future of the residential real estate brokerage industry, The

Real Estate Issues, Summer 2001 by Jud, G Donald, Roulac, Stephen

The real estate brokerage business is on the cusp of a radical transformation brought about by the revolution of cyberspace technology and the globalization of business. This new technology is crushing established institutions and opening up new venues of change. In this manuscript, the authors examine how the new cyberspace technology is altering the residential brokerage business, how it will change institutional structures, and how it will shape the ways in which brokerage business will be conducted in the future.

THE TRADITIONAL BROKERAGE BUSINESS

In 1997, there were 129,333 establishments operating in the real estate brokerage business, employing 783,518 persons with a total payroll of $21.9 billion.1 The average brokerage firm was small, with a staff of 6.1 persons and a total payroll of $169,451. Ninety-five percent of all brokerage firms employed 19 or fewer persons. Less than 1 percent of all firms employed 100 or more persons.

The small size of most brokerage firms indicates that scale economies have been absent in the industry. Traditionally, individual agents have been more important than real estate firms were to home sellers selecting a listing agent. Likewise, most homebuyers have searched for and found their homes using real estate brokers. The National Association of Realtors (NAR) reports that when home buyers are asked where they first learned about the home they bought, 80 percent of buyers report that they learned about the property from a real estate agent; 43 percent respond that they saw a newspaper ad; and 37 percent learned about the property by searching the Internet (Roth, 2000).

FORTHCOMING CHANGES IN THE BROKERAGE BUSINESS

Historically, the brokerage business has existed because of the lack of market information. Buyers and sellers needed brokers to assemble market information that was too costly and time-consuming for them to amass on their own. Up through the mid-1800s, lawyers, bankers, and other business persons were the most common intermediaries in a real estate transaction (FTC, 1983). As the size and complexity of the real estate market increased, real estate brokerage developed as a business specialty. The brokerage firm operated with an independent contractor model, paying sales agents out of commissions and charging customers only commissions for closed transactions. Although brokerage fees are nominally negotiable, most customers accept the so-called standard commission without much discussion. And, because of industry business practices, few firms made meaningful investments in technology and training.

The National Association of Realtors (NAR) was formed in 1908. Early on, NAR began to encourage local boards to create multiple listing services (MLSs) to reduce search costs and to lobby state legislatures to enact legislation that institutionalized the agency relationship between the real estate broker and the client. These institutional relationships, which have been in place across the country since the 1920s, are now being challenged because of sweeping technological and legal changes.

The Challenge of the Internet

The new technology of cyberspace has wrought a sea of change that is making the search for housing much cheaper and easier (Tessler, 1999). Real estate Web sites like Realtor.com, sponsored by NAR, Home-Advisor.com, sponsored by Microsoft, and others allow potential buyers to search available properties by location or zip code and narrow the search by adding information on desired amenities and price range. Many sites also provide virtual tours of home interiors, allowing buyers a 360-degree look at each room. When Web searchers find something that meets their specifications, they can e-mail their interest to the seller or the listing broker.

Web sites also provide buyers and sellers with basic information about the home-buying process, loan qualification, and the other basics of a real estate transaction. They offer information about communities such as tax rates, school test scores, crime rates, etc. And they provide links to service providers: mortgage bankers, moving companies, utility providers, etc. Some also offer tools like mortgage loan calculators and links to online appraisal services.

These online services are provided free to consumers. The online service providers make money by selling advertisements and links to other Web sites. Thus, there is competition among sites to offer the most services to capture the highest traffic volume. Real estate Web sites represent substantial resource commitments by their sponsors and there is continued pressure to expand and consolidate to capture an ever-larger market share. This dynamic augers for substantial change in the brokerage industry and the way services are provided.

For years, brokerage firms have worked together to increase the efficiency of housing search through local multiple listing services. By cooperating and sharing information through their MLS, brokers reduced the cost and raised the efficiency of search. Because access to the MLS was available to market participants only through member brokers, the MLS gave members an informational monopoly. Now, however, with the availability of free market information online, the power of the MLS monopoly is greatly reduced. Almost everyone now has access to market information through the Web, and the real estate broker is no longer the gatekeeper to the housing market. The result is that search costs for buyers and sellers are greatly reduced.