Editor’s note: The fragmented real estate industry seems to be consolidating. But is it really? And is it good for the consumer?

Editor’s note: The fragmented real estate industry seems to be consolidating. But is it really? And is it good for the consumer? This four-part series looks at the trend of consolidation, who wins, who loses, and who is driving it. (See Part 1: NRT: The mega consolidator; Part 3: Smaller lenders see opportunity in mergers; and Part 4: Brokerages combine while market explodes.)

In the last year, some name-brand companies have invaded the real estate technology space, buying up companies in the Internet and software categories: First there was Fidelity National Information Solutions, then there was Barry Diller’s InterActiveCorp. Then Prudential bought eRealty and First American bought a slew of smaller technology firms.

Industry insiders say several firms are on the block and others are in discussion to be bought out. For a while, observers may have imagined a world where these giants might gobble up the entire category. But the jury is still out on how much consolidation will occur.

Some say the online real estate industry has not matured enough to experience further consolidation on a large scale. Others believe it’s ripe for much more consolidation.

Is consolidation good or bad for the real estate industry? Take a survey.

The profit potential in real estate coupled with the industry’s fragmentation points to the opportunity for consolidation. But an industry as localized as real estate may never consolidate in the same way that other mature industries might. Within online real estate, many first-generation companies failed or were acquired during the dot-com bomb, which left few survivors to consolidate.

Thomas Reddin, president and COO of LendingTree, believes the online portion of the real estate industry–those companies whose core product or service is exchanged on the Web–is still too new in its lifecycle. LendingTree matches online consumers to mortgage lenders and real estate agents.

“That portion of the industry is very young, and therefore the opportunities for massive consolidation are limited,” he said.

However, Reddin believes online and offline companies will be less defined as separate entities and instead blend or consolidate together as the real estate industry evolves. He pointed to banks as an example of a sector in which most consumers use a combination of bricks and mortar, telephone and Internet-based service channels. But consumers who use online banking don’t consider themselves to be purely Internet-only customers.

“In real estate, there’s no such thing as 100 percent pure online customer,” Reddin said.

Although most consolidation within the real estate industry has occurred offline with brokerage companies, Reddin said most markets are still fairly fragmented.

LendingTree, which InterActive acquired last year, has led the consolidation of online real estate with its purchase of Domania, RealEstate.com and GetSmart. However, Reddin said these deals were acquisitions, not consolidation. In most industries, consolidation means the top two or three companies have acquired and consolidated the majority of the market in their own few hands.

Steve Kropper, founder of Domania and SVP of Equinox, believes more consolidation is coming in online real estate, especially among mortgage Web sites as the bulk of mortgage business shifts to the home loan purchases instead of refinancings.

“We’ll see lots of consolidation of mortgage lending Web sites because most are compatible with refinance business, but not the online purchase business,” he said.

Refinance transactions are fairly simple compared with purchase originations. Many mortgage Web sites aren’t sophisticated enough to handle the purchase side so they’ll consolidate with other Web sites, he said.

Kropper also said venture capitalists don’t have much appetite for innovation right now. Instead, they are focusing on growth funding for companies that already have a proven business model. Two examples are HouseValues, an online lead generation company, which last month received a second round of investment capital, and ZipRealty, an online real estate brokerage, that last year received funding after four years in the business.

The focus on growth funding rather than seed money for new companies could indicate that not a lot of new companies will be entering the same space.

John Baker, president of HomeGain, said the first wave of consolidation within online real estate has already occurred with consumer market share. More consumers have shopped online for homes and real estate services, and that indicates more companies are online to serve their needs.

But for consolidation to occur, investors have to believe the industry will be successful.

“If that’s going to happen in the online world, it’s another sign that the online presence is a part of the future industry structure,” Baker said.

HomeGain is an online real estate company that matches home buyers and sellers with real estate sales agents. The company’s founder and CEO Bradley Inman is also the founder and publisher of Inman News.

Baker said consolidation contributes to innovation. When people start to fear that consolidation means there will only be a handful of players left in an industry, someone new will enter with a new product or service.

“It’s a natural part of business evolution,” he said.

John Perkins, COO of Homes.com, thinks the online consumer traffic portals such as HomeGain and Homes.com are ripe for consolidation. Online consumer lead harvesting is accelerating and the growing number of brokers and agents willing to buy leads online has enabled a lot of these companies to become successful.

“That will result in more money by the online models being thrown at corralling more consumer traffic, as well as buying other lead generation portals with intuitive URLs or high levels of organic traffic,” he said.

The impact of this kind of consolidation is mixed, he said. While it’s good for those brokers and agents who like buying leads on the Web, it’s not good for traditionalists who believe the Internet won’t encroach on their business.

As the younger generations using the Web as their primary research tool age, overall usage of the Internet for real estate research will increase, Perkins predicted. That could mean a windfall of profit for those portals that aim to be the first point of contact.

“The consumers win if the online portal players provide a long-term relevant service. Some agents and brokers will win if they find that lead buying is the highest and best use of their marketing dollars,” he said.

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Send tips or a Letter to the Editor to jessica@inman.com or call (510) 658-9252, ext. 133.

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