Silicon Valley once thought it could replace the old-fashioned Realtor, touring would-be buyers around town in a well-worn Mercedes, with online agents working remotely for cut-rate commissions. It hasn't worked out that way.
ZipRealty (ZIPR) and privately held Redfin, two firms slugging it out in the online realty business, are posting some better numbers recently. But both have had to change their business models radically, making them look a lot more like the traditional real estate agencies they once hoped to put out of business.
The first of the dot-home contenders was Zip, which was launched in 1999 with funding from Benchmark Capital, one of the early backers of eBay (EBAY). Zip, like Redfin, is a discount broker, meaning it shares some of its sales commissions with its clients. This is a different business from that of real estate search sites, such as Zillow.com, Yahoo Real Estate (YHOO), and MSN Real Estate (MSFT), which list homes for sale and sell advertising on their sites but don't actually try to handle the sale.
How the Rebates Work
On a typical $200,000 house, Zip earns a $6,000 commission from the seller and rebates $1,200 of that to the buyer. The concept holds some appeal in these budget-conscious times. "We had to break a lease, so the idea we'd get some money back was definitely an incentive," says Georgi Heltz, a 30-year-old social worker who recently bought a townhouse in suburban Los Angeles through Zip.
Last year, one in which home sales nationwide were down 13%, Zip sold 17,100 houses, a 23% increase over 2007. In February traffic to its Web site was up 74%, year over year, to 1.8 million monthly visitors, according to Web tracking firm comScore (SCOR). That puts it ahead of sites run by much larger brokers, such as RE/MAX and Century 21, but below the search-only sites, such as Zillow.com, many of which are also seeing big increases in traffic.
Zip, based in suburban San Francisco, began as an online-only enterprise. Web surfers could find a listing on the site but had to do the work of arranging home tours themselves. That didn't fly. "Clients were nervous about buying a home without seeing someone they got to know," says Patrick Lashinsky, Zip's chief executive. Zip began hiring its own agents in 2002 and now has 3,000 of them showing homes to buyers in 35 cities across the country.
Racking Up Losses
Because of obstacles both regulatory and financial, Zip can't always offer rebates. A dozen states still don't allow discounted commissions. Zip has also had to reduce how much it returns to customers, from 1% of the home price originally to about 0.6%. With home prices plunging, Zip recently stopped paying any rebates on houses selling for less than $100,000.
Zip lost $13 million on sales of $105 million last year. By the fourth quarter, however, those losses had narrowed to $2.7 million, half that of the same period the year before. That's allowing Lashinsky to plot expansion. He's reaching out more to home sellers—who represent just 5% of the transactions at Zip today—by offering such services as listing the number of Zip buyers looking for homes in a particular ZIP Code so sellers can get a sense of demand. He's also letting sellers choose how much they want to offer in sales commissions on a sliding scale from 4.5% to 5.5%. Surprisingly, most sellers choose a number in the middle of that range, wanting to keep some money for themselves but also provide incentive for outside agents to show the place.
Rival Redfin, launched in 2006, has similarly had to rethink the way it does business. "I thought we were the white knights," says founder and CEO Glenn Kelman. "I thought we could make the industry better." But most of Redfin's traffic was techies in well-to-do areas in cities such as San Francisco, Los Angeles, and the company's hometown, Seattle. Most of the sales these days are in foreclosure-heavy parts of Southern California. Last October, Redfin laid off 20% of its staff and began sharing commissions with traditional agents out in the field. "Our partners are out in the desert," Kelman says. "We're on the beach."
To differentiate its site, Redfin now publishes customer reviews of its brokers, posts pictures of them, and lists their recent transactions, so would-be buyers can choose to work with agents they like. "I'm just a software guy in the real estate space," Kelman says. The strategy seems to be paying off as Redfin's sales and Web traffic rose 20% in February and March, according to Kelman.
Whether discount brokers such as Zip and Redfin will ever really change the real estate business is still an open question. According to a survey of 10,000 home buyers and sellers conducted by the National Association of Realtors last year, only 9% chose a "limited service" broker, which is defined as anyone charging discount commissions, flat fees, or hourly rates. "I haven't seen a radical change in the way real estate is bought and sold, just a big increase in the information available," says Errol Samuelson, president of Realtor.com (MOVE), the official Web site of the Realtors' association. "After WebMD (WBMD), people still go to doctors."
Palmeri is a senior correspondent in BusinessWeek's Los Angeles bureau.