Is this the right time to start or expand your discount realty business?

Though real estate sales are down nation-wide, Condo Domain announced they’re expanding into several markets, Seattle included. Most real estate firms across the country are struggling. Zip Realty has yet to make a profit. Redfin hasn’t shown a profit either and has had to raise their prices, while quietly eliminating the listing agent contact info that they originally had on their site.

Another Seattle discount/rebate company Findwell has purchased a cute name, has a cute little logo’d car (think bankrupt real estate firm Foxton’s) and has both a static and a map search, but only made about 19 sales since they’ve started (Seattle Business Journal) and 10 sales total in 2009. The average sales price was around $400K and based on a 3% sales commission, they’ve netted about $60K so far in 2009. They have 6 agents and brokers listed on their roster, so that’s about $10K per agent for the first 5 months of 2009, and that’s before taxes and marketing expenses.

In the big wide world, there will always be desperation and individuals willing to undercut the competition, cross picket lines, become scab labor and participate in buy-downs, kickbacks and pay-outs, no matter what the business.

The Condo Domain expansion coincides with their announcement that their prior business plan of refunding all but $5000 of the commission wasn’t making any money, so they’re moving to an a la carte plan where you only get that if you don’t need to tour more than 3 properties. They’ve found that in their business the average buyer tours 14 condo’s before buying, so in that case, they’ll refund 20%, similar to Zip & Redfin. But again, none of those companies are making a profit. They are essentially giving away their profit to the buyer in order to capture the buyers business, and they’re betting they can capture enough market share before the money runs out.

Interestingly enough, Condo Domain seems to be expanding after making only 33 sales. (33 sales! Condo Domain White Paper) This reminds me of Buyside Realty, the discount firm that tried to launch an IPO with a million dollar loss. They have since gone out of business.

Perhaps that fabled “6%”, spread out over all of the sales, from $200K condo’s to $2M luxury homes, when that amount is averaged out, that percentage miraculously equals the amount of money it costs to run a real estate business. Maybe, just maybe, owners of brokerages have actually looked at the books, consulted with accountants, tabulated results, crunched some numbers, and came up with this simple formula that will allow them to stay in business. Could be. Just sayin’.

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9 comments

  1. Dale Martin

    All of those companies listed have compelling websites. Redfin is superb. Findwell is graphically striking. Condo Domain, not so great because it’s just a big advertisement with no MLS search, but the public may not know that, and it looks beautiful.

    The interesting thing to me is that any of those companies, with their great search functions, beautiful graphics, enlightened marketing strategies, any of those would be successful if they did’t insist upon being “discount” firms.

    I’ve run a brokerage for years, and we have less than 20% profit. Yet these companies business plan is to give that amount, or sometimes more, away. It just doesn’t make any sense.

  2. Mark DeCoursey

    Buying real estate can be a risky business. Leaving aside the buy/sell price difference, we have discovered that the realty professions too often have less than perfect ethics.

    After we got rooked ourselves, resulting in a three-year court battle with a 12-man jury trial (in which we prevailed), we discovered other victims.

    And behold, realtors are engaged in all kinds of nasty practices lately, from forging documents and funneling business to their personal interests, to disguising rat infestations and scamming customers with “foreclosure rescues.”

    We have documented some of the more colorful cases from court records at http://RenovationTrap.com/gallery

    Part of the problem is the supine government here in Washington. Time after time, despite court rulings and large awards, the DOL can find nothing wrong with the conduct of the offending licensees, and they are permitted to continue wreaking havoc on the Washington public.

    Despite the lofty ideals of National Association of Realtors and the bombastic standards of such realties as Windermere (“the highest ethical standards” etc.), the first time (and second and third time) home buyer should trust a realty company no more than he/she would trust a used car sales lot.

    A home sale is an opportunity to rip off many thousands of dollars in a single transaction. The home buyer should proceed with proportionate caution.

  3. Marlow Harris

    Hi Mark,

    Thanks for your comments, even though they’re not quite on-topic.

    I’m very sorry you had so much trouble with your real estate purchase. Anyone who breaks the law should be punished and those who violate the public trust should be disciplined, fined, and even jailed if the violation warrants it.

  4. Pingback: Web Real Estate Tools is honored to be the Hosting of the Carnival of Real Estate — Web Real Estate Marketing
  5. Bob

    The traditional brokerage model has been crumbling for several years. Brokerages offer the following core value propositions in exchange for affiliation; brand, technology, agent community and training.

    Brokerages have done a very poor job at branding, training and creating an environment that encourages agent community. This is because the vast majority of brokerages view these activities as expenses rather than investments. Few consumers differentiate between major brokerage brands and most seasoned agents find less value in training opportunities by brokerages.

    We are at a point where agents can purchase technology that is superior or equal to anything offered by their brokerage on their own (the exception to this is Communications Server which will revolutionize corporate email, yet few brokerages will be quick to invest in it). Companies such as Market Leader, Agent Image, Lone Wolf, and NetAspects have had very limited success getting brokerages on board and as a result are selling directly to the agent population. Most brokerages encourage this as it means they don’t need to invest in technology to recruit or retain agents. The ones that do promote a vendor, attempt to get as many agents on board as possible so as to receive a rebate back from the preferred vendor.

    The bottom line is that the value proposition of the agent to their clients and the broker/agent relationship has changed. Housing prices relative to inflation, the availability of information and the fragmenting of the agent population mean that 6% commissions and current affiliation fees are no longer appropriate.

    We won’t see more discount brokerages, we’ll see brokerages disappear all together unless they adapt.

  6. Marlow Harris

    Hi Bob,

    Thanks for your comments. I’m not sure what part of the country you’re writing from, but here on the West Coast branding is more important than ever. In a cacaphony of choice, a positive brand name gives the public a clear and concise option. There are always some who will buy generic to save a buck, but most people purchase name brand because they’ve found that this is the safe, conservative choice. A name brand gives the assurance of trust and strength that Brand X can never give.

    And where you may believe the 6% commission is “no longer appropriate”, if that’s the break-even number, then that’s the only number that IS appropriate.

  7. Bob

    Having personally watched the Bain brand erode for the last three years, I can tell you with 100% certainty that most consumers do not distinguish X from Y, let alone full service from discount brokerages. The only exception in your market might be Windermere (with Prudential NW gaining slight ground). Heck, half the people out there think Coldwell Banker is a bank (as see in your national TV ads). I can’t believe your management didn’t have the common sense to even put ‘Real Estate’ in the logo when they redesigned your signage three years ago.

  8. Bob

    Just because 6% is the break even point for a brokerage or agent, does not mean this is acceptable to consumers.

    New models allow the customer to dictate what the proper commission should be. And its not based on broker/agent costs.

    For years brokerages have dictated commission percentages, primarily due to lack of information by the consumer. Of the 3% seller side, 1% is supposed to go to marketing a listing. We all know that traditionally agents go through the motions of marketing a property, but most use this for self promotion purposes. The MLS system and high speed internet have made ‘property marketing’ unnecessary. Houses don’t sit for lack of exposure, they are on every website out there. They sit because they are not introduced to the market correctly or not priced right.

    This means commissions should be no more than 5%. Given the price of houses relative to other items, 2% sales commission is more than fair for helping the seller set the price, negotiate offers and help buyers secure financing (which is where agents really offer value).