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The Last Stand of the 6-Percenters?
Seattle
WHEN David and Annette Wolf decided that their family was outgrowing its Seattle area home, they also decided that they did not need much help finding a new one.
They combed Internet listings of homes for sale until they spotted a four-bedroom house on a cul-de-sac with a three-car garage and 2.5 acres.
But the seller’s agent refused to show it to them. Why would she turn away an eager buyer? Not because of the Wolfs’ race, creed or color. Instead, Mr. Wolf, a software engineering manager at the online directory InfoSpace, said he and his wife were shunned once the agent learned they used an online broker called Redfin.
Mr. Wolf said they turned to Redfin because it gives two-thirds of its sales commission (which is usually 3 percent of the sale price) to its customers. “I didn’t want to pay 3 percent for the opening of a door,” he said. But customers like Mr. Wolf — affluent and comfortable with the Internet — are a frightening prospect for real estate agents who, as a group, reap at least $60 billion a year in commission income.
Redfin and other innovators, including ZipRealty and BuySideInc.com, are using technology to reduce costs and to save time for their brokers. Agents don’t find and recommend homes — customers do that on their own, using Internet listings — and that enables agents to charge less for the services they do provide, chiefly handling the paperwork and negotiations.
The Internet has radically changed the way consumers buy books and airline tickets, trade stock and learn news. But the real estate industry has resisted change — and protected its commission structure — by controlling the information on its Multiple Listing Service database of properties for sale.
“You can find out more on the Internet about an eBay Beanie Baby than you can about a $1 million house,” said Glenn Kelman, chief executive of Redfin, a licensed broker in Washington State and California.
The M.L.S. is the only place that contains nearly all the homes for sale in a community. Only brokers can post there, but agents can also display selected information about a listing on their own Web sites and on Realtor.com, a site that works with the National Association of Realtors.
Traditional agents still firmly control the M.L.S., which allows all participating brokers, including Redfin, to view almost every home for sale in a particular area, even those being offered through competitors’ agencies. But the typical 6 percent commission, paid out of the seller’s proceeds and split between the seller’s and buyer’s agents, is under attack because, as economists note, it does not serve consumers well.
Economists who have studied the current system say that it also does little for most agents — except for a few stars, whose impressive earnings give hope to the large majority of less-successful agents and thus encourage them to protect the status quo. Rivals on the Internet say they do this by refusing to cooperate with buyers using Web-based brokers and by denying M.L.S. information to some online firms.
THEY have not, as yet, fought back by reducing their commissions. And Paul B. Goodrich, the managing director of the Madrona Venture Group in Seattle, an investor in Redfin, says he thinks that they are unlikely ever to do so. “It will be hard for the real estate industry to change the way it compensates its agents,” he said. “If Coldwell Banker announced it was paying 1 percent commission to its agents, there would be a mass exodus.”
As it turned out, the Wolfs’ offer was the highest of five bids made for the house they wanted, and they were able to buy it despite the balky broker. (They toured the house with a friend who is an agent.) They also received a $16,300 commission rebate from Redfin and became firm believers in online real estate brokers.
But as the couple’s story shows, people who want to use Web-based brokers often have to fight to do so. Many are, and there are growing signs that they are succeeding. BuySideInc.com, an online buyer’s broker in Chicago that offers a 75 percent commission rebate, said that at one point 12 percent of its customers reported that traditional agents had refused to show houses to them.
The rate is now down to about 6 percent, perhaps because of responses like this: One client who was denied a showing made an offer anyway that was contingent on getting a tour — a move intended to alert the seller to the refusing agent’s actions.
“I’d like to have been the fly on the wall for the conversation between that seller and his agent,” said Joseph J. Fox, chief executive of BuySide and a founder of one of the earliest online stock brokerage firms, WebStreet. “The amazing thing,” he added, “is that the selling agent still got paid and made $15,000 to $20,000.”
In many cities, real estate agents have tried to restrict access to M.L.S. information or to limit its use on the database. Some have asked state legislatures to pass laws forcing brokers to offer certain levels of service, a move that Mr. Kelman sees as intended to squeeze out discount brokers. “It’s a thousand tiny shackles on innovation,” he said.
The Justice Department and the Federal Trade Commission have fought these tactics in Texas, Kentucky, Tennessee and Oklahoma, among other states, and the department is suing the National Association of Realtors, the powerful trade group of agents and brokers, over what it calls anticompetitive rules.
“Where it comes to our attention that significantly anticompetitive state laws or regulations are under consideration, we approach state officials to advocate that they take into account the benefits to consumers of a more competitive approach,” said J. Bruce McDonald, deputy assistant attorney general for the antitrust division of the Justice Department.
The battle by the traditional agents reveals how vulnerable the broker’s 6 percent commission has become. Agents are quick to point out that the average commission may be closer to 5 percent — a 17 percent decline over 10 years, they say — but no one knows for sure because no one collects data on that.
In many cities, of course, even a one-point drop in commissions has been more than offset by soaring sale prices in recent years. In 1994, for example, a home in San Francisco that sold for nearly $500,000 earned a total of almost $30,000 for the agents commanding a 6 percent fee. Even if the commission slipped to 5 percent when the same house sold this year for more than $1.5 million, the higher price earned its agents a $75,000 commission.
Some economists wonder why agents fight so hard to maintain this pricing system when it is making so few of them rich. In every housing boom, the number of new agents entering the market tracks the climb in home prices. As a result, the average agent sells far fewer homes and makes less money. On average, agents earn $49,300 a year, according to the National Association of Realtors, and that is before paying for their own health insurance and retirement benefits.
“It’s a case where nobody wins,” Chang-Tai Hsieh, an associate professor of economics at the University of California, Berkeley, said of the current system. Mr. Hsieh, who has studied real estate commissions, said that they did not vary much from 6 percent and did not generally change in good times or bad. He said it was a form of price fixing, but an odd one. “Consumers pay a lot of money, and even the people who do the price fixing don’t win,” he said. “So it is a colossal waste.”
Traditional agents spend very little time brokering a deal, Mr. Hsieh added. Most of their time is consumed looking for new clients, which is of no benefit to consumers. An agent working for a salary, he said, would be freed of the need to prospect and would thus be more inclined to focus on negotiating.
Others agree. Steven D. Levitt, an economics professor at the University of Chicago, found that commissions did not align the interests of agents with those of their customers, a conclusion he recounted in his book “Freakonomics.” The agent has little incentive to get a few thousand dollars more for a homeowner, he wrote, because it will not much improve the commission. It is far more important for an agent working on commission to get the deal done and move on, he added.
A salaried agent is less likely to pressure a customer to make a deal, especially if the agent’s bonus depends on customer satisfaction, as at Redfin. Agents at that company, like Allie Howard in Seattle, are quick to point this out. “I don’t have to sell anything to the client,” she said.
Traditional agents portray their service as more personal and thus more valuable, but such agents, unlike Ms. Howard, are not paid unless a deal is completed.
Redfin opened in 2004 as an online real estate listings site for Seattle, and now has 35 employees, including 12 agents in Washington State and California. Its first innovation was to layer maps with historical prices for each area as well as information on property taxes and which homes had a view, for example.
In February, it introduced a Web site that automates the bidding process — and the commission rebates. The sale of a $500,000 house, for example, typically yields a 3 percent commission of $15,000 for the buyer’s agent. A Redfin customer would get $10,000 back.
“At that point we became a true pariah to the industry,” said Rob McGarty, Redfin’s director of West Coast operations. Buying a home online is not too different from ordering a book at Amazon.com or a computer at Dell.com. A prospective buyer finds a house on the Redfin site, which populates its maps with homes found on the local M.L.S. A request to see the house can be made with the click of a mouse.
Buyers also enter details of their offers — the price they want to pay, the size of the deposit they are willing to put up and, for example, whether they will pay for the termite inspection. Then they click on “Submit.” A Redfin agent checks everything with the customer before passing along the offer to the seller.
“It took eight minutes,” said Perry Webster of Des Moines, a suburb of Seattle, who bought a new four-bedroom house through Redfin. “But it didn’t really matter that it was online. We just liked the business model.” He asked, “Is it really worth $10,000 to ride in a real estate agent’s Lexus?”
Redfin can also work the seller’s side of a real estate transaction. It uses a disruptive method there, too: it lists homes in the M.L.S. for a flat fee of $2,000. The customer is responsible for showing and advertising the home; Redfin handles paperwork and negotiations. But one part of the old system is steadfastly adhered to: buyer’s agents are offered their full share of the usual commission.
Like many Redfin customers who were interviewed, Mr. Webster and his wife, Robin Meyers, told of encountering hostile selling agents who said their offers would not be competitive if they used Redfin. But other agents’ antagonism only seems to make Redfin customers more loyal.
Matt Bell, general manager of sales at RealNetworks in Seattle, said that “when the listing agent wouldn’t show me the house, that’s when I knew Redfin was on to something.” He added: “If agents don’t like it, then it must be better for consumers.”
A dozen Redfin customers described similar experiences during the last few months. The selling agents, at least those who returned calls, denied that they had refused to work with Redfin. “That’s an absolute absurdity,” said Leslie Hancock, an associate broker at Windermere Real Estate, the dominant agency in the Seattle region. “I don’t represent buyers on my own listings. I don’t care if it’s a Redfin agent or a Windermere agent. I’m not going to turn anyone away.”
INITIALLY, many people used Redfin to submit lowball offers, so that the company was not taken seriously by other agents. But those “goofy offers” have disappeared, Mr. Kelman said. His agency, he said, has closed 89 transactions and returned $900,000 in customer rebates.
Traditional agents have criticized Mr. Kelman for appearing, as did representatives of the Justice Department and the F.T.C., before a House subcommittee that was looking into real estate law. At the hearing, Representative Maxine Waters, Democrat of California, wasn’t buying his complaints that agents would not show homes to his clients, and seemed doubtful that it was a serious matter. “You want us to stop people from bullying you?” she asked.
Some agents say the biggest problem with Redfin is that it complains too much. “Someone may be trying to manufacture controversy, even going so far as to bait other real estate practitioners, invite ‘war stories’ on their blog and whine to Congress and to newspaper reporters that they’re being treated unfairly,” said Marlow Harris, a Seattle agent with Coldwell Banker Bain Associates who also runs the real estate blog 360digest.com.
Still, Redfin agents — like their customers — say they meet real resistance from traditional brokers. Ms. Howard, for example, said that in her first days at Redfin, several agents for sellers said they were too busy to show a house to her clients. “That was my boot camp,” she said.
When that happens, Redfin agents contact the sellers and let them know that their agent will not show the house. When they cannot find a phone number, they send a registered letter. When sellers have moved, they track them down through the relocation service that moved them.
That is hardball, but the online agents have learned to be tough. “If we didn’t do that, the word would get out that Redfin can be blocked,” Ms. Howard said. When Redfin said it would try to make peace with rival agents by sending them gift cards for coffee, some of them told Redfin that such a move could violate a Department of Housing and Urban Development regulation having to do with transactions between agents. Redfin scuttled the plan.
Mr. Fox, the chief executive of BuySide, a start-up that operates in five states, says his company is working harder to get along with existing agents. “You have to play by their rules until the value to the customer drives the change,” he said.
Redfin’s financial backers, who so far have invested $8 million in the company, say they see parallels in the past introductions of automatic teller machines, big-box stores and discount stock brokerage firms — all innovations that faced industry resistance until consumers embraced them and forced change.
“You can only move as fast as the consumer; you can’t move faster,” said Marc A. Singer, general partner at BEV Capital, a venture capital firm in Stamford, Conn., that specializes in consumer businesses and is a Redfin investor. Redfin, he said, is becoming smarter in each market it enters. “You learn to cookie-cutter that fight,” he said.
AMID its battles, a funny thing happened to Redfin. It realized it was not primarily a tech company, but a real estate broker. It moved to stylish offices in Pioneer Square in Seattle because many customers wanted to meet agents the old-fashioned way: in person. Redfin posts pictures of agents on the Web so that customers realize, as Mr. Kelman says, “they won’t be talking to a person in Mumbai, India.”
Redfin said it planned to use the power of the Internet to personalize listings — if local M.L.S.’s allow it. Sellers, for example, could post online brochures that describe the history of their houses, any improvements made or what makes the homes special to them. Buyers, meanwhile, would automatically get help in searches through software that analyzes their past queries.
(Some local M.L.S.’s are particularly eager to fight one Redfin innovation: a display of how long homes have been listed on the market, a possible tip-off to buyers of an eager seller.)
“If you give people freedom, you can’t take it away,” Mr. Kelman said. “A consumer force has been unleashed.”
