Redfin Seminar

This is marginally related to my condo hunt, so I figured I'd report it here.

As I mentioned in my previous post, I'm increasingly intrigued by Redfin.  I've been lurking/using their site for about a month now, and have been quite impressed.  Their major goal is Freakish Depth: giving you access to all the information possible about every single market and property.  It's the ultimate site for real estate nerds, and features a huge variety of data that they have parsed into helpful charts, trend analyses, and other great stuff.

It seems like it'd be worthwhile to at least evaluate using them.  Their main sales pitch is on the commission rebate: you get to keep half of whatever commission they earn.  So, if you buy a $500,000 house, and the buyer's agent gets a 3% commission, then you will get $7500, either applied to your down payment or handed to you as a check.  Personally, I'm less excited about this aspect - don't get me wrong, money is great, but in a hypothetical choice between one agent who could negotiate a 10% lower price and another agent who gives me a 1.5% kickback, I'd take the former in a heartbeat.

No; the main reason why I'm drawn to them is that they just seem to operate in a way much more comfortable to me.  They're a discount brokerage, which means that you end up being responsible for most of your search, but that's the way I LIKE doing things.  I mean, I don't go to a department store where I work with a personal shopper who helps me pick out products; I go online, I do research, I find products I like, analyze them, over-analyze them, decide what I want, then look for the best deal I can get on it.  I enjoy the process of hunting and evaluating, and frankly it's something that I feel more comfortable doing on my own than under another's shadow.  Obviously, I haven't tried it yet, but the Redfin model sounds perfect: you use an awesome website to find homes you like, you schedule home tours until you find one you like, then you tell them to write an offer for you.  They take over, run the negotiations, and then see you through closing.  Ah... that sounds so wonderfully simple.

Anyways.  While browsing their (Awesome!  I love it!) site, I noticed that they were hosting a seminar in Palo Alto.  Now, for years I've seen those notices in real-estate newspaper sections for "First-time homebuyers seminar" or whatever.  They're almost always hosted by real estate companies, and I'm never tempted to go - it seems like a transparent ploy for new contacts.  This was... well, it sounded different.  They would discuss market trends, explain how Redfin works, and answer questions people had.  Okay, so that doesn't sound too much different, but I was sufficiently intrigued to sign up for it.  Basically, I was already interested in them, and this seemed like a good, low-key first point of contact.

Plus, they announced that they would be serving pizza and beer.  How could I turn that down?

It proved to be quite a crowd.  The last I checked, there were over 150 people registered for it.  I'm not sure exactly how many turned up, but it was probably close to that - we filled a good-sized hotel conference room.  There was pizza and beer, as promised.  The pizza was good - fancier than I'm used to, and trickily divided into unusually small portions so that one would need to take six pieces in order to reach the standard two-slice portion size.  The beer was high-quality.  One of the (many, many) things I love about the Bay Area is regularly good beer.  Even at free events like this, people would be ashamed to offer Budweiser and Miller Lite, so you can count on decent options.

I had been curious about exactly who would be present from Redfin; I'd seen the various local agents on their website, but the announces host wasn't any of them.  It turned out that Catherine Jardine (that name may be misspelled) was previously an agent in the area - I guess maybe she's part of the corporate structure now?  Or something?  Anyways, she ran the seminar, and spoke more than anyone else.  The tone was relaxed, casual, confident, and informative. 

The first part of the evening focused on general market trends.  Many of the graphs that she showed (Case-Schiller, inventory levels, etc.) were things that I had already seen on their site or elsewhere, but it was incredibly helpful to have someone explain their significance.  One of the weird things about our current situation is that, while there's a general perception that we're in a buyer's market because prices are down and foreclosures are rising, we're actually technically in a seller's market because of the incredibly low inventory levels.  Six months is the standard dividing line: more than that indicates a buyer's market, lower indicates a seller's market.  A year ago, Santa Clara county had about 14 months of inventory.  Today, it has about 3 months.  San Mateo county is even lower, and parts of San Francisco and Marin have less than one months' worth of homes for sale.  The consequence of all this is that it's really hard for buyers to find homes that they want, because there just aren't that many options on the market.  When something good does come on the market, you'll be competing with many other buyers for that very limited resource.

This may partly be marketing, but it did feel like Redfin was genuinely trying to give people the straight story, without spin or pressure.  Throughout the whole night, nobody said, "Now is a great time to buy!"  They just told it straight.  Many people would be better off as renters than as owners.  For people who do want to buy, nobody really knows if prices will go up or down.  They even had a slide that listed four bullet points listing why prices will fall another 20%, and another four bullet points listing why prices will rise 20%.  (The former: high unemployment rate, shadow inventory of foreclosed homes, a few others.  The latter: it's now cheaper to own than to rent in some regions [like San Jose], interest rates are low, etc.)  They included a few great quotes, including one I hadn't heard before from Mark Twain: "I have never recognized an opportunity until it ceased to be one."  Nobody can predict the future, and anyone who claims to is selling you something.

Another thing they pointed out was the sales-to-list price ratio - that is, the values at which homes are actually selling when compared to their listed price.  They showed the values for major cities - San Jose, Redwood City, Palo Alto, San Mateo, as well as wealthy enclaves like Woodside and Atherton.  Virtually all of them were within a few percentage points of 100% - some had average prices of as low as 97% of list price, others were bid up to as high as 102% of list price.  So, again, while the story we've been hearing is that it's a buyer's market out there, the reality is that buyers don't have a whole lot of leverage over the limited properties that are out there, and as a result homes are selling for approximately what their sellers list them for.

Now, a crucial point here is that this chart was comparing sales price to the FINAL listing price, not the original price.  So, if a home was originally listed at $750,000, then was reduced to $700,000, and finally sold at $707,000, then it would show as a 101% price ratio.  Still, as they pointed out, we shouldn't get overly excited about price reductions.  If a home is listed at $750k, and the owner gets an offer for $700k, then the owner most likely won't sell for that amount.  Instead, if they don't get any better offers, they will drop the list price to $700k, in order to attract more offers and create competition.  So, once again, the onus is on the buyers.  You should be aware of what homes are selling for in your targeted areas, but if a home is listed for much higher than what you think it's worth, you probably won't have luck with a low bid.  Instead, you should wait for the price to fall in line with the market, and then be prepared for some competition.

Some of the people at the seminar were surprisingly emotional about this.  Throughout the evening there were some passionate questions about why prices weren't falling more quickly when we are reading about foreclosures (reason: the banks are keeping the inventory off the market), or whether the last decade of the housing market has been an "aberration" (in Catherine's opinion, no - prices went up, and then went down, and that was the reality, not an aberration - property is worth whatever a buyer and a seller agree on).  I recognized the same tendencies within myself: as a buyer, I'm frustrated by high prices, and tend to emotionally feel like I'm being thwarted by the unrealistic expectations of sellers, rather than recognizing the particular role that they're playing within a competitive marketplace.

After an intermission, we moved into the second session of the evening, which focused on the Redfin process: basically, how buying with Redfin works.  I was already pretty familiar with the concept from their website: you do research on your own, using the tools that they provide, and also some other sites that they recommended here.  I was already familiar with many of them, such as Zillow, Trulia, and WalkScore.  One of the best take-aways from the evening was a reference to Property Shark, which looks extremely useful, and can provide some pieces of data that even Redfin doesn't have (like permit applications, zoning, etc.).

Once you find some properties you like, you can use the website to request a home tour.  This process has changed - in the early days, Redfin would charge for each home tour; now, there's no longer a charge, and you're not even obligated to buy with Redfin if you decide to pursue a home.  All you need to start touring is to send them a copy of your drivers' license.  By your third tour, you should also provide a pre-approval letter.

I've been curious for a while about how this would work.  Pre-approval letters are constantly talked about, but as I've mentioned before, I find that the reality is a little different.  One thing I've been unsure of is just how important it is to keep the letter up-to-date.  Mine was valid for 60 days and has since expired; I could renew it, but am reluctant to take an extra hit to my credit score.  First of all, they re-iterated that buyers in the Bay Area won't even consider an offer without a pre-approval letter.  They used to suggest that buyers get pre-approval letters of various amounts; now, they ask that you just get one letter, but have a relationship with your lender where they will provide you a customized letter when you're ready to make your offer.  As for the dates, they said that in this market, most agents are leery of letters that are older than 30 days, even if they haven't expired yet - they'll wonder about how good your relationship with the lender is.  So that was a bit of a bummer.  I'm fairly sure that I'll stick with San Mateo Credit Union for my eventual loan, but think now that I might want to get pre-approved through someone else in the meantime who won't do a hard pull of my credit report.

One other thing that I'd been curious about was how and if Redfin works with new construction that isn't listed in the MLS and therefore isn't listed on their site.  I asked them, and learned that you can use Redfin as long as the builder pays a commission.  Apparently, most builders in the Bay Area do offer this.  The lead agent further explained that the builder usually offers a "referral fee" - officially, the builder's agent is also your agent and will represent you.  In order for Redfin to get the referral fee (and, hence, you to get your kickback), the agent needs to go with you the first time you visit the property.  The best way to do this apparently is to schedule a tour in a nearby area, get in touch with a Redfin agent that way, and then set up the tour of the new construction property.  I was satisfied with their answer, and glad to have relatively clear explanations - this is something that I have been unsure about for a while.

Once you decide to pursue a property, you can submit the offer - tada! - online!  That seems weird and cool to me.  As Catherine explained, clicking "Submit an Offer" is roughly analogous to "winking" at someone on a site like eHarmony: it means you're interested, it doesn't mean you're married.  You fill out some information about your offer (your preferred agent, what you're willing to pay, what you want to use as an opening price, etc.).  It then goes into their system.  The lead agent will call you to finalize the offer: you'll discuss pricing and strategy and ultimately agree on whether and how to pursue the deal.  He (or she, but on the Peninsula it's a he) then handles negotiations with the seller, contacting you as necessary if anything comes up.  Once (and if) both sides agree on a deal, it is handed off to an associate agent who sees you through escrow and closing.

The whole system is fairly specialized and assembly-line-ish and impersonal; I approve.  Unlike a traditional real estate relationship, where a single person is your point of contact for every step of the process, here you will work with various field agents while touring homes; the lead agent for crafting and negotiating the deal; another set of associate agents for inspections, walk-throughs, escrows, and closing.  What I like best about this is the idea that people can specialize in what they do best.  It makes sense that someone who's great at negotiating should focus on that, so they can provide the best value to the most people.

They also spent some time talking about the hot topics of the year: short sales, foreclosures, auctions, and REOs.  Redfin refuses to work with short sales, and after this night I could see why.  I was shocked to learn that, nationally, fewer than 1% (one percent!) of all short sales result in an actual sale.  Most real estate agencies will take short sales and put a low price on them because it's a great way to bring people into the office and get new clients; however, the banks don't have to accept the low price, and most will reject them, but may wait for months and months to do so.  Even if a short sale is finally approved six months later, you may no longer want the home, and cut it off from your end.

That said, buyers remain convinced that short sales are an amazing deal, not recognizing that if YOU think it's a great deal, 50 other people will be thinking the exact same thing.  Demand for short sales has grown so high that Redfin has finally (sort of) given in - they still won't directly work with short sales, but you can now search for them on their site, and they'll refer you to other non-Redfin agents who will work on those properties.

Foreclosure auctions are generally off-limits to people like us.  They're held on the courthouse steps, and usually dominated by speculators and investors who will buy dozens or hundreds of homes at once, sight unseen, and don't really care about the condition of the homes.  You're not likely to be very successful.

REOs are slightly brighter, but still not great.  REOs are more traditional transactions, with the bank as a seller; they are more frustrating that regular sales, because the banks are usually dealing with incredibly high volumes, the process is very impersonal (I thought it was a little funny to hear this complaint from Redfin, but maybe that's just me), and the banks are usually extremely poor at communicating what's happening with the process.  REOs are often priced low to attract a large number of offers, then bid up to the maximum that the bank can earn.  If 50 people bid for one property, then 1 person gets it and 49 people lose it.  Those 49 people will then move on to the next property and bid on it, so if you're chasing REOs, you'll probably be competing against the same buyers over and over again.  This can, of course, be frustrating.

So, what's my take-away?  All in all, I'm glad that I went.  Looking back over it, I think the thing I appreciated the most was how much intellectual respect Redfin showed the attendees.  Everyone in that room was, to a greater or lesser extent, a real estate nerd, and someone who wants to educate themself.  As a result, we didn't waste any time at all covering basics like what a down payment is, what points are, what disclosures are, and so on.  What remained, therefore, was the higher-level, more useful and more interesting information that was relevant to us as interested consumers in a particular market.  I had a good time, learned some useful stuff, got a more realistic understanding of my role as a buyer, and further warmed towards working with Redfin as a company.  I think I may try touring with them in the next month or so to see how that goes and at least get plugged into their buyer system - at a minimum, it'll be good to evaluate what other resources are out there to assist me as a buyer.