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Purplebricks pays the price of trying to run before it can walk

The industry disruptor's fixed fees are generally a lot cheaper than high-street estate agencies, but they have one big drawback
May 9, 2019

Not all industry disruptors prosper. Purplebricks (PURP) has tried to revolutionise the business model of selling properties. Its decision to sell over the internet and avoid all the overheads of running high-street estate agencies makes a lot of sense, as does its offer to customers of charging a fixed fee for selling their property.

This is where the good bits of the story end. Purplebricks has done a lot to draw attention to the ridiculous percentage of value fees charged by traditional estate agents. Its fixed fees are generally a lot cheaper, but they have one big drawback – the customer has to pay them whether Purplebricks sells their home or not.

In a buoyant housing market, this is not an issue as homes sell easily and relatively quickly. When things get a bit more sluggish, as they are doing now, its customer proposition starts to look decidedly poor value. This is especially true when some ‘no-sale, no-fee’ agents are cutting their charges closer to Purplebricks’ level.

Estate agents quickly go out of business if they are not selling houses. Yet expecting customers to pay up and watch their house sit unsold on the market for months is not going to endear them to Purplebricks. Weak house markets find estate agencies out and I think that this will happen to Purplebricks in the UK in the current market. In short, I don’t think its business model stacks up in a weak market as it makes more sense for people to go with a traditional agent.

This serious issue aside, Purplebricks has made life very difficult for itself by trying to set itself up in Australia and the US before it had proved that its business model could make meaningful profits in its home market. This is a classic case of trying to run before you can walk. It has not worked out well.

This week, Purplebricks announced that it was getting out of the Australian market and cutting back in the US. These businesses have been losing lots of money and the company has effectively admitted that it cannot see the day when profits will arrive. The founder and chief executive of Purplebricks has left the company as a result.

The UK business is making a small profit while the one in Canada is operating at break-even. Whether these businesses can be profitable over an economic and housing market cycle is by no means certain.

What I find slightly amazing is that at a share price of 124p, Purplebricks still has a market capitalisation of £376m. It has just over £60m of cash to absorb losses in the US and to meet the cost of closing down the Australian business. Whether it will have any money left afterwards remains to be seen. But the valuation still looks very rich to me.

The idea of undercutting high-street agents and operating online is a good and commendable one. Charging fees regardless of whether a sale is made is not, and this is why I think this business will sadly fail.