Why Discount Real Estate Agencies Don't Work...

By Craig Lowe

 

I am sure you remember the real estate company that jumped onto the scene with a splash in 2006, called The Joneses. They promised to “reinvent real estate,” by undercutting traditional real estate companies and charging a fixed price fee. Rather than incentivising salespeople with commissions they employed salespeople on salaries and tried to systemise exceptional service using call centres and specialised employees for each step of the process. Just 18 months later the business was liquidated after a failed attempt to re-capitalise through a share market listing.

It was an interesting idea. Many great businesses in other industries have thrived by being the ‘lowest cost provider,’ relying on low margins and high volumes to dominate the competition who cannot reach the scale required to compete on price. However, in the case of The Joneses, there are fundamental reasons why the odds were against their business model. The first problem was the assumption that the market would respond so enthusiastically to lower commissions, they would have enough demand to be profitable. The reason this is wrong is because it is based on the view that saving on commission is always a true economy when in fact it’s often a false economy. It also implicitly assumed the market would treat real estate salespeople like commodities. But all salespeople are not equal; there are highly skilled salespeople, terrible salespeople, and everything in between. An exceptional salesperson will achieve a significantly higher price for your home – typically 5% to 10% in my experience - than an average or inexperienced salesperson. In other words, a very good agent will pay for themselves by adding more to your bottom line than they cost. The key to understanding this is to think about how subjective house prices are – the housing stock itself is so varied and incomparable, and prices are so much in the eye of the beholder, that great salespeople using strategic and competitive sales processes can have an enormous impact on the final selling price of a home. Although a small percentage of people are fooled by the false economies of low commission offers, markets as a whole are undeniably efficient at working out the most profitable path. Indeed that is how markets work. The Joneses were never going to have the flood of demand they were banking on.

The second flaw in The Joneses business model is intrinsically linked to the fact they missed the first point. Clearly, the most successful agencies will always be the ones that can attract the most talented salespeople, for the reasons I outlined above. By paying modest salaries they guarantee that the best salespeople will not work for them. The point they missed is that conceptually, the customer of the real estate agency is actually the salesperson, not the home seller – agencies need to reward and attract the best agents who in turn add the most value and provide the best service to home sellers.

Finally, it takes an enormous amount of self sacrifice to be a successful real estate salesperson. You have to be willing to give presentations to owners on weeknights, work every Sunday, do Saturday appointments and your cell phone rings at all hours of the day and night. You give up time with your family. With so much at stake for buyers and sellers, it is inherently stressful. Under The Joneses scheme, their salaried employees did not have the right incentives needed to go the extra mile and work around the clock for their clients.

The Joneses demise was now many years ago, but cut price agencies come and go all the time, so the lessons are always relevant. The marketplace is ultimately the judge and jury, so it should be telling to potential real estate entrepreneurs that no discount agencies have prospered. As usual, if you would like a free no obligation appraisal of what your home is worth including a brief presentation on how to add tens of thousands of dollars to your sale price, call me anytime on 021-764-647.

 

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