This transition is described as a lay-off in the news, without much comment.
What does this transition in one company mean to the residential real estate industry?
The firm lost $15 million in the third quarter this last year, following a loss of $0.8 million during the same period last year. Because of losses, the firm decided to cut costs, including the benefits it has been giving to its agent. Employed agents have been receiving medical, dental and 401(k) benefits from the firm. When these employees become independent contractors, they will stop receiving these benefits.
Zip Realty hired agents as “employees” and gives a 20% real estate rebate to buyers and offers a less-than-standard listing fee to sellers. If they can’t make money doing this, what does this mean for the other major real estate employer, Redfin? Even though they claim to have reached profitability, I think they meant that for one month they actually brought in more than they spent. But to reach true profitability, they have to do that consistently, and I doubt they can do that by paying agents as employees (along with all the accompanying benefits) and giving back 50% of the commission to buyers. And at what rate would they be able to return any part of the $32M given to them by investors? Their angel investors can be paid dividend payments or profit sharing over time, but if there’s never any true profit then the only way they’re going to get their money back is when there is a liquidity event, either by being sold or having an initial public offering. But who would buy the business or the stock if there aren’t any profits? As Zip has found out, they cannot consistently make a profit by giving the “profit” back to the customers. In Redfin’s case, they’re not just refunding the profit, but actually giving their customers the angel investors money. It’s a massive money transfer and eventually the money will dry up. I predict they will move to a more traditional model in the next year because they cannot continue giving away their investors dough.
Russell Shaw wrote on Bloodhound Blog a few years ago about the problem with Zip Realty:
Here’s the problem the company has created, unsuccessful agents leave because they’re not making any money. Successful agents also leave because they’re not making enough money.
I think that statement is the simple truth of the problem with having employees v.s. agents.
To motivate, there must be a profit incentive. If there’s no profit, what’s the point of working? I ran across a Findwell blog post about trying to find an agent/employee for the business. The author complained about the quality of applications for employment at his firm. But who but the least successful or the least ambitious would be looking for a job like this? Everyone in the real estate business knows you have to work nights and weekends… who would want to do this unless highly compensated. And Findwell, like the others, refunds 50% of the profits back to the buyer. Yikes! I’d rather sell 10 houses at 3% commission than 20 houses at 1.5%. That’s just common sense.
As Russell pointed out, they’ve got to get rid of the rebate. The rebate is unnecessary.
Zip rebates about 20% of their gross commission to their home buyer customers. They provide a similar discount to home sellers. In my experience, the discount/rebate attracts buyers and sellers at the low end of the market. I sold houses for Zip and gave the required rebates. I also sold homes for traditional firms and never gave a rebate. Guess what happened when I stopped giving a rebate. My average home sales price went way up and so did my average revenue per transaction. Most of my leads were sourced online just like Zip’s so, this is a relevant comparison.
All three of these companies listed have great websites, and they all rebate. Yet, the companies that have the highest sales volume are the traditional firms which do not refund a percentage of the profits to their customers.
I think they should quit doing the rebate and just focus on good customer service and doing a good job for their customers and clients. It’s difficult to compete on price as there’s always someone more desperate and hungry than you are. Focus on exemplary customer service and reap the rewards.