Purplebricks: An Unsustainable Business Model? | In Practise

Purplebricks: An Unsustainable Business Model?

Founder and CEO at Emoov and Current Director at Keller Williams

Learning outcomes

  • A post-mortem on why Emoov failed and risks to Purplebricks' model
  • Why Purplebricks only do half the job of a full-service estate agent
  • The post-sales progression process and role of the agent
  • Ancillary revenue opportunities in conveyancing and mortgage lending for online agencies
  • How Keller Williams are positioned in the UK and comparison agent earnings
  • The challenges for Purplebricks' business model to scale beyond 5% of market share
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Executive Bio

Russell Quirk

Founder and CEO at Emoov and Current Director at Keller Williams

Russell has nearly 30 years experience in the UK property market across both old traditional models and new hybrid agencies. He was the Founder and CEO of Emoov, the UK’s former second largest online estate agency, before the business entered administration in 2019. Russell founded Emoov in 2010 and pioneered the online model which raised over £27m in venture capital to compete with Purplebricks. Russell previously ran Quirk Deakin, an independent traditional estate agency in the South East of England. He currently runs a Keller Williams franchise in the UK and is a regular commentator on UK property. Read more

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Can we walk through that broken process and explain the hybrid real estate transaction, step-by-step?

Estate agency is a very traditional sector, which I would argue is backward. It is predominated by many independent estate agency businesses, created by managers from Countrywide, Foxtons and LSL, who have gone out on their own. Of the 20,000 UK estate agency offices, the long-tail majority are small independents with one to three branches. Then there are the big corporates like Connells, Countrywide, LSL and Foxtons who, between them, have 1,500 offices. They are all very traditional, office based, without tech, and the sector has not evolved much in 100 years. Up until very recently, it was the same as it was when my grandfather founded our original Quirk and Partners estate agency business in the 1950s.

Some people call it hybrid or online, but the online digital estate agency business was invented by me at Emoov and also Mark Readings and Graham Lock who, just before me, started a business called House Network. We thought we could commoditize the estate agency sector, the stack 'em high and sell 'em cheap type of thing. We were determined to ensure the process and service, from start to finish, was better than a traditional estate agent, including valuing the house, getting it on the market, dealing with inquiries and offer negotiation, to the important and often overlooked conveyancing process, which is horrible, laborious, sticky and problematic. We thought we would stack 'em high and sell 'em cheap but keep the service levels high, which we managed to do. Both our businesses made profit, until along came a business called Purplebricks.

Purplebricks was famously backed by Neil Woodford, Paul Pindar, ex Capita and DN Capital, as a venture capital business. In their first 12 to 18 months they raised £20 million and hit the estate agency sector by storm. They had a clever marketing approach which was to blow everybody out of the water with one brand and become the biggest, which they achieved by brand and volume, within four years. That led Purplebricks and the guys that came along at the same time – Yopa, House Simple and Doorsteps – to take short cuts. They thought, we will be cheap and have a fixed fee approach, but not do the whole job. Purplebricks would send someone around to list the property and stick it on Rightmove, and that was it.

That is not sustainable because, no matter how low the fee you pay is, you do not want half a service, half a holiday or half a meal.

What is missing in that service, comparing Emoov or the traditional service to Purplebricks?

Mainly the 50% which comes after the first bit: the valuation, listing and marketing. Purplebricks probably do that the same as everybody. They will put your property on Rightmove and Zoopla, do a floor plan and take pictures. But the important bit, which everybody seems to forget, is when somebody comes along and says yes, I will buy that house; it is listed at £300,000 and I am going to offer £280,000. You need an element of skill on the agent's part to negotiate that deal so that it is better for the seller. The seller is your client and the one who pays the fee. Purplebricks do not do that. Their philosophy is that the buyer and seller deal with that themselves. Of course they can, but there is no skill or experience on the part of the seller to do that, so Purplebricks are abdicating that very important part.

What is also vital is knowing the buyer is decent. You need to check the buyer for credibility, are they ready, willing and able? Do they have a mortgage and the certificate to prove it? If they are a cash buyer, can you evidence it? If they say they sold their property, which agent sold it and has their buyer got a buyer? Are they proceedable, is the technical term. Purplebricks do not do any of that and neither do most online agents. A huge deficit is the sales progression, once everybody has agreed and lawyers are instructed. You need to oversee the transaction properly and ensure solicitors are engaged and talking to each other, problem solving, ensuring survey completion, troubleshooting any issues with down valuations or a crumbling shed wall.

If you are not involved in that, you have no way to ensure the deal stays in situ. Purplebricks do not sales chase or progress the sale, which is half the job. You can either choose a traditional agent who does the whole job and you pay a decent fee, normally at the end on success, or you can go for a listing agent like Purplebricks or Yopa, and you pays your money, you takes your choice. The difference is in service.

Why does Purplebricks not offer this? Why do they not validate the buyer?

It is a question of resource and business model. The resource involved to vet the buyer, ensure the chain is checked, mortgage paperwork is in place and the sales chasing and coordination, is a huge job. We have calculated that an individual can only deal with 80 clients at a time when it comes to that sales progression element. Purplebricks have 12,000 properties under offer; that is the amount of deals they have done which have not yet exchanged or completed. They need 150 people to do just that one job, and each one of those individuals is on £25,000 a year.

That comes to £3.75 million a year, which for that business, is the difference between profit and loss. Purplebricks have posted losses of £19 million in the last 12 months, and shareholders are going to run a mile. Your business is not sustainable if you have to add an increasing level of cost as you grow the business. They have abdicated a responsibility, in my opinion, of doing the whole job, because they simply cannot afford to when they are charging £995 for that job.

What exactly is the sales process? If I am a buyer searching on Rightmove, I see a listing and click through to Purplebricks, where I can book a viewing directly, and I can also bid on Rightmove.

Once you see the property on Rightmove, you click through to the Purplebricks website and there you can book the viewing, make an offer or talk directly to the seller through their electronic platform. You are on your own though; there is no hand holding or shepherding and there is no expert.

You spoke about the post-sale process being labor intensive and a more important part, but what is the process after you sell the house?

You have 12 to 14 weeks of legal shenanigans. Firstly, you have to ensure the surveyor gets booked to value the property on behalf of the buyer. Once the surveyor has been you have to wait for the survey valuation report and mortgage offer, which sometimes stick and can take days or weeks. At the same time, you might have a chain of eight properties, each with a buyer and seller and each with a lawyer on both sides. There could be 30 people that need to be coordinated. Some agents do that well, some do it really badly, but if you do not coordinate that at all, how on earth would you know if the chain was moving? In a chain of eight properties, the one in the middle is not going anywhere unless the bottom and top are progressing.

Unless you have an agent ringing the agent above to find out what is happening and where the obstacles are, the deal either stands still or everyone gets frustrated with the process. The first-time buyer at the bottom cannot get his deposit money out for three months, because it is stuck in a high interest account and he has to give notice, or the seller at the top is a divorcée and the husband has left in a huff and refuses to sign the contract. Estate agents deal with that daily because the lawyers deal with the technical side, but property conveyancers cannot problem solve. One of the problems with conveyancing is that it is consecutive. Because the agent is generally on a big commission, they go in and say, there is a bottleneck here, I will find out what the problem is and I will solve it.

It is very labor intensive and very important, and what Purplebricks have done over the last four years, is lean on other agents to solve all the problems, which is simply not fair or equitable and certainly not sustainable. This might be one of the reasons why Purplebricks accelerated really quickly in their first three years. They got to 7% market share but have now dropped back to 5%. As an investment proposition and a listed business with big shareholders, that is not a good look. You have rapidly gone from a billion-pound valuation, which has expanded into the US, Australia and Canada, then gone horribly wrong and had to wind that back. Your business is now worth 150 million rather than a billion, and you demonstrate to your shareholders that you cannot scale the business.

Vic Darvey, the new CEO, who took over from Michael Bruce 18 months ago, told the city a few weeks ago that this business will get to 10% UK estate agency market share. I will eat my socks and my shoes if Purplebricks ever get to 10% market share. It is not going to happen because they are already spending £20 million a year on marketing like Google AdWords, paid social, TV, radio and outdoor. They have saturated their marketing spend and cannot do any more; how are they going to double market share?

Why can they not double market share?

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Purplebricks: An Unsustainable Business Model?

August 27, 2020

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