The whispers and rumors surrounding Zillow, a new real estate service created by Expedia founder Richard Barton, echo the fears, jeers and cheers associated with the entry of other real estate business models launched by newcomers in years past.
Some of the outsiders’ forays into the real estate industry have met resistance or misgauged consumer demand and ultimately failed. Others, though, have succeeded by providing industry professionals with desired tools and services or by tapping into consumer demand for new services and business models.
New technologies haven’t yet found a way to replace the very human interaction that is almost always part of a real estate transaction, said Larry Knapp, president of Alain Pinel Realtors. And some new companies that have sought to change the industry with technology have learned that the industry doesn’t turn on a dime, he added.
“I think that they overestimated the ability of technology to replace the human interaction. I have come to the conclusion that there is really no ‘silver bullet’ for a new business model to come in and take over this business lock, stock and barrel,” Knapp said.
Industry changes, he said, “have tended to be an evolution rather than a revolution. I haven’t seen any that have set the world on fire yet – they’re just making progress. No one has cut through that ultimate need on the clients’ part for professional counseling.”
And in his experience, new innovations tend to embrace traditional elements of the industry, and traditional industry participants tend to adopt some of the emerging innovations, Knapp said. “The business models that have shown some element of success have revolved around a continued relationship between an agent and a client. The ones who have fallen by the wayside started with an attitude that wasn’t important.”
Also, new entrants who seem to have an arrogant approach to changing the industry may have a harder time, while those who actively consult with industry participants may have an easier time understanding the business and making an impact, he said. When there are good ideas, the industry seems to quickly incorporate them – real estate professionals are very savvy entrepreneurs, he said.
In the mid-1990s, Microsoft created HomeAdvisor, a Web site that featured property listings, real estate information and links to real estate-related services.
By 2001, the site had reportedly amassed over 1 million for-sale home listings, though industry observers have said the backers of this ambitious effort perhaps underestimated the power of the real estate industry and overestimated the power of the Web; the site slowly dissolved and was incorporated into other Web sites. Microsoft’s HomeAdvisor had become the latest “lion over the hill” to some in the industry, and sources of property listings information began to dry up for HomeAdvisor. Microsoft officials did not respond to an Inman News request for comment about HomeAdvisor.
Knapp said that HomeAdvisor seemed to have “swarmed right in and swarmed right out” of the industry. “I think Microsoft thought that the delivery of raw data to the client was the essence of the real estate transaction, when in fact that is not the value that the traditional real estate firms deliver to their clients. That was just the information. (It) wasn’t the value in the transaction, it was a small part of the transaction.”
Kenneth L. Jenny, CEO and managing partner of tranCen.com, a residential brokerage services company, said Microsoft officials apparently “thought they could win the battle by bringing more consumers to the table. They found themselves in a difficult position.” Realtor.com, a home listings Web site affiliated with the National Association of Realtors, essentially “squeezed Microsoft out of the market” through exclusive listings agreements, he said.
LendingTree, an online marketplace that links consumers with its network of affiliated lenders and Realtors, announced last year that it plans to enter the real estate brokerage business. This, Knapp said, appears to support his theory that industry newcomers often evolve to become more like traditional industry participants.
Barry Diller, chairman and CEO of InterActiveCorp, was an outsider to the real estate industry when he bought LendingTree for $700 million in 2003, and his entry sparked talk of a new “lion over the hill.” At the time of the purchase, IAC owned such brands as the Home Shopping Network and related Web site HSN.com, Ticketmaster, Match.com, Evite, Expedia, and Hotels.com. And after the LendingTree purchase, Diller acquired a string of other online real estate companies, including RealEstate.com, Domania and ServiceMagic.
IAC’s diverse spread of businesses are often compared to that of Cendant Corp., the largest real estate brokerage company in the nation that owns and franchises major real estate brands including Coldwell Banker, Century 21 and ERA. Cendant’s operations also include hospitality services, travel distribution services and vehicle services, with such brands as Avis and Budget rental cars, and Days Inn, Howard Johnson, Travelodge and Ramada hotels, among others.
Cendant’s predecessor, hotel franchisor HFS Inc., took big and bold first steps into the real estate market, acquiring ERA, Century 21 and Coldwell Banker from 1995-96. This rapid acquisition spree shook the industry and some real estate professionals worried that Cendant’s success would usher in more mega-consolidation. Cendant has proven its staying power and has remained a leading force in the industry.
Cendant last year announced plans to divide the company into four independent companies, with Cendant chairman and CEO Henry Silverman leading the new Real Estate Services company.
It’s not the first time a company has bulked up by acquiring diversified set of businesses and then slimmed down to a more streamlined business model, Knapp noted.
In 1981, Sears, Roebuck and Co. bought Coldwell Banker Co. in a deal worth $179 million. The deal marked a major expansion of the company’s real estate operations. Sears also built a financial services network that included Allstate Corp. and Dean Whitter, but later sold Coldwell Banker along with a mortgage company and development company, and spun off Allstate and Dean Whitter as separate companies.
Knapp, who worked for Coldwell Banker during the Sears ownership, said the company’s business strategy had been referred to as “socks to stocks,” referring to the store chain’s supply of everything from clothing to financial services. “What’s happening at Cendant right now is almost exactly what happened to Sears back then,” he said.
The Sears plan to offer everything under one roof was perhaps ahead of its time, he added – nowadays, consumers are used to seeing banks inside grocery stores.
Costco, a retail chain that offers discount electronics, household goods, and groceries, among other items, launched a real estate affiliate program in 1997 that it said would offer consumers discounted real estate services. Large independent brokerages John L. Scott, Realtors and Long & Foster Real Estate were among those that signed up for the Costco affiliate program, which also featured financial services company AmeriNet as a participant, but the companies soon withdrew, according to reports.
“Not surprisingly, the deals sparked a furious reaction among salespeople, who see the Costco-AmeriNet foray into the real estate business as an assault on their livelihood,” according to a report in the National Association of Realtors’ Realtor Magazine publication.
Inman News reported that consumers would receive discounts on real estate transactions if they worked with participating agents and AmeriNet, and agents would reportedly get about two-thirds of the typical sales commission.
The “Wal-Marts of the world,” Knapp said, have done a good job in keeping down the cost of consumer products, though he said they haven’t yet had much impact on the real estate industry, perhaps because the industry is “largely a people industry,” he said.
Jenny said he believes the biggest obstacle for new business models is in convincing consumers that their way of doing things is superior to other existing options.
“Their biggest challenge, in my opinion, is at the kitchen table,” he said. “They’ve got to make sense to the consumer. They have to have a viable alternative (to other companies).”
Intermediaries – which Jenny defines as those companies that “try to use the industry’s assets … in order to garner the leads from those listings and then take buyers and redistribute them back to the industry” can have a tougher time in the industry than those companies that are a brokerage-based model, he said.
“Their challenge has been getting the data which they don’t own,” he said. “They capitalize this intermediary role by leveraging industry assets. I think the success of some of these intermediaries … has been falsely fueled by hostages in this industry – people afraid that they will lose something by not (signing up).”
Intermediaries have had an easier time in the past because industry rules were outdated and more lenient, he said, though it may be more difficult now for those companies to get a foothold. Still, there is room for companies that add value to the industry, he said. “There are great opportunities with new technologies to partner with brokers who can’t figure them out or afford them.”
Using a lesson from biology, Jenny said that those companies that offer symbiotic relationships with their host – the brokerage industry – will have the best chance at survival. “Predatory relationships will be killed over time,” he said.
New industry participants who offer a brokerage model will quickly realize that brokerage business is not easy money. “It’s not a fun job being a broker,” he said. “You have agents you have to herd like a cat, skinny profit margins, huge upfront expense – you put all the money into marketing and you may not even sell (a property).”
One powerful outsider that the real estate industry has been fighting to lock out of the brokerage business is the banking industry.
While the National Association of Realtors continues to battle against the entry of federally chartered financial services companies into the business of real estate brokerage, Jenny said, “I’d have difficulty finding any broker who wouldn’t welcome banks into the industry.”
While some small brokerages might not welcome new competition from the banking industry, Jenny said those same brokerages are already facing the pressures of consolidation and competition by large brokerage companies.
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