FT Article on Digital Estate Agents

“Digital real estate start-ups battle to build on early promise”

 

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As house prices plateau, digital estate agents such as Redfin have seen their share prices fall sharply Share on Twitter (opens new window) Share on Facebook (opens new window) Share on LinkedIn (opens new window) Save to myFT Judith Evans yesterday Print this page 7 When Dave and Judy Kistler decided to downsize from their family home in the Seattle suburbs three years ago, they opted for a new type of estate agency to help them sell. Redfin, a local start-up offering low commission rates and a slick digital platform, secured several offers and sold their house for about $400,000 in a strong real estate market. “Because we had not sold a home for 30 years, we had nothing to compare it to — [but] we had multiple offers and it was only on the market for a short time. We would use them again,” Mr Kistler says. The Kistlers were not the only converts. Since their house sold, Redfin’s model has gone global. It listed on the Nasdaq exchange last year and now has a $1.4bn market capitalisation; digital-first estate agents in the US and UK have attracted billions in investment. But in that period, real estate markets have cooled in Seattle and other global cities. That has intensified the fight among estate agents for market share, and caused analysts to water down their predictions of wholesale digital disruption. At the same time, some US players have added a new business line in which they buy homes outright to flip themselves, ramping up risk even as the outlook for housing markets darkens. “It’s a much riskier model: they are taking real estate to the tune of hundreds of millions of dollars on to their balance sheets at any one time,” says Mike DelPrete, who teaches real estate technology at the University of Colorado Boulder. “With that risk comes reward — it’s a hugely better customer proposition.” This “i-buyer” business was pioneered by dedicated start-ups such as four-year-old Opendoor. But Redfin entered this market in 2017 with its Redfin Now service, albeit on a small scale. The property listings site Zillow launched its own version, Zillow Offers, in pilot form the same year. Stock market investors are less optimistic about the digital estate agency model than a year ago. Shares in Redfin have shed 52 per cent of their market value this year, to $15.05, while those in Purplebricks, the largest digital agency in the UK, are down 64 per cent to 174.4p from a peak in January. Michael Bruce, chief executive of Purplebricks, says the more “challenging” market has prompted a “shake-out — not just in relation to online propositions, but equally in the traditional [estate agency] market.” Entrepreneurs began launching digital estate agencies in the mid-2000s, with the UK at the “front line of disruption”, according to Mr DelPrete. They saw an opportunity to market a fresh approach to an often mistrusted profession. Many introduced cut-price fee structures, such as charges that were lower than traditional agents’ but payable upfront whether homes sold or not. Initially, some companies thought they could eliminate estate agents altogether, but in most markets that proved a step too far. Glenn Kelman, chief executive of Redfin, says: “What we’ve learned about US consumers is that they are very risk-averse. They want full service, they want to see the house and ask questions of us . . . We ended up grudgingly hiring estate agents.” Purplebricks’ London flotation in 2015 began an era of large-scale investment in digital alternatives, while also raising the sector’s profile. Purplebricks has since expanded to the US, Australia, Canada and Germany, and brought in £93.7m of revenues in the year to April; Redfin reported $95.8m of revenues for 2017. Privately owned rivals have secured heavyweight backing. Compass, a US start-up, attracted $450m of funding from Japan’s SoftBank Vision Fund — the world’s largest tech investor — last year, while in the UK, Yopa has drawn more than £75m. But others have failed to gain traction. Connells, a traditional UK estate agency that bought the online brand Hatched in 2015, closed it in September, saying the model was “fundamentally flawed”. Another rival, Emoov, is struggling financially and has put itself up for sale less than six months after a £100m merger with two other firms. Analysts agree that in the UK and US, digital agents’ share of home sales remains in the single digits. Russell Quirk, chief executive of Emoov, says: “The sector has definitely grown . . . but has it got to the destination I thought it would in the time I thought it would? The answer to that is no.” I rolled my eyes last year when analysts were talking about 20, 25 per cent market share [for digital leaders] Mike DelPrete, real estate technology academic at University of Colorado-Boulder Despite the challenges, Purplebricks’ UK division reached profitability in 2017, making £4.2m of operating profit on £78.1m of revenues in the year to April. It remains lossmaking as a whole, while Redfin swung to a profit in the three months to September. Low prices mean scale is essential to profitability, but Mr DelPrete says market dominance is hard to achieve. “I rolled my eyes last year when analysts were talking about 20, 25 per cent market share [for digital leaders]. That’s not how real estate goes,” he says. “Real estate is very fragmented, there are relatively low barriers to entry to get into the business of selling houses, the products are undifferentiated and there’s no customer loyalty. That leads to this natural fragmentation.” Adam Day, founder of Hatched — who left the company after it was sold to Connells, and has since worked at two other digital estate agencies — has become a vocal critic of digital players. “It doesn’t work for the customer and it doesn’t work for the estate agent,” he says. “It’s not executing brilliantly well as a long-term, sustainable business model.” Mr Day believes agencies cannot provide full customer service on a low fee. Vendors are “not having their hand held . . . you get pushed through to the call centre,” he says. Digital agents contest that: Mr Bruce says his company is “investing more and more in the customer experience”, while Mr Kelman says digital efficiencies enable Redfin’s agents to handle two to three times more listings each than rivals. An even greater change to the customer experience comes with the “i-buyer” model, in which companies such as Opendoor take homes on to their balance sheets rather than acting as agents. Distance runner Mo Farah has been used by Yopa, the UK internet estate agent, in an advertising campaign this year © AP Like Compass, Opendoor — the pioneer of the “i-buyer” model — has drawn attention from SoftBank. The Japanese conglomerate’s Vision Fund committed $400m to Opendoor in September, reportedly valuing the company at more than $2bn. Opendoor and its rivals, such as OfferPad and now Redfin, generate “instant” offers based on data covering homes in the surrounding area. They offer completions in periods as short as three days, buying homes for 95 to 98 per cent of their market cost while charging fees of 6 per cent or more, says Mr DelPrete. They then sell the homes on, often after a refurbishment. Most i-buyers are still operating in a limited number of local markets: Redfin Now sold 24 homes in the third quarter. Mr Kelman told investors in August that with signs of a cooling housing market, “we’re being very beady-eyed about which homes Redfin Now buys in the shoulder of the 2018 season”. In the UK, a two-year-old start-up called Nested offers a similar proposition, but in the form of a loan for most of the value of a vendor’s existing property so that they can search for a new one before it sells. Nested raised £120m in its latest funding round. Amid the fragmented market, digital agents believe they can stand out by establishing brands that are recognised on a national and even international level. One UK agent, Yopa, hired the distance runner Mo Farah for an advertising campaign this year. Ben Poynter, Yopa’s chief executive, says: “Most of the large [traditional] groups operate multiple brands which often compete against each other in particular territories, they don’t sync their databases . . . when you operate one brand you do get the benefits of scale.” The quest for brand dominance means marketing costs can be high; Purplebricks, for example, spent £42m on marketing in the year to April. Redfin draws in customers through its real estate listings service, but Mr Kelman says Purplebricks “saturating the airwaves” has prompted it to increase its own marketing. Amid questions about how far they can increase market share, the larger players are looking beyond listing and sale fees. Purplebricks wants to become a digital dashboard for home-related transactions such as utilities, broadband and insurance. Compass is looking at a similar idea, while Redfin wants to integrate more parts of the homebuying process, like mortgage borrowing and legal paperwork. “We can materially increase our profitability . . . not just through market share but by offering customers more than just a traditional estate agency service,” says Mr Bruce. Charged up: how digital agents keep prices low Most digital agents have adopted a low-cost model. Purplebricks charges vendors £899, or £1,399 in London, upfront, whether a home sells or not. Redfin charges a 1 per cent or 1.5 per cent listing fee, below standard US sales commission; it also refunds part of buyers’ costs. Some in the industry have questioned the incentives in the upfront fee system adopted by most UK-based online agents, saying they lack a financial interest in securing a high price for sellers or even, in some cases, a sale at all. Such worries came to a head in Purplebricks’ Australian arm in September, when local media reported the digital agent had held a competition with cash prizes for agents who persuaded vendors to lower their prices. Michael Bruce, chief executive of UK-based Purplebricks, says the company is “no different than anyone else” in “ensuring you give the right advice and understand where current market conditions are”. Purplebricks changed its Australian pricing in September, raising fees and splitting them into two instalments, the second due when a house sells. Compass, a US digital agent, is unusual in the online industry for charging standard commissions. It believes digitisation alone can make agents far more efficient and smooth the customer’s experience. “You start being able to change the economics of an agent, because the [digital] platform allows them to do things they were doing in 12 hours, in two,” says Maëlle Gavet [COO]…”

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