How do U.S. residential brokerage trends & fees compare to the rest of the world?

Real Estate Issues, Fall 2001 by Delcoure, Natalya V, Miller, Norm G

INTRODUCTION: PRESSURES FROM THE INTERNET

There are many sweeping changes in the way business is conducted in all industries as a result of the Internet. The real estate industry is no exception. According to the 2000 National Association of REALTORS(R) Profile of Home Buyers and Sellers, in 1999,37 percent of homebuyers used the Internet as a key source of information in their home purchase process, a 19 percent increase from 1998. It appears that in 1999 the U.S. real estate industry has become more Web-based despite the fact that four out of five customers used real estate agents in their home purchase process. If this trend continues, and more consumers use the Internet as the primary source in their real estate information search and purchase, real estate professionals may face a decrease in commission fees and a reduced demand for their services.

Technological innovation (voice mail, e-mail, cell phones, pagers, Web presence, etc.), has empowered consumers in their real estate information search and purchase decisions, and prompted the development of virtual real estate brokerages offering "ala carte" services to their customers. Cyber brokers, (i.e., www.4Sale-ByOwners.com, www.FSBO Freedom.com, www.FISBODepot.com), provide customer services such as:

* free 24-hour-a-day access to property listings;

* different property listing fee alternatives, including promotional packages;

* a FSBO site index;

* blank pre-formatted real estate contracts and forms;

* virtual sale negotiations including instant contract formulation; and

* many other resources for homeowners.

For a traditional real estate firm to compete with cyber brokers, it has to perceive that the Internet expands capabilities and is a vital tool for achieving greater service, cost efficiency, and profitability, thus turning the technology into a source of new empowerment rather than threat to its existence. One tactic often exercised by traditional real estate firms to defend against the cyber brokers is to buy the more successful private MLS style networks. The consolidation process among traditional and newer real estate companies with a Web-presence can be already observed. For example, the www.cyberhomes.com Web site links to www. homeadvisor.com, which is owned by Microsoft Corporation. Also, Cendant Corporation owns www.homebytes.com, and www.cold wellbanker. com, and they recently acquired www.owners.com.

Successful real estate companies may gain several advantages if they efficiently use automated communication and information technology to attract and serve customers. Web-based programs like www.valueyourhome.com can estimate prices or market price trends and provide neighborhood information. Other online programs can set up appointments, transmit contract offers and counteroffers, provide mortgage assistance, and much more. Ancillary and complementary services including relocation, title insurance, landscaping, property insurance, and more can produce referral fees or new profit centers that many large traditional brokerage firms already attempt to capture, but the Web makes it easier to track the flow of information requested and to instantly offer potential services. Traditional firms that will survive have no choice but to embrace all the possibilities for new services and efficiency gains in order to compete in the future.

Investment in technological innovations requires cash outlays. There are economies of scale to such investments and small firms with no affiliations may have to look for assistance to support this investment. Thus, there is a potential for further consolidation trends in the real estate brokerage industry as smaller real estate companies look for a potential acquirer that will allow them to stay in business.

Another possibility for traditional real estate companies to survive the increasing competitive pressure from "lean and mean" cyber brokers is to mix traditional and non-traditional listings. For years U.S. real estate brokerage companies successfully operated through strong local, state, and national trade association representation (the National Association of REALTORS) and provided the core of the Multiple Listing Service (MLS) system. Most real estate agents belong to more than one MLS. Over the years, the access to MLS and strong interdependency among industry participants ensured high real estate commission fees in the U.S. compared to other countries and promoted a stable rise in the U.S. real estate agents' compensation.1 However, open listing MLS services and the development of cyber brokerages challenge the market information monopoly once held by traditional real estate companies and encourage commission price competition within the industry.

Until recently the majority of traditional real estate firms with a Web presence prohibited For Sale By Owner (FSBO) listings. However, there are exceptions. For example, www.owners.com, which was acquired by www.homebytes.com in October 2000, is the biggest FSBO database in the U.S. Also, open MLS vendors are starting to encourage commission price competition in residential real estate. Several Internet-based real estate companies charge fees of 3 percent to 5 percent instead of the 6 percent or 7 percent traditionally charged by real estate firms. Some cyber brokers charge a home seller 4.5 percent, the homebuyer agent receives 3 percent, and the company keeps 1.5 percent. Technological innovations allow real estate brokers to speed up Comparative Market Analysis (CMA) report generation, the contract negotiation process, thus making the real estate professional more efficient and productive.