What If Real Estate Brokers Worked Like Car Dealerships?

My friend Eric Stegemann, whom many of you already know as a frikkin’ brilliant dude who runs Tribus, posted something on Facebook today and in our banter, got my thinking going.

Here’s his post:

[fb_embed_post href=”https://www.facebook.com/ericstegemann/posts/10100343757120490/” width=”550″/]

And obviously, you can see my comments too.

I thought the similarities between car dealers and how they feel about automotive third party websites (like TrueCar) and real estate brokerages and how they feel about real estate third party websites (like Zillow) were superficial at best, because of vast differences in the business model of car dealerships and real estate brokerages.

But that got me wondering… what would it look like if real estate brokerages actually functioned like a car dealership did?

Car Dealers vs. Real Estate Brokerage

The biggest difference between the two — although there are really so many given that houses and cars are totally different products — to me is that a car dealership has inventory cost, whereas a real estate brokerage does not.

The dealer has to buy the cars that it sells. Whether they buy the cars from the manufacturer (new cars) or from the public (used cars), they have to buy the cars in order to have something to sell. A real estate brokerage, obviously, does not.

But what if it did?

What if a real estate brokerage functioned like a car dealer. If you want to sell your home, you call your local real estate brokerage, someone comes out, takes a look at your place, and gives you a price. If you buy a new house from the inventory of that brokerage, your trade-in price is higher; if you just want the cash so you can buy a different house from some other brokerage, then you get a lower cash price.

You want to buy a house? You go browse the inventory of local brokerages, find one you like, and either walk in with a check from your bank (pre-approved mortgage, etc.) or you talk to the in-house finance guy at the brokerage to arrange for financing. (I know, I know, the process is totally different, but for sake of fantasy, let’s assume it can work roughly the same way.)

Like any car owner, a homeowner can always go FSBO. Put up signs, go on Craigslist or some other website (Zillow even), and buyers can choose to go that route if they want.

Question is this. Is this bad for the consumer? Is this bad for the industry?

The Consumer

From the consumer’s standpoint, I’m not so sure this model is that bad. I discussed this before when writing about Opendoor.com, and while it isn’t sure if that is the business model over there these days, the concept of a “market maker” still remains interesting.

As a homeowner, I now have a choice. I can go trade in or sell my house to a local real estate brokerage for price $X, which is the brokerage’s “trade-in value”. Maybe that’s tied to some national pricing database, like a Kelly Blue Book for cars. Maybe that involves negotiating back and forth a bit. As I said, if you’re buying a house from that brokerage, maybe your trade-in is larger than if you just want the cash price.

Or I can go FSBO with an array of tools at my disposal. Perhaps real estate consultants can help me price the home, stage the home, market the home, etc., much like a listing agent might today, and maybe I pay them on a commission basis. But it’s more like an assisted-FSBO, rather than working with a “house dealership” if you will, so maybe it’s commission, maybe it’s fee-for-services, maybe it’s a blend… whatever the homeowner and the real estate consultant works out between them.

If I want to buy a house, then I can go to one or more of the local “house dealerships” and see what they have in stock. If that “house dealership” is affiliated with one or more homebuilders, perhaps I can order a new home designed exactly the way I want it (just like I can with a new car with all the options, and only those options, that I want).

Maybe there are “buyer consultants” who will work with me to make sure I’m not getting ripped off, or helping me make sure that house I’m buying is quality. (Kinda like how I might hire a mechanic to look over a used car to make sure it’s not a lemon.) But they’re getting paid by me, just like the mechanic in a used car situation.

I can’t help but think that this model would reduce all kinds of frustration for the seller and the buyer both. Negotiation isn’t four steps: Me to my Buyer Agent to Listing Agent to Seller, and then back again. It’s Me vs. “House Dealer” salesman. Selling is similar: I negotiate directly with the “House Dealer” on price and terms, and if we agree, we’re done. You don’t live through weeks and months of stress, taking the kids out whenever there’s a buyer who wants to tour the house, don’t worry about deals falling apart, etc. etc.

On the other hand, without question, the home seller who wants to get the most dollars for their house would do better going FSBO under the “House Dealership” model. The whole point of used car dealers, after all, is that they take on the risks, they take on the PITA of selling the car, but in exchange, they’ll pay less than what the actual buyer would pay. It’s the whole business model.

Industry

From a brokerage’s standpoint, I’m not sure this model is such a bad thing. Would brokers really make less money from the “house dealership” model than they would from the current model?

Say a couple walks in (well, virtually, of course, these days…) and says they really like 123 Main St., a 4BR/3BA house I have in my inventory. It’s priced at $400K. I acquired it for $370K, then the cleanup, repairs, and maintenance etc. over the past month have cost me an additional $10K. The couple wants to trade in their starter home, which the Fannie Mae Red Book says is worth $280K. My agent — who is an employee who works for me — negotiates with the couple, they get walked back to the manager’s office, they haggle a bit, etc. and we arrive at a deal:

• $390K for 123 Main St.
• $260K for trade-in value on their current starter home, contingent on an inspection.
• Couple finances the $130K remaining with my in-house mortgage guy at 4% (their credit is a bit on the weak side). I earn 1% on mortgage commissions, and I split that 50/50 with my mortgage guy.
• My manager throws in a free paint job, new carpets and new cabinet fronts (value: $3,500)
• Couple also buys home warranty, yard and pool maintenance, and extermination services from me for $200/mo. (This is sort of like the dealer making margins on repairs and services.)

We close on the spot, schedule move-in and move-out for a week from today and my manager calls the home inspector who will visit the couple’s home day after tomorrow with my Acquisition Manager.

My gross profit from that transaction is:

Yep, I have to deal with overhead out of that gross profit of $27,150, including salaries and such, and I may have carrying costs and repair costs on the newly acquired trade-in house.

In contrast, let’s assume similar scenario with an in-house double-ended deal.

• My listing agent takes the listing for 123 Main St. for 3%. Assume through negotiations that the price ends up at $390K
• My buyer agent brings in the couple for the other 3%
• My buyer agent then also takes the listing for their starter home for 3%. Assume through negotiations that they get “market value” of $280K (instead of the higher trade-in value, which I was willing to do above).
• Let’s say my in-house mortgage guy actually does end up writing the mortgage to boot, and to keep the analysis the same, the buyers are going to finance $130K (i.e., put the proceeds from their first house into the new house).

That’s… quite a gap. Even if we assume that the “House Dealership” model has very significant overhead — salaries, benefits, etc. — the gap between gross profits and company dollar is $18,220. On one sale. And that’s assuming that the brokerage would get three transactions out of this one deal: 123 Main St. listing, buy-side, and the trade-in home listing side.

I’m sure I’m missing a whole bunch of things here that explains why this model wouldn’t work in real estate, but at face value… the “House Dealership” model seems like it wouldn’t hurt the industry much at all. Sure, some buyer agents would go away, and listing agents would end up as salaried employees who do acquisitions of the Dealership… but then again, many of them would end up with benefits and income stability with (probably) bonuses for production.

Back to Zillow and So-On-and-So-Forth

The point that Eric was making is that car dealerships are investing in their own websites, etc. because they’re tired of paying their versions of aggregators. But I think there’s a pretty big difference when the business model is sale-of-inventory vs. commissions on selling someone else’s house.

The WSJ article that Eric linked to has this passage in it:

Still others are trying to go it alone. Lenny George, general manager at Berger Chevrolet in Grand Rapids, Mich., said he recently quit doing business with several of the third party lead-generation sites and hasn’t seen any sales drop-off.

“I’m better off generating leads through my own website,” he said.

In April, Mr. George received 35 referrals from third parties, spending an average of $313 for each one. The leads resulted in three sales. Yet through the dealership’s own website, he gained 556 leads, spending $17 for each and netting 86 cars sales as a result.

…

TrueCar CEO Scott Painter pointed out that his site currently works with 9,000 dealer franchises and only charges when a sale is complete. His fee is $300 for a new-car sale and $400 for used.

“If they can acquire customers for less than $300,” says Mr. Painter, “they should do that until the cows come home.”

In the “buy-and-sell-inventory” world of car dealers (and “house dealers” in my fantasy scenario), the entire issue is cost-of-acquisition. In that world, if Zillow charges $300 per sale, and the brokerage-house-dealer can acquire customers for less than that, they wouldn’t use Zillow. If not, they would. If my gross profit from a sale of a home in my inventory is $22K, what’s a rational cost-of-acquisition for that customer?

In our world of brokerage-commissions and independent contractors and brokerage splits and all that, I don’t know if cost of acquisition is even a big issue. The real issue has to do with generating buyer leads off of listings since the brokerage and the agents have no inventory at all.

Look, obviously, I’m not saying any of this is going to happen. The real estate industry is centuries old, with a whole lot of infrastructure and business models and so on and so forth that have grown around it since the founding of the Republic. (And before that, when some entrepreneurs bought an island in New York for some beads and stuff.) But it’s always interesting to think about business models and how things could be different, and if different, how that might impact some of the ways we think about issues today.

Fun Sunday post. 🙂 Okay, back to messing around in my garage…

-rsh