The Commission Squeeze

By Daniel Kadlec

When Bryan Geston set out to buy a home, the first thing he did was log on to LendingTree.com where he described what kind of house and mortgage he wanted. A day later, several real estate agents and lenders contacted him. Then, in a single afternoon, he viewed more than a dozen listings online and visited two places in person. That night he made an offer. The process was painless, says Getson, 23, who moved into his Centreville, Va., home just five weeks after starting his search. "As a bonus," he adds, "I'm getting a Home Depot gift card for $1,000 that I'll use to redo some cabinets."

This is not how most people buy a house, largely because it is not the way the nation's dominant real estate firms, including Century 21, Coldwell Banker, ERA and ReMax, choose to do business. The big guys on the block prefer the old way: their agents usher clients door to door and show house after house. Frequently the houses are closely held listings on which the agents have exclusives, and they pocket a hefty 5%-to-7% commission on each sale. Today that clubby world is being shaken more and more by a handful of upstarts. Internet interlopers like LendingTree, along with regional discounters like Foxtons in the Northeast and CataList Homes on the West Coast, have been gaining traction with a new scenario--one that simplifies and shortens the process for buyers and offers sellers overdue relief on the commissions they must pay.

The dollars at stake are huge. More than 6 million homes are expected to change hands this year, generating sales commissions of $60 billion. Predictably, the big Realtors aren't going without a fight. In response to the new threat, the National Association of Realtors (N.A.R.) has proposed guidelines that would restrict online agents' access to the industry's lifeblood: multiple real estate listings--the Holy Grail for home shoppers--which are maintained on the association's regional databases.

Consumers are beginning to reap the benefits of the heightened competition. Getson's $1,000 gift card came from LendingTree, which used the card, as it always does, to rebate half the fee it collects for referring business to brokers around the country. In this case, the rebate chopped the total commission on Getson's deal from 6% to 5.5%--an important chink in the Old Guard's armor, says Peter Sealey, a professor of technology and marketing at the University of California, Berkeley. "Slowly but surely, technology is coming into play in the real estate market," he says. "As it does, brokers will lose their stranglehold on the process. Commissions ultimately should be cut in half."

That's no small chunk of change. Buying a home is the largest financial transaction most Americans ever take part in. The nation's housing equity--home values minus mortgage debt--is worth more than $7 trillion and accounts for the largest slice of most individuals' net worth. Yet buying and selling remain "horrendously expensive and full of hidden traps," Sealey notes.

The Internet has already made many other financial transactions cheaper and simpler. Stockbrokers once routinely charged $250 for trades that can now be done for $15 on the Web. People who buy a car or truck online pay an average of 2% less than those who walk into a dealership, studies show. Travel deals are so prevalent online that hotel owners normally offer lowest-rate guarantees, which drive down the average price of a room. Yet for the most part, the real estate industry has managed to shield itself. "The way real estate is sold hasn't changed since Eisenhower was President," says Eric Danziger, CEO of ZipRealty, one of the new online real estate firms that generate most of their business on the Web. "We're trying to change that."

Danziger's company and others are preparing for battle. ZipRealty and HouseValues, another online firm, each raised tens of millions of dollars late last year selling initial shares of stock to the public--in part to fund a marketing blitz. LendingTree was sold to Barry Diller's IAC/InterActiveCorp in 2003, giving it deep pockets to jump-start its real estate ambitions. In just a year, LendingTree has gone from zero listings to more than a million. Foxtons, which is owned by London's biggest real estate firm, will relaunch its U.S. business this month with a marketing push of its own, playing up Web benefits and 3% commissions--and sending 200 agents into the field in a fleet of BMW minis decorated with flowers.

All these new entries--as well as a slew of real estate websites from Domania.com to Houseandhome.msn.com--have helped make home buying more efficient. Consumers who buy their houses via the Web spend slightly less than two weeks looking at homes, on average, visiting six properties in person, according to the California Association of Realtors. That compares with spending more than seven weeks and looking at 15 homes, on average, for those who don't use the Internet. As a result, the new online agents can show more homes--and charge lower commissions.

Since 70% of all home buyers now initiate their search online, even traditional real estate firms embrace the Web. Century 21 and the other dominant players operate their own websites, and the N.A.R. puts up 95% of all listings in the country on its Realtor.com Yet the industry has a keen interest in freezing out discounters and Web-based firms, which would like to put those listings on their own websites and offer them at discount commission rates. Cendant, which owns franchise rights to Century 21, Coldwell Banker and ERA--and is the industry heavyweight--submitted a paper to the real estate-industry trade group in 2003, warning that Web-based firms "present the potential to undermine the profitability of real estate brokerage firms and increase costs to consumers." Says Mark Panus, spokesman for Cendant's real estate division: "Listings obtained by real estate brokers are their work product, and for others to use that product without approval is wrong."

Nationally, the average commission on a house sale has slipped to 5.1% from 5.5% a few years ago, in part because discounters are making a dent. Nonetheless, house prices are rising so fast that agents are stuffing their pockets as never before. The Department of Justice is reviewing the new rules proposed by the N.A.R. to restrict access to the multiple-listing services with an eye to determining if any antitrust issues are involved. "There is no intent to keep anybody from accessing this data," says N.A.R. spokesman Steve Cook, who points to the group's website of listings. Not all firms would be free to use those listings, though, and critics argue that the data really belong to home sellers--not to the real estate agents who maintain the listings. "It's clearly in the clients' best interest for as many people as possible to see their listing," says Rob Atkinson, a director at the Progressive Policy Institute, a Washington think tank. "But Realtors are worried about their commissions." So are we all.