On Monday I profiled Redfin, a technology company that set out to revolutionize the real estate industry but wound up adopting many of its practices instead. When I interviewed CEO Glenn Kelman for the story, I asked him if he saw any smaller, hungrier real estate startups following in Redfin's footsteps.
"Not really, but I worry about it all the time," Kelman told me.
After my story ran, I was contacted by a real estate startup that's doing just that. SQFT has created a mobile app and a set of real estate services that allow people to sell their homes for a third the cost of a traditional listing agent. I talked to the company's CEO, James Simpson, on Wednesday.
Here's what distinguishes SQFT's business model from Redfin's — and what they still need to overcome to prove their approach is viable.
1) Redfin initially focused on buyers. SQFT is focusing on sellers.
From the outset, Redfin has offered services for both buyers and sellers, but because its original innovation was showing real estate listings on a map, most of its business came from buyers at first. One of the big hurdles Redfin faced was the fact that representing buyers is labor intensive.
Buyers expect their agents to drive them around town touring houses, and a company can only offer that service if it has a significant staff on the ground in every city where it operates. That's why it has taken Redfin nine years and tens of millions of dollars to reach 36 states. It's not so labor-intensive to serve sellers, and SQFT hopes to get by with many fewer agents per city, allowing it to expand more quickly.
This is significant because the sellers' side of the market has the most room for innovation. The seller is the one who sets the rules of any real estate transaction. So if a company wants to experiment with ways to make the real estate market more efficient, it needs to work with people who are selling homes, not just buying them.
2) SQFT relies on sellers to hold open houses
A traditional listing agent will run open houses for a property (Redfin does this too). That's a godsend for sellers who are nervous about interacting directly with buyers. But Simpson believes that some sellers will be willing to hold open houses themselves in exchange for thousands of dollars in savings — helping to keep SQFT's headcount down.
3) SQFT is still tiny
Simpson told me that his company has closed just 20 sales in the two months since it launched. Most of those sales occurred in Colorado, where the startup is based (it has ties to Boulder-based Techstars). It's raised $1.4 million in funding and has around a dozen people on staff.
4) SQFT charges a bit less than Redfin
Listing agents normally charge sellers 3 percent of a home's sales price — for example, $15,000 for a $500,000 house. SQFT charges just 1 percent — $5,000 for the same property. That compares favorably to Redfin's service for sellers, which charges 1.5 percent in most markets, though it has experimented with charging 1 percent in a few locations, including Washington, DC.
5) The big question is whether SQFT can get good prices for its customers
SQFT will save customers 2 percent of their home's value compared with a traditional listing service, but that's only a good deal if homes sold on SQFT can fetch prices as high as homes sold by more traditional realtors. Conventional realtors argue that their knowledge and experience — about advertising, staging furniture, timing, and other sales tactics — can fetch sellers a higher price than do-it-yourself sellers can earn. Unsurprisingly, Simpson disagrees — he thinks that with some advice from an SQFT agent, sellers willing to put in the necessary effort can sell a home as effectively as a professional.
Still, "we may not appeal to a first-time home seller who has never sold a house before," Simpson concedes. "They might be a little bit anxious about using a service like ours. We're not going to appeal to everyone, but I think those that have been through a couple of transactions are going to be very comfortable using us."
6) SQFT is an incremental advance over Redfin's business model
Real estate startups like SQFT have to deal with the traditional real estate agents who still dominate the market, and who do things much as they did a couple of decades ago, so there's not a ton of room to change how real estate is sold, at least in the short run. That's probably why SQFT isn't dramatically different from Redfin's service for sellers. SQFT offers a bit less service — no agent-run open houses — and charges a modestly lower price — 1 percent compared with 1.5 percent.
Yet that doesn't necessarily mean SQFT's launch is insignificant. For the past few years, Redfin has benefited from being essentially the only technology company that also operated as a real estate brokerage. That might have been because Redfin itself seemed to be struggling to make its business model work. But now that Redfin has clearly found its footing, it's starting to attract imitators. That will force Redfin to keep innovating while keeping costs down, to the benefit of customers.