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.
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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