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The Real Estate Web Blog
Filed under: Real Estate News
— admin @ 12:07 pm
Technology and competition have transformed the businesses of trading stocks and booking trips. Now they are opening the door to change in the business of helping to buy and sell homes.
Discount real estate brokers have emerged to offer a menu of options for less money. They are threatening to chip away at the real estate industry’s traditional business model: full-service help — from pricing to marketing — for a 6 percent commission on sales.
In the other service industries, changes brought more choices for consumers. Traders and travelers who want more help and advice are able to find it. Other businesses have carved out a niche catering to the do-it-yourselfers.
The Internet has made the discount model possible, said Randall Guttery, associate professor of finance and real estate at the University of North Texas.
“For the first time ever, there was a technology that could compete with the Multiple Listing Service,” Guttery said. “Whereas before buyers and sellers couldn’t really find each other quickly and efficiently, and now they could.”
Only licensed brokers can list properties on the Multiple Listing Service, a listing of homes on the market maintained by Realtor members. The MLS is the nation’s largest database of properties for sale.
Entrepreneurs, including several in North Texas, are taking advantage of the Web to offer a variety of services that cut costs for sellers. Among them:
• Putting houses on the Multiple Listing Service for as little as $99.
• Staging reverse auctions, in which agents bid for business by offering lower commissions.
• Giving rebates to home sellers who use their services.
Full-service brokers say the traditional fee structure works because there are costs associated with superior marketing and strong negotiating. They say that most customers value the help in what is usually the biggest financial transaction of their lives.
Discount brokers say that there’s room for everyone, and that the marketplace will sort it out.
It’s not easy to find a number that accurately quantifies how much of the market is occupied by discount brokers. But discount brokers say that they are seeing their customers grow and their companies move up Metroplex rankings of top-producing real estate companies.
The question now is whether the marketplace will get the chance to do that. The Texas Legislature just passed a bill that would require real estate agents to negotiate for their clients; Gov. Rick Perry has yet to sign it. The Texas Real Estate Commission is also planning to take up the issue this month. If they pass a similar rule, it would threaten the license of real estate agents who don’t follow it.
Some no-service brokers who are simply putting houses on the MLS say it will either push up their costs or force them out of business in Texas.
Lee Thurburn, president of flat-fee broker NetOffer.com in Richardson, said e-mail and fax machines have made presenting offers very simple. Most sellers can have their offers presented and questions answered within the 30 minutes of consultation that come with his service. Even if a client needs him to negotiate for $150 an hour, he said it’s still cheaper than what a full-service agent charges.
“They don’t care; they know they’re getting a bargain,” Thurburn said.
The U.S. Department of Justice and the Federal Trade Commission are also watching, stepping in when they believe that proposed rules threaten to hobble competition.
The front line in this battle is the traditional 6 percent commission, typically split between agents for the buyer and seller.
For instance, on the sale of a $200,000 house, the agent for the seller collects $6,000, as does the agent for the buyer.
For that money, the seller’s agent generally agrees to negotiate offers from potential buyers. The agents also list the house on the Multiple Listing Service, the largest collection of information about homes for sale in a market.
The buyer’s agent, in turn, generally agrees to show houses, negotiate prices and help the client through the many forms that go with the transaction.
Some discount brokers are letting their clients choose how much — or how little — of these services they want.
Ready Real Estate, started by Aledo resident Von Sutten last year, is offering a standard 4.5 percent commission structure. The buyer’s agent gets 3 percent and the seller’s agent gets 1.5 percent. The home buyer gets a check for 1 percent of the selling price of the home out of their agent’s commission if they use a Ready Real Estate agent or no agent. The Fort Worth-based company recently opened franchise offices in Chicago, Albuquerque, N.M., and Austin.
NetOffer.com offers a la carte pricing for services, starting at $99. Realty Baron, which is based in Dallas, puts agents’ commissions up for auction. It just passed its first anniversary.
Jack McLemore said his Euless office of Broker Direct MLS, a flat-rate discount brokerage, has seen significant growth in the Texas market. The three-person office had 600 listings in 2004, double the number from the year before and half what the office expects to do this year.
“We don’t go out and work buyers and do all that; we just stay here and list houses,” he said.
National agencies are joining the battle, too. ZipRealty, which is based in California, offers buyers 20 percent of its agents’ take, whether that is a 2.5 percent commission or a 3 percent commission. Nevada-based Assist-2-Sell offers to sell a home for a flat rate through its office in Denton. And New Jersey-based Help-U-Sell also offers full service for a flat rate through its local offices in Flower Mound and Mansfield.
The discounters say that the Internet saves money that would otherwise go to maintaining large offices on high-traffic corners and advertising individual properties. Instead, they can take out general ads promoting their Web sites.
“It has a lot to do with overhead,” Sutten said. “We drive the customers to the Web site instead. The offices are there if they need contracts. We have conference rooms. But we don’t spend a lot of time in the offices.”
NetOffer.com’s Thurburn predicted that in the next few years, those savings on marketing will push commissions lower.
“Certainly, a dramatic reduction in fees is going to happen in some way, shape or form,” said Thurburn, a Fort Worth entrepreneur who founded and sold the Internet service provider Flashnet Communications in the late 1990s. “Traditional real estate operations will no longer be able to sustain the large operations that they have centered around the 5 percent or 6 percent commission.”
Guttery noted that discount stock brokerages helped force down commissions for stock trading. But he said full-service brokerages have adapted.
“If they’re going to offer the same level of service for a lower fee, basic economics tells you that others are going to have to follow suit,” said Guttery, who wrote a series of groundbreaking papers on this topic with fellow UNT professor John Baen in 1997.
Full-service brokers, for their part, say that real estate transactions are more complex than basic stock trading. Brokers offer their clients expertise and knowledge that can simplify paperwork and ensure that the sale doesn’t violate any laws.
“There is a cost that the Realtor incurs to provide full service,” said Inga Brown, a broker-owner of Keller Williams offices in the Hulen area of Fort Worth and Eagle Mountain Lake. “So when a discount brokerage firm is cutting the brokerage fee, they are cutting the money that they could spend for marketing costs. Something always has to go.”
She said discount brokerages might not provide a full range of marketing needed to sell a home. In turn, she said, the homes might take longer to sell, or the homes might be priced at the wrong level.
She also said that full-service brokers provide more attention to customers, and that she has gotten clients who first tried a discount broker.
Martha Williams, an owner of Williams Trew offices in the Hulen and Camp Bowie areas of Fort Worth, said she believes that all of the services that her agents offer are important. She said she won’t be cutting back on service to offer a lower commission.
At the same time, she doesn’t see discount brokers as a major threat.
“We know it’s out there, just like for-sale-by-owners are out there,” Williams said. “That’s just part of the market.”
Discount brokers say their customers often don’t want or need full service. Thurburn said many sellers want only one thing — a posting on the Multiple Listing Service — but they need a licensed broker to get it.
“The MLS is nothing but a database,” he said. “By the time you prepare all of the documents and do the data entry, you may have an hour invested. And to charge a person 3 percent for essentially doing an hour’s worth of work is ludicrous.”
Realty Baron customers can check off any of 25 services they expect their agent to provide when they sign up to have agents bid for their business.
Most people select 12 to 15 requirements, indicating that they don’t want every service an agent offers, said Marc Dugger, founder of RealtyBaron.com.
Ready Real Estate lists homes on the Multiple Listing Service at a 4.5 percent commission. It also offers buyers a 1 percent cash rebate when it’s the agent for both sides in the transaction.
“On a $200,000 home, we bring a check for $2,000 to give them for using us,” Sutten said. That check comes out of the Ready Real Estate agent’s cut, so it’s only available if they use this agent or no agent.
Kristi and Rick King, teachers in the Northwest school district, used their check from buying a three-bedroom home in Rhome to buy kitchen furniture and a refrigerator.
“It was just super, super easy,” Kristi King said.
With Realty Baron’s bid-for-the-lowest-commission model, agents use the service to augment their search for new deals, Dugger said.
Home sellers like getting the lowest commission they can find in a system in which clients rank the quality of the agent. A constantly updated ticker shows what the going commission is at that moment. Last week, the going rate was a commission of about 4.5 percent.
Both discount and full-service agents anonymously compete for the same business, and Realty Baron pockets a finder’s fee of 5 percent to 10 percent of the sales commission when the deal closes, Dugger said. For a $100,000 house with a 4.5 percent sales commission, that’s at least $225 from the agent’s cut.
“I feel like, given an open marketplace, those commissions will drop,” Dugger said. “And they’ll drop to a point where people will not choose for sale by owner.”
Sutten of Ready Real Esate concedes that his agency is not for everybody.
“But I think as time progresses,” Sutten said, “and the Internet grows and technology becomes even more useful, I think we’ll see continued growth of a business model such as ours.”
Source: Star-Telegram/Andrea Jares
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