Before I talk about the RE/MAX and Redfin “partnership” — how it started, how it ended, and what its significance is to you, let’s talk a bit about each of these companies so you get an idea about the significance of what happened.
RE/MAX is a real estate company that was founded in January 1973. Currently, it has more than 100,000 real estate agents in 6,800 offices in about 100 countries. It’s a pretty big real estate brand. RE/MAX operates in many regions around the world and is in the business of selling franchises to local operators who operate brokerages that employ real estate agents. It provides systems, marketing, training and other resources. Its market capitalization (for you investors) sits at less than a billion dollars.
Redfin is also a real estate company but is structured as a brokerage. It doesn’t sell franchises but it does operate in the United States and in Canada. It is focused on its technology offerings benefiting consumers by providing an enhanced real estate buying and selling experienced, but is also focused on discounted commissions. More on that later. Its market cap is about $1.5 billion dollars.
The ongoing battle between traditional real estate brokerages and technology centric ones really boils down to one thing: the consumer experience. How easy is it to work with a real estate agent? What level of knowledge, service and expertise do you expect from them? What commission do you pay — and is it worth it for the service and experience you receive?
Real estate agents are paid on commission. Typically, they don’t receive payment if they do not procure a successful sale between a buyer and a seller. Commissions range depending on what kind of real estate brokerage you employ. On one end of the spectrum, discount brokerages and ‘flat fee’ brokerages tend to charge a low commission, a low flat fee, or a combination of both. On the other end of the spectrum, traditional, full service brokerages charge a higher fee, typically 5% and upwards, but provide a greater range of services (or at least you’d expect they do).
In Ontario, commissions are usually paid by the seller and include a listing component (what the brokerage charges to list, market and subsequently ensure the sale of your property), and a co-operating brokerage (also known as ‘buyer brokerage’) commission, which is paid to a buyer’s agent. Yes — the seller pays both the listing agent and the buyer’s agent. In today’s market, the buyer does not pay their own agent out of pocket, but effectively the commission that gets paid to the buyer’s brokerage does come from the proceeds of the sale of the house. Indirectly, buyers are paying the buyer’s brokerage commission.
Whether it was the result of bad experiences with agents, or an ultra-competitive real estate environment, commission rates have become challenged. Discount and flat fee brokerages emerged (and have been around for decades). For example, a homeowner wanting to sell their own property can choose to work with a flat fee “for sale by owner” company, pay a certain amount of money to have their property listed on the market, and then the homeowner would take care of the rest of the selling process: arranging buyer visits, open houses, negotiating the offer, and ensuring the successful sale of their property.
Meanwhile, traditional brokerages continue to thrive, charging anywhere from 5% and up though many commission rates and service options exist. Traditional brokerages typically employ agents who are responsible for building their own book of business, and their agents are independent contractors rather than employees. Commissions are negotiable — they always have been — but some traditional agents stick with the typical 5% commission, split between the listing brokerage and the buyer brokerage (usually 2.5% for each side).
As independent contractors, real estate agents employed by traditional brokerages are responsible for their costs of doing business. They pay the brokerage fees, franchise fees, their local real estate board dues, licensing costs, marketing costs, office costs, car leases, insurance, office space, administrative support, etc. It’s pretty much like starting up your own business. Each real estate agent has to market themselves and generate a sufficient amount of business by helping people buy and sell real estate in order to earn commission, sustain their livelihood, and build a thriving business.
RE/MAX was an early disrupter in the real estate industry. While traditional firms at the time were charging agents 50/50 splits on commissions (meaning brokerages took 50% of the proceeds and paid out the remaining 50% to agents), RE/MAX came in and introduced a completely different compensation package: pay agents maximum commission but charge a desk fee to cover brokerage operations. This radically changed the real estate industry in its time. While the brokerages offering 50/50 splits did provide advertising, office support and other services to agents, the radical commission plan of “real estate maximums” meant one thing: agents could keep more of the commission they earned, but they had to pay for everything themselves. They had to run their own ‘business’ within the brokerage.
The introduction of this maximum commission compensation model attracted the top producers of the real estate brokerage’s back then to join RE/MAX, which grew to take over the #1 spot in marketshare in the United States and Canada. Until recently, it held the #1 spot in the entire United States. In Canada, it remains the #1 real estate company by market share of all transactions in several markets.
RE/MAX continues to remain a strong driving force in many real estate markets not only in North America but worldwide. But in recent years, changes in consumer preferences, the need for transparency and the introduction of innovative technology has challenged the traditional real estate brokerage business model.
Enter Redfin. It’s a real estate brokerage that operates in several states in the US and has now entered Canada. It is technology driven, backed with heavy funding, and offers a discounted commission model. It wants to please consumers by giving them a technologically driven real estate experience — at a low cost. This novelty has gotten a lot of attention (and business) in the United States, but is barely gaining any traction in Canada. The attention it has garnered in the US has benefited Redfin by attracting consumers who want to buy and sell real estate using its discount model. This means it gets what real estate agents covet: leads. Lots of leads.
(By the way: a lead is someone who is willing, able and motivated to buy or sell real estate in an immediate timeframe.)
In the United States, Redfin doesn’t have the infrastructure to operate in every market. So while it does have an active role in certain areas of the US, it relies heavily on outside brokerages where it doesn’t have operations. RE/MAX works with Redfin in the US by servicing the leads Redfin can’t service. This referral ‘partnership’ has been ongoing for years.
Recently, Redfin sought to expand to Canada by focusing on two key markets: Toronto and Vancouver. Naturally, these are two of the biggest real estate markets in Canada. While there are many large metropolitan areas in the United States, real estate activity in Canada is really centred around these two cities.
And guess who the dominant real estate player is in Toronto? RE/MAX.
With RE/MAX’s brand dominance worldwide, and dominant market share in large Canadian cities like Toronto, it was a logical move for Redfin to extend its partnership in the US into Canada. From RE/MAX headquarters in the US, two Canadian regions, RE/MAX Western Canada and RE/MAX Integra, joined the Redfin partnership.
The idea for the partnership in Canada is essentially the same as the US. Redfin would refer leads it couldn’t service on its own. It doesn’t have the manpower nor infrastructure to roll out aggressively in the Canadian market. But it does have the backing of the technology already available in the United States. It only made sense to partner with the dominant real estate player in Canada.
But there was a problem with this partnership that many agents and brokerage owners voiced out early on. How do you juxtapose a traditional real estate brokerage, keen on providing full service, charging traditional commission rates of 5% (more or less), with a technology brokerage focused on advertising discounted commission rates as low as 1%?
RE/MAX brokerage owners usually discourage their agents from advertising low commissions. This is not to say that agents aren’t charging lower commissions. It’s no secret that some agents do. But they just don’t outright advertise it. So to partner with a real estate brokerage that isn’t shy about tooting its horn and proclaiming as low as 1% commission rates is a major conflict.
And which company would benefit more from this partnership? Would Redfin benefit by having its leads serviced by RE/MAX agents, and thus earning generous amounts of referral fees? Would RE/MAX agents benefit by getting more leads than their current technology provided for them? Which real estate company had the upper hand?
To me it seems only logical that Redfin had the most to benefit from this partnership. I mean think about it — a real estate company with no Canadian presence, would literally be able to start operations and have its leads serviced overnight by a network of top producing and experienced real estate agents in Canada. This would allow the Redfin brand to become recognize and gain market share. And eventually it could lead to consumer preference for the brand if the services being offered met consumer expectations.
What about RE/MAX? Well, they’d receive leads from consumers looking to buy and sell real estate. Except the consumer would expect a rebate when buying a home. And would expect a 1% listing commission. And if the RE/MAX agent didn’t want to deliver on this Redfin promise, what would the consumer’s choice be? Hmmm… perhaps to work with a Redfin agent instead?
As a Broker/Manager, I wanted so badly to believe that RE/MAX had a much bigger play in mind. They couldn’t buy out Redfin because of their smaller market cap. But perhaps the partnership could have resulted in a shared technology platform or some other form of innovation. I found it difficult to believe that the partnership was a shortsighted decision by RE/MAX to take advantage and jump on the technology bandwagon without having to build something out on their own.
But I was wrong.
Redfin tooted its horn once again and sent a message out to the world. They wanted to eliminate buyer agents. Yes — ELIMINATE buyer agents. How? By introducing a ‘buy it now’ button on its website allowing consumers to click a button when they see a house they like, and initiate the buying process without a buyer’s agent working with them.
Wow. This was a big threat to the real estate industry. A big threat to traditional real estate brokerages such as RE/MAX. A big threat to buyer agents!
But wait a minute. If you read the press releases and articles closely, it wasn’t Redfin that said they wanted to eliminate buyer agents. It was how other real estate commentators and the media translated Redfin’s message. Redfin, as a matter of fact, employs several buyer agents. And I’m pretty sure they weren’t in the business of eliminating the buyer business for everyone AND themselves.
After a massive barrage of articles and commentaries in the industry alluding to Redfin’s quest to eradicate buyer’s agents, Redfin clarified their position. They did not have the intention of eliminating buyer’s agents. They wanted to give consumers more power to choose whether or not they wanted to work with a buyer agent. If they did, fine. After all, Redfin does employ buyer agents. If the consumer wanted to work directly with the listing agent, Redfin offered that option as well.
No matter how novel this innovation may seem, it certainly wasn’t new. Redfin didn’t invent the ‘buy it now’ button that gives consumers the power to buy directly from the seller’s agent. This has always been around. It’s called: dual agency.
Before the existing of the internet and technology, if a homebuyer wanted to work directly with the seller’s agent, all they had to do to bypass a buyer’s agent was to pick up the phone and contact the listing agent directly. Voila. No buyer agent involved.
In some jurisdictions whether in Canada or in the US, dual agency isn’t allowed. Buyers must be represented by their own buyer’s agents and not by the seller’s agent. But in jurisdictions where dual agency is allowed, the consumers always had the choice of working with the seller’s agent directly. Nothing new.
Yet the noise created by this Redfin announcement caused a whirlwind in the industry. And promptly pushed RE/MAX to kill its partnership with Redfin.
Although I did my best to promote the possible benefits of this partnership during the brief time it existed, deep down inside I was torn between two possibilities. On the one end, I wanted to believe that RE/MAX had a strategic move in mind that would lead to further dominance, even if it meant a joint venture down the road with Redfin — but the biggest conflict was the opposing commission models. On the other hand, I felt the pain of my agents who saw a brand they were loyal to and venerated position themselves alongside a discount real estate brand. Imagine what would happen if Maserati ever partnered up with Honda. Not that there’s anything wrong with Honda. Nor Maserati. (In fact, my household owns a Honda. We don’t own a Maserati… LOL.)
When a discount brand partners with a luxury brand, typically the discount brand benefits by gaining accessibility and prestige based on its perception by the market. When Redfin partnered with RE/MAX, Redfin stood to benefit more from the partnership by gaining popularity and acceptance.
Except it didn’t work out. The two broke up. And now it’s a continuous battle for what real estate model will thrive in the years to come.
I love technology. I admire what Redfin has created, and how companies such as Zillow, Housesigma, and other startups in both the US and Canada are changing the face of real estate.
But let’s face it. At the end of the day, whether you’re buying or selling a home, you need results. You need experience. And you need someone who can deliver.
Technology is only an enabler. It’s merely a tool. It won’t replace an expert whose market knowledge, value proposition and expertise delivers more than the amount of commission you pay them.
I believe in RE/MAX’s value proposition of training, nurturing and developing real estate agents to be the very best at their business. And I’m confident that in the years to come, their technology initiatives will improve based on what real estate agents need.
What this looks like — I can only imagine. But when you look at the productivity of an average RE/MAX agent, the market share dominance it has in many local markets, and the expertise of its real estate agents — there’s a reason why consumers choose RE/MAX above other real estate companies here in Toronto, and in Ontario… and in Canada for that matter.
Will Redfin or any other technology based real estate startups gain traction? Who knows. But when they’re competing against aggressive, passionate and knowledgeable real estate agents from RE/MAX, I guarantee it’ll be a tough battle. And who ultimately stands to benefit from this?