The Real Estate discount brokerage Purplebricks goes belly up this week. My question is this: Is Redfin next?
Purplebricks which started in the UK and came to the US in 2012 announced this week that it was shuttering all of its US operations. This follows posting an 88% loss of profit. The closure affects their offices here in Austin, Dallas, and all the US.
The company had a goal to disrupt the real estate business. How? By offering a discount to sellers. They failed, having never made a profit. The business model offered sellers a flat-fee listing service for which they got MLS entry, a sign, and a lockbox. Buyers who bought with them received a rebate.
The business model failed.
Is Redfin next?
Redfin posted $42mm in losses for 2018. This was up 147% from the $17mm loss reported for 2017. And, it was recently announced that Q1 losses for 2019 were up 84% at $67.1mm.
This discount business model offers sellers a listing fee of 1-1.5%. For that the seller gets MLS entry, a sign, a lockbox, and other services that can be purchased. Buyers who buy with them receive a discount.
The two models are very similar. One key is that the real estate agents who work for these kind of companies often are salaried employees and are paid whether or not they sell a home. Or, they may receive some extra compensation when the home sells. This is unlike the traditional agent who is only paid if they actually deliver results.
How long can Redfin continue to bleed?
Key Points
- Discount models pop up during strong seller’s markets. It’s easy to sell a home by putting it in the MLS and putting a sign in the yard. (Note: I’m not saying this puts the most money in the seller’s pocket.)
- These discount companies compete with traditional brokerages on price. They offer a discount to sellers and buyers. Sounds good in principle, but doesn’t work so well in the real world.
- The services offered are limited, but are pitched as full service. Sellers become enamored with the idea of a “discount”.
- They key is understanding what matters most. It is what you as a seller agree to pay your real estate broker or is it the amount of money you put in your pocket at closing. Smart sellers know it’s the latter.
- Value is not determined by what you pay, but by what you get. A discount does not necessarily equate with the best value.
The experience, skill, and marketing strategy of a great real estate agent will put more money in your pocket. That’s my conviction and my experience.
