Sellers Trade Brokers
For Internet Discounters

By MOTOKO RICH
Staff Reporter of The Wall Street Journal

From The Wall Street Journal

When Karen Reynolds, a Dallas industrial engineer, decided to sell her home of 10 years, she didn't even consider listing the property with a traditional real-estate broker. "They charge too much money" for commissions, she says. "It's highway robbery."

Instead, the 37-year-old Ms. Reynolds listed the four-bedroom house with a new brokerage firm: homebytes.com Inc., of Richmond, Va. For $499 (plus $150 for a virtual house tour), she posted her listing on the company's Web site, while homebytes distributed the listing to the local multiple listing service -- a centralized database of homes listed by licensed area realtors. Ms. Reynolds sold her home early last month for the asking price, $280,000, to a buyer who didn't use a broker either, saving $16,000 in commissions.

Services like homebytes.com are the latest threat confronting the residential real-estate brokerage industry. A growing number of Internet-based companies are offering tech-savvy buyers the opportunity to buy and sell homes without paying the traditional 6% commissions charged by conventional real-estate brokers. Some, like homebytes and Chicago-based econobroker Inc., charge a flat fee, while others, including Houston-based eRealty Inc., zipRealty.com Inc., Richmond, Calif., and eHomes.com, Laguna Niguel, Calif., charge commissions of 4% to 4.5%. Some shift responsibilities usually taken on by a broker -- like showing the home or hosting an open house -- to the seller.

So far, their success has been mixed. According to the National Association of Realtors, Americans sold 5.4 million homes valued at an estimated $908.8 billion last year. Traditional brokers collected about $46.3 billion in gross commissions. By contrast, Internet-based brokers sold only a few thousand homes combined. And some discount Web brokers have already shut their doors: Internet Home Services Inc., San Jose, Calif., last month laid off 100 workers and is closing its brokerage business. ExploreRealty.com, the residential brokerage arm of GlobalStake.com Corp., Palo Alto, Calif., abandoned the business in July and will shortly launch a Web-based commercial real-estate mortgage site.

Still, discount Internet brokers are beginning to spook their traditional brethren. In response to the threat, Century 21, the nation's largest real-estate brokerage firm, with 5,000 franchised offices and 100,000 agents, next quarter will send its agents a package of suggestions on how to compete if customers ask them to cut commissions, says Van Davis, president and chief operating officer of Century 21, a unit of Cendant Corp., New York. The package shows agents how to offer an a la carte menu of options, so some sellers can pay lower commissions for less service.

Coldwell Banker Real Estate Corp., another Cendant brand, will begin testing a lower-price, "limited service" Web-based brokerage model in two markets in the first quarter of 2001. Alex Perriello, Coldwell Banker's president and chief executive, says the company is motivated more by opportunities in technology than the presence of discount brokers.

Traditional brokers, like stockbrokers before them, will no doubt be forced to respond to technology-induced price pressure. Average residential brokerage commissions have already dropped to 5.5% from 6.1% in the past decade, according to Steve Murray, editor of a newsletter for Denver-based Real Trends Inc., who says Internet discounters will likely exacerbate the trend. Indeed, a recent survey of 4,000 brokers found that about 30% said they discount fees "on a regular basis," according to Gomez Advisors, Lincoln, Mass.

Those who don't negotiate lower fees risk losing customers. When Wayne Cosmo, a 33-year-old investment manager at BankOne in Deerfield, Ill., and his wife decided to sell their four-bedroom home last year, they listed with a traditional broker. When a buyer offered $230,000, Mr. Cosmo quickly realized the deal would cost him $13,800 in commissions. He asked his realtor to consider lowering her fees, but she refused, and after four months, he pulled his listing. Mr. Cosmo then got a flier in the mail from econobroker offering to list the home for $495, and within two weeks, he says, he got an offer -- again for $230,000. Since he wasn't paying the listing agent a commission, he accepted the offer, and saved nearly $7,000 in fees, after paying the buyer's broker a 2.75% sales commission.

Traditionally, listing brokers split the 6% commission with the broker bringing the buyer to the deal, and many discount brokers also offer 3% to cooperating conventional brokers. "We're totally committed to the realtor community," says Russell Capper, chief executive of eRealty.com. The company, which charges sellers 4.5% commissions, gives buyers' brokers their customary 3%. Adds Scott Kucirek, president and co-founder of zipRealty.com: "If you don't offer [brokers] what they're looking for, they have the power not to show your listing."

But some firms are starting to shave percentage points off buyer-rep commissions, too: eHomes.com, for example, offers buyer-rep brokers 2.5%. And others, like homebytes, allow home sellers to determine commission levels for cooperating brokers. A homebytes spokeswoman says that so far, about 97% of sellers have agreed to pay a 3% commission, while the rest usually offer lower fees. Ms. Reynolds, who sold her Dallas home through homebytes, says she offered 2%, but many brokers refused to show the home. "They would call me and say, 'Is this 2% negotiable?' " says Ms. Reynolds. "And when I said no, they would say, 'I'm just not going to show your house unless you give me 3%.' "

Bob Wolff, a real-estate sales agent with Re/Max Real Estate Services, Dana Point, Calif., says he has happily accepted 2% and 2.5% commissions from eHomes.com on several deals. But, he adds, he doesn't think the online brokers will significantly cut into his commissions, because he says many sellers want full service and will pay for it.

A big problem facing online discounters: Getting exposure in markets dominated by traditional players. In Atlanta, for example, brokers spend $144 million a year in marketing and advertising, says Real Trends' Mr. Murray, while their online competitors mustered only about $1 million.