Purplebricks: boards up, shares down?

Why I won’t buy Purplebricks shares and why if I had any, I’d sell fast…

In its latest adverts, Purplebricks attempts to address the issue of ‘best price’ by claiming a Trustpilot review is enough incentive to go the extra mile. 

What it’s trying to do is eek out a few more weeks and a few thousand more customers, but in the end its model is broken and this will become more and more apparent. Let me explain why I’m so confident...

Before I became an estate agent 30 years ago, I was a financial advisor. I specialised in mortgages and pensions. I’ve always had a good understanding of investments and it was disillusionment with conventional investment funds, as well as advice on stocks and shares, that led me to invest in property and help others do the same.

I mention my credentials because what I’m about to do is to deconstruct the argument that Purplebricks is a good investment and show why, in my opinion, its business model and therefore its shares, are likely to crash and burn. 

My opinion is not unique, many others have already made the same points, but I believe I’m in a position to provide a more rounded perspective because of my background and past experience. 

The reason I feel like this is because, in a way, I’ve been where Purplebricks is now and I know what is likely to happen and why. 

The internet has allowed traditional business models to reach a global audience. The concept of mail order has given rise to Amazon, auctions to Ebay, letter writing to Facebook etc. Arguably, the concept applies to advertising very well. Rightmove may be the first step on the way to a global property portal. 

So, what about Purplebricks? Will it become a global estate agent working on a low cost up-front fee model? The answer is no it won’t, and the reason is simple. 

All the global players are internet versions of successful, conventional business models, whereas Purplebricks has based its business on an unsuccessful one. Sure, there is a tech aspect to what it does but like conventional agency, its model depends on the people who are the hardest to attract and develop, valuers. Unlike a conventional valuer, who is motivated by taking a saleable instruction, Purplebricks valuers have been twisted into ruthless sales people, motivated to say whatever they have to in order to get an up-front fee. 

The fundamental flaw in the up-front fee model is there is no incentive to sell once instructed, and every incentive for valuers to say whatever the vendor wants to hear. 

The idea that the tech will make up for this is flawed. It won’t and the figures are starting to prove this. However, if we go back in time, we can find irrefutable evidence of what happens to a no commission agency model in a buyers’ market - it gets destroyed. Actually, it gets obliterated.

“I'm an estate agent and it wasn't me guvnor. That said I think the PB proposition is doomed Capt Manwaring. There have been money up front models before aka Seekers 'The No Commission Estate Agent' Michael Nyman where are you now? You need incentive to get the best price for a property and you have to be skillful, motivated and proactive. Sure, some will sell with PB and some won't but on average any savings will be false.”

I made this comment in September 2017 in response to an article in The Times titled ‘Purplebricks finds that no news is good news’ and indeed, it has been true. Conversely, as far as Purplebricks is concerned, ‘all news is bad news’ or perhaps we should substitute the word news for ‘facts’.

My Seekers comparison comes from direct experience because I started my estate agency journey as a Seekers Franchisee. 

I was running a successful life assurance business with a healthy mortgage division. At the time, estate agents were hot stuff. They were being purchased for skyrocketing prices by misguided corporates in a buying frenzy which still taints the value of home sales-only businesses today.

Most of the hype was around the supposedly limitless financial services potential these high street offices could offer banks and insurance companies. I was actually ahead of the curve in that I saw the opportunity to create estate agents as one-stop property shops and the frenzy was evidence that others were thinking the same way.

I was, therefore, a bit miffed at seeing the price for an estate agency shoot beyond my reach. Then, in early 1988, I came across the Putney branch of Seekers and there sat a very disillusioned franchisee called Ray. I remember asking if he was interested in help with his mortgages, to which he replied something like ‘what I’m really interested in, is selling this business and getting out of this dump’.

He wanted £20K, which seemed like a stone bargain for an A2 shop opposite Townends on the Upper Richmond Rd. What he forgot to tell me was that his franchise sat at the base of the burgeoning Seekers franchise empire. He had the honour of occupying position 83 in a list of 83 franchises and there was a lot of distance between his operation and the next least successful.

I’m not sure if it was the filthy office, bad attitude or the smell of fear and failure that was most responsible for the branch’s dire performance, but what I smelled over the fear was opportunity. 

So I went to meet Michael Nyman, the franchisor, paid the £20K, and within three months we’d put that little branch into the company’s top 10. We went from taking two instructions a week at £250 plus VAT to an average of 11. 

I asked the franchisor about what we should do about selling these properties. I was told ‘don’t worry, they sell themselves and if the sellers are serious and you don’t sell, they’ll go on with a local agent’.

To be fair, Michael Nyman did not originally conceive the idea as a replacement of no sale, no fee, more as a low-cost option that was better than a private advert and, if successful, could save money. However, as the service evolved, in order to get up-front fees, the claims got bigger and bolder.

Nevertheless, you couldn’t argue with the growth - 83 offices, some really successful. I remember Maidstone in particular - a business which remains today in an evolved form. Or should I say devolved? Because yes, it is now a conventional no sale, no fee agent. 

Anyway, what put paid to Seekers was the market crash that started in August 1988 as a result of the withdrawal of double tax relief on mortgages (MIRAS).

The removal of double MIRAS proved to be a catalyst for the biggest property slump since the war, a slump that only ended in 1995. The most interesting thing was what happened to the volume in the market, which peaked at over 270,000 transactions in a single month in August 1988, compared with a fifth of that number today. 

Another interesting thing responsible for what was to happen next was the1988 Housing Act which created the modern lettings market. Although the Housing Act coincided with the crash, it was not responsible for it and would later to prove to be its saviour. 

Despite the crash, we were still piling up properties in Putney. The downturn initially made it easier to get them because agents weren’t selling them and we had the magic answer, or at least that’s what we kept telling ourselves in order to get up-front fees.

However, the reality was very different and a bit scary. Before, our properties would eventually sell. Suddenly, they were accumulating at a rate of knots, as were the complaints. 

I spoke to Michael Nyman and proposed a solution. My solution was to introduce a 0.5% commission in order to give us the incentive to sell the properties. I persuaded him to let me pilot the idea based on the formula that commitment + incentive = effectiveness. 

Sure enough, it was an easier concept to sell and within a few months we had employed a negotiator to sell properties.
 
But then Michael did a volte face. He told me there were complaints from other franchisees about their trademark ‘no commission estate agent’ slogan. He admitted I had an interesting concept but said he had to stop the pilot. 

I was so incensed I bought myself out of the franchise, kept the office and opened a new one in Crawley. In June 1989 Choices was born. I launched my own franchise in the expectation that I had the solution to everything. As they say, make sure you succeed when you’re young and you still know everything.

I don’t mean for this to be an autobiography but I think it’s vital for potential investors to understand that when I say I think Purplebricks will fail, I’m speaking from in-depth experience, not jealousy. 

Choices started out in a terrible market with a great idea and a lot of enthusiasm. As a result, within two years we had over 70% market share in Crawley.

However, despite the incentive of 0.5%, we still couldn’t sell much. It wasn’t enough to pay the negs and make it worthwhile, so I put the commission up to 1%, employed an experienced estate agent and it started to work - until our competition lowered their fees without the up-front commitment. 

It wasn’t competition that killed it, though, it was reduced volume. From 1989 to 1995, the volume of sales dropped catastrophically. Plus, the vendors who remained were more serious than before. This eroded the point of the up-front fee, which was to deter timewasters and stop serious sellers from having to subsidise their marketing costs.

By the end of 1994, I made the decision to adopt a no sale, no fee approach, albeit with a total freedom guarantee. The original model had a lot going for it, but in the end the niche wasn’t big enough for it to survive and if you charged enough to make it worthwhile, you were no longer low-cost.

What really saved us was the rise of lettings. Sales was and continues to be a challenging business in which you need talent, experience and determination to succeed. What I learned was that good estate agency is harder than it looks and there are no cheap shortcuts. 

Sure, there are bad agents but under no sale, no fee, they earn very little and fail fast. Sure, there are dishonest agents, but that is true in every business where dishonesty is possible and Purplebricks are certainly not immune. But the most important thing is great agents are not a cost to their clients, they actually add value and their service cannot be matched or emulated by an online service charging up-front fees.

So where is Seekers now? Well, if there is anything that backs up my hypothesis it’s how comprehensively it has been erased from the market. There is no mention on Google, not a single franchise remains. There is no Wikipedia entry for Michael Nyman - it would have been virtually expunged from history if it wasn’t for this memoir. 

Purplebricks has knowingly or not directly copied the Seekers business model. It has been made possible by technology, although there is not a big enough market in a local area to make the proposition viable. By appealing nationally, it has created an audience, albeit at a huge price in terms of advertising. 

As the market softens, less people will part with the up-front fee. Purplebricks’ advertising ROI will deteriorate, it will ask Local Property Experts to start prospecting and the whole edifice will implode. I make this prediction with confidence based on my personal experience.  

Anecdotally, I was in a taxi recently and it turned out the driver had gone on with Purplebricks. He agreed to be interviewed, I still have the recording. To summarise his opinion in his own words, ‘they’re rubbish’.

*Simon Shinerock is Chairman of Choices Estate Agents. For more information on Simon, see his blog or his LinkedIn profile.