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Purplebricks is underperforming and the numbers don't add up, says analyst

An investment consultancy has issued a note to investors, advising them not to buy shares in Purplebricks. 

Jefferies – the firm which advised Zoopla on its flotation – says 'whether people buy or sell homes through Purplebricks, we don't recommend that they buy shares in the company'.

"The numbers in the business model look very attractive, however it is our view they don't add up," the note reads. 

The investment firm says Purplebricks' model favours 'listings over sales' and that costs will need to increase for the agency to increase its number of sales.

Jefferies' analysis suggests that each one of Purplebricks' Local Property Experts will need to win as many instructions each week as the average estate agency branch in order for the model devised by Michael and Kenny Bruce to be successful.

"With no reward for actually selling a home, all eyes are focused on winning instructions, especially if Local Property Experts want to get close to the advertised On Target Earnings," the note reads.

"We believe that, over time, Purplebricks' cost and reward structures will need to change in order to both attract and retain the number of Local Property Experts underpinning current consensus estimates."

The note goes on to reference the hybrid agency's average sale time. 

It quotes Purplebricks as saying that it takes an average of 14 days to find a buyer. Jefferies says its analysis shows that it takes Purplebricks closer to five months to actually complete a sale on average, around ten times longer than it takes to find a buyer. 

The note questions whether Purplebricks would be a more 'disruptive' force if its Local Property Experts were incentivised for completions, rather than just instructions. 

"In our view, Purplebricks is currently priced for perfection, and yet we believe this early stage disrupter has yet to prove the efficacy of its business model," the note concludes.

"Should the model stumble, the share price may do likewise."

Last week, online estate agency comparison site SellingUp.com released figures showing that Purplebricks had more stock at the beginning of May than its four closest rivals combined.

The website's research director, Oliver Lewis, claims that a merger between competitors or another stock market flotation is the only way Purplebricks' dominance of the online estate agency sector can be challenged.

Purplebricks' pre-float prospectus showed the company made significant losses in its first three years of operation. 

In its trading update to the City last month, the agency reported that it expects full year revenue to be approximately £18.5 million. 

Purplebricks' next update is due later this month on June 16, when it will announce its full year final results. 

  • Simon shinerock

    The 100% up front fee model was used by Seekers 'The No Commission Estate Agent' in the 80ies, they got up to over 80 franchised offices but were seen off by the 90ies recession. I actually bought one of their franchises in 1988 and advised the Franchisor to change his model to include a back end commission. He refused and I created Choices, in our early years we operated on the formula
    commitment +incentive =effectiveness
    Not a bad model even today.
    Having thought through low cost estate agency models, I think they represent a real threat to poor agents and an opportunity for good ones because they polarise the market and highlight the added value a good agent can provide, provided they can show they can deliver

  • Robert Ulph

    Is this the beginning of the end of this model? which I understood as being massively flawed from the start. The model as Simon states has been around for years and only works when instructions are plentiful. It has also come to light that it is the same problems with this "take the money and run philosophy". Where is the incentive for the agent to make sure the sale goes through!! A Purple Brick property close to me has been sold 3 times and come back on the market. Why? its because no one is checking the back story on these sales and actually asking the questions of the buyers before they call it a sale. The only model that really works is the traditional Estate Agent and they will still be here 20 years from now when all these online models would have folded.

  • icon

    Seems like Jefferies is saying everything people have been saying on these forums for months now...at least they're not puffing them up, I guess.

  • Kristjan Byfield

    Some interesting points which many forum members have raused many times. Will Purple Bricks be the General Magic of online agents? Maybe! Can a low orice model sustain a high-cost marketing strategy? Unlikely! However I am still surprised to see so many hang their hat on a sepcific model being successful. Online agents will forever have a place in the market but will only be a threat to poor agencies and those competing at the lowest level. However a tool for hands on Vendors & Landlords is great for those that want that control amnd resonsbility at reduced costs.
    What I dont understand is the relvance of a sale completion schedule? Although 5 months is on the high side, this is largely dictated by lenders, solicitors and chains- which seem to be getting slower as time goes on. Our average leasehold, chain free sale takes around 3.5-4 months.

  • John Evans

    I love cheap crap agents, my fees have never been so high

  • Terence Dicks

    Kristjan, do you not realise that Purple Bricks either force their vendors to use their conveyancers (which are more expensive than most high street conveyancers and nowhere near as efficient) and then take a big cut from said conveyancers to bolster their bottom line or they charge their vendors to pay a £300.00 penalty and the whole £799.00 fee immediately for not doing so?? Their second-rate conveyancing firm, as with other "bucket shop conveyancing firms" increases completion times and stress levels for all concerned and heightes the possibility of fallen sales.

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