British Company Purplebricks quit business in Australia just three years after it had entered the market with a dream to change the real estate scene. The company had made an $18 million loss in six months before October 2018, which mounted pressure on the management. Purplebricks’ fall was attributed to the small profits made from low fixed-fee from their customers. This has raised questions on the low-fixed fee business model.
Viability of fixed-fee structures
A lot of opinions were aired suggesting that fixed-fee structures were a flawed business strategy. The role played by a flat fee real estate agent was also questioned. The current model was thought to have failed because agents did not put in enough work. Agents were supposed to work extensively to help both buyers and sellers. They were liable to pay the full fee for a property regardless of whether the property was sold or not. The fixed-fee structure only brought small profits that were not enough to sustain the business model. Additionally, the Australian market was not ready to give payments before receiving the services, which made it hard for the business structure to succeed.
Although the fixed-fee structure faces a lot of criticism, it looks as though the exit of Purplebricks in Australia won’t be the end of the business strategy.
Chris Thorpe, the head of HouseSettled, a fixed-fee agency operating in Queensland, suggested that the failure of Purplebricks was due to its commercially unviable business structure and not the fixed pricing model used.
For instance, instead of studying the market first, they tried growing as fast as possible by using $20+ million on TV and media, which built expectations on their profit margins. The business model may have worked in another real estate market but not a declining one. For vendors to pay the full fee of their listing before they were sold, there needed to be a booming market for a good flow of business.
In addition, there were the additional costs involved with having “on the ground agents”, when with today’s technology this can be avoided, by the vendor simply showing potential buyers around.
Ashley Davidson, a business advisory specialist and executive director at Pitcher Partners, joined in giving hope for the fixed pricing model, saying it is sustainable. He purported that the success of the business model would have come if all the risks of the business were considered. The risks would have been prominent if the fixed pricing was used in professional services such as accounting because the amount of work and time is different from one case to another. However, the real estate business depends on big profits coming from positive results.
Vendors are still looking for ways to save money when selling their largest asset. So the demand will always be there, it’s just finding that middle ground of where the savings match the practicality and service on offer.
At HouseSettled we believe you still need a qualified agent to sell your home, however, why do you need one to show a buyer around? In the majority of circumstances the vendor is able to show a buyer around and in doing so is able to offer so much more value to a viewing. Remove the agent from this stage, in turn, removes the high commission. This is what we offer at HouseSettled.
The future of fixed fee agencies
Purplebricks failed because they didn’t realise the true cost of what they were undertaking while still retaining on the ground agents. They missed the mark when it came to market needs and went on with their business strategy without understanding that so much work needed to be done. This was a big risk.
However, there is a huge demand for fixed-fee model in Australia.
In the three years that Purplebricks operated, they had over 5,500 sales and 7,000 listings. Going with these figures, Purplebricks quitting business in Australia won’t be the end of fixed-fee agencies
At HouseSettled we offer a full agent service including:
-Premiere listings on Domain.com.au & Realestate.com.au.
-Professional Photography & Floor Plan
-For Sale board
-Access to your very own customer portal.
-Preparation of contract of sale
You simply need to open your front door to potential buyers, we do all the rest.
Simply pay for your advertising fee upfront of $2,500 just like any other Real Estate Agency and once your property is sold it’s just a further $2,500 to pay.
Check out our calculator to see how much you can save.