Editor’s note: This is the final article in a six-part series focusing on low-fee real estate business models.
With a fleet of branded vehicles for agents, billboards touting its 2 percent commission for real estate listing services, and 100-person call center, Foxtons North America made a big splash in the Northeast before sinking into financial ruin.
Foxtons North America, originally founded as YHD.com (for "Your Home Deal"), had stirred up resentment among some competitors as it grew to become one of the top brokerages in the New Jersey and New York area, with about 400 employees by 2004 and 500 employees at its peak.
London-based Foxtons Real Estate had invested $20 million in YHD.com in 2001, and the company was rebranded. Foxtons bought out founder Glenn Cohen’s interest in the company in 2004.
As with some other prominent low-cost brokerages, the company’s business model and cost structure changed over time, in some ways bringing it more in line with the practices of other industry participants. By 2007 its operations ended in bankruptcy proceedings.
Help-U-Sell, a prominent real estate franchise company that offers discounted services, is recovering from Chapter 11 bankruptcy, filed in 2008. And some other low-cost brokerage models have left the industry landscape or reduced their footprint owing to financial difficulty.
Financial troubles during this prolonged housing downturn are definitely not isolated to real estate companies that offer discounts, but some industry observers who have worked at low-cost brokerages see some common mistakes among the low-cost models that have fizzled or faded.
They also say that pioneering low-cost models have helped pave the way for other companies offering alternative cost structures for services, and that industry participants are now generally more open to a variety of business models.
"Play by their rules"
"We learned that when you play in somebody else’s ballpark, you’ve got to play by their rules," said Burke Smith, who founded iPayOne, a real estate company that accepted a 1 percent commission for listing homes for sale, and offered $1 via multiple listing services for the cooperating broker who brought a buyer to the table.
That pricing structure, which led the company to "double-end," or represent both buyer and seller for about 25 percent of its listings, led to some angry calls and letters from industry competitors, and even some stolen real estate signs, Smith said.
"I learned the hard way. I tried to minimize the role of the agent by maximizing the role of technology and offering an alternative commission. That’s why I started iPayOne. I built a company that kind of removed agents from the process as much as possible," he said, and iPayOne was "not embraced by … peers in the industry."
He added, "I think the discounters that have gone out of business have proven that they didn’t embrace the importance of working with the traditional side of the industry."
Foxtons North America, for example, in 2004 structured its compensation model to a 3 percent total commission, with Foxtons receiving a 2 percent commission on listings and awarding a 1 percent commission to the broker on the buy-side of the transaction.
This commission imbalance — industry participants typically offer a larger (above 2 percent), more balanced share of the total commission to cooperating brokers on the buy-side — drew criticism from some Foxtons competitors, with some agents refusing to show Foxtons listings to clients and some agents offering an imbalanced commission split to Foxtons agents representing buyers.
Launched in March 2004, iPayOne was formed by a group of mortgage and real estate companies and offered a range of real estate-related services in addition to brokerage services.
The San Diego, Calif.-area company had an advertising contract with the San Diego Padres, a Major League Baseball team, and purchased naming rights to the San Diego Sports Arena. At one point, iPayOne grew to become the 10th-largest real estate brokerage in San Diego. In 2007, iPayOne ceased accepting new real estate listings.
Smith left iPayOne in 2006 to join Prudential California Realty, where he served as director of strategic development. This year he was hired as chief communications officer for HSA Home Warranty. He is also founder of YourNetCoach, a real estate marketing and technology coaching company.
Smith said he is planning to serve as a consultant in the relaunch of iPayOne as a sort of hybrid discount/traditional brokerage model.
He said the new company will be a "broker-friendly lead generation company that works with local real estate professionals to sell homes at a reduced commission," with plans to launch simultaneously on the East Coast and West Coast this summer. The company, he said, will provide "savings to the consumer through real estate and affiliated home products and services."
His experiences at Prudential and iPayOne helped shape his new view for business, Smith said.
"I think there is an absolute need to offer a discounted commission for listings, but you still need to offer a competitive cooperating broker commission … usually at least 2.5 percent. Where I think discounters go wrong is trying to change the rules of the ballpark you’re playing in," he said.
"Where I see the industry has to go is meeting somewhere in the middle. I think that both sides have it wrong — I think companies that have gone exclusively tech and virtual don’t understand how important the agent is to the consumer," he said, while other companies "don’t realize how important tech is to the agent and to the transaction."
He said that in his coaching sessions with agents, he tells them, "Technology will never replace you, but real estate agents using technology will. It’s not, ‘Point. Click. Sell a house.’ It’s an emotional process. You can’t take emotion out of this business; otherwise we will go the way of the travel agent."
Industry more accepting of low-cost models
Smith also noted that discounting of real estate services is more accepted today than when he launched iPayOne.
"If you were to compare 2005-06 to today … I would say that at least 50 percent of the agents (during the housing boom years) would not show a discount real estate company’s listing if there was another company’s listing in the neighborhood that was close enough," Smith said.
"They would choose not to show a discount listing. Whereas today, that number is less than 5 percent," he estimated. "The feedback I’ve gotten from agents: They will show whatever property is best for their client now."
Also, Smith said, more brokers are open to discounting their services than in the past. "I don’t think there really is any such thing as a discount broker because every broker discounts. Every broker makes concessions, whether they call it concessions or discounts — it’s the same thing."
In this changed real estate market, the brokers who can offer a full range of services — as well as discounts — should prosper, he said. "As we see this market turn around and change, the real driving force behind it will be the company that can meet the needs of both the client who wants the additional services and is willing to pay for it, and who wants the discount."
Russ Capper,a veteran technologist who founded eRealty.com as a discount brokerage in 1998, also said he believes the industry has opened up more to alternative business models.
"I think clearly the industry perhaps accepts more discounting today and takes it in stride compared to my era," said Capper. In the months following its launch, eRealty.com was pulled into litigation with the Austin Board of Realtors over whether the company’s use of multiple listing service data infringed on the copyright to the MLS data.
After a one-year battle, the dispute ended in a settlement, but "the drain on money and time was unbelievable," he recalled.
Capper said he believes there are several reasons that industry participants are more willing to accept discounters these days. "As time has gone on, people know that they can’t control pricing," he said.
Another large factor: "the god-awful market conditions," he said. "I just think the continued downslide of the market kind of took the air out of the tires in a lot of the tires in a lot of categories." So discounters may not be perceived to pose as great a threat as other factors. An Inman News survey of industry compensation practices does reflect that the industry is now generally far less concerned about discounters than in years past.
A real estate commission and compensation study that Inman News conducted from November 2008 to February 2009 revealed that "competition from agents offering discounts" was chosen by 24.3 percent of participants — the largest share among all of the response choices — as having the most impact on commission rates in 2008. In a follow-up survey conducted this year, 3.4 percent of respondents said competition from low-cost brokers had the biggest impact on their compensation in 2010.
The emergence of popular non-industry real estate portals, and widespread syndication of real estate listings to those sites, has also created a robust venue for all firms to get their listings seen by consumers, Capper said.
"Syndicators really allowed a person who’s not so concerned about cooperative brokerage to get his listing broadly out there, and therefore the buyer shows up in some form or fashion."
The lawsuit filed by the U.S. Department of Justice over the National Association of Realtors data display and distribution policies, which was settled in 2008, cannot be downplayed, Capper also noted.
But what is still missing from many conversations about discounts is discounting on the buy side of the transaction, Capper said. "When we launched eRealty most of the discounting was on the buy side. I think that differentiation is left out of way too many business and technology discussions."
So the amount that is paid on the buy-side to a cooperating brokerage may actually be less meaningful today than it was in the past, he said — "I think the ‘friendly to the industry’ (factor) is not nearly as important."
The rebate practice on the buy side of the transaction, as he found out in the early days of eRealty, can be confusing for clients. "It was hard to tell somebody that they’re going to rebate something that used to be for free," he said, as buyers often do not directly pay their agent — buyer’s agents are typically compensated based on a percentage of the sale’s price that the listing agent has agreed to offer to a cooperating broker. ZipRealty and Redfin are among the brokerage companies that do offer rebates to buyers.
Technology, efficiency, and long-term leads
While eRealty had sought to incorporate technology to lower the industry’s overhead expenses and make agents and the business of real estate more efficient, some real estate firms still have a wrong-headed approach to technology use. "I think that the industry, in general, still only wants to use technology to … try to attract a lead, like they always did in the newspaper," he said.
"The logic behind (eRealty) wasn’t just, ‘Hey, let’s screw with the industry and try to get some business by discounting. The theory was that you could have agents who could close five or six transactions a month rather than five or six a year."
The company at one point was paying salaries to its agents, and the discount proposition was in listing properties for a 4.5 percent total commission vs. a traditional 6 percent commission, with 3 percent offered to the buyer’s agent.
Capper said that eRealty had been a pioneer in recognizing the value of "incubation" in real estate: getting involved and staying involved with consumers early on in the home-search process by tracking their home-search activity.
In 2004, Houston-based eRealty was acquired by Prudential Real Estate Affiliates. The company had grown to 150 real estate agents and 13 markets by that time. While Prudential adopted aspects of the technology platform that had powered eRealty’s growth, the discount model did not take root with the new owner.
Capper, who was named president of Prudential Real Estate Services Co., where he led technology efforts for the company’s real estate franchisees through 2008, said it became clear that the technology backbone that eRealty brought to Prudential was more important than the discount proposition.
"We were beginning to feel that the actual discounted price, the rebate, was not as important as being able to demonstrate that we were real serious about collaborating online" with real estate consumers, and buyers in particular, he said.
Capper now participates in a BusinessMakers Radio Show, launched in May 2005, which features interviews with high-profile executives and innovators, and he hasn’t totally left the real estate arena. He said he is currently working as an adviser and consultant for several real estate and technology companies, and he noted that about six months ago he was approached by an innovator who "became disenchanted with the way the Realtor world worked and came up with a plan remarkably similar to the eRealty plan."
He noted that great ideas are not always enough to make a business big in the current landscape of innovation. "You’ve got to get it out of your mind — this attitude that ‘you build it and they will come.’ "
Aaron Farmer, who founded Austin-based Texas Discount Realty in 2000 and has fought several battles over the years against industry rules and state regulations that he believes impacted discount brokerages, said a key for his firm’s survival is in keeping overhead low.
Obstacles and opportunities for low-cost models
Commenting on the discounters that haven’t survived, Farmer said, "I think just too many probably spent too much on fixed costs and advertising that did not necessarily produce the highest return on investment." His firm offers a range of discounted services, from flat-fee to full service.
While some discount models seek higher productivity from agents to compensate for the lower rates charged for services, Farmer said it’s important to note, "There is a high burnout rate in this industry, in general. It is very difficult to maintain a high rate of production, year after year."
Also, it’s difficult to run a real estate business without having "real live agents in all the markets you are in, to make it work." Farmer has served on the board of directors for the Austin Board of Realtors for the past three years.
In the current economic downturn, "I do not personally see a lot of banks or short sales using discounters, just because the transaction is more labor intensive," and the prevalence of distressed properties in some markets may be taking a toll on discounters, he said.
Like Capper and Smith, Farmer said he believes traditional agents are "much more likely" to offer low-cost services to clients today than in past years. He said he heard an agent with a large brokerage company speaking on the radio about a plan to roll back the listing commission for consumers who also worked with the agent as buyers. "The agent then adamantly said that it was not a ‘discount’ but an ‘incentive,’ " Farmer said.
Corey Scholtka, owner, broker and CEO for Wisconsin flat-fee real estate brokerage BuyHomes.com, said he believes there will be another trend in more agents becoming brokers, which in turn will allow them to offer lower-priced services and "keep all of the commission to themselves," which allows them to "give more back to (the) client," he said.
Scholtka, agreeing with other low-cost real estate veterans, said it’s important for discounters to "work within the established MLS system and offer the typical co-broker fee to others in their marketplace" when listing properties in the MLS.
Some of the unsuccessful low-cost brokerages may have "failed to focus on the buyer-side commissions offered through the MLS to other companies," he said. He noted that there is some erosion of traditional buy-side commissions, because rebating is now more prevalent among buyer’s agents.
Another potential "fatal flaw" for discounters: "We have fewer ‘warm bodies’ working for us," Scholtka said, adding, "We have a lot less money available to promote our brand."
It’s generally a bad time to be in real estate because of falling home values in many markets, Scholtka said, though alternative models such as Exclusive Buyer Agents may find some leverage in the marketplace.
His advice to new alternative entrants in low-cost brokerage: "If you charge less commission, you have less to spend on advertising and marketing than the big guys — so watch your budgets." Another tip: "Keep an eye on the political influences on your industry."
Derek Eisenberg, broker-owner of Hackensack, N.J.-based Continental Real Estate Group Inc., a brokerage that offers flat-fee and traditional real estate services, said there are a range of reasons that some low-cost models have failed or fizzled, including "lack of market research; not listening to the public; (and) acting on what made sense to them instead of how the market behaves."
He added, "Most new models fail because they know a lot about the workings of the business but very little about what drives customers." His advice for low-cost brokers is to "listen to consumers by doing lots of market research and not acting impulsively based on what you think is so obvious."
There is a lot of opportunity for new companies to take root in a down market, he said, as "the market can only improve."
While real estate sellers may look to low-cost models as home values are on the decline, sellers may also be more "averse to risk and may not chance what they consider an unproven model" in such times — Eisenberg said he views these two factors as offsetting, "however there is less volume overall and that is what hurts low-fee brokers. Their margin is low and they need volume to sustain their pricing model."
Cohen, who after his Foxtons departure founded another discount company — Expert Realty in Florida, which morphed into a real estate marketing and lead-generation company that is no longer operating — said during a 2009 presentation that the market downturn is particularly tough for discount real estate companies "because in a down market people are desperate to sell."
"And in their mind they believe — whether it’s true or not, and in some cases it very well is — that the local agent of the big brand name can do a better job for them and they’re less likely to trust the sale of their home with a discounter," he said. While discount business models can be viable, Cohen said they are likely to only occupy a "small place" in the industry going forward.
Eisenberg said that in his own experience, working as a flat-fee broker who gets money upfront for services serves as a sort of hedge in this slow-moving market environment, as brokers who rely on the traditional commission-based model may not receive any payment if their clients fail to complete a home-sale transaction.
"I got paid vs. brokers working on contingencies who never got paid for their work because their listings never closed," he said.