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, \u201cWait, real estate agents still exist?\u201d 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].<\/p>\n
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].<\/p>\n
But why are homeowners willing to give RE\/MAX 5-6% of their home\u2019s 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\u2019s 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.<\/p>\n
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.<\/p>\n
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\u2019s 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.<\/p>\n
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.<\/p>\n
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.<\/p>\n
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\u2019s 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 \u201cagent\u201d roles are becoming more and more obsolete (think travel agents).<\/p>\n
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?<\/p>\n
<\/p>\n
[1] Dexheimer, Elizabeth, and Leslie Picker. \u201cRe\/Max Gains After $220 Million IPO Priced Above Target.\u201d Bloomberg.com<\/em>, Bloomberg, 2 Oct. 2013, www.bloomberg.com\/news\/articles\/2013-10-01\/re-max-raises-220-million-in-ipo-pricing-shares-above-range.<\/p>\n [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<\/p>\n [3] \u201cQuick Real Estate Statistics.\u201d Www.nar.realtor<\/em>, 30 Apr. 2017, www.nar.realtor\/research-and-statistics\/quick-real-estate-statistics.<\/p>\n [4] DePillis, Lydia. \u201cWhy do real estate agents still exist?\u201d The Washington Post<\/em>, WP Company, 22 Aug. 2013, www.washingtonpost.com\/news\/wonk\/wp\/2013\/08\/22\/why-do-real-estate-agents-still-exist\/?utm_term=.2087c757f653.<\/p>\n","protected":false},"excerpt":{"rendered":" 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?<\/p>\n","protected":false},"author":9924,"featured_media":25771,"comment_status":"open","ping_status":"closed","template":"","categories":[2123],"class_list":["post-25770","hck-submission","type-hck-submission","status-publish","has-post-thumbnail","hentry","category-digitalization","hck-taxonomy-organization-remax","hck-taxonomy-industry-real-estate","hck-taxonomy-country-united-states"],"connected_submission_link":"https:\/\/d3.harvard.edu\/platform-rctom\/assignment\/rc-tom-challenge-2017\/","yoast_head":"\n