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.

Wednesday, April 1, 2009

Springtime May Bring a Sharp Rise In Home Sales

Between dropping interest rates and the government’s effort to make credit more attainable, there could be a large number of homes put on the market in the next few months. While this is certainly good news for buyers looking to purchase a piece of Marin real estate, the increased inventory of unsold homes could drive prices even lower, depressing the market even further. Meanwhile, it should serve to boost the housing market by bringing more buyers in. With legislators making such a concerted effort to stimulate the real estate market, buyers and sellers alike should be tempted to jump into the market, particularly if interest rates remain low. The past week has brought very promising signs for the future of the real estate market. Mortgage rates fell sharply after the Federal Reserve, in an effort to nurture confidence that banks who purchase mortgage debt will have someone to sell them to, announced their plan on Wednesday to purchase mortgage debt. Earlier this week a report indicated that housing starts and building permits were higher than predicted. This is another indicator that confidence in housing markets is growing in spite of falling prices and low sales.

Many experts are hopeful of an economic turnaround based on government efforts to help the housing market. Mortgage re-finance applications have been growing, although some of those are coming from owners who are then putting their houses on the market. These people feel like they can’t lose because either they’ll sell the property or be able to get a lower rate on their mortgage. Experts claim that while financing can be obtained, it will be restricted more than in the past. It is also recommended that buyers as well as re-financing lenders explore all options available. Sellers are entering the market believing now is the time to trade up because they can get more value for their dollars with prices at record lows. All this leads to a noteworthy cycle: the large inventory of unsold homes will keep driving prices down, hurting sellers; while buyers are rewarded with tremendous savings.

An important factor in the future of the housing market is the willingness of banks to issue loans with lower interest rates taking hold. The market will only pick up dramatically if banks continue to be willing to finance buyers. The banks continue to face capitol ratio issues, hence should require higher credit scores and larger down payments which will make it difficult for first-time buyers. This has some economists skeptical about a turnaround in the market. Meanwhile, homeowners looking to sell will be forced to list their properties at lower prices dictated by the local markets. Buyers, however, must face the reality that FICO scores of at least 625 and an average of 20% down are the norm to qualify for a mortgage.