TorontoRealtyBlog

Every fall, my team, the Toronto Realty Group, publishes a magazine that we call “INSIGHTS.”

This is sent to our client database but the content isn’t made available anywhere else.

Chris, Tara, Matthew, Richard, and myself, and even Christan Bosley, all write an article for the magazine that could be on any number of topics.  Simply, whatever is floating our proverbial boat at that time.

Chris had the idea to talk about “discount brokerages,” and I thought it was great.  After all, it’s a topic that most Realtors shy away from.

The magazine went out earlier this month, and while some of my friends (you know who you are…) sarcastically sent me photos of their children pretending to read it, or even a photo with the magazine being held by a pair of hands – with pants around ankles underneath ( funny but weird…), the serious feedback we received was primarily directed toward Chris’ article.

So I figured that I might as well share it with the TRB readers.

Agree or disagree with the opinions herein (and this is actually a somewhat unbiased article), it’s the history of the discount model, as well as the failures – sorry to say, that I think many of you will find interesting.

Enjoy!

Alternative Brokerage Models: Are We Trying to Solve a Problem That Doesn’t Exist?
By: Chris Cansick

Innovation in the Canadian real Estate industry may seem like an oxymoron to many as it has to be one of the more traditional practices still standing. Although you may have heard about new business models emerging in the last decade, and there are surely more to come, there hasn’t been one with any real staying power yet.

Most recently, you may have read about the latest and greatest innovator, “Properly” Real Estate Brokerage whose founder, Anshul Ruparell, recently engaged the investment arm of Raymond James to evaluate potential “acquisition” options for the firm … We’ll see where this goes, but this announcement followed a 71-employee layoff and seemed more akin to them closing their doors gracefully without saying as much.

For those of you who are unfamiliar with Properly, they had entered the market with deep-pocketed backers from the private equity world and positioned themselves as a “tech” company that sells real estate. They are certainly not the first to try this and will almost certainly not be the last, but their tech offering quickly became more of a simple valuation assurance for your property, and from there it manifested into a guaranteed purchase option for sellers looking to buy before selling. As flashy as their marketing may have seemed at first, there doesn’t seem to be any real innovation here – I don’t mean to sound like someone standing in the way of progress, but after all the pizazz from the tech world, I still can’t see what problem they were solving in the first place.

Any good full-service agent worth their salt will stand behind their market valuation for your property, and there have been gimmicks around guaranteed value and property buybacks for decades, so what is Properly really doing differently? Or was this just innovation for the sake of innovation?

To unpack this argument a little bit further, it’s helpful to understand a little bit more about the history of both the real estate industry in Canada and the effort to advance or disrupt it.

Organized real estate in Canada is almost as old as the country itself with the very first real estate board set up in 1888 in the growing community of Vancouver. The Toronto board wasn’t established until 1920, and the cooperative board system, that we know today as MLS (Multiple Listing Service), wasn’t established until 1962. It was at this time that technology first touched the industry and created the need for a larger organization to establish rules and promote cooperation among agents. Since then, there have been many evolutions around education and common practices which have always ignited debate about what the future of the industry should look like.

And of course, there are lots of different business models around the world that have also contributed to the debate about how to best model the industry; but this most recent wave of disruption all started in 2012 when “Comfree Commonsense Network Brokerage” first opened its doors. This was an amalgamation of a handful of essentially “sale by owner” companies across the country backed by venture capital firm DN Capital.

This network was based on the British version of organized real estate, which I will discuss later, but was essentially based on a low or no-fee model. Now of course, everyone wants to keep fees as low as possible and this is arguably the very mission of the free market, but a lot was missing from their service offering, and as it turns out their business model in Canada was only good in theory.

After only three years of operation (2015) Comfree was sold to Yellow Pages for $50 Million Dollars. And ironically, this acquisition only gave further credibility to the potential of the commission-free brokerage model in Canada. But upon closer review, this was more an effort for the struggling Yellow Pages Co., known best for the large Yellow Directory book, to reinvent themselves into the “new” digital era than it was about smart business acquisition. As put by the company at the time; “The acquisition is aligned with the Company’s verticalization strategy, which is a core component of Yellow Pages’ Return to Growth Plan. The Plan serves to promote digital revenue growth by providing a better level of service to the Company’s existing customers, while also attracting new audiences and merchants in underpenetrated verticals.”

The CEO went on to say, “We strive to accelerate Yellow Pages’ digital transformation by creating marketplaces that help Canadians discover what’s around them and transact within their local neighbourhoods,”… “The acquisition of ComFree grows Yellow Pages into a leading digital real estate marketplace, extending our reach of Canadian home buyers and sellers and strongly positioning the Company to monetize consumer audiences within this sector.”¹

I’ll come back to this point later, but this quote is relevant as it was the first time a company was publicly declaring that they were planning to use the “real estate” industry as a marketing tool, or even more subtly, as a loss leader, to drive revenue to their existing business model(s).

But for those unfamiliar with the Yellow Pages saga, the acquisition didn’t save their core business, nor did it bring any additional revenue, and only three years later (2018), they sold the company back to the same group under a different name; “Purplebricks” for roughly the same amount; $51 Million.

Purplebricks was (and still is) the brand established in Britain, which now saw an opportunity to bring its “no or low” service fee, do-it-yourself business model to not only Canada and the US, but the world. But, once again, they underestimated the difference between each country’s industry and the service levels demanded by both its consumers and governments.

A brief note about the current state of the British real estate industry might be helpful here to provide some further context. In Britain, there has never been an established nationwide MLS system, or a larger national overseeing real estate board, so the rules and regulations around the transactions of real estate are much looser. Most notably, there are no “trust” accounts, where we hold a deposit for the purchase or sale of property in Canada and both buyers and sellers in Britain can walk away from a transaction up to the day before closing without penalty. This of course creates far less financial obligation on the brokerages, and in turn far lower operating costs which are ultimately passed on to the consumer. But more importantly, it can also create chaos for any would-be buyer or seller, who will often get “Gazumped”; which occurs when a Seller accepts an offer on their property from one potential buyer but then accepts a higher offer from someone else only days before closing. This is only one of the many drawbacks of the lower-fee British business model, but one that often causes entire transaction “chains” to fall apart and lowers overall liquidity in the market.

But I digress; Purplebricks decided to exit the Canadian industry in 2020 after realizing a lack of profitability here (again) and sold the business to Desjardins Group, who bought the company for roughly $60 Million. Luckily for Purplebricks, Desjardins had a similar idea to Yellow Pages around using the sale of Canadian homes to drive additional revenue to their core and new businesses, so once again the overall sustainability of the business model was likely overlooked upon acquisition.

Shortly after this acquisition, Desjardins rebranded the company into Fairsquare Group Realty and claimed the acquisition was to “help our clients, our customers, our members,” to remove a part of the stress associated with buying and selling real estate.²

Anecdotally, they also entered the renovation industry simultaneously with a product called RenoAssistance, a platform that helps homeowners and commercial operators complete renovations.

Now, the Desjardins Group is the leading cooperative financial group in Canada and the sixth largest in the world with assets of $362 Billion and 7.5 million members and clients, so they can invest in just about anything. But here, they weren’t making a pure profit-seeking investment, they were trying to protect and grow their core financial business by building their competitive offering for clients and members. More simply, they didn’t require the real estate arm to be profitable to make the acquisition align with their strategy.

But sure enough, in February of this year, Desjardins Group shut the doors on Fair Square stating that “The decision to cease the operations of FairSquare was not an easy one,” and citing that “…the rapid deterioration of the housing market and its business model does not allow us to continue operations.”³

Private equity firms and many others from the finance or insurance world have been trying to disrupt the real estate industry for decades but none so far have been able to create a sustainable business model. So why have these new business models failed repeatedly?  Quite simply, I think it’s because they all underestimate how much work is involved in what we do for our clients to attain top dollar.

But more specifically, it’s likely because most people want strong representation when selling their largest asset and not someone from a company trying to sell them other products and services in the process. They understand that by putting in the effort to repair, stage, market and negotiate the sale of your home, they’re likely to profit far more than they would by simply putting a sign on their lawn or taking a “guaranteed” cash offer.

On any given offer night in Toronto, a well-listed and highly sought-after property might easily see $50,000, $100,000, or more, over its expected value; and that’s what makes the business so unique and inherently tough to automate.

And for the rest of the market that would choose a discounted broker to save on fees upfront, the demographic is either too small or doesn’t generate large enough margins to support a sustainable business model.

There are, of course, more changes to come in the world of Canadian real estate, and I welcome any real progress, but to make any lasting innovation within the industry, it will need to come with its own independent and self-sustaining business model.

¹ “Yellow Pages Limited Acquires ComFree/DuProprio, a Leading Digital Real Estate Marketplace in Canada.” Yahoo!Finance, June 16, 2015

²  Jordana, Springgay. “FairSquare No Longer Accepting New Business.” RealEstateMagazine, February 17, 2023

³ Rachelle, Younglai. “Desjardins Group Shuts down FairSquare Realty, Blames Slow Housing Market.” The Globe And Mail, Feburary 16, 2023

I would like to now officially open the door to calls for A.I. taking over the real estate industry, as well as those who simply want to yell, “Realtor Scum!” and provide absolutely nothing to the discussion.

Personally, I enjoyed Chris’ article.  So much that I read it three times, although once was for editing.

But for those who don’t know the history of the discount real estate brokerage model here in Toronto, I hope you learned something today.

And for those that weren’t aware that all the “names” of yesteryear are all the same company, failing and being sold over and over, well, I think I’ll leave that up for discussion.

Thanks, Chris!  This meant I got to spend my Sunday night watching TV with my wife instead of blogging.  Having said that, I was forced to watch “Love Is Blind” which actually made me dumber, no joke – my brain hurts and I forgot my Grade Nine math teacher’s name as a direct result of watching this awful excuse for entertainment, but at least my wife was happy…

Speaking of happy, Happy Monday, folks!

The post TRB Guest Blog: “Alternative Brokerage Models: Are We Trying to Solve a Problem That Doesn’t Exist?” appeared first on Toronto Realty Blog.