$75 MM Investment In REX Homes Makes No Sense

A few weeks ago REX Homes, another real estate startup with a unique business model, raised an additional $45 MM in a third round of financing, bringing their total to $75 MM since they were founded in 2015. God knows the real estate industry is in sore need of new business models. Home buyers and sellers willingly waste billions in commissions every year hoping that traditional realtors can sprinkle magic dust in the air. But REX Homes does not seem to be the answer to anyone’s prayers despite the fact that they have a veritable who’s who of investors including a co-founder of Sun Microsystems, the founder of Best Buy, and a former SVP of search at Google.
As I wrote about a year ago, hundreds of millions of dollars are pouring into new real estate brokerage concepts, which include full service and low service brokerages with discount commissions and rebates and many companies that will buy your home from you on the spot. REX Homes is another variant which offers a lower commission for selling your home but there’s a catch. They discount their own, sell side, commission to 2% but the big “savings” comes from totally eliminating the 2.5 – 3% co-op commission. On the flip side they claim to offer additional benefits to sellers by using artificial intelligence to identify buyers for the home and paying their agents a salary instead of a commission.

Marketing Real Estate Listings

I think this is a joke. On their Web site they claim to post your listing “right alongside MLS listings” on Zillow and Trulia (and I’m also told Homes.com) but you won’t find them on any of the regular brokerage sites or Realtor.com since they are not a member of any of the MLSes (is that the plural?). So your REX listing is going to be in pretty limited distribution.
They try to offset this by claiming they are going to use some kind of artificial intelligence/ machine learning/ big data (they get all the magic buzzwords in there) technique to find buyers for your home. It appears to be a two pronged digital marketing strategy targeted to visitors to the REX site as well as other people that their algorithms think might be interested in buying based on third party data.
With only 2 listings in San Francisco (a prime target market for this kind of concept), I doubt the visitors to the REX site are going to be a fruitful source of buyers any time soon – chicken and egg problem. That means that they are substantially banking on their algorithms finding buyers using the third party data.
It’s a sexy concept but can they really do it? Keep in mind that the holy grail of real estate is being able to predict who is about to buy or sell a home. There are already numerous companies out there attempting to do this because Realtors will pay handsomely for this information. However, I’m skeptical of these promises. I’ve already debunked one company’s claims of having a crystal ball and another one couldn’t run away from me fast enough when I asked for specific predictive accuracy data.
But REX isn’t just trying to predict who is looking to buy or sell a home. They are trying to figure out who would be interested in a particular home. That’s an even taller order.

Any Realtor Can Easily Match The REX Commission

Perhaps the biggest flaw in the REX business model (did their investors seriously not see this?) is that there is not any secret sauce to cutting the co-op commission. Anyone can do it, including real estate agents that will put it on the MLS and instantly get better distribution than REX is getting. There is nothing that prevents us from putting a listing on the MLS with absolutely no co-op commission. In fact, I occasionally see it.
So why isn’t it done more often? Because, according to the National Association of Realtors’ Profile Of Home Buyers And Sellers, 87% of home buyers still use a real estate agent and that agent needs to be paid. If there is no co-op commission then the buyer’s agent is going to seek a commission from the buyer, which will then be reflected in the purchase price. The commission gets taken out of the transaction one way or the other.
So REX seems to be thinking that they are going to be marketing to a buyer that isn’t working with a real estate agent and isn’t necessarily looking in all the normal places for a home and maybe saw the home on REX but wasn’t interested or maybe isn’t looking at all. Right.
#RealEstate #Realtors #RealEstateAgents
Gary Lucido is the President of Lucid Realty, the Chicago area’s full service real estate brokerage that offers home buyer rebates and discount commissions. If you want to keep up to date on the Chicago real estate market, get an insider’s view of the seamy underbelly of the real estate industry, or you just think he’s the next Kurt Vonnegut you can Subscribe to Getting Real by Email using the form below. Please be sure to verify your email address when you receive the verification notice.

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