Who Wins: Discount Brokers or Six Percenters?

Posted by: Peter Coy on March 30, 2006

GUEST BLOG FROM TIM MULLANEY

BusinessWeek’s Tim Mullaney writes:
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For at least a year, real estate types have been arguing over who will win when the market gets tougher – old-line brokers who charge 6% of a home’s price to sell it, or Web-based insurgents who discount, rebate and otherwise slash fees. The old liners say Mom and Pop will retreat to the warm embrace of a Realtor who will happily sell your 2,100-square-foot house in Northern New Jersey for a mere $35,000, just so M&P can be sure it will sell at all. But the Web guys have been quietly counting on a slower market. Sites like discount realtor ZipRealty and InterActiveCorp housing portal RealEstate.com, which gives you big gift cards if you choose a broker it refers, know they attract more buyers than sellers, so they’ve been waiting for a market where buyers are scarce. That way, they figured, the traditional brokers would have to deal with them even if it meant cutting or splitting their fees.

Well now we think we know the answer. The winner in a slower real estate brokerage market is: Nobody.

The shock so far – at least to me -- is how hard a time the discounters are having. In the fourth quarter, Zip not only missed its numbers but stopped gaining market share in California markets where the signs of a housing slowdown (a term of art, so far, since it’s hardly a crash) arrived first. Zip is picking up share in newer markets such as Texas and Seattle, but CEO Eric Danziger says “our lack of growth is a California problem.” What’s the problem in California? “It got crazy. You priced yourself out of the ability for a lot of people to buy,” he says. Plus the number of agents nearly doubled, so competition is fierce. IAC says the number of real-estate closings it helped make happen fell 1% in the fourth quarter –- not exactly what it had in mind.

IAC wouldn’t make an executive available to talk about the problem, and I went away with the impression that they haven’t yet figured out what happened. As far back as 2004, the smartest realtor I know told me he wouldn’t pay IAC for client leads because RealEstate.com referrals were always for buyers, and he had all the buyers he needed. IAC was counting on a slowing market to make agents like this guy come to the table. There’s no evidence that’s happening. IAC chairman Barry Diller has always expected RealEstate.com to take time to get big, but it looks as if they’ll need a good bit of that time.


Not that things are so much better among the 6%ers. Cendant, the largest real estate broker in the US by far (they own 1100 offices and franchise Coldwell Banker and Century 21), says its real estate unit’s earnings before interest, taxes and non-cash charges will be flat this year. One notable trendlet is that a couple of full-service brokers are setting up side businesses that charge a much lower, flat fee for selling a home, for customers who don’t have the equity to pay 6% or 7% and are willing to do some of the selling work themselves. Lay aside the obvious problems of a brokerage like Des Moines’ Iowa Realty offering such a plan that competes with its core business. The really wild part is that a year ago, Realtor groups were on the warpath in state capitals to get some of these limited-service models legislated out of existence. Now at least some brokerages are thinking half a loaf is better than none. As Iowa Realty CEO Mike Knapp told me, the alternative is to send these folks to Home Depot to buy a for-sale-by-owner sign. About 5% of Iowa Realty clients are signed up for the cheaper plan; we’ll see if they can move their houses as effectively as people who are willing to pay agents three times more.

So I don’t know yet who wins, if anyone, or how power shifts in a more normal market. Right now, nobody. Over time, I’ll bet on discounters to gain share and to push prices lower at traditional shops. Here’s why. Some estimates say nearly 80% of home shoppers begin their search online. We know that, but two years ago the usual drill was to poke around online, then get an agent to show you houses. The much more ominous thing for highly paid brokers is that now nearly a quarter of buyers, according to the head of one discount brokerage I interviewed, buy a specific home they found online themselves. When the buyer finds the house himself, 6% is a lot of money to pay an agent. A whole lot. When 40% or 50% of buyers come in Web-prepped and ready to buy, look out. Best guess: that’ll happen around 2009.

Reader Comments

Andy

March 31, 2006 9:00 PM

The winner in a slower real estate brokerage market is: Young folks who have just started saving for a downpayment. Slowing or falling market is great for those looking to buy at more reasonable prices in the future.

jason

April 1, 2006 5:28 PM

Last year I sold a house in NJ and had no problem listing it with a well known Real Estate Agency @4%. This year I sold a house in Richmond, VA. A broker balked at cutting his commissin to 4% but reluctantly agreed. I think 6% will be a thing of the past as sellers wake up and the internet brokers get stronger.

ocrenter

April 2, 2006 8:42 AM

We bought and sold over the last 2 years, both transactions were through ziprealty. The purchase was came with a $2,000 rebate, the sale was at 4.5% commission. This after trying a traditional agent that was extremely pushy about us using "his" lender. If I found the home myself on the internet, why shouldn't I get a little rebate from the commission?

Priscilla

April 10, 2006 8:27 PM

I still think "you get what you pay for" is what you'll get from a discount broker. No matter how they advertised that they'll provide full service, they won't be giving the seller the full attention as in a full commission agent does. And think about who are the people who rely on cutting fees in order to get business? For buyers, they are not paying the commission, and it's their choice that they are looking at houses on the Internet other than what their agent is showing them. It is also their choice that they don't have a good agent to help them buy a house they want, and being pushed around. I believed that traditional agent still have a big market share for those who appreciate the full service they are getting. And for those that are more tech savvy, and willing to spend that 2-3 hours a day searching on the Internet for new listings, they can find their match with the discount broker as well. Just don't expect full service if you are expecting to get money back from it.

Angie

September 15, 2006 12:12 AM

I own a full service real estate firm that has for the past 5-6 years offered lower commissions...as low as 3.9% to our sellers and we provide FULL service to all of our clients...both buyers and sellers. Our sellers have been extremely pleased with our services and the money they have saved by using our firm. My company advertises our listings as much or more than some of the "big name" firms in our area. We have been approached recently by two larger firms that wish to discuss a merger or acquisition...probably because they have been asked by so many sellers to cut their commissions because word is getting around that we do the same work and same advertising for less money. I'm very proud of what we do for our clients and my business is doing very well. We have a strong internet presence also and our sales continue to grow each year. Discounted commission at our office doesn't mean discounted service.

dave

October 29, 2006 9:59 AM

hooray for R.E. discounters !

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About

BusinessWeek editors Chris Palmeri, Prashant Gopal and Peter Coy chronicle the highs and lows of the housing and mortgage markets on their Hot Property blog. In print and online, the Hot Property team first wrote about the potential downside of lenders pushing riskier, "option ARM" mortgages and the rise in mortgage fraud back in 2005—well ahead of many other media outlets. In 2008, Hot Property bloggers finished #1 in a ranking of the world's top 100 "most powerful property people" by the British real estate website Global edge. Hot Property was named among the 25 most influential real estate blogs of 2007 by Inman News.

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