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 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.