The Kentucky suit could be just the opening salvo from Justice. Given that eight to 10 other states have similar rules, many in the industry expect Justice to file comparable suits around the country. That could give a huge boost to the Internet camp. Such rebates are a key strategy for brokers like ZipRealty Inc. (ZIPR
) that do most of their marketing online. Similar gimmees are also used by broker-referral services such as RealEstate.com, a unit of IAC/InterActiveCorp (IACI
), which give consumers gift cards in lieu of cash rebates.
Clearly the old-line industry is worried. Realtor associations around the country are backing so called "minimum service" laws like the proposed rules in Texas that could soon be passed by the state legislature. The Realtors argue that letting online brokers sell a stripped-down service, without performing such hard-nosed tasks as negotiating prices, would leave unwary consumers in the lurch. "These rules were put there for consumer protection by the legislature," says Austin lobbyist Bill Miller, who represents the Texas Association of Realtors.
But those rules have also turned the buying and selling of houses into a money machine for real estate brokers. Commissions to sell homes top $60 billion a year. The industry is dominated by local brokers who buy franchises from national giants Cendant Corp. (CD
) (which runs Century 21 and Coldwell Banker) and RE/MAX International Inc., as well as large regional independents. Most charge a commission of 5% to 6% of the purchase price for their services. By contrast, the online discounters offer huge savings. New York-area discounter Foxtons North America Inc. charges only a 3% commission. ZipRealty charges 5% to 6% but gives "rebates" of 25% of the commission to sellers. Some brokers with more limited services charge far less.
In exchange for cheaper commissions or other bennies, Web players expect consumers to do more of their own work or pay additional fees for more service. That can include arranging open houses and shelling out big bucks for escrow and legal fees. Many consumers seem to think that's fine: Foxtons expects to have up to 5% of the suburban New York market this year, CEO Van Davis says. ZipRealty, which went public in 2004, says it will earn as much as $10 million this year on more than $100 million in revenue, even though it has yet to reach 1% market share in any market where it does business.
The online brokers can afford to give big breaks since each house sale requires far less work. That means they can handle more clients at a time than traditional brokers. ZipRealty says its agents sell about twice as many homes as its rivals'. It cut costs by having few offices and finding clients via telemarketing or online advertising, rather than by having reps in every suburb.
Whatever their strengths, however, online brokers continue to be held back by the raft of industry-backed state regulations that blocks discounts on commissions. But as the Justice Dept. has shown in Kentucky, those regs could soon come tumbling down. By Timothy J. Mullaney in New York