After two-and-a-half years of trading in Australia, the UK-based real estate start-up Purplebricks announced on 7 May this year that it was exiting the market.
There is a lesson here for the real estate industry generally, and not just in Australia. It’s a lesson in real estate modelling.
Take notice of what happens when the discount model comes to play in the market.
Despite Purplebricks’ marketing budget of well in the tens of millions of dollars, and its much-touted ‘low flat-rate listing fee’, it failed to meet its targets in Australia.
Oh, the company cited “challenging” market conditions and “some execution errors” as the reasons for the decision to shut down its Australian operations, but the bottom line was that Purplebricks got it way wrong with an upfront fixed fee, paid by the property owner whether the property sold or didn’t.
It may have worked in the UK, where many sellers also happily hold their own opens and the industry average commission rate is very low (much lower than it is for Australia or New Zealand), but it was never going to go down well in Australia, and it wouldn’t in New Zealand either.
There is a serious flaw in the upfront flat fee model, which is that the agent loses interest.
The way it was structured, Purplebricks’ agents were given more incentive to list than any encouragement to follow through with an outcome for the customer.
Further to the listing itself, any add-on service meant an additional fee, per service, for the customer.
The agents realistically needed to list a great number of properties each year to barely make a living. This arrangement was unlikely to attract and retain high-quality agents.
The brand spent a massive amount of money in self-promotion and denigrating the nation’s existing industry.
The public – the Australian market – saw through Purplebricks’ offer. The high volume of sales did not materialise so Purplebricks fell over. Low commission didn’t attract the high volume of sales it needed in the end.
What this shows us is the value of a real estate agent who charges a reasonable fee. It demonstrates that value and commission are inextricably linked. Sellers want an agent who has their interests 100 per cent in mind.
Not every home sells in a stable real estate market and sellers may withdraw properties from the market for personal reasons; however, property owners can rightfully expect that an agent will do their very best to market their property.
Agents don’t and shouldn’t earn anything by doing nothing. Agents shouldn’t earn anything unless consistently working toward and remaining focused on the prospect of a sale.
Remuneration will come because the agent builds relationships and genuinely helps customers – when they add value to the client-agent relationship, not because they charge the upfront fee regardless of how cheap it is.
In October last year, Purplebricks changed its model in Australia to charge a higher fee but where half was paid up front and the remainder only should a sale occur – but it was already too late.
Purplebricks has never made it to New Zealand. It went to the US after Australia. What is happening there now?
When Purplebricks announced it was exiting Australia, it added that it was conducting a review of its US operations. It had changed its business model in the US in January of this year to offer varying listing fees and to only charge when a home sold. Given more recent reports out of the US, its future there seems cloudy.
In Australia and New Zealand, buyers and sellers value having someone to walk them through a transaction as complex as a property sale, which involves legislation, regulations and some serious skills in marketing, communication and negotiation, along with comprehensive market and local area knowledge, to navigate the way through processes and procedures.
Will real estate customers in the US prove any different?
The lesson for discount models is not to underestimate the value sellers and buyers want out of a real estate service and not to assume that what works in one market will work in another.
There are brands that have successfully entered new markets.
That success has only come when the brand has adapted to the market.