Real Estate's New Reality

Speed and heft will let Net players drive down brokerage fees -- and gain share

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. (CD ), to be more competitive, offer better service, and cut rates.

These cyber-middlemen likely will flourish in the next few years. While they collected less than 1% of the $60 billion paid in U.S. 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.

What forces are at work? Consider zipRealty. The Emeryville (Calif.)-based brokerage cuts costs by having its agents work via the Net from home, rather than in offices. Agents get online training and sales tools, which helps them sell two to three times more homes than typical realtors. Last year, the startup turned profitable as its home sales doubled, to $1.6 billion.

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

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