My recent article questioning (and answering) why real estate agents had not been killed off, as the internet has disinter-mediated so many other businesses; was published on the NBR website and generated a number of interesting comments. Amongst the more predictable with a focus on private sales vs agents, this comment grabbed my attention:
The article I wrote, specifically focused on the role of the agent, and how this component of the real estate process continues to be successful, and in my judgement will be so in the foreseeable future. There will be challengers within this industry. In fact there have been challengers in the past, and so I thought it worth examining some of these technology empowered aspiring challengers, so as to more fully answer this comment, and thereby provide a broader picture of the new more digitally focused real estate landscape internationally.
Researching many operations across the main markets of the UK, US and Australia / New Zealand, has highlighted what I think are three key categories of challengers to the (traditional) real estate process. These are what I call 1. The low price operators / 2. The true innovators / 3. The opportunists.
Given the number of models to examine, I propose to separate this analysis into 3 separate articles. I'll start here with the first being the low price operators.
Low Price Operators
The commenter in the NBR, cited two UK based real estate operations - Yopa and Purple Bricks. These are but two of what are many operators in the UK market offering an online focused / fixed fee solution. Most charge around £800 for what they claim is a simple, and far more efficient model than traditional estate agents. Take your pick.
The key thing as ever in examining overseas models is context. The UK real estate market is very different to both the New Zealand and Australian. Firstly there is no equivalent of the Real Estate Authority legislating and overseeing the licensing of agents. More significantly though is the fact that the UK industry is what I judge to be 'low touch' service offering; meaning that as a vendor you engage a local real estate office to market your property (rather than a specific agent). They advertise the property online on the leading portals and handle enquiries and schedule viewing, but largely don't physically leave their office, as you the vendor, will host the interested buyer. The UK process is by comparison to NZ highly protracted (at least in England and Wales - Scotland is very different) in that an offer to buy is not legally binding until the settlement day and as a consequence often up to a third of all "sales" never settle and fall over in the final days and weeks leading up to settlement.
For this 'low touch' service real estate offices typically charge from 1% to 1.5% of the sale price and agents are largely employees of offices. For this reason the online service of the likes of Purple Bricks, emoov, easy property and Yopa are not that far removed from the traditional model. Instead of calling in at a local office, you sign up online and the service provider advertises the property and receives the enquiries and schedules with you the viewings. All this for around eight hundred pounds, compared to an estate agent charging say 1.5% of the average sale price of £225,000 amounting to just over £3,000.
The thing is, most of these operations have been around a while - especially emoov and easy property. It was not until Purple Bricks started to talk about a stock market listing just over 2 years ago and at the same time, investment funds started investigating real estate as a new sector to find a home for large amounts of cheap money, did media pick up on the potential of these startups; and as we all know, where investment money flows, so marketing budgets explode and consumer awareness grows. However as reported by TwentyCI a UK based property data company, whilst these online estate agents have grown year-on-year in absolute terms they barely amount to 6% of the total market. By comparison the NZ private selling market is c. 12%. Added to this is the fact that Purple Bricks (now a listed PLC) and others have recently in the UK tripped-up over a lack of transparency around the fees charged which are not refundable if the property does not sell, as well as finance charges for the deferment of the fees, creating a flood of media coverage likely to impact their growth.
Returning to the comment in the NBR, as to the notion that Savills investment in Yopa is a sign of the burgeoning of this sector in the UK - I would judge it is simply a smart each-way bet by Savills to see if the segment does challenge the incumbents. As for LJ Hooker in Australia, I judge that they got a little too enthused or better put, 'carried away' on the belief that they needed to launch a low price service and that is why they launched Settl which based on the information at the time was due to launch in the second half of 2016, however as yet no service is available - possibly LJ Hooker have got cold feet.
As to any Artificial Intelligence (AI) integration which some of these online agencies purport to offer. They are largely leveraging automated valuation models (AVM) and a rudimentary buyer / seller matching AI which as anyone who understands the principle of a two-sided market place, is only effective when you achieve scale on both sides of the market and none of these operators have anything like enough scale. The smarter use of AI in my view as an example in the UK was the acquisition by Rightmove (the UK's leading property portal) of predictive analytics company The Outside View in 2016, this company's smarts will leverage Rightmove's massive scale advantage of close on twenty years of data to undertake deep AI analytics to be the best at predicting the future sellers in the market thereby powering agent tools as a new business for Rightmove.
Moving away from the UK, Purple Bricks launched in Australia last year and now offer a service through local property experts (who have to be licensed) and who are a point of contact with the consumer through the process for which a fee of $6,000 (VIC / NSW) is charged. A US entry for Purple Bricks is currently underway. Interestingly the recent UK issues of transparency around the liability of consumers to pay the fees even if they don't sell, has now plagued the Australian operation with a $20,000 fine in Queensland as a solution to the avoidance of possible court action after alleged possible breaches of the Australian Consumer Law and the Property Occupations Act.
New Zealand is not alone and has low price models - 200Square currently has a fixed fee of $4,500 and Tall Poppy have a fixed fee - well actually a sliding fixed fee: $500,000 property price: $12,000 / $1m price: $20,000 / $2m price: $30,000. There are also many operations in NZ charging 1% - most of these price based competitors have been round for many years and of course you may remember the 2007 flash of "The Joneses" with their "flat fee.. not fat fee" of $8,000.
Regardless of whether these various operations are labelled as online estate agents or fixed fee operations, they all stand behind one positioning strategy - they are low priced operators. As any marketing or MBA course will tell you, being the lowest price player in the market is not a sustainable place to build a long term business. A low cost operator now that is a sustainable platform for sure, but these are not low cost operators. The true low cost operation in this industry is the traditional business (as far as in the NZ model) because traditional real estate franchise groups don't employ salespeople, they are made up of local teams of independent commission-only contractors. Low price operations have by their very presence always to be looking over their shoulder to new competitors trying to undercut them, instead of building long term value in their brand and reputation.
Technology has the ability to drive out cost and improve efficiency, but when it comes to the real estate process as outlined in detail in my earlier article, efficiency through technology comes at a cost to the customer, largely that cost is in the loss of a trusted individual deeply engaged in the process end-to-end. For the low price operators such individuals tend to focus on being a pure lister (in the case of Purple Bricks) or a generic customer service answering contact points in the case of the other online agents.
Next article will focus on The True Innovators and finally I will examine The Opportunists