Despite a somewhat encouraging second quarter, national online brokerage ZipRealty posted a 20 percent drop in revenue and a $5.1 million net loss in its third-quarter earnings report released Tuesday.

In response to the decline, ZipRealty announced a transition of all of its agents into independent contractors among its strategies to strengthen the company — the change will be effective as of Jan. 31, 2011.

ZipRealty operates in 35 markets in 22 states and Washington, D.C. About 2,000 of the brokerage’s 3,305 agents are currently employees and will be impacted by the change to an independent contractor model. ZipRealty’s California agents became independent contractors on Sept. 1 and the company’s Las Vegas and New York agents are also independent contractors.

"We believe this switch allows us to present a more appealing value proposition to agents that will enhance our recruiting and retention. It also allows us to redirect resources from day-to-day management to what we believe we do best: developing great technology and online marketing solutions," said Lanny Baker, ZipRealty’s president and CEO, in a statement.

"Finally, the conversion shifts a portion of our fixed costs to variable, which enables us to limit downside productivity risk while rewarding our best performers. We believe that these shifts support our priority to attain profitability," he added.

The company’s third quarter revenue total was $28.3 million, down 20 percent from $35.4 million in 2009’s third quarter. The company posted a net loss of $5.1 million in the third quarter, up significantly from a $0.8 million net loss the same period a year ago.

"As expected, the lack of government-sponsored housing support in the third quarter sharply reduced transaction volumes and weighed on our revenue," Baker said.

ZipRealty, which offers commission rebates to buyers and discounted listing fees for sellers, closed 6,557 transactions worth a total value of $1.2 billion in the third quarter, down from 5,080 transactions worth $1.5 billion in third quarter 2009.

The brokerage was the nation’s fifth-largest brokerage by transaction sides in 2009, according to Real Trends.

ZipRealty also changed its financial outlook for the rest of the year. In the second quarter, the brokerage expected some revenue growth and a smaller net loss than the one posted in 2009. Now, net revenue is expected to decline in the mid-single digits over 2009 levels, and the company expects to post a larger net loss for 2010 than the $12.9 million loss in 2009.

According to the Internal Revenue Service, business owners generally do not have to withhold or pay taxes on payments to independent contractors. Independent contractor status depends on the degree to which a company controls how a worker does his or her job; whether it controls the economic aspects of a worker’s job; and the type of relationship the company has to the worker, including whether or not the company pays all or a portion of the worker’s benefits.

"ZipRealty’s independent contractor agents will be free to develop their own work styles and will have access to an expanding array of compensation alternatives," the company said.

Company representatives were not immediately available to respond to questions about benefits and compensation alternatives before publication time. As part of the transition in California, however, ZipRealty no longer offered its agents the benefits they received as employees, including medical insurance, dental insurance and 401(k) retirement plans.

"The transitioning agents will continue to have access to the company’s proprietary technology, marketing support, training and brokerage resources," the company said.

According to the National Association of Realtors’ 2010 Member Profile, 81 percent of Realtors are independent contractors. 

ZipRealty in recent weeks has announced a series of management changes. Baker succeeded company veteran Patrick Lashinsky as CEO on Oct. 1.

David Rector took over Baker’s former position as the company’s chief financial officer on Oct. 25. He had served as the company’s senior vice president, controller, and chief accounting officer. Two other executives resigned their positions: William Sinclair, executive vice president of operations and business development; and Leslie Tyler, vice president of marketing.

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