Real Estate’s New Reality

It’s pretty clear that the Internet is changing how people look for new

homes. These days, more than 70% of home buyers shop online before inking a

deal, up from 41% in 2001. Little wonder. With a few mouse clicks, up pop photos

and floor plans for a $1 million estate in St. Petersburg or a $100,000 condo in

St. Louis.

What’s less obvious is how all these Web-surfing home buyers are changing

the real estate industry. With a flood of data at their fingertips, they’re

becoming savvier and starting to chip away at the 6% commission that real estate

brokers collect on each home sold. For example, by using the Web to cut costs,

upstart zipRealty Inc. can refund 20% of its commission back to buyers and 25%

to sellers.

Net insurgents HomeGain.com Inc. and LendingTree Inc., already a leader in

mortgages, may have a bigger impact. They’re using the power of the Net to

gather home sellers and buyers, and funnel them to realtors. They’re bucking

tradition, giving potential clients’ names to several agents and letting them

fight it out. That pressures existing middlemen, from realtors to franchisers,

including RE/MAX International Inc. and Cendant Corp., to be more competitive,

offer better service, and cut rates.

These cyber-middlemen likely will flourish in the next few years. While they

collected less than 1% of the $60 billion paid in US real estate commissions

last year, they’re expected to hit 4% in 2007, according to analyst Steve

Murray of research firm Real Trends Inc. in Littleton, Colo. It may not sound

like much, but in such a fragmented industry, small shifts in market share

affect consumer expectations. Once your neighbor gets a lower commission, you’ll

want one too. "The standard 6% commission is no longer standard at HomeGain,"

says CEO Brad Inman.

Web referral services, such as LendingTree and HomeGain.com, are taking a

different tack. Their strategy is to help brokers find clients more cheaply and

quickly. In exchange, brokers pay LendingTree up to 35% of their commission when

they close a sale. On a $300,000 house, for example, LendingTree would get up to

$6,300. If the services deliver more clients, brokers can get enough extra deals

to make up for sharing commissions. Last year, LendingTree’s referrals led to

about 7,000 home sales.

The big franchisers have more defenses than incumbents in other industries.

Cendant and RE/MAX sued LendingTree to stop advertising that local brokers

franchised by them accept LendingTree referrals. With the case pending,

LendingTree is under an injunction to stop using the names. Lawsuits aside,

Cendant says agents make more money when they get clients from the franchisers

and don’t split commissions.

But changes are underway. Murray reports that in recent focus groups, agents

said they’re cutting rates, amid pressure from customers. Like termites, the

Web is eating away at the old homestead.

By Timothy J. Mullaney in BusinessWeek. Copyright 2004 by The McGraw-Hill Companies, Inc