After closing offices in 12 markets and shedding 700 agents during the first quarter, ZipRealty says it will no longer offer commission rebates to buyers in the 23 markets where it continues to operate brokerage offices. The move is part of an overall strategy to achieve profitability.

The decision to eliminate buyer rebates — a hallmark of the company since it was founded in 1999 — follows pilot testing in four markets. At the end of January, ZipRealty stopped offering buyer rebates in Austin, Texas; Raleigh-Durham, N.C.; Richmond, Va.; and Vancouver, Wash.

ZipRealty CEO Lanny Baker said that buyer rebates were instrumental in establishing the brokerage’s name and market share.

But the pilot testing and customer surveys demonstrate that the company’s website — which offers sophisticated listings search and market evaluation tools — and the experience and skill of its agents "represent a great value to consumers without the rebate."

The buyer rebate — currently 20 percent in most ZipRealty markets — will be available only to clients who have or will enter into a contract to purchase a home by July 15 and who close escrow by Aug. 31, 2011.

ZipRealty will continue to offer sellers, who represent less than 10 percent of the brokerage’s clients, a competitive fee that’s typically 1 percent below the going rate for the market, with a $2,000 minimum.

Baker acknowledged that some may think of ZipRealty "as having powered our business to date off of our website, our technology, and our rebate, and there could be questions about taking one leg of that formula out."

But as ZipRealty continues to attract quality agents, he said, "the value of services we provide is (also) outstanding, and very competitive."

Although Baker declined to say whether ZipRealty agents had a harder time landing clients in the pilot markets where it’s already eliminated buyer rebates, "It’s our goal to not see any decline in transactions," he said. ZipRealty has never offered buyer rebates in Portland, because Oregon is one of 10 states that ban the practice.

The decision to eliminate buyer rebates also takes into account feedback from ZipRealty agents, who until 2010 were typically employees but are now independent contractors, Baker said. The shift to independent contractor relationships — which began in February 2010 and was completed in January of this year — has helped the company attract and retain a more experienced agent force.

When agents were company employees, Baker said, ZipRealty "used to dictate quite a bit about how they ran their business." Eliminating the buyer rebate "elevates the image of the company and the image of the agents" and better aligns the company’s interests with those of its agents, Baker said.

ZipRealty posted a $12.9 million loss in 2009 and a $15.5 million loss in 2010, and Baker said eliminating the rebate is part of the company’s overall strategy for becoming profitable.

That strategy also includes the launch of a more consumer-friendly website with easier access to real estate information, the introduction of new mobile applications, and referral partnerships with brokerages in two markets.

Like Redfin, another high-profile technology-based brokerage, ZipRealty attracts buyers by offering them access to deeper listing data through Virtual Office Websites, or VOWs. VOW data rivals what brokers and agents see when they log in to their multiple listing service (MLS), including recent sales of comparable properties, previous listing and sale prices, and the amount of time a property has been on the market.

At the end of April, ZipRealty said its VOW site had approximately 2.4 million active registered users who had accessed the website within the last year. Web metrics firm Experian Hitwise ranked ZipRealty’s website as the 11th most popular real estate site in May — higher than any other brokerage or real estate franchisor listing portal.

Real Trends ranked ZipRealty as the fifth largest brokerage by transaction volume in 2010. But that was before ZipRealty announced in January that it was pulling out of 12 markets, including five in Florida (Jacksonville, Miami, Palm Beach, Tampa, and Naples) plus Fresno, Calif.; Charlotte, N.C.; Hartford, Conn.; Minneapolis; Virginia Beach, Va.; Atlanta; and Tucson, Ariz.

In Atlanta and Tucson, ZipRealty has moved to a "Powered by ZipRealty" referral model, providing leads to Better Homes and Gardens Real Estate Metro Brokers in Atlanta and Long Realty Co. in Tucson. In those markets, ZipRealty’s partners feed listings to the brokerage’s website, and ZipRealty earns referral fees from leads it sends back to the brokers.

The arrangement also means that has listings data in 25 markets: the 23 markets the company operates brokerage offices in, plus Atlanta and Tucson.

Redfin, which recently announced it’s experimenting with reduced buyer rebates in the Boston market, is using a similar referral strategy to expand into new markets, opening an office to gain access to the MLS and referring leads to "partner agents" at other companies that provide 15 percent commission rebates subject to a minimum commission of $2,500.

Although noncommission revenue has traditionally represented less than 5 percent of ZipRealty’s net revenue, that threshold was exceeded in the fourth quarter of 2010 and the first quarter of 2011, the company said in its most recent quarterly report to investors.

ZipRealty said it boosted revenue from transaction referrals and corporate marketing agreements, lead generation and advertising by 43 percent from a year ago, to $1.35 million.

First quarter net revenue was down 23 percent from a year ago, to $19.7 million, as closed transactions plummeted 25.8 percent to 3,636. That reflected a nearly 20 percent year-over-year decline in agent headcount, to 2,422 at the end of March.

Looking only at the 23 markets in which ZipRealty still operates, transactions were down 12.2 percent, falling from 3,904 during first quarter of 2010 to 3,428 during January, February and March of this year.

On the expense side, ZipRealty cut spending on product development by 19.3 percent from a year ago, to $1.95 million, largely through headcount reductions. As a percentage of net revenue, product development expenses were actually up slightly from a year ago.

The same was true of sales and marketing expenses, which were down 24.2 percent from a year ago, to $8.1 million, but which equaled 37.3 percent of net revenues, up from 35.2 percent a year ago.

The deepest cuts were in general and administrative expenses, which ZipRealty managed to cut by 34.7 percent from a year ago, to $2.36 million — a figure that represented 11.9 percent of net revenue, down from 14 percent a year ago.

Nevertheless, ZipRealty posted a $5.9 million net loss for the quarter, only slightly less than the $6.2 million loss during the first quarter of 2010. But earnings before interest, taxes, depreciation and amortization (EBITDA) improved from a $5 million loss a year ago to a $2.8 million adjusted EBITDA loss for the first quarter of 2011.

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