The Unconditional Blog

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7

New real estate business model emerging for 2011

Posted on: October 11th, 2010 | Filed in Buying / Selling a home, International, Real Estate Industry

Any business needs to adapt to survive – real estate is no different, and as such it should not be surprising to see new business models emerge to challenge established practice. Just such a new model is planning to launch across the Tasman in the early part of next year, and may in time enter NZ at some stage given the similarity of markets.

Refund Real Estate - Refund Real Estate

Refund Real Estate is currently advertising to attract new franchisee to provide a platform for a national launch. The business is a springboard extension from the company’s foundation of mortgage broking which began in 2004.

The business model for the mortgage broking service is to provide a ‘refund’ of part of the commission from brokering the loan with a bank or lending institution back to the person who has applied for and ultimately takes on the mortgage. This model is what has been called “less than free*” – given the fact that all mortgage brokers do not charge clients as they earn fees from the lenders, offering a refund or rebate is a legitimate means of establishing a point of difference. The lending institution is not overly concerned that its commission is being split with the broker, the broker has the marketing advantage and the client gets a discount.

The advertising on the new real estate website indicates that this will be the model for the real estate business. They state that “For the first time Australian customers, both buyers and sellers, will received a cash refund when they buy and sell property with us!”

In the USA there are business models in real estate that provide a cash back incentive for buyers to use a particular agency. This model works because the US brokerage model has both buyers agents and sellers agents. Each agent operates exclusively for their specific client and acts in their best interest. In the US it would be seen as a conflict of interest for an agent to represent both the seller and the buyer or at least broker the deal between them directly.

Both agents to a deal are paid through a split in the commission (in the US the commissions – paid by the seller, are considerably higher at around 4.5% to 6%). In this way a buyers agency can offer a cash back to the buyer by splitting their commission and thereby offering a “less than free service” as the seller is paying for the overall service of the two agents.

It will be very interesting to see the success and reaction to this business model in Australia when it launches. Certainly a buyer may well be attracted to contact an office of Refund Real Estate so as to ensure they get a cash refund for buying the house through them. However certainly in the beginning without a large portfolio of listings it may be hard for them to convince established agents and offices that they hold value in this buyer, given the fact that buyers can talk to any agent.

Another interesting point highlighted to me when discussing this model with an agent was the fact that the service of real estate in NZ (and similarly in Australia) is solely  a service provided to the seller who pays the agent to act entirely in their best interest. Given this, how would a seller feel to see that their fees go to not only pay for an agent representing a buyer who will be motivated to negotiate directly against the seller, but then for some of that fee go to the buyer?

At this stage there is not yet a clear detail surrounding this new ‘refund’ model – when it launches to the public it will be interesting to see how it works and the reaction it generates in the media and the industry across the ditch.

* “Less than free” was a term I first came across when reading Chris Anderson’s book ‘Free’. The concept is that many businesses these days (particularly online) seek to attract audiences with free offerings – in many cases to then in time to upsell to premium charged services – this is called Freemium. The concept of Less than free comes from the idea of where do you go to compete with free? – well less than free is where you actually pay the consumer to use your product or service in the belief that the experience will be rewarding and ultimately profitable in the long run. In this case for real estate the value will not come in the long run as there is not likely to be repeat purchase so “less than free” has to be funded from another party paying enough to allow for this incentive.

Article Discussion

  1. J.C. says:

    I’ve never really fully understood how mortgage brokers work in the banks’ favor. All I can see is that it outsources the fixed costs that a bank has to cover to sell mortgage financing, but apart from that, the benefits for the bank don’t seem that clear. Obviously a need has been identified (customers are paying too much or costs need to be lower) for this business to be conceived.

  2. I was in Australia last week and saw the Refund RE infomercial scouting for franchisees. The advert had me quietly chuckling to myself. Good on this franchisor fellow for giving this a go but I can’t see it working at all. He, of course, may become wealthy because he will suck quite a few average agents into his net who will borrow and pay him circa $100k (my guess) to “own their own business”.

    I compare the whole concept of Refund real estate to the used car sales ploy of “minimum $5000 trade-in”. Trade in a bomb worth $2000 and get $5000 for it if you buy a much more expensive car at “full” retail price! Clearly, in life as in retail, you get what you pay for.

    The same is true in real estate. The best agents won’t be found at “Refund Real Estate” so why would anyone who really understands the “law of value” go there. They won’t. But I suppose that leaves a lot of people who clearly don’t understand the “law of value” who probably would use the services of a company like Refund real estate.

    Having said all that, good luck to Refund real estate. I support anyone entrepreneurial that aims to add value and improve the way we do things. Problem is I struggle to see the value-add – it may appear cheaper – but we don’t need cheap. Real value is what people need and deserve.

  3. J.C. says:

    Steve,

    Interesting views. In my opinion (I’m not a REA or a broker), I think you will find that some people think that the real estate industry, as a whole, makes much money for very little output or adds little value. Whether or not that is true (and I have no research to back me up), I have no doubt that the perception exists. That’s why there may be a market for a service like this. Despite the efforts of individual people, I feel that the bar for the industry is quite low.

    I’m sure the REI has done its own qualitative and quantitative research on this, but perhaps not made the findings public.

    Cheers

  4. Alistair Helm says:

    J.C.

    Appreciate your comments – the demonstration of value by real estate agents seems to be one of the challenges of this industry. A component of this is the fact that frequency of transaction and thereby experience is so infrequent (7 years) – thereby removing comparative ability; the other factor is the unique aspect of every house and transaction scenario.

    Beneath the surface the task of a real estate agent is challenging and very demanding of time – most agents actually work 6 or 7 days a week and most spend a considerable amount of invested time in the first year in establishing an income stream. The data shows that reasonable income rarely comes until year 2 or 3 onwards and that is why the % of those that stay until year 2 is very low leading to very high turnover.

    In reading your comments and writing these comments I am reminded of a great line from the excellent book by Jeff Jarvis – What would Google do?. In the chapter on what would Google do if it ran a real estate business he in a very challenging tone states “if a real estate agent has to demonstrate to me the value they add.. then clearly it is not as great as it seems” – this is fundamentally an issue – the demonstration of value and the appreciation of that value by clients served by this industry.

  5. JC – completely agree that public perception is that it is difficult or impossible to find good value from real estate agents. I suppose the same could be said of other service providers like dentists, lawyers, cleaners, etc. Difference is that agents ‘seem’ to charge so much more per trasaction (and per hour) than the 3 examples I’ve given. But do they really?

    At the end of the day (or the transaction) it boils down to how much value the client receives for the fee they pay. As you correctly point out some individual agents provide good value and some don’t.

    I find that consumers who choose good dentists, lawyers and cleaners are also smart enough to choose good real estate agents. My point is that the more savvy consumers won’t need to choose a sevice like Refund. They’ll seek and find better value. I agree there will be a place for their service for those less savvy. The franchisor, realising this, will make some good money from it.

  6. […] last year details emerged of an Australian company Refund Real Estate looking to enter the market with a rebate scheme of fees and a focus towards online […]

  7. Kim says:

    … “In the absence of value – we question the price..”

    That is why some spend $250k on a Mercedes Benz & others spend $2500 on a Nissan… It is all relevant to the client based on the solution it offers to them for their life to move forward into the future they have created for themselves… Great negotiators get this – good negotiators don’t.

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