Redfin raises their fees – By the numbers

Today Redfin announced price increases to home buyers and big changes to their service. Looks like this got rolled out in all of the markets except Seattle and Washington DC, but they said that they will launch the same thing in Seattle and Washington DC in “a few months,” as soon as they hire more agents to support it.

The promise of the new service level is that you get to have a direct relationship with an agent, rather than being shuttled around between team members. If they can pull this off, it will be a positive for customers. Frankly I’m a little surprised that it took them this long to implement the change, as we continue to receive customers who fall through the cracks of their automated system or are just frustrated by the lack of direct interaction with their agents. To support this, they’ve boosted their fees quite substantially to home buyers.

In the past, if you bought a home with Redfin, they would refund 50% of the commission they received from the seller, subject to a minimum for lower-priced homes. Gone are the percentages and calculator to figure out how much you can save. It has been replaced with a “black box” formula based on the listing price. Their rebate pages only say “Redfin keeps a portion as our fee” and “You save with Redfin.” To figure out how much you save, you have to look at the number on each individual listing.

I dug into the numbers further, and the new black box commission formula does result in a rather significant increase in their fees to many home buyers. In their blog post, they mention a 16% increase in fees, though based on these formulas, that depends entirely upon the list price of the home you are looking at. I’m not sure where the 16% number comes from. You could get a 39% increase in their fees for a $400k house.

It is not a straightforward formula, so here is a chart to show you how it appears they calculate their buyer rebates. I picked two cities that have different typical commissions paid to buyer’s agents, and looked up the rebates that they are offering at various price points. In Dallas, many sellers offer 3% to the buyer’s agent and in Portland, a typical commission of 2.5% is paid to the buyer’s agent. The commission formula appears to be different in these two cities based on this.

Redin's new rebate percentages

As you can see their buyer rebate climbs in a curve between $200k and $900k. You don’t get the full 45% rebate unless you buy a $900k+ home when commissions are 3% or a $1M home when commissions are 2.5%.

increase in Redfin fees

Depending on the price of the home you are buying, the fee that Redfin charges for their service is up dramatically compared to their previous rebates, with buyers in the $350k-$650k range looking at price increases of 20-39%. While they remain very attractive at price points nearing $1M, the savings for the middle-of-the-road homebuyer is reduced substantially. I can’t help but think that customers are going to be turned off by the lack of transparency on how these rebates are now being calculated.

It also appears that they’ve hit a snag on this already in San Francisco, where they’ve set their minimum at $900k to be able to use a Redfin agent. Anything under that and they’ll refer you to one of their partners who doesn’t work for Redfin. The limit is apparently temporary as they staff up in the Bay Area, but consumers have to deal with a moving target of how much they can get back on their purchases there until it’s resolved.

We’ve always liked Redfin’s approach to the real estate market. They’ve built a great website and have managed to break down a number of industry barriers by equipping consumers with in-depth data. We’ve also admired their willingness to try something different in how they charge consumers and compensate their agents. With the latest price increase, however, it looks like their efforts to transform the commission side of our business are reaching an end. Clearly they are going to message this price increase as necessary to support enhanced customer service, but there is likely a back story here about how they need to boost their bottom line to show a return and exit strategy for all of the venture investment that they’ve taken.

Whether they are successful with these new fees remains to be seen. Clearly customers want more from their relationship with a real estate agent than they’ve been offering, but the smaller monetary difference when picking one of their agents makes the comparison to traditional Realtors less clear.