs previously 1%).

I congratulate them. I have frequently said “I used to rebate, but then I got good.” (see Realtor Rebates also see Redfin Saves $27,000 vs FranklyRealty.com Client Saves $152,000! )

So I thought their 50% increase would be an interesting message to get out (few people know this, they just remember the headlines). But I also re-stumbled upon their “Real Estate Science” blog post claiming that they ALSO did better negotiating vs an average Realtor.

That is a pretty ballsy claim.

I see why they felt they had to unleash “data” since their jealous competition was trying to dismiss them by saying: What you gain in rebate, you lose in negotiations.

So their data proving they are better negotiators is great marketing, but it is just that, marketing. There is no scientific correlation to better negotiations (in my opinion).
A larger % off list is not better negotiation.

For example: I’ve often said, “I’d rather a buyer pay $12,000 over list on a property that is $50,000 underpriced, then negotiate $50,000 off on a home that is $100,000 overpriced.” See video on bank bidding wars. And recently I helped a client win an over list bidding war (6 buyers) and we were NOT the highest price. According to Redfin’s stats I didn’t do as good as an agent that got below list (regardless if that listing is overpriced).

Did you know that over 50% of Prince William listings sell for OVER list price? (based on 35 recent sales, not counting subsidy, which makes the stats look more impressive.)

Anyhow, my other gripe with their “scientific” analysis is what I think is a pretty HUGE flaw in that data. (see why I don’t like certain data but love other data, see best post ever FranklyCRA.com)

A.D.H.D. Sidenote: Also they don’t allow lowball offers. While I could use this as an opportunity to say “use us, we will submit your lowball” that would be a bait and switch, since I actually don’t believe lowballs work (see video on lowballing).

Why do I feel compelled to write this? Am I threatened? Nope, I just get asked a lot about them (like to match them, which I personally won’t), and this 3 hours to write post will save me the 34 minutes explaining why. I just send the link. I guess that is shellfish, but it lets me focus my time on saving clients a lower NET, and yes it takes actual human hours to do this.

So what is wrong with their claim that they negotiate better (besides % off list not being a good indicator)?

They left off something pretty big in their stats…

- SELLER SUBSIDY –

Seller Subsidy is also called Seller Paid Closing Costs, or Seller Contribution, where the seller will pay part of the closing costs (bottom line, the seller cares about their NET, but I highly recommend to MAXIMIZE this number as it makes your home close HIGHER, long story for a future post, make sure to subscribe to this blog).

Anyhow, Seller Subsidy has skyrocketed in this market vs the 2005 boomtime. And lenders have STRICT requirements for how much “cash back” (regardless if that is from the seller or the agent) will be allowed on the HUD1*. (*Update 1/8/09: Redfin does somehow give rebates OFF the HUD1, they found a legal way to do this)

The result? A rebater, like Redfin, has to adjust their offer accordingly.

Example:
A) $510,000 Published Close Price with a 2% Seller subsidy= $500,000 NET to seller
vs
B) $505,000 Published Close Price with a 1% Seller subsidy= $500,000 NET to seller

Same NET to Seller!

The “Close Price” looks 1% lower in Home B vs Home A.

So the major flaw in their data is Redfin is using the “Published Close Price” (Home B) NOT the NET closed price.

I brought this to Redfin’s attention, and they told me that the areas that they calculated do not publish the seller subsidy on the MLS. How convenient. (note that Lane Bailey questioned this on Redfin’s blog months ago, with no reply, and minutes ago I found his post on it and more Redfin exposes).

(Update 1/7/09: Redfin maintains that the subsidy data is not available in the area where the study was made. Ok fine, but I maintain that a rebater should know that subsidies are lower, and thus disclosed to the public that their data could be off significantly.)

However in Northern Virginia, our MLS DOES publish this
data (No Va is NOT in their science analysis since it is “too new”). When I ran my ROUGH unscientific stats, it showed that Redfin was .75% WORSE, almost a full 1% WORSE in the seller subsidy department. Again this is because the lender HUD1 closing docs will not allow total cash back (subsidy or rebates) to be too high (Update 1/9/09: see workaround above). My #s were based on 65 Redfin purchase closings in VA, vs 100 closings on Dec 29th 2008, which I do NOT consider 100% scientific, mere food for thought. (Update 1/9/09 I also ran 100 homes on April 4 2009 and jan 4th and got 1.4% and 1.6%)

(I’d love to know how they do on Home Inspections re-negotiations. This can sometimes take TWICE the time of the initial deal.)

The Net is so important, that on FranklyMLS.com I barely show the Previous Close Price on listings (yeah we are the only MLS site in the DC area that has this data), FranklyMLS.com instead emphasizes the NET closed price after subsidy.

So a super sharp consumer will say “AHA”!
And try to catch me with “You used the phrase ‘Same NET to Seller’, what about the Rebate? I care about the Net to the BUYER, ie my bottom line ’savings’. You can’t fool me Frank!!!”

If you didn’t catch that, don’t worry. This stuff is tricky (I Pitty Da’ Fool) , and numbers can be easily warped and manipulated. (When anybody tells me their “team” is #1 at this office or that, I like to say that I was the “#1 Realtor in the USA, 30 and Under, in sales volume… in my First Year in the business“ a true statement, ask me for details though.).

So back to Net to Seller, that is the point of my Realtor Rebates blog post, and for discount listings and For Sale By Owners go to my 2nd best post ever: Go FSBO! Save $20,000! Agent Tells All!

In their science blog post (which is kinda confusing) they claim “on average 1.015% below homes’ asking price, while customers of other brokerages paid .087% below asking price.”

Well with my previous post on % of list data . I showed the average agent getting about 1.5% off (talking closing price, NOT NET).

(update 1/8/09, the below is not scientific, it uses some of Redfin’s Seattle numbers and intertwines my ROUGH Va numbers. This is not a “scientific” comparison, but food for thought)

So if Redfin
a) Gets their clients 1% off on negotiations (their scientific data in Seattle)
b) Only .75% subsidy (My rough Va numbers)
c) 1.5% off with a rebate (was 2%)
Redfin Total = 3.25% Total off

Average Agent in Virginia
A) Gets 1.5% off (my rough Va data)
B) 1.5% average subsidy
Avg Agent Total = 3% Total off

(rough) RESULT? Advantage Redfin= 0.25% vs an Average Realtor. (do you see where I am going?)

Again, this is not a bashfest. I have recommended people for Redfin (mainly their great search engine), and they have very sharp Realtors that I have met personally. I Like Redfin. They are GREAT for the business and for my business.

If you have no alternative, sure why not beat the average by 0.25% (heck I do that with how I buy stocks via index funds)

Shameless plug coming on. Turn away! Hurry! EARMUFFS!!

If you are looking for average service, Redfin is better.

We don’t offer Average service, here Excellence Comes Standard ™.

Written by Frank Borges LLosa- Broker FranklyRealty.com

Encore? Ok, here you go.

Two bonus stories on Discounters.

Update: my first story is under review. Long story, will explain later
<!– 1) I sold a staged end unit townhouse (specific post coming soon, so SUBSCRIBE) that got bid up $10,000 with 4 offers (yes in 2008) that went for $75,000 higher than same sized interior unit ($40k nicer tops) two months earlier. So high we had to negotiate OUT the appraisal contingency (which isn’t easy!)!

One of those bidders was Redfin (they actually had the cleanest/nicest visually, but not highest, written offer). That buyer tried to contact me directly. I sent them back to Redfin.

Two weeks later, a neighbor with an end unit listed $15k higher (a very small community) than my unit closed for. I told my Redfin contact about it. (sidenote: is anybody still reading this? If so, if you follow my stuff, I got an A- in my Torts law school exam, end sidenote). He knew already since his buyer contacted him. I told the Redfin agent that there was a nearby sister community (technically a diff zip, so easy to miss) that just reset $75k lower since a Short sale closed. That community was now a MUCH BETTER DEAL.

His reply was something like “Sorry, I can’t tell my client about that. We don’t do that. That type of advice isn’t part of our business model.”

Let me recap this neighborhood, all sold with the ONLY unit on the market:

Unit 1 sold for $450,000 Net after $80,000 in slow drops over 200 days
Unit 2 sold for $525,000. $10k OVER list with 4 offers in 4 days. FranklyRealty Listing.
Unit 3 sold for $525,000. $5k under list. Bought by Redfin (while the sister comm. was tanking)
Unit 4 sold for $460,000 in 91 days.

Analysis? I might be biased (which I am), but seems to me that some great marketing and staging helped get us $75k higher, then another unit listed and Redfin’s client bought it. Then another listing came on, and it went back down to $65k.

“Advantage” Buyer (their client)? or Advantage Seller of Unit 2?

Our listings are so good, I even say “Don’t Buy Our Listings”

–>
Example 2) Another client had a horrible experience with an average Realtor (or maybe below average), so in the future they vowed to use a big rebator. Until they read my blog. Actually ALL of my blog (ask if you want me to send you the blog in book form). They read EACH post, even saying to me “I see you didn’t buy a Saab” which was in reference to the car buying post. They signed an Exclusive buyer agreement, see Exclusive Buyer Agency Contracts. Don’t Sign Them… Yet.

We played hardball on one house. So hard we didn’t win it. So we Round Robined (“Round Robin” Buying System. Unearthing The Desperate Seller.)

over to another house. We were so aggressive and impersonal (long story on my stategy, heck I can’t put it ALL online, or the other agent will read it) that the seller felt the buyer didn’t want it as a “home.” Apparently I wasn’t warm and fuzzy, and this deal needed that. So, having never dealt with a no counter like this, I got creative. We wrote a warm and fuzzy letter. Including a photo of the buyers and about how much they loved the fountain in the back… stuff like that.

They accepted the offer. No counter. About $10,000 to $15,000 below what my clients were willing to counter and about $50k below list. Few Realtors will take all that extra effort to fight for that last $15k. We do that.

The End. Please report typos.

Disclaimer: I might come off kinda cocky here. Sorry about that. I just love what I do and I get all worked up. I promise to be calm in real life, like a real person. Also make sure you subscribe to this blog (at the top of the blog).

And don’t forget my more frequent Video Blog http://youtube.FranklyRealty.com

America was lured in by the… 20 year long regurgitated story “Attack on the 6% Realtors” and comments about “saving thousands.”

After watching such a biased infomercial, of course Redfin seems like a no-brainer. Well my blog readers have a brain, so here it goes…

Sidenote: Normally I’m not a fan of NAR, but I did agree with most of their comebacks (click to see).

I have written extensively on my bias opinion on the pros and cons of rebating and discounting including:

• For Buyers: Realtor Rebates. Free Money or Expensive Savings?
• For Sellers: Go FSBO! Save $20,000! Realtor Tells All!!

I would like to focus on the “savings” comment put forth by 60 Minutes’ case study.

“WE SAVED $27,000″* NOTE THE ASTERISK!

After they were done laughing and giggling on their couch about how they saved $27,000 and how they could spend it on their wedding, they made an under-the-breathe comment that they sold their place for…

“$10,000 under what Redfin recommended that we list it for.”

In this comment I see two things to question:

1) “$10,000 Under List”

2) “The list price recommended by Redfin.”

So let’s start with the latter…

If some of their agents do as many as 8 closings a week, might it be remotely possible that they might have a strategy of listing low in order to sell fast? I’m not saying they do, but would that make sense to anybody besides me?

And for the “$10,000 under list,” while I oftentimes say that “Many Listing Agents Suck” See RealtyTimes article or my blog, one has to wonder if another motivated agent that had more time to devote to the listing might have:

1. Landed them full list ($10,000 higher)
2. Started higher and ended higher ($15,000+ higher)
3. Got a bidding war going, resulting in a much higher net ($32,000 like our Realtor Megan’s listing, see blog).

In my biased opinion, the best way to get the most for the house isn’t to find one buyer, but to find at least TWO buyers. I don’t believe in pricing low to start a bidding war, but I do believe in getting as many buyers into the process as possible. A process that can take an extra 8 hours in one day for one agent, while netting the client another $32,000.

Back to the “$27,000 total in savings,” that was for buying and selling. If we assume that they bought a bigger place, they probably “saved” $12,000 on the listing and “saved” $15,000 on the purchase.

I’m confident, and I have references to back me on this, that I can consistently do at least $12,000 higher than a discount agent. I wish there was a way to prove this with statistics, but they would just be manipulated.

Instead I can only give real world examples:

1. Megan, with FranklyRealty.com, had a recent listing (See Bidding Wars? It’s The Staging Stupid!) The initial discussion regarding the starting price at the listing appointment was roughly $550,000 (seller’s opinion). After staging, light remodeling and further research, and many hours of work, the starting price was set aggressively at $570,000. The end result was 3 offers and a ratified contract $13,000 higher. While I’m confident in these number being an example of hard work, Redfin might also find an example of an agent that did a similar great job. And if that person was so great… I would hire them and pay them double, because they are worth it. (think about that for a second, if you could offer value way beyond discounting, wouldn’t you start charging accordingly?) 

   Sidenote: ZipRealty, another discount firm (some disagree with that term, see blog comments/debate), according to one blog is full of disgruntled, newer, and underpaid agents that are overworked. External blog: What’s Wrong with zipRealty

    

2. FranklyRealty.com Saves Client $152,000 should be the next 60 minutes update.

The above is actually a true story. It was a hot seller’s market, and with proper marketing and about 10 stressful non-stop hours the $499,000 listing was bid up to $601,000. One thing is to bid it up, another is to actually close at this price. Especially after several attempts to renegotiate, and appraisal issues. Yeah sure, I got a few bucks for the incremental difference, but that is nothing compared to the unexpected $102,000 in their pockets. Sure they could have “saved” and sold it fast FSBO, but they wouldn’t have been able to get anything near wha
t I got them (their words).

Then on their purchase, they loved a house that was getting 8 offers. At FranklyRealty.com we don’t write normal looking offers, and that sets us apart immediately. Each offer is different. I can’t publish all my tricks here, but when was the last time that you saw a contract that put the Realtor’s ENTIRE commission on the line as a promise that we wouldn’t renegotiate the offer? That is powerful. Also we run a CRA ™ Comparative Realtor Analysis report (see it here on RealtyTimes.com) amongst many other systems that net our client more.

A good agent should approach buying a house like an acquisition of a company. Thus winning contracts for less. In this case the 8 offers were bid up to approximately $800,000. Why in the world would somebody take our lower offer? Well because money is not the only motivating factor. When we got that house for only $750,000 my clients were in shock after just getting approved by the lender to get bid up to $800,000. They saved $50,000.

So it doesn’t matter if the market is hot, cold or you are buying or selling, an aggressive agent can save you much more, and do it in a way that all parties are smiling in the end.

Ok, I got sidetracked. The point is that what a great agent does can’t be compressed into 8 closings a week per agent.

So you have to pick one:

1. “save on commission” or
   
2. “net more.”

Bottom line is,

I used to rebate… but then I got… good.

Frank Borges LL0SA- Virginia Broker/ Owner FranklyRealty.com

Blog.FranklyRealty.com Featured in BusinessWeek, CNBC, WSJ etc.

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Keywords: Housing bubble? Arlington, Alexandria, mls, homes, Real estate, Virginia, Alexandria, 22201, 22314, Fairfax Va, DC Realty, Realtor

Well lets talk about a huge hush hush: Realtor Rebates!

Wow, I said it, and I put it in writing. A non-Rebate firm educating their customers and readers about something that we don’t do*… REBATES.

A fellow Realtor who hates rebaters told me “You’ve got some brass ones to talk about that.”

I say thanks!

Will this be suicide for my business? Shouldn’t that be kept secret? Why tell potential clients about your competition, which might be a better deal that they didn’t know existed? Why? Because I think buyers should know about all their options, and decide what is best for them.

(*Regarding the “we don’t do Rebates” comment earlier, tell me you want to pay full price for a particular $1M home , and sure I’ll give you a rebate. But what if I can find you a neighbor’s house for $20k less?)

Rebating is not bad. It is NOT the devil, it is just another business model.

First of all, what is rebating, isn’t it illegal?
Rebating is when a Realtor gives back part of their commission to their client, the buyer. This is done above the board on the HUD1* at closing. This is 100% legal in Virginia (4 or 5 states don’t allow it, the DOJ is working on them). (*Update 5-27-08 Even though HUD wrote me specific instructions on rebates having to be on the HUD1, some companies have found a legal way around this)

Why would a Realtor be stupid enough to do this?
(others say that, I don’t agree with that comment)

Lets take the following scenario:

1. Agent #1 might get 2 deals and not rebate
2. Agent #2 uses rebating as a marketing tool and as a result might do 4 deals within the same amount of time.

Lets say each commission is $10,000.

1. Agent #1 “makes” $20,000 (* another blog will go over what they REALLY make, which is far lower)
   
2. Agent #2 brings in $40,000 but “gives” back lets say 1% of each deal (1/3rd of their commission)
   
3. Agent #2 “makes” $26,000.

Who is the dumb one? The rebater makes 30% more! That doesn’t sound too stupid to me!

Confession… When I first started I used to almost always rebate!

Why not? I was brand new, FranklyRealty.com just started (long story) and I had to find a competitive advantage. I didn’t have a good reason why the heck Joey should use me over his Mother’s cousin who has been in the business for 20 years?
Tell me what other industry doesn’t first compete on price to break into the market?

My rebating techniques got me in , and on the Discovery Channel’s Double Agents reality show. They mentioned my rebating including my “REBATE” license plate. I got a ton of deals from that. And my Internet marketing was hot. Heck, look to see who owns RebateRealtors.com and RebateAgents.com. Yeah I made less per deal, but I was doing just fine, I made it up with quantity. I was also named 2003 Northern Virginia Association of Realtors Rookie of the Year, out of 1,000 new agents, and I did that in just 6 months, even though Rookie agents were given 18 months.

Why did I stop rebating?
I kinda got good. (I’m not saying rebaters are bad). I finally had a reason why people should use me over Joey’s Mother’s cousin.

• This story was my tipping point:
  I had one client that wanted to buy a house listed at $600,000. They were ready to pay full price. I ran through my dozen proprietary how-to-price techniques (that I can’t publish in my blog, just email me for more info). I call it a CRA report (patent pending). Not a CMA, Comparative Market Analysis (which everyone does), but a CRA, Comparative Realtor Analysis. This is a background analysis of the agent’s past performance (not a bad idea heah? Imagine what else I have up my sleeve, the CRA was featured in Smart Money magazine).
  I saw that this listing agent in 5 recent listings dropped her price by $25,000 after exactly 30 days. Obviously this was how she got deals. She would convince sellers to use her because she said she could get a high price, and after 30 days would drop the price and sell it fast. So there was a good chance they would do that with this listing. With 28 days on the market we offered $30,000 under and… they took it.
  My client was super excited about the $30,000 discount, and didn’t really care that they were also getting 1/3rd
  of my commission. At that point my focus changed to helping the client save as much money possible, without having to sacrifice my pay.

So are you saying that we should or should NOT use a Rebate agent?
I’m saying you definitely SHOULD use them if you think all Realtors are just overpaid paper pushers. However if you read my entire “insider scoop” blog and see that there is more to it, you should pick the best agent, and if perhaps you find one that also rebates, good for you!

Think of it another way. They have to make money some how, right? Either they are new and need this marketing technique to get more business (ask yourself whether a new agent is going to help you negotiate a lower price vs a 20 year veteran) or they have to do a higher volume to make the same pay (they claim to be more “efficient,” and maybe they are). With that volume does any service get left out? Maybe, maybe not. Will they search for deals that are off the market? FSBOs? Recently expires? Did they send out 100 letters on your behalf to see if a particular neighborhood that you loved had potential sellers in it (yes that works with my letter)? Will they take 3 weeks to negotiate a contract with a $100,000 price drop, or will they want the deal to close fast and try to push you to close faster/higher? (Heck that can happen just as frequently with a non-discount Realtor too!)

I recently had a buyer that said “Well I have a friend’s friend that will give me 1% back if we buy with her.” I said in return, “Really, I can find somebody that might give you 1.5% back.” I had a new agent in mind that would love to make a quick $10,000, but will the buyer get the lowest net possible? In the end is that cash back worth it if the agent isn’t as good at getting you the lowest net possible or giving you the time, dedication and hand holding that you might need? I got the deal and it took 4 weeks after we found a home they liked. We offered on 2 homes, one $300k below list, and I found them 2 off the market properties from my letters. I don’t know if a rebater would have been as patient and aggressive. Maybe they would be. My clients were very happy in the end.

Lets run some numbers!
Discount firm vs. a known non-discount brandname firm!

I’m excited. What a brilliant idea! I ran an analysis comparing the negotiating abilities of one discount firm’s closings to another well known firm (not mine). What I was hoping to show was how a rebater might give you money back, but if they didn’t fight to get you that last $5k or $15k, how much do you really save with a rebater? Your NET is what should matter, right?!

But guess what?! My numbers showed that the rebating firm was a better deal! Ha! Oh no! Do I ditch my blog? Nah.

Here is what I found in my non-scientific study:

• Rebate firm closed an average 96.7% below list (including seller subsidy)
• Brandname firm closed an average 96.2% below list
• Rebate firm gives .75% back
• Rebate firm on AVERAGE did .5% “worse”,
  but with the .75% rebate, you’d be ahead by .25% or
  $1,250 on a $500k home, … on average.
• But you need to ask, what would an above average agent have been able to net you?
  
  
• Disclaimers: For those statistic majors out there, I know, I know, this is nowhere near a scientific report, just treat it as food for thought . It was hard to get a large enough sample (20 for the rebate firm and 65 for the brandname firm). Also buyers should not just be looking for the biggest discount off list. I’d rather buy a properly priced listing at full price, than get a $50k discount on a $100k overpriced home. I just used that as one way to measure a “good deal.”
  

So before you decide on your agent, whether it be a rebate agent, or another agent, make sure you read the following blogs so you know what type of agent to avoid (that is if you agree with the blogs):

1. I Need A Buyer’s Agent! But For My Car.?
2. Stockbrokers Can’t Predict Stocks, Realtors Can’t Either!
3. Leverage, The Untold Risks With Buying.
4. Tip #1 From Mom: Don’t Trust Realtors That “Sell” You On Buying.
5. Shady Realtor Bonuses? 10%!! Free Cruise? Be Aware.

Also ask yourself whether the agent you are considering will give you this type of information (including telling you about rebates) and whether they put you first or their commission first. Ultimately if they mesh with your style, great. If they also rebate, great, go for it.

And for you Realtors that hate rebaters, don’t. Get over it. It is just another business model, here to stay. Instead hate the “weekend warrior” who does 2 deals a year and is clueless. Once as a listing agent, I literally had a buyer agent say something to me that lost his client $10,000. He said “Don’t worry, I know they will
go up, they really need to get this under contract this week.” Maybe he was playing me, but I don’t think so.

Will your agent (rebate or not):

• Push you into buying. Or do they tell you the real-life downside risks with buying? (risks sub-blog)
• Expose Shady Agent Tricks. 10% buyer agent bribes, MLS fudging, etc (shady sub- blog) or will they participate and accept those legal bribes (rebater or not)
• Acquisition approach. Do they treat your purchase like an acquisition of a company? With research on all parties involved, (including once going to the courthouse to find the existing loan amount) or do they just run a CMA and tell you it is a great deal?
• CRA Reports Run a CRA report (as seen earlier in blog) or do they not even know what it is or why it would be important?
• Off Market and FSBOs. Look and find properties off the market. Lowering those darn Realtor fees can net you a better deal. But it takes 3 times the work for a Realtor.
• Willing to lose deals. Will your Realtor be as aggressive as you want and lose deals left and right until you find a seller that needs to sell at your price? (Ask them the last time they LOST a deal because they tried to get a great price. I know one agent that bragged about wining 90% of her contracts during the bidding war days. Hoorraay! Her clients probably always overpaid! Losing a deal can DOUBLE an agents time with a client, but you get a better deal when you finally get one.)
• Give you a rebate. Some will, some won’t (we don’t).
• Get you the lowest negotiated price. This is what matters (along with service).

Thanks for reading! Love to hear your comments! And remember…

- Written by Frank Borges LL0SA- Broker/Owner FranklyRealty.com
703-827-4OO6 Please report all typos, I don’t like looking stupid. If you like this post, sign up for new blogs daily.

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