The online estate agency model has been around for over 15 years, with only a handful of agencies gaining substantial traction until recently. With interest rates increasing, these companies have been facing more headwinds as the real estate industry slows down. Relative to the traditional high street estate agency, this model is more challenging to operate in an environment characterised by low transaction volumes. Naturally, an online model comes with limitations on the quality of the customer service that can be offered, by virtue of the fact that a differentiated service is harder to deliver remotely. On the other hand, online estate agencies have benefited from lower overheads and lower recurring costs. In this article, we examine the business model of online estate agencies, their cost structure, and competitive positioning.
Online estate agencies can be characterised by a low branch count, low employee count, little interaction with customers, and a heavy focus on technology. The primary task of online estate agencies is to deliver a high quality service digitally. As outlined before, this setup comes with advantages and disadvantages, which in a sense carves out the range of strategic options that these businesses can pursue profitably.
With a low branch and employee count, starting an online estate agency can be done without the need to fork out thousands of dollars to cover the deposit for new offices and recurring rent costs. These agencies tend to face lower staff costs, lower insurance premiums, lower lease costs, and lower utility bills. This makes it easier for an entrepreneur to start an estate agency from scratch and target a big addressable market. In a traditional high street estate agency, the entrepreneur would need at least 1 branch located in a central part of the town or city he/she wishes to target. The branch would serve as both a beacon to attract new customers and a place to house employees. Similar to a retail business, as a traditional estate agency serves more customers from more cities, its branch and employee count increases. Additionally, the more central the locations sought the higher the monthly rent paid.
It is very easy to immediately draw the conclusion that the low branch and low employee count is a big advantage, but you would be oversimplifying the issue. Lower startup and operating costs mean lower barriers to entry, which invariably means significantly more competition. As online estate agencies try to fend off the competition from players in their market segment, they may end up using a lot more resources to gain and retain customers. Furthermore, online estate agencies typically compete at low prices, which means that they need to get a large number of transactions to make a good return on investment. In order to get a large number of transactions, they need to cover more cities earlier in their growth cycle, which can only be done with aggressive marketing. In some cases, aggressive marketing may mean hiring more people than you'd expect.
Most online estate agencies provide a platform for the customer to help themselves and offer significantly lower prices to make up for the difference. These agents charge a small fixed fee, rather than a commission, and try to sell clients on the idea of big cost savings, and greater transaction flexibility and control.
According to the Home Owners Alliance traditional estate agencies usually charge a transaction fee between 0.9% to 3.6% (inc VAT) of the property value. This can amount to £4,000 per transaction depending on the value of the property, while an online estate agency may charge a fixed £150 fee upfront for a basic package.
When clients pay a traditional high street estate agency they can expect:
The situation is quite different for online estate agencies, where the client may receive:
If clients need more assistance, they can purchase extras that will cover items such as accompanied viewings, additional marketing materials, professional photographs, or sales negotiation. Some will even offer the ability to connect with a local expert. These "add-ons" can push the price up significantly - in some cases by up to £1,500. To augment their revenues, online estate agencies may earn referral fees. It is often the case that online estate agents recommend particular suppliers of legal services (such as Conveyancing), and collect a referral fee if a seller decides to use one of these providers.
In the initial stages, online estate agencies may spend a significant sum of money to build out the technology platform. If the founders of the company are developers, they may not need to spend this money directly, but the opportunity cost of the time spent building it without compensation would be significant. Nowadays, the recurring cost of operating a cloud-based technology platform is very low. Internet services such as domain name registration, web hosting, email hosting, online payments, and the other third-party services necessary to operate such a platform can be purchased for a small subscription fee. In the UK, the property portals are few and they hold significant market share (an oligopoly in some respects) so all estate agencies whether online or traditional can expect to pay an excessive fee for property listing and access to listing price data.
One of the major cost areas that tends to be underestimated is the cost of sales and marketing. Owing to the power of Big Tech - Google, Meta, Twitter, Microsoft, ByteDance - digital marketing has become quite expensive. Advertising on traditional media has and always will be pricey. As outlined before, online estate agencies may be forced to pursue aggressive sales and marketing strategies because they need to bring in customers from a large target market quickly to make up for the lower margins. Keep in mind that despite the lower cost offered by online estate agencies, only a small segment of the market will have the time to essentially sell their own home. Also, most people will likely not have the confidence nor the expertise to negotiate a good price for their property. According to the 2022 TwentyCi Property & Homemover report only 8% of properties across the UK are sold by online estate agents.
There is a place for online estate agencies in the real estate industry, notwithstanding the short-term challenges the business is facing. Just before Purplebricks was rescued by Strike from certain bankruptcy, the business generated revenues of about £70Mn which was coming from a high £110Mn just 2 years prior. Many of the businesses in space have also modified their value proposition considerably. For example:
It is fair to say that the long-term profitable model for online estate agencies is probably a hybrid, where they are able to find the right mix of technology and high-touch customer service at the right price. After all, there is a huge amount of market share to gain if they can offer a value proposition that meets the needs of the customer at a lower cost. In addition, with continued improvement in technology, the ability to deliver customised services remotely will continue to improve.
The real estate industry is ripe for continued disruption, and we expect entrepreneurs to continue to lead creative start-ups in the space. Though there have been some innovations in space, even among some of the traditional estate agencies, there is still a lot of room for improvement. In some segments, innovative start-ups already exist but the level of adoption has been slow. On the other hand, new technology startups in the real estate space should pay careful attention to their value proposition. In times of economic difficulties, consumers will be more discerning about each dollar they spend.