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HolidayBuyer's Guide
Tech Industry

Real estate's Net turf war

Big money is at stake as the Web puts more power in the hands of buyers and sellers--and makes agents nervous.

SAN FRANCISCO--It's already happened to travel agents, car dealers, wine retailers and stock brokers.

By matching buyers and sellers more efficiently, the Internet has whittled away at the influence of those middlemen. Not only have companies like eBay, Expedia and E*Trade Financial upset established industries, but they've delivered lower prices by axing once-lucrative fees and commissions.

Now the nation's approximately 2 million real estate brokers, who have seen their incomes balloon as housing prices have climbed toward the sky in recent years, fear they're next in line for what academics like to call "disintermediation."

And the brokers don't like it one bit.

At the "Real Estate Connect" conference here this week, brokers sought reassurances that their hefty commissions--the national average is around 6 percent, split between the buyer's agent and seller's agent--will not dwindle.

The Internet "has not put us out of business," said David Liniger, founder and chairman of Re/Max International, the largest real estate agency in the United States and Canada. "It will not put us out of business."

Liniger, who founded Re/Max in 1973 and became wealthy enough to try adventures like flying a balloon nonstop around the world, said the average annual income of a Re/Max agent was $112,000 as of 2002. Today, he said, the average income has climbed to $130,000.

"People not in the real estate business think we're overpaid--in reality we're not," Liniger told an audience of hundreds of real estate brokers. "You think we're overpaid? Let's start investigating attorneys."

Even that wasn't quite enough to reassure the skittish real estate agents who filled the ballroom of the Palace Hotel to hear presentations on topics like "How to defend your commission" and "What will the real estate industry look like in five years?

Zillow
Credit: Declan McCullagh
Zillow.com's Rich Barton (left) and Lloyd
Frink (right) describe what they've
learned about the real estate business.

Billions of dollars are at stake; industry estimates put brokerage fees at $65.7 billion in 2005, a more than 50 percent increase from 2000 and far above the rate of inflation. In a metropolitan area where homes routinely sell for $700,000, a broker charging a standard commission would need to be involved in only one deal a month to make $252,000 a year.

Particularly worried were the many conference-goers who switched jobs to cash in on skyrocketing housing prices--and now face the prospect of smaller paychecks thanks to a combination of competition from discount Internet brokers, rising interest rates and a national housing downturn.

"The real estate industry needs to realize that the genie is out of the bottle," said Steve Ozonian, CEO of Help-U-Sell, which runs franchises that charge home sellers a flat fee instead of a percentage of the home's value.

Other industries have strongly resisted disintermediation. It took the U.S. Supreme Court to open the door to buying from out-of-state wineries (opposed by local distributors). A federal appeals court had to affirm that Tennesseans have the right to buy funeral caskets from anyone they want. (Funeral homes liked their cartel.) Congress had to specify that Americans could shop around for contact lenses. (Optometrists and ophthalmologists lost hefty markups.)

Yet the real estate industry has proven itself singularly resistant to change. The anxiety of a major purchase, coupled with uncertainties about details like individual neighborhoods and school districts, has helped to bring in a continuous stream of revenue for both buyers' and sellers' agents.

A database debate turns political
Even more important has been real estate brokers' stranglehold over their local Multiple Listing Service, or MLS, a database of homes up for sale. Unlike securities or commodities exchanges, an MLS is not regulated by state or federal authorities. In addition, local brokers tend to restrict full access to the database to members of a professional association such as the National Association of Realtors.

That stranglehold has been the subject of a lawsuit filed last September by the U.S. Department of Justice, which charges that the National Association of Realtors' restrictive MLS policies unlawfully restrict competition.

Internet start-ups take an even dimmer view of the MLS. They say that local brokers are wielding their databases as a weapon to squash competition and maintain hefty commissions, even if opening the MLS would benefit their customers who are trying to buy or sell homes.

Justin McCarthy
Credit: Declan McCullagh
Justin McCarthy, Google's partner
development manager for real estate
(second from right), says the search
company wants to work cooperatively
with real estate brokers.

"Realtors want consumers to be dependent on realtors, not Web sites, for information," Glenn Kelman, CEO of Redfin, said during a House of Representatives hearing this week. "You can find out more on the Internet about an eBay Beanie Baby than you can about a million-dollar home." (Redfin charges sellers a $2,000 flat fee instead of a percentage of the sale price.)

Kelman is an experienced entrepreneur in the enterprise software business who said it had been impossible to raise money for Redfin until the Justice Department's lawsuit.

"Multiple listing services have told us we can't publish commentary on a listing, that we can't search by time on the market, that we can't display for-sale-by-owner listings, that we must register our users," Kelman said. "Rules like this are a thousand tiny shackles on Internet businesses."

Kelman's experiences in Seattle and San Francisco are not unique. In 2005, the Austin Board of Realtors changed its rules and began to allow MLS entries only if the home seller chose a traditional full-fee broker, not a discount one. If the seller refused to employ a full-fee broker, the Austin realtors would block the MLS entry from appearing on local Web sites and the national Realtor.com site.

On July 13, the Federal Trade Commission charged the Austin Board of Realtors with violating federal antitrust laws. A settlement announced at the same time, which contained no admission of wrongdoing, said the realtors would no longer deny or restrict access to the MLS.

The federal investigations have drawn the attention of some politicians, who are threatening a more extensive crackdown. "Organized real estate brokers (are) setting or using the rules to protect higher fees or stifle competition to the detriment of consumers and to the detriment of new brokerage models," Rep. Michael Oxley, the Republican chairman of the Financial Services Committee, said this week.

Saving money on a house

For most people, buying or selling a home will be one of life's biggest transactions. Here are some tips:

Pay by the hour: Instead of paying a broker tens of thousands of dollars for a few days of work, find an agent that will work by the hour. Some agents prefer this because they're guaranteed to make money even if no sale happens.

Do it yourself: Sites like ForSaleByOwner.com and Emongoo cut out the middlemen and provide some coaching on how to do it.

Pay a flat rate: Redfin and Help-U-Sell use licensed agents but pay them a flat fee, typically around $2,000 or $3,000, rather than a percentage of the sale price.

Negotiate: There's no law saying brokers must charge 6 percent of a property's value. If you use a traditional broker, negotiate that number downward. If your broker won't budge, realtors listed on HungryAgents.com will.

Oxley and Massachusetts Rep. Barney Frank, one of the House's most liberal Democrats, have introduced a bill to increase competition by letting banks get into the business of real estate brokerage. But realtors' lobbyists have bitterly opposed it, and instead have counterattacked with legislation--boasting 257 sponsors, or more than half the members of the House of Representatives--that would flatly prohibit it.

A report (click here for PDF) published last month by the nonprofit Consumer Federation of America also took aim at a "cockamamie brokerage system that traditional brokers are trying to maintain" at the expense of consumers. It singled out for criticism the 11 states that have adopted realtor-backed laws that discriminate against discount and Internet brokers, and called realtors a "cartel."

For its part, the National Association of Realtors denies any wrongdoing. Pat Vredevoogd-Combs, its president-elect, told Oxley's panel that the association is "not a cartel and does not encourage imitative price-setting." Vredevoogd-Combs said that the association's 1.3 million members are "vigorously competitive" and do not conspire to keep commissions artificially inflated.

At this week's conference in San Francisco, discussion veered between how to use the Internet to attract more customers and fear that more Americans would switch to flat-rate Internet brokerages.

A typical audience question: "Can you tell us the future of commissions?"

Fear of discount brokers and Google
Another common worry was that Google or other established Internet companies would switch from directing people toward brokers to replicating the MLS or providing real estate services themselves. Google Base, for instance, already offers a real estate search category.

Justin McCarthy, Google's partner development manager for real estate, tried to assuage the audience's concerns. "The proposition is to drive people back to you, the MLS who is supplying us with data," McCarthy said.

McCarthy did acknowledge, however, that the Internet has changed the way people shop for homes and brokers. Thirty-three percent of recent home buyers said they used the Internet to help find a broker, he said, and 50 percent used the Internet to find information on the purchase.

Lennox Scott, CEO of John L. Scott Real Estate, which employs 4,500 sales associates in the Pacific Northwest, downplayed the threat of Internet start-ups such as Emongoo, BuySideRealty.com, and HungryAgents.com.

A few years ago "everyone was trying to disintermediate the real estate business," and it still hasn't happened, Scott said.

Other brokers said that the Internet already has ended real estate agents' near-monopoly on information. "If people have the information that realtors pretty much have had a lock on, you have to have a value add," said Dottie Herman, CEO of Prudential Douglas Elliman, a New York real estate firm that handled $12 billion in sales last year.

Herman added: "I do not see the Internet replacing real estate agents."

Help-U-Sell's Ozonian said the industry's transformation is already well under way. "Anyone who says the Internet has not changed the way real estate is practiced--I don't think that's right," he said.

Ozonian took aim at realtor-backed state laws that "make doing business more difficult" for Internet start-ups and said "the government is standing partly in the way" of a level playing field.

"Consumers are doing one part of what a realtor had been doing previously," Ozonian said. With the dramatic increase in housing prices, he said, the amount of work that brokers do has stayed the same but commissions have zoomed upward. "There's been an automatic raise given to the industry based on the sales price."