One of the hallmarks of the capitalist system is the free, open and competitive market. Competition drives innovation, and it creates a wide array of solutions for a diverse set of consumers who don’t all have exactly the same wants, needs and budgets. While one particular vendor may have a “one size fits all” product, there are many other vendors who offer competing “one size fits all” products, or a different model entirely with mix-and-match a-la-carte solutions that may work better for particular market segments.
For many products and services, however, the market is saturated with solutions. Producers lack the creativity to truly differentiate and innovate, and they end up competing on price. It’s often a race to the bottom, where profits are made up on volume with many sales of low-margin products and services. You can see this clearly in the Amazon.com marketplace, where many “good enough” knock-off products are sold at significant discounts from higher-quality and better-reviewed products.
In the real estate sales marketplace, consumers looking for lower-cost alternatives to the traditional real estate model have many more options than they did 2-3 years ago: Redfin, HomeBay, Opendoor, Offerpad, Purplebricks, Reali, Zillow’s iBuyer program, and the list goes on. There’s a wide and growing array of real estate sales service providers that offer a dizzying selection of sales models and fee structures. It seems there’s something for everyone — if you know where to look and whom to trust.
But are they worth it?
Are new real estate models as great as they seem?
In the Realtor community, it has long been axiomatic that when the market is strong and homes are “easy” to sell, the low-fee and flat-fee brokers come out of the woodwork. For several years now, we’ve had a strong seller’s market throughout most of the country. This at a time when there are billions of dollars of venture capital money looking for new opportunities and markets to re-invent. It’s a dream environment for deep-pocketed investors to disrupt a huge market that they feel is rife with bloat and inefficiency.
It comes as absolutely no surprise that we see so many new real estate sales models on offer — but it’s an open question as to just how popular they actually are. Many of these new solutions are not available in every market, and many are so new that there is little meaningful data that has been published showing their true impact. And there is some indication that these new models might not be working as well as anticipated.
For example, Purplebricks — the low-cost “disruptor” born in the U.K. — has announced that it’s changing up its business model in the U.S. It launched its U.S. operations in Los Angeles in the fall of 2017, and in January 2019, Inman reported they’re switching to a more “traditional” model with “variable fees” and no up-front payments — with Purplebricks only being paid when the sale closes.
Which isn’t to say that in some markets, these new entrants aren’t enjoying some success. I have seen and heard from colleagues who have said they are having to compete against many of these companies now. However, up until today, I haven’t heard anyone say that they’re being driven out of business by them. At this point, it seems these companies are proving to be “disruptive” in some markets by forcing traditional real estate brokers to do a better job showing consumers the value that they have long provided, which they might not have had to so clearly articulate in the past.
The ‘freemium’ model works
While the jury is still out on how successful these new real estate sales models will be, there is a new-ish sales model that is undeniably a runaway success: The “freemium” model.
The freemium business model starts with a “free” tier freemium — a portmanteau of the words “free” and “premium” — which is a pricing strategy by which a product or service (typically a digital offering or an application such as software, media, games or web services) is provided free of charge, but money (premium) is charged for additional features, services, or virtual (online) or physical (offline) goods.
Virtually everyone in the modern world uses the freemium sales model these days, whether they realize it or not. A few years ago, many apps in Apple’s App Store cost money to download. Now, very few cost money outright — most are free to download and provide a good level of functionality — but if you want more, they offer in-app purchases to deliver more value for a fee, also known as a premium.
There are many other examples you’re probably familiar with: Spotify, Skype and Dropbox are some well-known multi-billion dollar businesses successfully using this model.
Hasn’t real estate always been a freemium model?
But how new, really, is the freemium model? How is it much different from the way that Realtors have long run their businesses? Realtors provide many, many services — to their communities and current and prospective clients — for free. It would take thousands of words to detail all the things Realtors do for which they do not charge. The list is virtually endless and includes everything from providing complementary (but thoughtfully and professionally prepared) comparative market analysis, previewing homes, staging guidance, no-obligation private home tours, property and school research, searching for off-market purchase opportunities – I could go on and on.
In fact, most traditional Realtors work completely for free, and entirely at their own risk unless and until they actually perform, often times against all odds, and make the deal happen. Most are paid purely on the consummation of a sales or lease transaction. And that last little bit — the successful closing — is the premium service. That is ultimately what agents are hired to do: make deals happen.
In my own practice, I have long said that my job is simply this: To help people come to the best decisions about their real estate needs, and then work for them to get the best results for whatever decision they make.
All of my services are completely free 99 percent of the time. Realtors often work with clients for years, off and on, before they ever actually make a decision that will result in the purchase or sale of real estate. Realtors provide a long chain of value and only at the end, when the client achieves their desired objective, do they receive a premium for the services rendered.
It’s a high-risk, moderate reward proposition — and it’s one that has long been favored by consumers. And it continues to be the favored sales model and will most likely continue be successful for the foreseeable future, despite the many aggressive, well-funded entrants into the marketplace. Its popularity is manifest, and the recent change in the Purplebricks U.S. business model underscores it.
And that’s because consumers will happily pay for value — if they can see the value that they’re getting. This is truly the challenge that traditional Realtors face in today’s marketplace — the ability to clearly and powerfully express the value that they bring when compared to these upstart would-be disruptors.
Are Realtors up to the challenge? It’s my firm belief that we are. The National Association of Realtors has been around for 110 years. And that’s impressive, considering that the average age of a S&P company is now under 20 years (down from 60 years in the 1950s). Realtors have long been demonstrating the value they bring to the real estate market and will continue to do so for many years to come.
Sebastian “Seb” Frey is the broker and owner of Realty World Virtuoso. Follow him on Twitter or Facebook.
