Saturday, April 08, 2006

Independent Real Estate Firms on the Rise

For 30 years, June McNamara played by the rules of Raleigh's real estate industry, charging 6 percent commission on every home sale she brokered. Then last year, she decided there was a better business model: She created her own real estate firm and started charging 3.9 percent commissions.

Former colleagues called her a turncoat.

"They were like; 'Et tu, Brute?'" said McNamara, who worked for several full-commission brokerages before co-founding McNamara Properties.

What McNamara is doing was largely unheard of just a few years ago. For about century, the real estate industry thwarted significant price competition by promoting standard commissions.

But a growing faction of brokers are refusing to the toe the line. They're setting up shops that undercut the higher rates. And -- in the clearest sign yet that the old-line fee structure is crumbling from within -- more traditional, full-service firms are encouraging agents to negotiate on price.

The National Association of Realtors is fighting back.

In recent years, the group has lobbied more than a dozen states to enact laws that prohibit lower-price business models. Last year, the association's Raleigh chapter discussed plans to block low-cost agent listings from the industry's local listing service. That effort was dropped after several Triangle discount brokers filed complaints with the state Attorney General's Office.

But for old-line firms, it may be too late.

The Internet has made it easier for buyers and sellers to find each other. That reduces the premium paid for professional match-makers to broker sales in real estate, just as it has in stocks, plane tickets and used cars.

Real Trends, a real estate research and publishing company, has reported that the average commission rate among the nation's top brokerages dropped to about 5.4 percent in 2001 and now averages 5.1 percent. That will fall to about 4 percent in the next five years, said Dave Liniger, chairman of national real estate brokerage RE/MAX.

For brokers, that means the end of the era of nearly guaranteed sales margins, and the start of a new line of price competition. For consumers, it means an increasing array of price and service options in home selling and shopping.

Some new brokers advertise full service at reduced rates -- generally 3.9 percent to 4.5 percent.

Others focus on Internet-based strategies and charge a flat fee of $500 to $1,500.
Still others offer an a la carte menu of services from which consumers can choose.
"There are more and more like us who realize that with technology we can save time, money and charge less," says McNamara, whose lower rate would shave about $4,200 off the average U.S. home sale.

Instead of driving hundreds of miles a week to size up homes, brokers can plow through dozens of highly detailed listings online in minutes.

That alone saves up to a third in overhead from gasoline and other travel expenses, McNamara says.

There are other examples. Uploading digital pictures of homes is cheaper than taking Polaroids. Buying home improvement materials online leaves more time for the sell. Faxing offers and counter-offers means no more hand-delivery.

Add it up and the savings on overhead warrant a lower price, especially when services should be about consumer choice, said Bobby Wieland, whose Wieland Properties, begun five years ago, is now one of the largest reduced-rate brokerages in the Triangle.
"Consumers want this. So why fight it?" he asked.

Since debuting, Wieland, 40, said he has endured crank calls and stolen for-sale signs just for advertising 3.9 percent commissions.

But none of that has hurt his business. Wieland now has 31 employees, almost all came from full-commission brokerage firms, he said.

Full-commission brokers acknowledge the growth of their lower-price counterparts but question whether many will survive the repeated downturns that shake the housing market.

The boom of the past five years, they say, enticed many into real estate and helped the inexperienced make sales. Skyrocketing home values, meanwhile, made it easier to give a little on price.

That may change, said Ed Willer, a full-commission broker with York Simpson Underwood in Raleigh.

Much of the recent fee-cutting is cyclical and will reverse itself when the going gets tough, he said. When houses get harder to sell, brokers charging less than
6 percent will have trouble making a profit, he said.

Internet-based brokers especially will take a hit in a less forgiving market. For a flat fee, many of these brokers simply post sellers' homes on the industry's Multiple Listing Service, a nationwide network that reaches hundreds of real estate Web sites. The seller does the rest.

For Willer, "that's a no service won't-return-phone-calls paid-upfront-whether-it-sells-or-not business model." He calls it the "MLS Lotto -- hope a buyer comes along."

Industry economists partly agree. They say the housing boom set off legions of armchair entrepreneurs who were able to capitalize on market frenzy, regardless of the breadth or depth of their knowledge.

"In 20 years, some of these will seem like great ideas, and some will have gone off the face of the earth," said Pat Vredevoogd, president-elect of the National Association of Realtors. "Still, I don't doubt that new service options will crop up more than ever before."

And for now local consumers apparently want them.

Owners of local brands including Why6percent, RaleighFlatFee, MyDogTess and Selling Directly say customers are eager for lower prices and more flexible service options. Selling Directly offers a range of services, from a pared-down Internet listing at $500 to a full-service brokerage involvement for a flat fee of $2,300.

Chris Caffera chose Selling Directly's pared-down service last year, which amounted to less than 2 percent of the $421,000 sale price of his Cary home. That took $20,000 off what he would have paid a full-commission broker.

For McNamara, choice in price and service will continue to draw customers, regardless of fluctuations in the market. "We consider ourselves the future, not the past," he said.


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