Opinion: Why the Discount Model does not Work

The news is out, the UK based company Purplebricks Real Estate is closing its doors in the United States after reporting shares plummeting by 75% over the last two years.  For more information, check out Bloomberg’s report by clicking here.

However, their “Get Out of Com-misery” campaign of being a discount brokerage isn’t a new concept.  Many real estate offices are and have been doing it, although no one has been wildly successful at it.  But why?  You would think that Sellers would be excited to save thousands of dollars on commissions. 

Here are a few theories based on my experience not only in the industry but having to compete against these discount services.

1. It’s expensive to be in real estate:  There are fees for the Multiple Listing Service, fees for advertising, photography, costs of money and time for open houses, and more.  These costs are upfront and if the listing doesn’t sell, the agent is out the money.  Worst part, it isn’t common for the seller to reimburse any of those costs if the listing doesn’t sell.  It is a risk every agent takes.  You need money upfront to cover your costs and the discount agents can’t always afford it. What they are hoping is to make it up in volume, but that isn’t always the case.
2. Discount Brokerage means Discount Services:  Recently I took over a duplex listing that was previously listed by a discount brokerage.  The discount brokerage listed the property for $950,000.  The result?  They had ZERO showings and ZERO offers.  I took over the listing, listed it at $975,000 and in the first week had over a dozen showings, three offers, and closed at full price. Why?  Because we were able to give it the full exposure it needed to get the job done.  That included professional photos, posting in the MLS, doing floor plans, and sending out the appropriate marketing.
3. Discount Brokerages try to cut out the Buyer’s Agent:  This is huge.  One way they “save” the sellers money is through dual agency.  The problem then is that the sellers are missing out on a huge pool of potential buyers.  Research shows that most buyers go with their own agent to purchase a home.  If you exclude the buyer’s agent, they will never see the listing, and if they do and know that they won’t get paid, will most likely not show it to their buyers.
4. Most Sellers understand value:  Yes, sellers want to save money and net more, but they also understand the value of a good agent.  People spend a lot of money on the latest iPhone, even though a low-cost phone might do the trick.  Why?  Because of the value the iPhone brings.  The same applies here.  It is very unlikely a seller of a high-end home is going with a discount brokerage.  They want someone who is going to spend the time, energy, and money to get it sold as quickly and for as much as possible.  Regarding the lower price points, it is easy to explain to a potential seller the value of paying a “full” commission and the services provided.  Every listing appointment is just like an interview.  You tell your potential seller everything you are going to do to get the job done.  The unique selling proposition that Purplebricks provided was the wrong one.  They focused on saving them money, rather than focusing on what they can do to get it sold for as much money and as quickly as possible.

Some people have had good experiences with the discount brokerages.  But considering what we are seeing with Purplebricks and others, it doesn’t look like a trend that will become mainstream anytime soon.