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Why Redfin Zillow And Trulia Havent Killed Off Real Estate Brokers

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This Businessweek article reinforces the reason why real estate agents remain vital in the the purchase and sale of real estate.

Over the last decade, the Internet has seeped into that bedrock of the U.S. economy: the housing market. A group of growing and mostly profitable websites have sprung up to help guide consumers through what in many cases will be the largest and most nerve-wracking transaction of their lives. Four sites—Redfin and Zillow (Z), based in Seattle, and Trulia (TRLA) and Realtor.com, based in the San Francisco Bay Area—attract 61 million of the 67 million visitors to real estate websites each month in the U.S., according to ComScore (SCOR). They also generate hundreds of millions in revenue and have helped turn buying a house into entertainment—a spectator sport that can be enjoyed without darting surreptitiously into random open houses. Ninety percent of consumers now start their real estate journeys on the Web, according to the National Association of Realtors.

It all looks at first glance like the same kind of electronic marketplace that has eliminated travel agents, decimated classified ads, depressed stock brokers, and taken the swagger out of car dealers, but it hasn’t dented the fortunes of real estate brokers. A majority of buyers and sellers still wind up working with traditional brokers, one on each side of the deal.

Not only have brokers resisted the attack by the Internet’s real estate sites but their fees remain stable. Real Trends, a research firm, reports the average commission paid to the buying and selling brokers was 5.4 percent of the price of a home in 2011, up from 5 percent in 2008. (The seller’s agent collects the commission from the seller and then splits it evenly with the buyer’s agent.) That’s considerably higher than the median rate in markets abroad, where there may only be one agent involved in the transaction, such as the U.K. (a 1 percent to 2 percent fee), Germany (3 percent to 6 percent), Israel (4 percent), and the Netherlands (1.5 percent to 2 percent), according to a 2007 report by the Organisation for Economic Co-operation and Development. “Ten years ago almost no one started their home search online. And yet none of that value has come back to the consumer,” says Glenn Kelman, Redfin’s chief executive officer

Redfin has been trying to change the equation since its founding nearly 10 years ago, and its story partly explains how one species of middleman has hung on with such tenacity. Unlike other real estate websites, Redfin employs its own agents who trudge through open houses, pound for-sale signs into lawns, and work directly with buyers and sellers. Departing from the model of traditional brokerages, however, Redfin pays its agents with an annual salary, rather than commissions, and ties bonuses to customer reviews of their performance.

It can save customers a lot of money, but Redfin, which had more than $50 million in revenue last year, has grown more slowly than competitors such as Zillow and Trulia, which display listings and other information and then pass customers off to traditional real estate agents, who finish the deal. Redfin represents less than 3 percent of buyers and sellers in Seattle, its hometown, and has a negligible market share in the 20 other major metropolitan areas where it operates. It is also not yet profitable, partly because of the cost of hiring brokers and setting up offices when it enters new markets.

Economists have long been perplexed by the resilience of the real estate agent. Theory suggests that the relationship between agent and buyer or seller is far from optimal, and that conflict is often borne out in practice. At the root of the difficulty is what economists call the Principal-Agent Problem, which describes the diverging, often conflicting, interests of the principal (the customer) and the agent representing him or her. (Since agents bear much of the costs of selling a house, in the time they spend hosting open houses and touring with clients and the money they spend advertising property, they’re rewarded for pressuring clients into selling quickly and accepting suboptimal offers, or, in the case of a buyer’s agent, for allowing the client to pay too much.) In 2008, Stanford University economics professors B. Douglas Bernheim and Jonathan Meer published the results of their study of nearly 30 years of house and condo sales on the university campus. They found that an owner’s use of a broker to sell their property reduced the eventual selling price by 5.9 percent to 7.7 percent, compared with homes sold by the owner directly.

 

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