Monday, April 20, 2009

Online Discount Brokers Have Small Impact on the Real Estate Industry

Online discount brokers have operated with the belief that they can run traditional realtors out of business. So far this has not happened, especially in the Marin real estate market. The National Association of Realtors recently conducted a survey of home buyers and sellers and found that only 9% used limited service brokers, or those charging discount commissions, flat fees, or hourly rates. Some online realtors are faring well, such as Zip and Redfin. However, both firms have recently undergone major changes in their business practices which have lessened the differences between them and traditional real estate agencies. Zip, founded in 1999 with funding from Benchmark Capital who also helped fund Ebay, was among the first of the internet realty sites. Zip and Redfin are both discount brokers, which means they split sales commissions with the buyer, and are not the same as real estate search sites like Zillow, Yahoo Real Estate, and MSN Real Estate. These sites list properties for sale and profit by selling advertising on their sites; they do not broker real estate sales.

As an example, when Zip handles the sale of a $200k home and earns a commission of $6,000; they would then kick back $1,200 of it to their client, the buyer. The idea does have some appeal in today’s suffering economy. In 2008 home sales were down across the country by 13%. Zip, conversely, sold over 17,000 homes which was a 23% increase from 2007. In February the Zip website had 1.7 million visitors, up almost 75% from 2007. Their traffic is ahead of traditional brokers like RE/MAX and Century 21, but falls short of the traffic on search sites like Zillow. Zip originally started as essentially a search site, though they would handle the sale; their clients just had to arrange home tours themselves. The company found that their clients were nervous buying homes without getting to know an agent. In 2002, the company began hiring agents and now has more than 3,000 operating in 35 cities across the nation.

Due to both financial and legislative reasons, Zip doesn’t always offer commission-splits with their clients. Twelve states do not allow the practice. They’ve also recently reduced the amount of their splits, almost cutting the rate in half, and, have eliminated the practice completely for homes selling for under $100k. The company lost more than $12 million on sales surpassing $104 million in 2008. Fourth quarter losses, however, were just over $2.5 million half of their 2007 fourth quarter losses. This has the company planning expansion. Zip is trying to interest sellers as they currently represent only 5% of their customer base. They are now offering the service of listing the number of buyers looking for homes in various zip codes so that sellers can better gauge demand. They are also allowing sellers to set the commissions they pay on a scale of 4.5% to 5.5%.

Redfin has also had to revamp it’s business model. In the early days most of their clients were technology professionals in affluent areas. Now most of their sales occur in the Southern California areas hit hard by foreclosures. In October, 2007 Redfin layed off a fifth of its workforce and started splitting its commissions with field agents. To make their site stand out, the company posts photos of its agents, customer reviews, and lists recent transactions for individual brokers. The changes have paid off as their website saw an increase in traffic of 20% over the last two months.

While online brokers have made a significant dent in the real estate market, it is doubtful they will be able to take it over completely. Even though people can find answers to almost any medical question on WebMD, the healthcare industry has not suffered drastically since its inception.

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