Another discount real estate model going down...next up Redfin

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Submitted by sdrealtor on January 11, 2011 - 4:45pm

Though we havent gone around this one in a while I just wanted to point out yet another Internet based discount RE brokerage is admitting the model doesnt work. All the cries about RE brokers charging too much do not understand how expensive the business is and how thin margins are. While individuals RE brokers can be opportunistic and do a good business the industry cannot survive without the large brokerage model.

Read here the sad tale of ZIPRealty which is exiting markets and moving away from the discount model.

http://www.inman.com/news/2011/01/10/zip...

Submitted by ljinvestor on January 12, 2011 - 8:16am.

The industry could use a breakpoint system though.

I would say that most realtors don't work any harder to sell $500k property vs $1MM.

Submitted by scaredyclassic on January 12, 2011 - 8:24am.

How does redfin go under? Once they have the computer system up and running won't they always be able to find an agent who will pay 30 perc got the referral? A referrals worth something, the advertising etc. I guess at sone point they could run out of agents willing to pay that but seems unlikely

Submitted by sdrealtor on January 12, 2011 - 10:12am.

scaredy
The system is more expensive to maintain than you think. If they were simply handing out referrals and drawing 30% they would make a mint but there is much more to support than that. Mark my words, in a few years Redfin will be toast too and will be changing their model. Frankly I dont beleive any of these companies really intend to change anything anyway. All these companies are started by tech entreprenuers. I have some experience in tech start-ups and these guys come from a mentality that they need an exit strategy and that usually means building something they can sell to an industry leader.

Submitted by njtosd on January 12, 2011 - 12:03pm.

sdrealtor wrote:

Read here the sad tale of ZIPRealty which is exiting markets and moving away from the discount model.

http://www.inman.com/news/2011/01/10/ziprealty-shutter-offices-in-11-markets

I don't see anything in the article saying that they are moving away from the discount model. They are planning on reducing the emphasis on discounting as a PR move, but that's all that I see in the text of the article. Plus, when there is a new business model, only the best start ups succeed. Failure of at least a few is assumed (i.e. Beta Max vs. VCR). I'm not convinced discount brokers are the wave of the future, but I don't think one business contraction proves a failure of the basic strategy.

Submitted by sdrealtor on January 12, 2011 - 2:17pm.

Huh? Here is the opening paragraph:

"ZipRealty Inc. is closing company owned and operated brokerages in almost a dozen markets, and will begin emphasizing personalized service and the experience of its agents over the commission rebates and discounted listing fees the company was founded on."

The are moving away from rebates and dsicounted commissions and moving toward personalized service. I dont think it could be any clearer. I'm not saying that you cant find discounted services and commission rebates which you can and always will be able to find from niche players. However anyone expecting a wholesale shift in the industry will be sadly disappointed.

This not one business contraction, its the next in a long line fo similar failures. Remember ipayone.com?

It doesnt work. I've seen the financials of large brokerage offices. The financials of perhaps the most successful office in SD and they dont look that good.

Submitted by njtosd on January 13, 2011 - 5:12am.

Read on, my friend. Later in the article you will find the following paragraph:

"The goal is to change the perception of the company -- for now, the company has no plans to reduce the commission rebates it offers to buyers. Although ZipRealty advertises itself as willing to offer commission discounts to sellers, those discounts are negotiated on a case-by-case basis."

Again, as I mentioned in my earlier post - the article indicates that the goal is to change the perception of the company. They have announced no plans to change their actual business model.

I think the more interesting data is that Redfin has not gone public and has not received any financing since 2007. That either means that they (a) aren't successful enough to attract additional financing, or (b) they don't need it.

Submitted by scaredyclassic on January 13, 2011 - 9:07am.

Kind of like personal injury law. 33 percent is Standard. You'd think lawyers might compete. But efffff It it's not worth getting involved in the madness w the risk of no payoff for much less. Probably. Kinda like real estate. The poor guy who had to deal w me for a year. What a freaking nightmare.

Submitted by sdrealtor on January 13, 2011 - 10:21am.

Yeah I saw that but I'm sure you are smart enough to read between the lines as I am. They lost $5.1 in the 3rd Qtr which should be one of their most profitable along with the 2nd qtr. That annualizes to over $20M operating loss. They are switching agents to an independent contractor model which is a big departure from their model and the one employed by traditional brokerages. The writing is on the wall and they will be chaging things soon enough.

Its analogous to when a company gets sold and they keep the management for a couple a years before dumping them. They have lots of revenue and want to keep that up so they dont want to risk changing the discounting aspect just yet. My guess is the have an investment bank looking for buyers as we speak.

Submitted by njtosd on January 13, 2011 - 11:03am.

Go back and read my earlier post. What I said was "I don't see anything in the article saying that they are moving away from the discount model." Which is true - there isn't anything in the article that says that they plan to change their discount policy. Your conjecture is reasonable, and I don't doubt the other facts that you've pointed to. I'm just saying that this article doesn't lend support to your position.

Submitted by sdrealtor on January 13, 2011 - 11:31am.

I would say the articles contains more then 20,000,000 reasons a year of support:)

Submitted by ljinvestor on January 13, 2011 - 12:20pm.

I guess you could say they are not moving away from discount model, but discounts/rebates are going to be less over time as deep discount model proved not to work.

What is the advantage of this company anyway? I have been able to get large brokerage company to list for 2% instead of the avg 2.5% in my area.

I couldn't get any rebate from the brokerage on purchase such as the 50% that Redfin offers, but I'm pretty sure the redfin agent couldn't make my deal happen at the price I want because I have seen how the relationships between the local agents work. I can get a lot more insight on property and sellers situation when its a listing agent that mine knows well.

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