SAN FRANCISCO — There’s room for growth for both lean brokerages employing new business models like Redfin, and traditional big-name franchises like Better Homes and Gardens Rand Realty, executives at the companies agreed.
In a discussion at Inman News’ Real Estate Connect San Francisco, Redfin CEO Glenn Kelman and Better Homes and Gardens Rand Realty managing partner Greg Rand both said that while market conditions are far from rosy, they are poised for growth.
Both companies expect their future growth and success to come at the expense of established brokerages that don’t innovate and invest in technology.
"Companies like ours, we grow when things are tough by opening up the tent" and bringing in new agents and companies through acquisition, Rand said.
Kelman said Redfin is in 12 markets, and will probably open for business by the end of the year in four of the six additional markets it’s currently planning to expand in. The brokerage has doubled its business every year, he noted, with the San Francisco Bay Area one of its fastest growing and profitable markets.
In some ways, the companies couldn’t be more different — Redfin has 100 agents, who with the help of support teams each average five to six transactions a month, Kelman said. Redfin offers commission rebates to buyers and reduced commissions for sellers.
Better Homes and Gardens Rand Realty has 800 agents working out of 23 offices in the Hudson Valley suburbs around New York City, who average only eight transactions per year.
Rand said the company, which affiliated with Realogy Corp.’s Better Homes and Gardens Real Estate last year, hasn’t lost money. But it’s been a trying time.
"I’ve been working for free for a couple years, which is not fun," he said. "We did not hit the red, but came close to it."
Rand said that while the company has shed some less productive agents, he would like to thin the ranks even more, because unproductive agents add to the brokerage’s overhead expenses. Such efforts are often met with resistance.
"We struggle all the time," he said. "We tell managers, make a list of the the people you want to save, and fire the rest."
But managers are reluctant to part ways with unproductive agents because "they might bring in a transaction tomorrow," and because of the effect dismissing veteran agents can have on moral.
"These are some of the nicest, friendliest, most unproductive people in the world," Rand joked. When they leave, their departures are lamented by other agents.
He marveled that at Redfin, "everybody that works there sells real estate, you don’t have a bottom third."
Kelman said Redfin has been able to reduce turnover amongst its agents as it’s gotten better at identifying the qualities that make a productive agent.
There are agents who can’t handle three clients a month without the service they provide to clients suffering, he said, while others who are computer savvy and good at delegating work can handle more than six transactions a month.
"We don’t want to pretend we have it all figured out," Kelman said. Redfin is an "operationally intensive" company, and not an easy business to run, he said. "If you followed me back to Redfin office, you would see there are so many problems we have to address. We have fixed costs like you wouldn’t believe."
Resizing to meet seasonal changes in the supply and demand for homes remains a challenge, Kelman said — as does meeting the 30 to 40 percent gross profit margins demanded by the venture capitalists who back Redfin.
Because Redfin agents are paid a salary, miscalculating demand can create problems.
"One thing I can’t reconcile is that in most markets, a quarter or a third of the business is still done by tiny little companies that haven’t innovated in years, and don’t offer anything but the relationship" with buyers and sellers, Rand said.
In a one-on-one interview with Inman News Publisher Bradley Inman, Alex Perriello, president and CEO of the Realogy Franchise Group, said that companies that don’t invest in technology and innovate "are probably the ones most at risk."
One reason the industry has so many agents who only do a few transactions a year is that they are typically independent contractors rather than employees.
"I was at a meeting with Dale Stinton, the CEO of NAR, and there was consternation about there being too many NAR members — that maybe we should raise dues to keep unproductive people out," Perriello said. "Dale said NAR has been around 100 years, and during that 100 years, we’ve never hired an agent. We have members."
In other words, it’s up to brokers, not NAR, to thin the ranks of Realtors. Perriello said that many agents might hang on during the downturn waiting for business to improve.
"It’s not lights on, lights off in our business," although some less productive Realtors might be better off joining a referral network.
Asked who has the upper hand in the business today — agents, brokers or franchises — Perriello agreed with Inman that consumers tend to relate to the agent, not the broker.
"I think the agent is always key to the transaction — that’s where the rubber meets the road," Perriello said. But there’s a better balance in recent years between agent, broker and franchisor today, he said, with each acknowledging "that everybody in the chain has to be adding value."
Agents have become more concerned about the ability of brokers to remain in the black, he said, because without the support they provide, agents would not be able to do business. Franchisors provide brokerages with systems, tools and training.
Perriello said that while Redfin’s business model can be a successful one, the company’s market share "is not keeping me up at night."
Launching Better Homes and Gardens Real Estate is one strategy Realogy has employed to build market share. In the last couple years, Perriello said, Realogy has done "a lot of roll-ins and mergers and acquisitions" of distressed brokerages, and having five brands for those companies to affiliate with has been a plus.
