Recent Chicago transplants Pieter and Beth van Es have recovered from their sticker shock and are ready to buy a house in Southern California. Now, the Irvine couple have a new incentive.
When they buy their home through an online broker, they will get a nice chunk of their money back.
The Van Eses are using Seattle-based Redfin, one of several new brokerage services that hope to revolutionize home buying by rebating part of their commissions back to buyers. The challenge is aimed at traditional firms that charge full commissions, which often total tens of thousands of dollars in today's high-priced Southland market.
Although these upstarts have yet to make a major dent in nationwide sales volume, they are raising eyebrows and causing traditional brokerages to worry.
Redfin, which launches today in Southern California, offers rebates because buyers do much of the groundwork of finding homes via the Web. The brokerage handles the paperwork and conducts negotiations, usually over the phone or via e-mail or fax.
"If I can find a house myself, then I don't need the help of a [full-service] agent," said Pieter van Es, 39, who hadn't even met his Redfin agent. "And I can get 2% back."
Typically, the commission totals 5% to 6% of the sale price, which is then split between the buyer's agent and the seller's agent. The industry is prevented by law from setting commission rates. As a buyer's broker, Redfin rebates more than half of its cut to the buyer.
Cutting customers in on commission fees isn't a trend the brand-name, more established brokerages are exactly cheering about. The industry is mired in a slowdown, and the number of brokerages and agents is expected to shrink as firms consolidate or go out of business.
What's more, after growing fat on fees that totaled more than $60 billion in 2005, the industry finds itself under attack for alleged anti-competitive practices. The Justice Department has sued the National Assn. of Realtors for trying to limit the availability of property-listing data to upstart online firms such as Redfin and others.
Such data are at the core of the burgeoning rebate movement. As consumers access the same information that brokers have long controlled, a growing awareness of the costs of buying and selling a house is taking hold.
"Regular folks resent what agents charge. Soon the industry will be seen as bad as Big Oil or the tobacco companies," said Glenn Kelman, Redfin's chief executive. He has made few friends in the industry for his take-no-prisoners style and a business model that relies on other brokerages' listing agents to show homes to Redfin's clients.
Having made a bundle on a software business during the dot-com boom, Kelman saw the real estate industry as ripe for the kind of technological changes that transformed the travel and securities brokerage industries. Redfin entered the Bay Area market last summer, after debuting in Seattle a year ago. It has transacted 242 deals but has yet to turn a profit.
Yet the rise of new models like Redfin suggests that "the agent's role is greatly diminished because they are not doing as much of the legwork as before," said Greg Sterling of online consulting and research firm Sterling Market Intelligence. "Now, the consumer is picking up much of the slack."
Tom Phillips and his wife were working with a full-service agent when they were in the market for a house in San Diego last summer. But it dawned on him after two weekends trailing her around town, viewing homes in neighborhoods he had little interest in, that he could do a better job on his own.
"I was following her Jaguar around and got to thinking, 'How many payments on her car will I be helping her make?' " Phillips said.
He then called BuySide Realty Inc., a Chicago-based online brokerage that entered the California market last year, and got a $15,000 rebate when he bought a house.
Many industry innovators are counting on independent, tech-savvy customers who prefer being hands-on. And thanks to so-called mash-up technology developed by Google and others, many of these brokerages' websites provide not only a given market's listings but also the means to plot them on an interactive map, along with comparative market data and historical price trends.
"The mapping technology changed the game for consumer search," said Michael Davin, executive vice president of Cata List Homes, a Hermosa Beach-based realty firm that charges sellers a 3% commission. CataList recently began giving rebates to buyers.
Although the dominant players have ceded some ground to the newer firms, they are quickly regaining their footing and have adopted an if-you-can't-beat-'em-join-'em mentality, confident that their name recognition and market positions will carry the day.
"These start-up companies that are doing innovative things are great," said Thomas Kunz, chief executive of Century 21 Real Estate, the nationwide brokerage based in Parsippany, N.J.
"But you don't have to be the innovator in every one of these areas because the one piece they don't have is the people on the street and the brand name."
And in a slow market, Kunz contends, consumers are more inclined to request a higher level of service.