The SeattlePI reported today that HouseValues lost $1.5 million last quarter and in addition is laying off 60 employees as well as key executives leaving for other ventures.
For those who haven’t followed HouseValues. HouseValues sells leads back to agents by harvesting them through the search engines and Television and Radio advertising. That being said their margins have erroded significantly over the last two years and agents have not been renewing their contracts for leads.Â
In my opinion (It’s a blog so its all my opinion) Housevalues has not had a defensible business model from day one. Other then a few domain names which provide some branding the consumer experience is horrible and inconsistent which ultimately kills the ability for the company to create the necessary viral buzz to expand without continually doing Pay-per-click, Television, and other offline media to try and drive consumers to their website.
Because the company is simply a lead generation company without the ability to enforce a service paradigm the company is without the big stick necessary to develop a Wow experience by the consumer. Also because consumers are even more wary of allowing others to know what their true real estate investment intentions are, the data that the agent gets is discouraging.
I also believe that consumers when they find out that their information has been essentially sold to a third party that they had no former relationship with and without choice as to who ultimately follows up with them the consumer ultimately pulls out of the equation and will also tell other consumers of the challenges of working with such a flawed business design.
Housevalues is parasitic by design. It’s an unnecessary middle man taking a significant piece of the real estate commission in the form of leads being sold to agents.
Without knowing exactly what percentage of leads that convert into closed transactions, using the industry average of about 2%, that means that the average agent will need to contact 50 HouseValues leads in order to close one transaction. Assuming $50/lead the cost per closed transaction would be $2500. If the average transaction side is say $300,000 or $9000 Gross commission at 3% (less at 2.5%) the agent is paying in excess of a 25% referral in advance. The economics just don’t make sense.
The economics of lead generation is break even at best. Given PPC (Pay-per-click) and the fact that HouseValues is competing head to head against actual agents on the ground in the same venue (sponsored advertising) on probably similar economic terms, the fact is that HouseValues is going to get squeezed. The only markets where they won’t get totally squeezed is in smaller specialty markets which are as far as the web is concerned lead generation is less efficient (meaning that many agents create a more efficient market then only a few agents).
I like many agents have learned the hard way the difficulty of converting HouseValues leads. It’s much easier to work with a client who has visited our website and requests information or sets up a search there then it is when the client comes via a third party. As much as the third party might think the leads are good, they really aren’t, at least not compared to leads we generate on our own websites.
January 25th, 2007
I saw this post on Craigslist and decided to blog a bit about it
>Â 6% is too much < tonka4x4> 10/02 14:30:17
I think 6% is too much, I think it should be on a sliding scale, 4% if the house sells in the first couple of weeks and if after the 1st month move to 4.5%, then if it’s 2 months maybe 5%, but I think that’s enough. 6% is crazy!
I’m a REALTOR and I also agree that 6% is too much for many properties. However here is the dilema. Most truly experienced agents who have had a fair degree of success over their career of 5+ years in real estate have enough business coming in that demanding 6% to some extent makes their job manageable. If they took listings at a lower commission they would have to hire more staff and ultimately may not make as much as an agent in the short run in favor of an economic model which would pay with larger marketshare and economies of scale. In my opinion this is the achilies heal of traditional real estate.
The second part of this dilemma is the newer agent who wants to get his/her feet wet with listings will often be willing to discount the commission, however newer agents are more likely to get the pricing wrong on the home, not be strong negotiators not having been involved in many transactions yet, and ultimately will in all likelihood cost the home seller more then the 1 or 2% savings on the commission rates vs the recognized expert.Â
In most cases the Home Seller and the agent won’t even notice the actual difference between a long time professional and a new professional in terms of pricing and marketing, but this challenge is real.
A third scenario is the “Limited Service Brokers” who charge less to the home seller who uses their services and claims that the sellers saved “$X” by choosing them.
This also is a misnomer. The national franchise which I currently hang my license with recently completed a nationwide study comparing selling prices, time on market and expiration of listings of “Limited Service Brokers” vs “Full Service”. What came out of the study was that “Limited Service Brokered” properties sold for less money (less net for the seller). The ones that did ultimately sell took on average 20% longer to sell and were 36% more likely to expire without a completed transaction. Here we could ask the question, “What about the Savings.” In reality the savings is an illusion in most cases. Sure there will be poster children for “Limited Service Brokers” of clients who sold in 1 day at a price above what they listed it at, but these poster children are just that, they are the anomaly. They are the sizzle of using a limited service broker.
One last item worth noting is that whether overt or not, most “Full Service Agents” are not excited to show “Limited Service Broker” listed product. If they do show these properties they are properties of last resort once the inventory of “Full Service” product has been shown to prospective clients. This ultimately leads to the financial dilemas that home sellers experience with the Limited Service Brokers.
What our team has been studying is a Flexible Commission model. Our research has shown that by modifying the commission based on the outcome, consumers ultimately would receive better perceived and real value for services provided. Ultimately if the buyer of the property comes from sphere of the home seller, or from a call on an ad or sign call there is no reason why the home seller should pay a full commission. In the case that the seller finds the buyer him or herself maybe they shouldn’t be obligated to pay a commission at all since in reality the marketing we do as agents didn’t ultimately result in the sale. We refer to our model as the 0,1,4,6 program which has structure for the seller to pay as little as 0 or 1% if the buyer works directly with the seller. If any of our team (6 buyers agents) sell the property then the commission is 4% (essentially 1% on the list side) and if another member of the MLS sells the property then the fee might be 6% depending on the property etc…
November 11th, 2006