Crumbling Purplebricks empire casts doubt on viability of fixed-fee model
MAIN IMAGE: Adrian Goslett, regional director and CEO of RE/MAX SA; Richard Day, chief executive of Eazi.com; Crispin Inglis, CEO of PropertyFox; Berry Everitt, CEO of Chas Everitt International Property group; Yael Geffen, CEO of Lew Geffen Sotheby’s International Realty.
Huge revenue losses forced UK-based fixed-fee agency Purplebricks to close their operations first in Australia and recently also the US – a sign that the fixed-fee model is bound to fail unless altered to align more closely to the traditional real estate model?
Definitely says some leaders from the local commission-based estate agency industry. Not so, say others, fixed-fee’s are doing very well, thank you.
It is almost a year since one of SA’s leading traditional brands, Pam Golding Properties, shocked the local estate agency industry with the news of their acquisition of Cape Town-based set fee start-up Eazi.com.
Adrian Goslett, regional director and CEO of RE/MAX of Southern Africa, remembers well the questions this bold move by PGP raised about the viability of the commission-based model and whether it would have to concede eventually to the digital revolution. In a recent statement he says with reference to the recent setbacks experienced by Britain’s largest online estate agency Purplebricks he finds it interesting that just one year later “the bubble around these new, low-commission operators seems to have burst”.
Founded by the Bruce brothers, Michael and Kenny in 2012 (both left the company in recent weeks), Purplebricks charges sellers an upfront fee that has to be paid whether the property sells or not. Following their success with the hybrid model in England and with strong financial backing from international investors, the online agency quickly expanded globally to Canada (where it is still doing well), Europe, Australia and last year also to the USA. However, as was recently admitted by the company they expanded too rapidly and following substantial financial losses consequently withdrew first from Australia in May this year, followed by recent announcements that it will exit from the USA also. The company has said it will now focus on it’s operations in the UK and Canada. It also said it will try new pricing models in the UK.
Goslett says he predicts that over time more of these fixed-fee operators will go either the same way as Purplebricks or amend their business model to offer a service that is more in line with the traditional real estate model. As evidence of this is already happening, he mentions that one of the local fixed-fee operators no longer advertises a fixed-fee price on their website. Instead, sellers are told that the fee will vary based on what the valuation of their property turns out to be and then this commission will be a discussion between them and the agent.
“The novelty of online agencies is evidentially starting to wear off. Unlike renting short-term accommodation or hailing a cab from an app, a property investment is one of the biggest transactions someone will make in their life. Having a professional at your side when navigating through this process is critical in ensuring that your investment remains well looked after and that the true value of the property is realised. Therefore, online agencies will only be a threat to agents or agencies that offer little to no value in the transaction. And, unless these online agencies are able to offer a competitive level of service, it is unlikely that they will survive,” Goslett concludes.
Local fixed-fee agencies say they’re doing well
Commenting on the above, Richard Day, chief executive of Eazi.com, says the notion that the fixed fee online model cannot be viable and is a thing of the past is contrary to their experience with Eazi.com, which he says is performing well. Contrary to the Purplebricks model, though, Eazi.com says their fixed fee of R39 500 is only payable on successful sale.
Regarding Purplebricks, Day says it is illogical to ascribe the UK-based online agency’s troubles in Australia and the US as a sign of its imminent demise. “One only has to look at Purplebricks’ performance in the UK itself to confirm the viability and potential of its business model. After all, it only took them three years to become the Number 1 residential real estate agent in the UK, and today Purplebricks has 3.5 times the market share of the next largest UK agency. They’re also profitable in the UK, with a reported 11.3% EBITDA (earnings before interest, taxes, depreciation and amortization) for their last financial year.”
“Fixed-fee agencies is no novelty – for sellers mainly in the lower price range and who require a ‘low-touch’ service, it makes good sense,” Day says.
Crispin Inglis, co-founder of PropertyFox, that charge sellers a low commission of 1.5%-3% or a fixed fee of R39 990 (whichever is higher), says the fixed fee, paid-upfront model of Purplebricks was probably not right for the Australian and US markets. “This was probably a big ask in a down market, particularly in ones that aren’t used to the offering. The model works very well in the UK, particularly London where there is high density and high value in the market. They possibly also tried to expand too quickly in the US and in Australia in average market conditions, so it would be a tough task for them in general,” he says.
Value remains deciding factor
Berry Everitt, CEO of Chas Everitt International Property group, says that fixed-fee models can’t add the same value to the customer’s experience of the home-buying or selling transaction as a full-service estate agent. “Indeed, the two models are not really comparable and ultimately, customers will decide what they want or expect in terms of service delivery and effectiveness and what they are prepared to pay to achieve their objectives in varying market circumstances. In our experience, fixed-fee agencies have always struggled in slow and declining markets where there are more properties for sale than there are buyers,” he says.
Yael Geffen, CEO of Lew Geffen Sotheby’s International Realty, says a fixed-fee model of Purplebricks is dependent on high sales volumes which places it at risk when the market is down. “There is also no risk to agencies as they get paid regardless of service delivery but there is a low growth trajectory for agents and one has to wonder how many will stay with those companies when the market improves,” she says.
Geffen explains that at first glance the fixed-fee model may appear to have many advantages, but it is flawed for a number of reasons. This includes advertising that their agents are superior “which is nonsense because no seasoned agent would work for a small monthly retainer – think nurse vs doctor” says Geffen.
They have their own conveyancer where as she believes most people would prefer to have a choice in which conveyancer they use. Sellers usually have to show buyers their homes unlike traditional agencies where the agent would handle this aspect, so there is an added security risk as well as an array of other disadvantages that a professional would offset.
Lastly, fixed fees are never just that. “They will fluctuate and increase and be dynamic with the market. One of the leading set fee agencies in SA started with a fee of R29 995 around three years ago, which has already risen to R39 995,” ends Geffen.
In a down market, as currently experienced overseas by Purplebricks and also locally, selling properties is a competitive business to survive in, whether you are a traditional estate agent or an online estate agency. With the new management of Purplebricks admitting that they will be reviewing their pricing structure, there certainly appears to be validation for the doubts cast over the viability of a fixed-fee upfront paid up model that caused the UK-giant substantive financial losses in big markets such as Australia and the US. In the end, the service that delivers the best value for money will be the one that continues on.
“At the end of the day, it is all about the value of the service a traditional agent provides. Consumers will pay for services they deem worthwhile. And, at this point in time, the online model simply cannot compete in terms of value, says Goslett.