Wisest of the crowds

No not what you are thinking - not social, ethnic, or racial discrimination. Redfin discriminates on price. PRICE! The 60 minutes piece was a yawn for me personally but it does give Americans the right to start to push back. See the posts and comments at TechCrunch, Redfin, Inman, BloodHound for an early read. Whether it becomes a consumer zeitgeist or fades will be seen but the open question is this: will price variation become mainstream in american residential real estate?

There is an old economic idea called price discrimination that is popular with every micro-econ 101 student, and their professors, that says you reach more customers and make more money by offering variation in pricing. Its sort of definitional for anyone who believes in supply and demand. It works like this: when you go to see a baseball game, there are a 100 variations in pricing to meet everyones needs and to tap into every possible cross section of demand. For example, there are ticket prices for corporations who entertain in luxury boxes and ticket prices for those who mostly prefer a beer and some sun in the bleechers. Ticket prices for season holders and ticket prices for last minute shoppers. In short, EVERYONE can have their demand met for baseball. A small example with the mighty SF Giants here.

What would happen if every ticket was the same price? Mayhem and lost profits. Some people willing to pay more for MLB tickets will transfer their money to an underground marketplace that will use price discovery to allocate tickets. Meanwhile, people at lower price points will be shut out resulting in further lost revenues to MLB. Thats why we have pricing variation. Its better for everyone because everyone gets an allocation and the business folks maximize their revenues.
People might argue that the price variation exists is in the underlying house price and not in the intermediary execution price (brokers & agents). If that were true, then why did trading volume in financial markets explode when electronic execution came into acceptance? (For a slightly more technical explanation {very slightly!}, see my earlier post here).

Redfin discriminates. So do I. It makes sense and it is better for everyone. Many people have commented that Redfin basically passes their work load to external agents to facilitate their transactions and to make their business model work. I can certainly see how that might play out. But if the consumer is footing the work load “bill”, don’t they deserve to get a rebate? Don’t consumers deserve the right to choose their level of service? In the end I believe that consumers will still depend on full service agents because housing is complicated and its something we do rarely. But by offering price variation, we get to grow the pie. Anyone else out there a discriminator? Anyone else want to make more money?

Redfin, a real estate start-up that is known for shaking things up a bit has launched a new initiative entitled The Real Estate Consumer Bill of Rights. Redfin CEO Glen Kehlman shows a lot of courage and perhaps even more media savvy by undertaking this effort. I will spare you the details, so here is the list without the explanations he provides:

1. Choose the services you pay for.
2. Know how your agent makes his money.
3. Know when you are committed to an agent.
4. Know what services your agent will provide.
5. Have an agent that represents only your interests.
6. Know the commission refund you can get before you buy a house.
7. See all the houses for sale.
8. Have an open discussion about a house for sale.
9. See all the information available about a house for sale.
10. Be sure your agent will show your house to everyone.

A lot of people have spent considerable time weighing in. Notable positive reviews include Kevin Boer of 3 Oceans Real Estate ,and Joel Burlesome of Future of Real Estate. Notable undeclared bloggers are and Ardell Dellaloggia of Rain City. Notable undeclared bloggers include Christine Forgione of NY Houses for sale. A thorough and negative review comes from Greg Swann of Bloodhound. All worth a read.

This is a complicated issue that I am still assessing but in principal, I like anything that gets people talking about making things better for us consumers. In this regard, I support Glen’s efforts.

There are some areas that deserve some more thoughtful consideration, particularly when the answer results in a request for MORE legislation. My experience with private Board deliberations versus on-the-ground reality for some of the largest financial institutions in the country is that big business uses big government to create advantages for themselves vis-a-vis their competitors (large and small) and the silent majority of consumers. There is nothing Machiavellian about this reality. Ours is a system that wants all sides to speak-up. Unfortunately, those who speak the loudest (usually via money) get heard. So creating more layers of laws means we make change more difficult and less likely. Also, we cede legislative influence to money politics. When was the last time you paid into a lobbying fund?

Glenn can’t fight the fight with money so he is enrolling the people. Bravo! Is it good for him? Yes, absolutely. Discussion of this is a waste of time. Why else would he propose it? Does this matter? No! Glenn has started a discussion and I am much better informed as a result (are you?). Do I see the validity of some of the arguments from opponents such as separating commission paid by buyers and sellers so that we get better align of incentives and flow of money into the ecosystem? Yes, very much so! So let’s keep the discussion alive and thriving and then let’s demand some changes where we agree. Glenn, thanks for getting us started.