The following is a guest post from Houston, Texas real estate developer and entrepreneur Tracy Suttles.
Redfin, the first major online real estate brokerage, was founded in 2002. The company first began to offer homes for sale online in 2006, using a business model that particularly benefits consumers. According to their corporate website, the brokerage has completed more than $1.5 billion in home sales and has been favorably reviewed by 97% of customers who ranked the company (redfin.com).
This unusual real estate company was profiled on NPR Marketplace. However, here we provide calculations that demonstrate when dealing with Redfin makes the best financial sense, as well as a general description of how this brokerage works.
What Makes Redfin Unique
The major difference between Redfin and other real estate companies is how agents are paid. In many brokerages, buyer’s agents are paid by commission. That is, the real estate agent who helps a potential buyer find their new home is paid a percentage of the purchase price of the house. Usually, the sellers are responsible for paying the commission.
Redfin agents, in contrast, receive a salary. Therefore, the commission paid by the seller’s agent is not given to the buyer’s agent (a Redfin agent). Instead, in major metropolitan areas, the brokerage keeps 50% of the commission and refunds 50% of the commission to the buyer (however, the minimum fee the company charges a seller is $5500). This rebate is not taxable, and, in some cases, the rebate money can be applied to closing costs on the new house (redfin.com).
According to redfin.com, the company has refunded almost $100 million as of 2017.
Why Buy a New Home Using Redfin
Redfin’s commission rebate policy is very attractive and can help homebuyers save a significant amount of money; the exact sum saved depends on the price of the house purchased (see below). In addition, their online database gives potential buyers access to extensive data (Multiple Listing Service, or MLS listings) about properties for sale — including tax records, whether a property has been re-listed, and previous sale prices — that are usually only available to real estate agents.
Home buyers use the database to identify properties they are interested in, and can schedule private showings online. When a potential buyer is ready to make an offer on a home, the buyer chooses a Redfin agent who then guides the offer process. This business model has been very successful because, according to the company website, “When you come to Redfin having already done your research, our agents can focus on serving you, not selling you”.
Why Redfin May Not Be the Best Option
Although Redfin agents generally have excellent customer service ratings, according to the company’s website, they are by definition more ‘hands-off’ during the first stages of a potential buyer’s search for a new home. In fact, much of the background work involved in finding a suitable house, such as identifying comparable properties in a single neighborhood, is completed by the buyer, not the agent. The fact that Redfin’s well-organized, detailed real estate database is accessible by buyers makes this possible.
Therefore, a potential buyer may not have any contact with the online brokerage’s agent until the buyer wishes to make an offer on a property. Buyers who want guidance in all parts of their search for a new home may choose a more traditional real estate brokerage.
Calculating the Redfin Commission Refund: Will a Buyer Always Get a Rebate?
The brokerage’s website states that “clients who buy and sell through a Redfin agent can save $20,000 in commissions”. However, it is important to note that the amount of money a client may save will depend on:
- Location: In major metropolitan areas such as Boston and San Francisco, Redfin gives 50% of the commission paid by the sellers to the buyers. However, in other locations, they refund just 15% of the commission. In addition, the typical commission paid by the sellers varies. For example, in Boston the typical commission is 2.5% (of the purchase price of the house), while in many other areas the typical commission is 3%.
- Home Price: Redfin sets a minimum fee of $5500. How does this affect the commission rebate? Suppose a house in the Boston area is sold for $360,000. In Boston, a typical commission is 2.5%. Therefore, the commission Redfin receives from the sellers for this house would be $9000. Because of their minimum fee, the brokerage will keep $5500 of the commission and give just $3500 to the buyers. Clearly, the more expensive the house, the larger the commission rebate.
Based on this data, will a client always receive a commission rebate from working with Redfin? Not always. For example, if Redfin keeps $5500 as a minimum fee, then buying with this company would not yield a rebate if the house was bought for $220,000 in a region with a typical 2.5% commission, or approximately $183,000 in a region with a typical 3% commission, because $5500 would equal the entire commission.
Online Brokerage a Good Choice for Hands-On, Motivated Home Buyers
Redfin is an excellent choice for home buyers interested in taking a hands-on approach to finding a new home. The 50% of commission rebate model gives home buyers a powerful incentive to work with this innovative brokerage. The very high customer satisfaction enjoyed by Redfin speaks to the professionalism of their agents and the overall success of their business model. However, not everyone who buys a house using this online brokerage may save a significant amount of money through the commission rebate.