Discount brokerage tries to crack New York City real estate market

Takeaways:

• Frugality has helped RealDirect outlast some other discount brokerages, the firm says.
  
• Technology and lead generation can enable realty firms to offer discount rates.
• RealDirect has evolved to provide hands-on service to sellers and buyers, and cooperate with buyer’s agents.
• The benefit of offering buyer rebates remains unclear.

Why do so many high-tech discount brokerages bite the dust?

Failing to incorporate enough of a human touch into their service model is perhaps one reason. Another could be more straightforward: They let their expenses spiral out of control.

RealDirect, one of New York City’s only discount brokerages, can offer below-market rates to buyers and sellers because its technology has streamlined the process of helping consumers buy and sell homes, according to CEO Doug Perlson.

But plenty of other now-defunct discount brokerages have claimed to do the same. And the jury is still out on how much offering discount commissions actually helps a brokerage.

RealDirect launched in 2010 and claims to have closed about 45 sell-side transactions and 55 buy-side transactions in 2014 — a tiny share of the huge New York City real estate market.

But the brokerage has survived. The main reason RealDirect has outlasted some other discount brokerages is that it’s resisted spending excessively, Perlson said.

“Almost to a fault I have been very, very focused on the bottom line and keeping our expenses in check,” said Perlson, who claims RealDirect is profitable and saved consumers $2 million in 2014. “When it comes to being a real estate brokerage, there’s an unlimited amount of opportunities to spend money.”

‘I’ve never met a monthly expense that I like’

Every day, vendors offer RealDirect enticing opportunities, such as customer relationship management systems, advertisements in local newspapers and ads in a “large storefront on the best avenue in Midtown,” he said.

Doug Perlson

The best way to avoid succumbing to these temptations?

Shun any product that requires monthly payments, Perlson said.

“I’ve never met a monthly expense that I like, a recurring expense that I like,” he said. ” I will try to avoid those like the plague.”

RealDirect, which Perlson says has five agents who work on commission, instead seeks to build gifts that will keep on giving: “proprietary systems and technology that’s going to help us grow.”

Some observers would argue that developing your own software isn’t economically sustainable. Upgrading to match or outdo the latest and the greatest requires constant investment, they would contend.

Buying software might make sense for brokerages that maximize revenue by hiring as many agents as possible, Perlson said.

But his philosophy is, “If we’re going to build a business for the long run, and we’re going to build a business that has real value for our shareholders, it’s incredibly important for us to own our proprietary technology and our lead generation.”

It also doesn’t hurt that his team is highly cost-conscious about deploying resources, he said.

Lead generation

Thriftiness may be why RealDirect has managed to outlast other discount brokerages, but the primary reason the brokerage can charge reduced rates is one commonly cited by many other high-tech discount brokerages: lead generation.

RealDirect uses a combination of different tactics to churn out a steady supply of leads for its agents, Perlson said.

He wouldn’t share details on RealDirect’s lead generation strategy, but he did say that search engine optimization (SEO) — crafting a website and website content in such a way as to maximize rankings in search results — and search engine advertising play a role.

Echoing a claim made by many high-tech discount brokerages, Perlson said, “Because we’re handling all of our lead generation centrally … I think we’re able to be incredibly more efficient” than traditional brokerages.

Proprietary technology

RealDirect’s proprietary technology also gives it a boost, Perlson said.

One of the technologies that helps RealDirect the most is its free home value estimates.

To get an estimate, sellers must register their name and address on RealDirect’s website, upload photos of their home and fill out a questionnaire, which asks questions such as “When was your kitchen remodeled?”

RealDirect then asks its agents to come up with list prices based on that information, after which the seller receives a crowdsourced “range of prices” from RealDirect.

Two other technologies that RealDirect says helps it maintain a competitive edge are website features that benefit buyers, which RealDirect began serving in 2012, according to Perlson.

1. Tips

These are posted by RealDirect agents on its site’s listing pages to help buyers using RealDirect’s listing search tool to better understand properties. For example, one tip might be that a listing’s living room window looks out onto a brick wall.

2. Notes

These are left by RealDirect agents on its site’s listing pages for their specific clients. If a client is pregnant and wants three bedrooms, her agent could note that a two-bedroom apartment could easily be converted into a three-bedroom apartment.

Screenshot showing RealDirect’s savings estimate for a buyer who purchases an $800,000 existing home with a mortgage using RealDirect.

Frugality, technology and lead generation help explain why RealDirect has turned into a profitable firm, but the brokerage might have flopped if it hadn’t steadily added more of a human touch to its services by working with real estate agents. That’s a tweak many high-tech discount brokerages have made to their business models to stay afloat.

Listing packages

RealDirect originally launched as a marketplace that enabled sellers to offload their homes without a real estate agent. And listing packages that don’t include help from a real estate agent still account for a significant share of RealDirect’s business, Perlson said.

Sellers can pay RealDirect $395 a month to list their home, and pay for additional services a la carte, like professional photography.

As part of RealDirect’s self-service option, RealDirect offers automated suggestions based on a listing’s performance across major real estate sites, and sellers can fill out a calendar to indicate when they’re available to show their home to prospective buyers.

“I have an owner-managed seller who’s negotiating with a direct buyer, selling a $5.5 million apartment,” he said. “That’s a full 6 percent commission” in savings.

But to cater to a range of other sellers, RealDirect has introduced two other types of listing packages: 1) The seller pays a 1 percent commission for the same services offered under the $395-a-month plan, or 2) The seller pays a 2 percent commission for hands-on service from RealDirect agents.

Bringing buyers into the picture

RealDirect originally didn’t offer any compensation to buyer’s agents for bringing a buyer to a sale. But like some other discount brokerages, the firm changed course. It now offers buyer’s agents a typical commission split.

To “preclude” a seller from working with a buyer’s agent, RealDirect realized, would put its clients at a disadvantage, Perlson said.

RealDirect also came to the conclusion that it could make more money if it began working with buyers, not just sellers.

“What’s interesting about the buyer business is the more listings you have, the more buyers you get,” Perlson said. “It’s a virtuous cycle.”

Rebates: What are they good for? (Absolutely nothing?) 

Staying true to its discount roots, RealDirect rebates 1 percent of what is typically a 3 percent commission paid to buyer’s agents for bringing a buyer to a sale, he said.

But does offering a rebate actually benefit RealDirect’s business?

Some discount brokerages have said that they have discovered that rebates do little to attract — and even possibly scare away — potential clients. Rebates sometimes equate to an inferior level of service in the minds of some, they say.

Redfin, perhaps the most prominent high-tech discount brokerage, has scaled back the rebate it offers to buyers to an average of about one-third of a buyer’s commission split from an average of about two-thirds of a buyer’s commission split.

The brokerage has said that it’s found that increasing its commission rate does not impact demand for its services, meaning it could theoretically boost profits if it charged going rates to match its competitors.

The brokerage says it continues to offer discounts in order to stay true to its mission of putting the customer first.

“There are a lot of schools of thought around the rebate, and I think that it’s still early to determine how big a rebate is the sweet spot,” Perlson said.

Some of RealDirect clients “don’t even care that we have a rebate.” Others that don’t even know RealDirect offers a rebate are “pleasantly surprised” upon discovering that they’ll get it, he said.

Still others — those whom discount brokerages are designed to attract — work with RealDirect solely because it offers a rebate.

Email Teke Wiggin.