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Foxtons: Cutting Commissions = Watching MTV

Last week, the well known discount real estate brokerage firm Foxtons [1], closed its operations in the US, which was concentrated in the tri-state (NJ, NY & CT) region. Their web site lists them as having 10,000 listings per year (which doesn’t seem like a lot?)

In their announcement, they seem to suggest that the weak housing market was to blame [2], however, I think its more related to the business model itself.

They were originally known as “Your Homes Direct”, morphing into YHD Foxtons, as the British firm bought into them and then eventually dropped the YHD label. Curiously, the firm markets itself as “Full Service Realtors® in NJ, NY & CT.” But they were known as discount real estate brokers.

Their commission structure was originally 2%. I remember seeing the ads on my commute saying something like:

2% Commissions, 98% Common Sense

I noticed that some of the houses that were languishing on the market in my town, despite strong market conditions, were switching over to YHD as evidenced by the yard signs, and yet they still languished. I guess that these houses weren’t selling because they didn’t have the right pricing advice.

Or to look at it another way (apply liberal doses of sarcasm here):

if I want to make even more money by not selling my house because its priced too high, then I might as well save even more money by paying a lower commission…er…or something along those lines.

The implication in the Foxtons marketing pitch was that full service brokers don’t do much for home sellers so why not pocket the difference? It was interesting to me that Foxtons eventually raised their commission to 3%, to about half the going rate to encourage other brokers to show their listings, likely because their overhead was too high [3].

I want my MTV…
Foxtons was like watching MTV [4] in the early days. Targeted consumers watched MTV for the music. Targeted consumers listed their house with Foxtons for the low commission.

But both companies found they couldn’t make money the way they had intended so MTV went with reality programming and little or no music while Foxton raised their commission rate and level of service. In the case of the latter, they didn’t adapt fast enough and went under.

During the housing boom, there was a dotcom explosion with innovation running amok looking for solid business plans to latch onto. Some survived and some didn’t. YHD found a suitor in Foxtons, but was not able to find a place in the minds of sellers.

Perhaps the reason for their downfall, is that it is not all about pure cost, but rather a combination of cost, value and service level associated with buying and selling your home. And in a market with lots of competition, full service brokerage firms had better show their mettle and get results with better marketing. Its their chance to recapture market share lost to the discounters. Otherwise, there will be a lot of late nights at real estate brokerage offices spent watching MTV.

Perhaps hybrid versions of these discount models, like Redfin [5], will survive.

We will have several lean years to find out. And I still don’t want my MTV.