Editor’s note: The following guest perspective commentary was submitted by Derek Eisenberg, an Inman News reader and real estate broker in New Jersey, reacting to the Sept.

Editor’s note: The following guest perspective commentary was submitted by Derek Eisenberg, an Inman News reader and real estate broker in New Jersey, reacting to the Sept. 27, 2007, story, “Massive layoffs at discount brokerage Foxtons.”

Discount real estate brokerage Foxtons’ downfall is attributable to a series of bad business models, but there are good models out there.

When Foxtons’ predecessor Your Home Direct was formed, it was billed as “full service for 2 percent.” It was never full service. The savings was derived by cutting one broker out of the deal. They did this by not placing their listings in the MLS and essentially forcing dual agency upon the consumer. So the savings of 3.1 percent over the 5.1 percent national average (per Real Trends) was predicated on no MLS exposure and denial of a buyer’s right to have his or her own representation.

Then Foxtons took over and changed it to a 3 percent commission paying out 1 percent. That too failed. Besides the fact that brokers already were irritated by predecessor YHD’s failure to share listings in the MLS, when they finally did share their inventory, they shared less than 50 percent and less than the mean commission of 2.55 percent (half of the 5.1 percent national average) that other brokers were sharing.

Finally, the company went to 4 percent with a 50/50 split. However, by the time they had made that change, the market had declined. They were simply too slow to do the right thing.

As a flat-fee broker, I strongly believe that the broker to reward is the broker that brings the buyer because a listing without a buyer is not worth a hill of beans. Consumers are happy to pay a buyer’s broker, but the listing broker is perceived by many to be a glorified ad agency. Foxtons and its predecessor YHD realized that when the listing agent is keeping 2-3 percent, consumers demand more from their listing agent than an MLS listing. Consequently, they touted virtual tours, floor plans, extra photos and broad advertising exposure on all listings. The problem is that all of those services cost a veritable fortune.

When I started my firm, I attempted to train my staff, many of whom were dual licensees (salespeople and appraisers), to draw a floor plan, take virtual tours and take photographs. I figured that with their appraisal background, they knew how to draw houses, and take photos so virtual tours were a natural extension. I was totally mistaken. My staff did not know how to deal with lighting. They never set the aperture correctly so the photos and tours had glare or dark spots on them. My staff was fine at sketching the exterior but when they had to show interior amenities such as kitchens and bathrooms with fixtures and doorways, their sketches were amateur compared to a builder’s floor plan prepared by an architectural firm. I eventually outsourced the tours to a third-party firm and abandoned the floor plans realizing that high-quality supplemental exhibits were too costly on a low-priced listing.

Foxtons also had a huge advertising budget. They had a full-page ad every Sunday in the real estate section and often mailed color brochures to every residence in a county. Their predecessor YHD had billboards, radio and TV ads as well. When Foxtons was hit by a slow market while retaining a less-than-average 2 percent commission (listing side) and then fortifying their listings with floor plans, virtual tours and heavy newspaper advertisements, it must have been virtually impossible to sustain operations.

Lastly, the company’s model had failed previously. Many people may forget SOMA Living, a San Francisco Bay Area-based firm that went out of business about five years back. (See Inman News story.) GMAC bought into SOMA for the same $20 million investment that Jonathan Hunt of Foxtons gave to Glenn Cohen for YHD. GMAC’s interest in SOMA was fueled by SOMA’s Car Dealership/Segmented business approach. A car dealership employs a separate salesman, finance manager and warranty-and-add-ons manager. Foxtons and SOMA both utilized this approach of segmenting job tasks to create what they thought were highly efficient people in each job. There were a number of problems with that model.

The premise of taking a top salesperson and freeing up his or her time with assistants to set appointments and perform some of the more mundane tasks in a real estate brokerage is a good one, but first you have to have a top salesperson. Additionally, a top salesperson does not work on salary; another flaw to the Foxtons model. If you want to attract really top people, you have to pay them more. Foxtons’ premise that salaried employees with a bonus would work in an industry like real estate was flawed because any time a salesperson reached the top of the sales ladder at Foxtons, a company like RE/MAX became ever more tempting. Foxtons’ top salespeople must have thought, if I can do this well, why not go to a 95-100 percent firm? My guess is that Foxtons never hung onto top salespeople.

I don’t believe that discounters can survive unless they are so well-financed (hundreds of millions of dollars) that they can become the Wal-Mart or Home Depot of real estate. In absence of that, there can only be unbundlers. Also, there aren’t too many Amazon.com stories where a firm gets a few hundred million dollars and then is given five years to make it work.

A real estate firm has expenses. When you work for less, you have to give less or do such incredibly high volume that you can sustain working for less. YHD was an unbundler that converted to a discounter. It failed as an unbundler because they cut out the most important component in the equation: MLS exposure. It failed as a discounter because it could not do the volume to offer full service for less.

Foxtons’ failure is not a bad sign for new business models. Real estate is changing and some of the new business models will work. In fact, given the subprime debacle, buyer rebates may be the next boon to home ownership. When a buyer can’t put less down because there is no longer 100 percent financing, a rebate check from the agent at the closing table does the same thing — offsets the down-payment requirements. There is no better time than now for new models.

Similarly, in a down market like the one we are in, flat-fee models that compensate brokers for their time regardless of whether the home sells are better for consumers that sell. Brokers have a cost of doing business. If a broker lists four houses and two sell and two don’t, the two that sell pay the broker’s salary for the two that don’t. Consequently, educated sellers who list their homes for a fair price with a flat-fee broker pay less because they don’t pay for the broker’s failures. This allows sellers to market their homes at more affordable prices while offsetting that with commission savings. In a down market, this might be the margin needed in the negotiations to make a deal fly.

The worst time in real estate is now and any new model that can survive could be huge when things rebound. The key is that the model has to be the right one. The model that prevails will eliminate waste. It will cut things that people don’t care about while fortifying things that people do care about.

Derek Eisenberg is president of MultipleListingSystem.com, a Web site of Continental Real Estate Group Inc.

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