(Bloomberg Businessweek) -- To understand how inequities in real estate persist in the U.S., consider two homes in Chicago. The first is a brick bungalow with five bedrooms and 2 1/2 bathrooms on the city's predominantly Black South Side. The home has more than 2,000 square feet and sits on a pretty, tree-lined street, a short walk from a Nigerian restaurant. The second property is an 800-square foot, two-bedroom condominium unit in Glencoe, a mostly White suburb.
The South Side house is worth $187,000, about $20,000 more than the Glencoe condo, according to a recent visit to the website of Redfin Corp., the real estate technology company. Based in Seattle, Redfin provides home listings and valuation estimates to buyers and sellers. The company also operates one of the country's largest real estate brokerages—but it doesn't provide its services to just anyone. On its page describing the more expensive house in an overwhelmingly Black part of the city, Redfin's site noted that “customer demand is through the roof right now,” so it couldn't provide one of its real estate agents to help broker a sale. It offered a referral to another company instead. For the less expensive apartment in the overwhelmingly White suburb, Redfin promised a lot more. “We'll handcraft your analysis,” the site said, offering a call from an agent and comprehensive market data within two days.
The striking contrast in Redfin's treatment of these two homes—and similar disparities in the level of service the company provides in majority-White and non-White neighborhoods—can be found in cities across the country. It is, Redfin's detractors say, a sort of digital redlining that harkens back to the days when loan officers shaded no-go areas red on maps. The critics include fair housing groups, which are in talks with the company to settle a federal lawsuit they filed that could force changes in how Redfin manages its business, and at least some of its own employees, who have pushed for more service in minority neighborhoods.
These people trace the apparent racial disparities in part to Redfin's software, which is supposed to help managers smooth out demand from consumers and direct the efforts of its growing workforce of salaried agents. For inquiries through its website and app, Redfin sets a minimum valuation in every market before it will sell a home on behalf of a seller or buy one on behalf of a buyer. The threshold can vary by the part of town and even by the day, based on Redfin agents' workload and the volume of leads.
Sellers whose homes are worth more than whatever the minimum happens to be when they sign up for Redfin's service get professional photos, 3D walkthroughs, data analysis, and added visibility on its site—all while paying less in commissions than they would with a typical real estate brokerage. Sellers of homes that are below the company's minimum threshold get a referral to a non-Redfin agent, which the company calls a “partner agent,” or no service at all. As a result, fair housing groups contend, these sellers may have to pay a bigger commission for an inferior listing, and may ultimately accept a lower price.
Redfin says its own data show that it doesn't discriminate by race. In a statement, the company calls it “sensationalistic and wrong” to describe its policies as the equivalent of redlining, a discriminatory practice in which lenders, insurers, and others withhold service from certain communities based on race. “Being fair is more important to Redfin than making money,” the company says. “We recognize that systemic racism affects who can pay for a broker, a book, or an airline ticket, but using price to determine which homes we can sell is not only legally permitted, it is the only fair way to make that determination.” Redfin also disputes the idea that third-party agents would offer inferior service, saying it carefully vets them and that for many lower-priced properties, they offer a better deal than its own employees can provide.
Redfin's potential to influence home prices comes from its size and scale. Since its website went live in 2004, the company has grown into the fifth-largest real estate broker in the U.S., with sales volume of $37 billion in 2020, according to the trade publication RealTrends. Redfin's site and app attract more than 49 million people each month to view its listings and valuations. This part of its offering helps shape perceptions about home prices and drives thousands of leads to agents every day.
Fair housing groups argue that, by withholding service disproportionately to lower-priced homes that tend to be in minority neighborhoods, Redfin's policy perpetuates unequal treatment that has persisted for generations and led to a huge loss of wealth for many non-White homeowners. “This is not just happening one time in one city,” says Diane Houk, a lawyer for the National Fair Housing Alliance in Washington, a plaintiff in the suit.
Redfin has promoted its technology-enabled business as a way of bringing racial justice to real estate. The idea that it might actually be doing the opposite has troubled some of its own employees. During a Zoom call for a few dozen staffers in Chicago in September 2020, Chief Executive Officer Glenn Kelman was asked about pay disparities among Redfin agents. It was just a few months after the murder of George Floyd by a Minneapolis police officer set off protests in many U.S. cities. Redfin had been through its own turmoil, dismissing 41% of its agents in the first weeks of the pandemic, only to bring many back within months.
One agent asked Kelman how the company could improve pay for those who worked and lived downtown and on the city's majority Black South Side, where lower home values meant bonuses were often smaller than those earned by colleagues in White neighborhoods. Kelman said Redfin would allow the best agents in the city to work in higher-end areas that brought more profit, according to people on the call, who asked for anonymity discussing the private conversation. One later told colleagues that Kelman didn't seem to get it at all. Under the proposal he floated, minority communities would get even worse service. According to Redfin, Kelman was simply trying to make sure everyone had an opportunity to work on “the most lucrative deals.” Redfin calls this “the only fair way to run a company in an industry where the amount agents earn is linked to the sale price of the homes they sell.”
A month later, the National Fair Housing Alliance and nine other fair housing groups argued that the racial dynamic the employees had observed in Chicago was much broader. In a lawsuit filed in federal court in Seattle, the groups alleged that Redfin was discriminating against buyers and sellers, violating the Fair Housing Act. They say their suit is based on a two-year analysis of how Redfin had applied its minimum price thresholds in markets across the country—including Chicago, Detroit, Baltimore, Memphis, Kansas City, Mo., and Long Island, N.Y.
The price minimums, the suit alleged, systematically deny service in places where a large proportion of residents aren't White. These are often the same areas once deemed risky on maps produced by the federal Home Owners' Loan Corp. in the 1930s to determine who could get government-backed mortgages. In greater Chicago in June 2020, for instance, Redfin was five times more likely to provide the best services and rebates in zip codes in which 70% or more of the residents were White, compared with zip codes where 70% or more of the residents were not White, according to the groups' analysis. At the time, the suit says, Redfin didn't make its own brokerage services available at all within Chicago's city limits unless prices reached $400,000—but it did so in majority-White DuPage County, in the Chicago suburbs, for homes priced above $275,000. In majority-Black Detroit, prices had to reach $700,000 for buyers and sellers to get Redfin's offering, according to the suit. But in the mostly White suburbs in Wayne County and adjacent Oakland County, Redfin was available to anyone selling a home worth at least $250,000.
Kelman declined to comment for this story, which is based on interviews with two dozen current and former Redfin staffers as well as data produced in the lawsuit. He hasn't said much about the suit publicly, other than in a letter sent to employees that was also published on Redfin's website. In it, he wrote that there were legitimate business reasons for setting minimum prices, and that Redfin has expanded the range of properties it can profitably sell as it has grown. He added that part of the company's challenge in serving lower-priced markets—including some urban neighborhoods and rural towns—stems from its compensation model. Unlike rival brokerages that operate solely on commission, Redfin's agents get health benefits and a base salary (starting at $12,000), in addition to bonuses.
In a statement, Redfin says it's being unfairly targeted because it publishes online what service it will provide to a property. It adds that its commitment to lowering the price thresholds means that “every year, by design, we lose money selling low-priced homes. The only issue in this case is whether we should lose more. We know of no other major brokerage with that commitment; the rest let each agent decide whom to serve.”
To some in the real estate industry, the most shocking element of the lawsuit was its target. It's hard to name an American business leader more attuned to issues of racial justice than Kelman. In 2018, long before George Floyd's murder, he hosted a “Race and Real Estate Symposium” during which he interviewed a prominent academic on stage about racially coded language still prevalent in the industry, which has long used words like “unsafe” to mean neighborhoods with lots of Black or Latino residents. He assigned agents to unconscious bias training and spoke out against some brokers' practice of selling homes within their own exclusive, often predominantly White networks instead of listing them more widely.
During the Black Lives Matter protests of 2020, Kelman published a blog post in which he wrote that “equal service should be the norm in our industry, but it isn't.” The company, he said, would tie executive bonuses in part to meeting goals to increase the diversity of its workforce, 37% of whom are people of color. Kelman continued: “Our first obligation is to fight for you the Black homebuyer—and also the veteran homebuyer, the Latinx homebuyer, the Asian homebuyer, the gay homebuyer, every homebuyer—using all our capabilities as top-producing local agents and lenders, and all our technology: to embrace your aspirations, and to give you every advantage when buying a home, especially in neighborhoods where you've historically been shut out.”
The message was in keeping with how Kelman has promoted Redfin since joining the company in 2005, when it was viewed as a digitally powered antidote to a traditional industry beset with the legacy of segregation and high costs. “Real estate, by far, is the most screwed-up industry in America,” Kelman told 60 Minutes in 2007. He compared Redfin to Amazon.com and other tech disruptors, suggesting it would make the industry cheaper and more transparent.
Americans pay average commissions of almost 5% on home sales, according to RealTrends. (Half of that typically goes to the buyer's agent and half to the seller's, paid by the seller out of the proceeds of the sale.) This structure is partly to blame for the stark racial disparities in U.S. housing, causing brokers to compete to service the highest-priced homes, which are more typically found in majority White neighborhoods, while devoting fewer resources to those in less expensive (often non-White) neighborhoods. The location of brick-and-mortar offices shows the industry's priorities. In Illinois, for instance, a Bloomberg Businessweek analysis found that more than one-third of neighborhoods have a majority of non-White residents—yet those places accounted for just 13% of more than 1,000 realty offices.
Early on, Redfin charged sellers a flat $3,000 fee, instead of a commission, for a no-frills service. (Home tours cost $250 extra.) But after finding that customers wanted more service, it raised the fees and adopted a version of the commission structure it had once sought to replace. Redfin is still relatively inexpensive, but more recently it has charged sellers 1.5% of the total sale price. (When Redfin agents represent buyers, it provides a further discount, paying out a portion of the buyers' agent commission—$1,750 on average—as a rebate, as long as the commission exceeds $6,500.)
From its start in Seattle and a handful of other big cities, Redfin has grown to serve more than 100 markets in the U.S. and Canada, with an agent workforce numbering 2,370 in the third quarter. For these agents, Redfin's website and easy-to-use internal sales checklists simplified their days. Instead of spending time drumming up new clients, they closed deals—as many as 50 or 60 a year. “You go to Redfin, and it's like you're on crack—jeez, keep bringing it to me,” says Michael Robertson, a former Redfin agent in the San Francisco Bay Area.
As it expanded, Redfin adopted tools to help it match the potential revenue in each city with the number of employees—hiring enough to meet demand without having too many idle agents during slow times. Senior analysts and executives at Redfin track many of these measures centrally, but the company also entrusts mid-level "market managers" in each city with some discretion over decisions. For example, a “busyness” meter for each agent is intended to help them find the sweet spot—when they're engaged in profitable business without spreading themselves too thin to serve customers. Such measures informed the managers' use of their most powerful tool: the ability to raise or lower the minimum home-value thresholds to bring in more or fewer leads. That kept the company working on profitable sales, but it also caused some internal consternation.
Some agents bristled at instances when their market managers set the minimum thresholds at prices they felt left business on the table. Bobby Maguire, a former Redfin agent in the Boston area, says he was shocked when the minimum value in his area reached $600,000 in 2018. He told managers he still saw plenty of opportunities for buyers of starter homes down as low as $380,000. Still, he could understand the business rationale. “A first-time buyer for a $200,000 condo in a tough area is going to take just as much time as a million-dollar house for a fourth-time buyer,” he says. “So why would they do that?”
Two former agents in Chicago say the leads they got from Redfin made them question the way the company was setting minimum values in more diverse neighborhoods, such as Hyde Park and Woodlawn, near the planned Barack Obama Presidential Center. “It was weird how we would handle South Side business—it was almost like the minimum threshold was different,” says one of the former agents, who recalled that at one point, Redfin would provide service to properties valued at $225,000 or more in the South Loop, when similar-value properties would get passed to a non-Redfin agent in Woodlawn. Redfin says its policy explicitly forbids market managers from routing more or less business to partners based on a neighborhood's racial composition. “We've never heard of a market manager doing that,” it adds, “and we'd fire one who did.”
Discrepancies in where the company served customers at times reflected labor shortages, according to several former employees. Minimum thresholds might go up if agents had recently quit—or were simply out sick. In parts of Seattle, Redfin struggled to recruit native Mandarin speakers who could help it tap into the city's Chinese-speaking population, according to one former employee. The company's decision to let go of more than two-fifths of its agents at the start of the pandemic (before later hiring many of them back) also affected which markets it could serve in 2020. “This made it easy for a plaintiff to find two areas, side by side, where our employee capacity was uneven,” Redfin says in a statement. “We're far from the only business that relied on partners more than usual because of staffing shortages.”
Still, when the fair housing groups filed their lawsuit later that year, at least some Redfin employees commented privately that they'd seen it coming, according to text messages viewed by Businessweek. One put a facepalm emoji in a text to a colleague, then wrote: “We tried to warn them.” Redfin says Kelman hasn't heard any questions from employees about its price thresholds.
In 2018 Morgan Williams, general counsel at the National Fair Housing Alliance in Washington, talked with a colleague who'd recently attended a panel on housing. One of the panel discussions had been about the way Redfin structured its business. He hadn't known that the company used minimum-home values to define service areas. “A price-based policy sent up a big red flag,” he says. As he well knew, it could be cause for a lawsuit.
After targeting banks, insurers, and agents for much of its history, Williams' nonprofit had recently turned its attention to technology companies, which are playing an increasingly important role in the real estate market. Four years ago, the group sued Facebook under the Fair Housing Act over targeted ads that, the nonprofit said, allowed landlords to filter for potential tenants by race. (Facebook settled the suit after making changes to its filtering policies and agreeing to future monitoring, while denying wrongdoing.) The law, passed in the wake of Martin Luther King Jr.'s assassination in 1968, makes it illegal for owners and intermediaries, including brokerages, to “refuse to sell or rent … or otherwise make unavailable” any dwelling because of race.
The Fair Housing Act is written so that even if a company's policies are unintentionally racist, they still may not be permissible. It doesn't matter if bankers or brokers aren't trying to redline; if their policies have a “disparate impact” on a minority community and there's no legitimate business reason for the policies, they're still breaking the law. In the 1990s, the nonprofit brought successful complaints against insurers over policies tied to the age and value of homes that disproportionately affected minority neighborhoods. Federal banking regulators created a further precedent by cautioning against using minimum loan amounts to determine service.
Over two years, Williams helped coordinate staffers from the National Fair Housing Alliance and groups including the Long Island Housing Services and the Fair Housing Center of Metropolitan Detroit to gather data from Redfin's website. They found that in predominantly White zip codes, people were anywhere from 2.5 to 69 times more likely to be offered Redfin's best service compared to those in predominantly non-White zip codes. “The differences were stark and in fact, statistically significant,” says Houk, the lawyer for the fair housing groups. She adds that they were “not likely to have happened by chance.”
Redfin says it doesn't deny service to any neighborhood based on demographic characteristics; instead, it uses a “neutral pricing policy.” In response to questions, Redfin said it reviewed data for 2021 and determined its thresholds were twice as likely to be higher in predominantly White areas compared to predominantly non-White areas. In other words, the company contends, its treatment of the bungalow on Chicago's South Side is hardly the norm.
More than a year after the suit was filed, the two sides remain in settlement talks, and Redfin has yet to file a formal response to the complaint. The parties said in a January court filing that they have a “framework” for resolving the lawsuit but are still working through details. How Redfin responds should matter to all homeowners, regardless of race, because Redfin's policies “bleed through the whole neighborhood,” says Shanna Smith, the retired former executive director of the National Fair Housing Alliance. “It doesn't matter about my race—if I'm the neighbor to a Black family that's been discriminated against in that way, I lose money as well,” she says.
Many of Redfin's critics acknowledge the irony of the dispute. The advent of online real estate services had the potential to eliminate many of the face-to-face encounters in which bias often occurred, says Cara Hendrickson, executive director of BPI, a public interest law and policy center in Chicago. As the housing market shifts further to the internet as a result of the pandemic, the risk is that new services will instead propel longstanding bias into the age of algorithms. “This is the moment not to let history repeat itself,” she says. —With Ann Choi
Read next: The National Association of Realtors Is Sorry About All the Discrimination
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