Flat Fee Real Estate Brokerage Business

On today’s show we’re looking at the efforts to disrupt the traditional real estate markets.

British company Purple Bricks announced earlier this year that they are pulling out of the US market. The company is one of several fixed fee brokerage companies that have tried to penetrate and disrupt the traditional residential real estate brokerage industry. The heavy use of software, combined with minimal services was supposed to lower the cost base for consumers.

Purple Bricks charges homeowners a fixed fee for listing a property on the MLS, whether or not a property is sold.

Purple Bricks tried to differentiate by offering exclusive territories to its agents based on postal code.

Part of the argument in favour of fixed price listing services is that in a hot market when any property listed will sell, often over asking price. The listing agent isn’t doing much work to earn their commission. The buyer agent has to take their clients on multiple showings, and draft multiple offers, the majority of which are rejected. It’s the buy agent that does all the heavy lifting. In a buyer’s market, during a downturn, the roles are reversed and the listing agent does the heavy lifting.

In the traditional model, the seller pays the entire commission which is split between the buyer agent and the seller agent. The fixed fee model charges a fixed fee for listing a property. The fee paid to a buyer agent is in addition to the fee paid for the listing. The traditional brokerage commission in the US is 6% of the selling price. This is usually split between the buyer and seller agent.

In some hot Canadian markets like Toronto, listing agents have fought back against the flat fee offerings by discounting the listing service. The still pay the full 2.5% commission to the buyer agent, while discounting the sell side commission to 1.5%, or in some cases as low as 1%.

In 2018 Canada’s Comfree was purchased by UK based Purple Bricks for $51 million dollars. Under ownership of Yellow Pages, the company didn’t experience a lot of growth, as evidenced by the fact that they sold the business basically for what they paid for it two years later.

Purplebricks Group Plc‘s stock climbed after the online estate agent said it was pulling out of the U.S. The company shares had lost 75% of their value since it ventured across into the US market in September 2017. The investment in the US expansion was bleeding the company of its resources and profitability was too far off in the future for investors and the board to accept.

The stock has regained some value since the decision to focus on its more-established U.K. and Canada businesses.

Purplebricks CEO said a “significant opportunity to disrupt the U.S. market,” remains, but it would take “substantially more management time and resources than the company is able to commit at this time.” The Solihull, England-based company reported a full-year operating loss in the country of 34.1 million pounds ($42.9 million), wider than the 16.8-million pound loss a year earlier.

According to the national association of realtors, flat fee transactions accounted for about 2% of home sales in the United States in 2018.

Another California startup called Reali set up shop in San Francisco. They’re offering a flat fee listing service at just under $5,000 for the service. Paying the buyer agent’s commission, if there is a buyer agent would be on top of the flat fee.

The problem with discount brokerages is that they assume a high volume of transactions in order to pay for the overhead associated with the business. In a market downturn when sales volumes drop, the cost of carrying the fixed overhead doesn’t change. We’ve seen many large discount brokerages fail in market downturns which is why they don’t survive in my opinion.