Real Estate Brokers Are Racing For Shelter

Barbara is a real estate agent in northern Virginia. She won't disclose her full name because she would be fired instantly if her bosses knew what she was doing: promising customers discounts on the gold-standard 6% commission charged by full-service brokers.

Most real estate companies require agents to get permission to cut a commission, or, like Barbara's employer, strictly forbid it. But as the housing market grows weaker on both coasts and in regions in between, more and more agents are willing to accept lower fees to drum up sales. Barbara is getting clients from the two-month-old referral service Realty Legacy Group. She charges a full commission in all the official sales documents but later secretly rebates at least 1.5% of the house price in the form of a personal check to the client. That hurts, but it has generated 20 leads in a few weeks. "Legacy allows you to negotiate the commission, but in a discreet way," she says. "I think it's brilliant."

Brilliant ploys are essential in today's brutally competitive market. After a five-year boom, the National Association of Realtors forecasts a 5.7% decline in existing-home sales this year, to 6.7 million. Inventories of unsold existing homes are up 27% from early 2005, and the number of Realtors has risen 57% since 2001, to 1.2 million. Plus, Web-based startups are still pouring in, highlighted by the debuts of automated appraisal site and Redfin, a Seattle discount broker.

The combination of slumping sales, a glut of agents, and an influx of aggressive rivals has traditional real estate brokers scrambling to devise new ways to move property. They're not just cutting commissions or prices. Many are adding services, too. Edina Realty, the biggest brokerage in Minnesota, is fighting a 30% jump in the number of homes on the local market by offering free warranties worth $400 and a one-year reduction in the mortgage's interest rate, says general manager Barbara Jandric. Iowa Realty in Des Moines is letting consumers choose a limited-service, flat-fee plan that costs $3,795, about 2% of the average local house. "We'd like to protect our fee, but we need to separate ourselves," Jandric says.

Other companies are investing in technology. Cendant Corp. (CD ) is laying out $50 million to upgrade its online presence. Others are working with referral services such as newcomer Legacy or IAC/InterActiveCorp's (IACI ) and LendingTree. These businesses take a split of agents' commissions and give consumers rebates or gift cards worth up to $2,000. "February was our first down month in seven years," says Stephen W. Baird, president of Baird & Warner in Chicago. "Anything that moves and says it has leads, we'll try it."

And the 6% industry-standard commission is under fresh pressure, as Barbara can attest. The national average has fallen to 5.1% and could dip below 5%, industry consultant Steve Murray says. Consumers persuade full-service agents to come down or hire discounters such as New York's Foxtons, which charges 3%. "In high-end markets, 4.5% is the new 6%," says Murray.

Given the pressures, brokerage profits are sluggish. Cendant, which franchises Coldwell Banker and Century 21 and directly owns 1,100 offices, says 2006 pretax earnings will be flat. Upstarts are struggling too: Web discounter ZipRealty Inc. (ZIPR ) and agent-referral service HouseValues Inc. (SOLD ) saw shares pummeled when they said earnings would be weaker than predicted. That buoys the hopes of full-price players. "In a moderating market consumers choose the firms that are the best marketers," Cendant Real Estate CEO Richard A. Smith argues.

Now that consumers hold the power, agents are more willing to negotiate for business. Just as last year sellers charged what the market would bear, this year buyers can push hard to get a deal.

By Timothy J. Mullaney, with Dean Foust in Atlanta

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