RE/MAX: How to Stay Relevant in the Age of Digitization
Real Estate Agents believe they deserve a percentage of your home’s value, but why? Is their value really tied to the value of your home?
RE/MAX completed its IPO in October 2013, raising over $220M [1]. This probably caused more than a few millennials (myself included) to stop, scratch their heads, and say, “Wait, real estate agents still exist?” RE/MAX then went on to prove us (me) wrong, posting a $86.6M adjusted EBITDA in 2014, and has been providing steady returns since [2].
How does RE/MAX make its money? RE/MAX allows agents to operate under the RE/MAX brand and associated national advertising in exchange for a monthly fee and a cut of the agents commission. This commission is where the real magic happens. For every house sold by a RE/MAX agent, the agent receives a 5-6% commission, of which RE/MAX collects 5-30%. This means for every $240,000 (national average for agent-assisted home sales) house sold, RE/MAX collects 720-$4,320, at an average profit margin of ~25%[2]. With approximately 5.76 million homes sold nation wide in 2015, there appears to be quite the market opportunity for RE/MAX agents [3].
But why are homeowners willing to give RE/MAX 5-6% of their home’s value? Well up until the fairly recent introduction of websites such as Zillow.com, agents had exclusive access to a national database of properties and transaction histories called Multiple Listing Service (MLS) [4]. Agents would utilize this database to provide an estimate of a home’s value, then take pictures, list the house, and hold open houses. This listing could then be seen by all other agents in the area, and could be sorted to provide personalized options for homebuyers.
If a homeowner wished to sell the house on his own, his/her reach would be reduced to yard signs, word of mouth, classified advertisements, etc. Additionally, the owner would need to estimate the price of their house on their own. Price too high and the house stays on the market too long, reducing its value. Price too low and you could be leaving tens of thousands of dollars on the table. With stakes this high and a low availability of information, its not surprising that home sellers turned to industry experts.
And most do. Of the 5.76 million homes sold in the United States in 2015, 88% were sold through a real estate agent or broker. And this percentage has been trending upward over the past couple decades, up from 69% in 2001 [3]. This is rather surprising, given that websites such as Zillow.com and Realtor.com have broken the iron grip on housing information that private MLS’s afforded traditional real estate agents. RE/MAX has embraced this movement towards open information, now offering portions of their MLS and rough price estimates online. However, RE/MAX agents are still sticking to their percentage based commission model.
In response, online companies such as Redfin are seeking to undercut traditional real estate companies, charging only a 1.5% listing fee for houses sold through their website. At this price point, Redfin is actually claiming more revenue per listing than RE/MAX, who receive 1.05% on average (RE/MAX only receives 5-30% of the 6% commission), while also undercutting the traditional agent model.
In order to avoid a race to the bottom and a commoditization of commission rates, RE/MAX should adopt a value based pricing model to reflect the reality of information parity. Under this model, RE/MAX could offer varying levels of services at various flat fee price points. Doing so would allow consumers to opt in to the services that fit their individual needs.
Under this model, RE/MAX would still maintain a large competitive advantage over newer market entrants such as Redfin, due to the existing scale of their database. They would also be able to significantly undercut Redfin’s 1.5% listing fee, and maintain their market dominance. Add-on services, such as detailed home valuations, staging, and open houses could be priced based on the availability of agents in the area on an hourly basis. Internet companies such as Redfin cannot currently compete on this front, as they do not have the necessary workforce distributed throughout the United States. I strongly believe that this value based approach provides a much more sustainable business model for RE/MAX in a time where “agent” roles are becoming more and more obsolete (think travel agents).
However, I think it is fair to say that this transition towards a fully digital home buying experience will take a significant amount of time. Homeowners still want a significant amount of handholding throughout the selling process. Can RE/MAX maintain steady growth during this transition period, and if so how can it best be managed? Which services should be transitioned to this model first?
[1] Dexheimer, Elizabeth, and Leslie Picker. “Re/Max Gains After $220 Million IPO Priced Above Target.” Bloomberg.com, Bloomberg, 2 Oct. 2013, www.bloomberg.com/news/articles/2013-10-01/re-max-raises-220-million-in-ipo-pricing-shares-above-range.
[2] http://investors.remax.com/investor-relations/press-releases/financial-releases/press-release-details/2016/REMAX-Holdings-Reports-Fourth-Quarter-And-Full-Year-2015-Results/default.aspx
[3] “Quick Real Estate Statistics.” Www.nar.realtor, 30 Apr. 2017, www.nar.realtor/research-and-statistics/quick-real-estate-statistics.
[4] DePillis, Lydia. “Why do real estate agents still exist?” The Washington Post, WP Company, 22 Aug. 2013, www.washingtonpost.com/news/wonk/wp/2013/08/22/why-do-real-estate-agents-still-exist/?utm_term=.2087c757f653.
Excellent read, and thank you for writing about a topic that many of us can relate to as (hopeful) homeowners and perpetual renters. I think you’re spot on that RE/MAX needs to justify the value they bring to the seller, but I’m not sure add-on services may be the most effective. As a first-time seller who might not have any exposure to what services a realtor provides, I would probably guess that the commission is an “all-in” type of fee that covers any service the realtor needs to provide to sell my property. However, by unbundling services like staging, open houses, and detailed home valuations, I would feel like I was being nickel-and-dimed by the agency and question what service they actually do provide. With MLS data now available at the fingertips of both buyers and sellers through the internet, companies like Redfin will inevitably replace human labor with digital interface. Like your allusion to travel agents! RE/MAX might be best served by acquiring the competition that will eventually lead to their demise.
Very well written article, thank you for sharing! I agree completely with your stance that REMAX needs to address the threat of Zillow. Before Zillow, a real estate agent (and therefor agency)’s main value add was in sourcing potential listings for buyers, and sourcing potential buyers for sellers. Now that Zillow has made so much data transparent to both buyers and sellers, it’s easy to feel that real estate agents just schedule showings and hand the keys back and forth, and one can (and should) go it alone. But I wonder how much value home buyers and sellers still find in the ease of mind that comes from having a professional consultant, feeling guided through the process, the paperwork, and especially the negotiation. If a buyer engages a realtor who is able to broker a sale below the Zillow “Zestimate” for the property, I would expect the buyer would be very glad to have that realtor. Similarly, I think a good realtor can daylight pricing nuances that Zillow cannot capture-for example a property next to a soon-to-be construction zone could definitely be bought for a discount to its Zillow price, if a saavy realtor is on top of such details. If I were REMAX I would abandon the “search” aspect of home buying and selling to Zillow, and focus on the services on which realtors can continue to outperform algorithms.
Thank you for this. It really is a fascinating market, as the value added by real estate brokers seems so marginal, and yet the market continues to re-affirm their value.
I spent the last two years running finance and analytics at Updater (UPD), which plays in this space. Updater provides movers with a simple tool through which they can manage moving-related tasks, e.g., booking a moving company, setting their forwarding address with the USPS, reviewing utilities options, etc. We sell the digital platform to real estate agents and property managers, who in turn give the tool for free to their movers, as a value-added service and as a medium for re-engagement post-transaction. Re/Max was a client of ours. The reason they were interested in partnering with us, and the reason why UPD has been successful, is exactly related to what you’ve written here: their information access advantage is eroding, so they are instead turning to differentiated service as their mode of competition.
That said, I am admittedly skeptical (hence, I am not at UPD, but here at HBS). Staging, open houses… these services are ripe for technological disruption. Companies like AR Pandora and iStaging have already built tools for augmented reality home tours, where you can place your own furniture and truly visualize your “home”. With such technologies, the role of the agent is diminished. Consumers can, in the comfort of their own home, merge financial information about listings with the look and feel information that agents so thoroughly enable today [1]. Re/Max does not have the technical expertise to build such products. My question is: who are these A/R companies more likely to sell to? Big tech companies, who have synergistic cultures and massive access to capital; or brokerages, aging giants who have lost their core competitive advantage. Again, color me skeptical.
Thanks again for a great article.
Sources:
[1] Forbes, 2017 “Eight Ways Virtual And Augmented Reality Are Changing The Real Estate Industry”
This piece reminded me of a case study in Freakonomics about real estate agents in Chicago. Levitt and Dubner looked at 100,000 Chicago-area home sales, specifically looking at homes sold by real estate agents on behalf of clients, vs. real estate agents selling their own homes. On average, agents keeps his/her own home “on the market an average of ten days longer and sells it for an extra 3-plus percent, or $10,000 on a $300,000 house. When she sells her own house, an agent holds out for the best offer; when she sells yours, she encourages you to take the first decent offer that comes along” [1]. There is a principal-agent problem where the relatively small additional commission the real estate agent would receive doesn’t incentivize him/her to do their purported job (sell your home for the best price). As information spreads and more people understand the split between what’s best for agents vs. homeowners, I agree with the author that ReMax will need to change their value proposition and service offering. Things like home staging, though, seem like tough businesses (high cost base includes cost not only of designing and moving / installing furniture in homes, but also of the initial furniture procurement and warehousing costs of everything not in homes). Redfin’s valuation comes from the fact that it’s a tech platform with low marginal costs — ReMax should also consider how it can leverage technology to reduce the people costs associated with its business.
1. Freakonomics, Steven D. Levitt & Stephen J. Dubner, p. 8. Excerpt available online here: https://www.nachi.org/forum/f11/exerpt-freakonomics-book-regarding-real-estate-agents-57929/
Thank you for your thoughtful comments and analysis. This is certainly an interesting read. RE/MAX’s response to the digitalization threat of its competitors will be interesting to watch. I predict their outcome is binary in nature – either they go out of business by not adapting at all or they strengthen their value proposition to their customers in the ways you mentioned.
One of the other interesting threats (or opportunities) changing the real estate market is the adoption of virtual reality (VR) technology. For many buyers, this technology could replace the cumbersome process of visiting a countless number of homes prior to purchase. This technology would be particularly valuable to home buyers coming from far away locations. As RE/MAX decides how to adapt to the new digital threat, I wonder if they will consider VR. [1]
[1] Nav Athwal, Forbes: “The Rise Of Virtual Reality In Real Estate,” June 13, 2007, https://www.forbes.com/sites/forbesrealestatecouncil/2017/06/13/the-rise-of-virtual-reality-in-real-estate/#5d58a9f61989.
For the life of me, I can’t understand why/how real estate agents still exist! I happen to have a (dormant) real estate license that I got for kicks years ago because I was interested in learning about the industry after I bought my first house in 2009. The MLS system was horrible the last time I used it and I remember thinking that it was only a matter of time before it’s disrupted and rendered obsolete.
In regards to your suggestion for RE/MAX to adopt a value-based pricing model, I actually think this will ultimately cause more harm to the company because consumers will eventually realize how little value realtors add to the transaction. As new technology (and information) becomes more accessible to buyers and sellers, it seems inevitable that real estate agents will go the way of car and insurance salespeople––primarily obsolete.
This was a great read. Real estate brokerage is being disrupted from several fronts and I think (or I hope) RE/MAX and other traditional players will not be able to maintain the same level of compensation to the value that they are currently providing to sellers and buyers. The article and previous comments have already mentioned Redfin, Zillow, and Realtor.com as examples of some companies disrupting the space. A few weeks ago I went to a Company Presentation here at HBS and met the founder of REX. It was fascinating to hear more about what they are doing and how fast they are growing.
REX is a real estate broker that uses AI and machine learning to find vendors and buyers. They act as a real estate broker and charge a commission of 2%, instead of the traditional 6% that current brokers do. [1] REX uses a complex software powered by big data and AI to find users on the Internet that could be potentially interested in selling their homes. After this, REX use the same software approach to find potential buyers and close the transaction. It was successfull in some of the first cities that they had operations and now they are expanding aggresivelly. This is just one example of the several companies that are being created to reduce fees in the buying/selling process of houses and properties. Hope that in a few years from now we will look back and be very surprised by how much money we were paying as transaction costs.
[1] https://rexchange.com/