As I know first hand, it’s not easy being a full service, discount real estate brokerage. Just ask the folks at ZipRealty who recently announced a major strategic shift in their real estate brokerage model. Here are some of the highlights:
- They are pulling out of 11 markets
- They are cutting overhead by 25 – 35%
- They are adopting the same independent contractor model used by most of the real estate industry
- They are focusing their marketing message on the service aspect of their business rather than the discount
ZipRealty is a publicly traded company so there’s lots of information available on their financial performance and strategy. In addition, I’ve done some personal research on them.
They’ve been in business for over 6 years. During that time I don’t believe they’ve ever made money. In fact, their cash position has dwindled from $80 MM at the end of 2007 to a bit more than $34 MM at the end of September. Meanwhile, in a total lack of confidence, their stock has been punished:
I think ZipRealty has had the right basic concept from the start but they have suffered from two major problems. First, it’s hard enough to profitably manage a full service, discount real estate brokerage in a local market but to do it on a national basis is quite challenging. You have to replicate the culture in each market and, believe me, managing the culture in a real estate brokerage is not trivial. For instance, they were spending up to $1 MM just to enter a new market. And the second big issue for them was they had a huge corporate overhead – something they now clearly recognize. For example, they overspent on technology, trying to automate even the simplest processes with proprietary technology – e.g. employee testing and application processing, showing scheduling. The end result was that, at least in 2006, 12% of their staff was overhead.
So their response is very interesting in at least two regards. First, they’ve explicitly recognized that it’s not enough to market low commissions and buyer rebates. You have to also address consumers’ need for comprehensive service in the real estate transaction. Second, they’re abandoning their employee model, opting instead to go the traditional route with independent contractors. This is a huge mistake in my opinion since the real estate independent contractor model is seriously flawed. Somehow they believe this is going to save them overhead. I’m not at all clear on that unless they are going to let their agents run wild.
BTW, notice that their stock has not reacted in the least to their announcement.