The Age of Amazon Lesson 4 | New Business Models

It’s the variety of new business models that may change real estate

Open Door is buying homes directly from consumers. Redfin is offering discounts to consumers connected to an online experience. Purple Bricks takes up where HelpUSell and Assist2Sell used to operate, offering deep discount brokerage services. HomeSmart, Realty One Group and others are offering deeply discounted flat-fee brokerage services to agents. Compass is offering to purchase agents’ businesses and a high share of commissions. Quicken Mortgage In-House Realty is connecting its mortgage customers to buyers and sellers who don’t already have an agent. USAA is offering its over 12 million customers rebates if they use the Realogy network. The list goes on and on.

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Why Does This Matter?

There are two things to think about here. Do any of these entities, by themselves, pose an imminent threat to the incumbent brokerage business? No. Do they pose a longer-term threat? Of course, they do. But, first, a bit of history. RE/MAX launched in 1973, but it was 10 years before they began to impact the brokerage business and another 10 years for the industry to feel its full impact. Keller Williams began franchising around 1987, and it was 10 years before they began to have an impact and another 10 years before the industry felt their presence. These two had completely different business models that defied industry convention, and neither was backed by large amounts of capital.

Lesson: Many believe that a game-changing, epochal, event is about to happen in residential brokerage. Instead, it’s the variety of new entrants seeking a piece of the market for housing sales that cause concern.

What happens when companies like Open Door, Redfin, Compass, which already have access to more capital than RE/MAX or Keller Williams ever had, and the others listed above, who likely can get access to such capital, can advance their businesses faster than without it? That should concern incumbents.

Keep in mind from Lesson 1 that it wasn’t just that incumbents like IBM, Sears and GM ignored new entrants; it was that they dismissed them. Both were to prove fatal to their futures.

Intentionally Choose Your Niche

One large truth is that you can’t be everything to everybody. You can’t be a Nordstrom and a Walmart. You can’t be a Realty One Group and a Coldwell Banker. But, you can intentionally choose where and how to compete so that you have a successful business. You can choose to compete with Redfin by offering services that mimic their services. You can choose to offer a guaranteed home-buying program in your market like Open Door. Or, you could become a low-fee brokerage like Purple Bricks. But, you can’t do these within the same organization and remain viable. We pick Amazon for low cost, commoditized, homogenized products; not for specialty items.

Will any of these new industry entrants achieve the success of Coldwell Banker, Keller Williams or RE/MAX regarding their national market share? Yes, it is likely. The largest of these have around 10 percent market share in the United States. In total, these three giants have around 26 to 28 percent share. Two were as non-traditional in their time as Redfin, Open Door and Compass. Due to the capital behind these new entrants, it may take them less time to get there, although Redfin is already roughly through their first 10 years, and they have less than 1 percent national share. Then again, that is about what RE/MAX and Keller Williams had after their first 10 years. The analyst who projected revenues of around $700 million for Redfin in 2019 didn’t comment on the fact that this is less than one-fourth of the revenues of HomeServices of America or Realogy’s NRT unit.

A time is coming where brokerage firms will have to pick which spot to excel in, what services to offer and who and how to employ those who will deliver service. There is no right or wrong in the choice. A brokerage services firm cannot be a specialty firm and a mass market retailer all at the same time. It’s not the merchants at either end of the spectrum who are getting punished today; it is those in the middle.