The Changing Role of the Residential Real Estate Broker

The emergence of online discount brokerages, unbundling of services, and disintermediation are three trends that will continue to challenge the traditional role of the real estate broker.

[powerpress: http://gsbm-med.pepperdine.edu/gbr/audio/fall2010/leib-realestate.mp3]

In recent years the Internet has enabled self-service components for real-estate buying and selling, such as the ability to search through listings of homes for sale. This has transformed the traditional role of the residential real estate broker. The purpose of this article is to examine how the information revolution of the Internet will transform business practices in the long run. To set the stage, we unveil three fundamental pressures that the real estate brokerage industry faces: discounted brokerages, disintermediation, and unbundled services, and provide a vision of the new role of a real estate broker in response to these pressures.

The Current Paradox: Internet-enabled Transparency but Low Competition

Online real estateThe advent of the Internet has changed the nature of interaction between buyers, sellers, and real estate agents. According to a 2007 California Association of Realtors® report, “Eighty-six percent of home buyers started using the Internet as part of their research process before selecting a specific home and before contacting a real estate agent.”[1] While in the past most home buyers and sellers contacted an agent from the start, today consumers are using the Internet to perform various parts of the transaction. Some of these activities include browsing for proprieties, researching schools and neighborhoods, looking-up home values, and using mortgage calculators.

Based on the informational nature of the real estate market and on the expected consequences of a more transparent market,[2] one would assume that these developments would make the industry more competitive, but, paradoxically, that has not been the case. The total buying and selling agent commissions for a home have remained at 5 to 6 percent, regardless of the listing price or marketing effort of the agent. According to research by Lawrence White at New York University, the standardization of commissions is a “troubling factor” and indicates that the real estate market lacks “vigorous competition.”[3] Two possible inhibitors of natural competition in the industry are the Multiple Listing Service (MLS) and the role of the agent in both the buy-side and sell-side.

The Multiple Listing Service (MLS) is a system that contains and distributes a comprehensive list of real estate properties for sale. To gain access to the MLS one must be a real estate agent or professional affiliate and pay a fee. Membership with the MLS is valuable because it gives the agent greater exposure to their listings, which increases the probability of making a sale. If sellers choose to avoid working with an agent to eliminate the 5 to 6 percent commission fee, they lose direct access to the MLS, which in turn reduces the ability to connect with a large pool of potential buyers. As a result, the MLS provides agents with value to their customers because they provide access to this comprehensive repository of property listings.

In addition to MLS exclusivity, the dual role of agents as brokers for both buyers and sellers helps maintain traditional brokerage fees. For example, a “high-fee-upholding agent who has a potential buyer may threaten to or actually boycott the listings of a price-cutting seller’s agent.”[3] The reverse scenario would also hold true in which a listing agent may boycott a fee-cutting agent with potential buyers. These agreements are informally made as agents make an effort to sustain a fixed-cost structure as opposed to the negotiable fee that is stated on the listing agreement.

Despite the lack of vigorous competition, the industry is already responding to the opportunities offered by the online channel. First, brokers are shifting their advertising spending to the Internet. According to Yahoo! Real Estate, by 2012 real estate agents will spend more on online media than any other ad source.[1] Second, by developing and maintaining realty sites of their own, real estate agents are able to increase the exposure of their listings to potential buyers without having to rely on buying agents.

Long-Term Pressures for the Residential Real Estate Broker

Based on the aforementioned trends, we contend that, in the long-term, the industry will redefine itself beyond a shift of advertising and business activities to the online channel. In the following sections, we identify three prevailing pressures that real estate brokers face, and predict how the role of the real estate broker of the future will change based on these pressures.

Unbundled Services

There is a growing demand for unbundled services in the industry, because home owners and potential buyers are more empowered. While some consumers may prefer a brokerage to handle the majority of the transaction, others may prefer to take on more responsibility themselves. Desktop publishing software has made it easy for home owners to create flyers and advertise themselves. Owners are also increasingly willing to host their own open houses, while buyers have access to online open house listings. This increasing ability of clients to perform some of the tasks necessary to sell their home creates pressures for brokers to unbundle their services and offer just the ones for which they can provide added value.

The Advent of Discount Brokerages

In response to the demand for unbundled services, since the late 1990s discount brokerages have emerged to offer reduced commissions to home owners if they perform some of the selling activities.[4] The pressure for reduced buying agent commissions has also increased in the current economic crisis. For example, some buyers will approach selling agents directly and negotiate a total commission below the traditional 5 to 6 percent. The properties involved are often listed on the MLS, so they are in direct competition with the traditional brokers.

ZipRealty and Redfin are online discount real estate brokers. On ZipRealty a $200,000 property earns a $6,000 commission from the seller, of which $1,200 is refunded to the buyer.[5] Redfin offers comprehensive listing information with maps, pictures, and price graphs that bring transparency to both sellers and buyers, and it also discounts selling and buying agent commissions in the form of refunds.

The online discount brokerage business model is still relatively new, but has gained traction in recent years. From 2007 to 2008, ZipRealty saw a 23 percent increase in homes sales while nationwide home prices were down 13 percent. In addition, in February 2009, traffic to ZipRealty’s Web site was up 74 percent year over year to 1.8 million visitors, placing it ahead of broker Web sites such as RE/MAX and Century 21.[5]

Disintermediation

An agent supports and executes transactions by matching supply with demand. Intermediaries improve the coordination between the market participants and help markets to reach what economists call the “market equilibrium.” The more buyers an intermediary serves, the higher its value is for sellers who want to use it as a distribution channel. While working with an intermediary can expose a seller to a greater number of potential buyers, the emergence of the online real estate market has challenged the survival of intermediaries because the Internet facilitates direct contact between sellers and buyers. The online channel has increased the ability of market participants to remove the middle-man, a phenomenon also known as disintermediation.

This threat to real estate brokerage has been present since the late 1990s. One example is Owners’ Network, a service that was established in May 1996.[6] In June 1997, Owners’ Network started to charge potential sellers to have data listed in the database. The fee ranged from $0 for limited information displayed for a short period of time, to $115 for a four-month ad displaying detailed information and pictures of the property. Access to the data was public and free of charge to all users. In August 1997 about 30,000 homes with a market value of $6 billion were listed. A virtual marketplace like this one allows buyers and sellers to bypass brokerage services and therefore threatens their disintermediation. Online sites like ForSaleByOwner.com have since emerged that provide support for sellers to prepare and execute a sale with no upfront commission attached to the service.

Analysis

To predict how the residential real estate industry will respond to these pressures, we should point out that the reaction so far is not surprising. In many other industries, established firms that feel the threat of the Internet retrench by avoiding the problem or trying to artificially raise barriers to entry.[7] Typically, entrepreneurial ventures like Redfin are the ones that actively pursue ground-breaking business models to adjust the industry to a new technological environment. We foresee that entrepreneurial innovations will morph real estate brokerage processes in the long run. To understand how this will happen, we analyzed the risk of disintermediation of traditional residential real estate brokerage by market segment and by stages in the real estate purchase process.

Buyers and sellers can be categorized as follows:

  • Delegator: A Delegator can be one or more of the following: 1) a high net-worth individual who finds value in the full service of a traditional broker; 2) a person who is pressed for time due to career and life circumstances; or 3) a cautious first-time home buyer or seller.
  • Middle-of-the-Road: A Middle of the Road buyer or seller is characterized by one or more of the following: 1) a desire to partially delegate, yet maintain a level of control; 2) past experience in selling or buying; or 3) the level of education to quickly understand the market.
  • Do-It-Yourself: A Do-It-Yourself buyer or seller is characterized by one or more of the following: 1) a strong ability to manage projects; 2) financial stress and a motivation to save on costs; or 3) significant experience in buying or selling.

Next, let us characterize the home-purchase process in three phases:

  • Information Phase: Prospective buyers identify and evaluate their needs, while sellers arrange to list their home for sale.
  • Negotiating Phase: Terms of the deal, such as price and conditions, are finalized and a contract is signed.
  • Execution Phase: Money and home keys are exchanged.

Table 2 classifies the risk of disintermediation for each market segment and phase of the transaction process with possible risk levels of Low, Low-Medium, Medium-High, or High. For example, Low means the function performed by a traditional real estate agent is of high value and is unlikely to be eliminated, while High means the function of the broker in the market segment will have little or no added value, so it is at a high risk of being disintermediated.

Table 2. Risk of Disintermediation of Real Estate Brokerage

Buying Agent

DelegatorMiddle RoadDo It Yourself
SearchLowMedium-HighHigh
NegotiationLowLow-MediumMedium
ExecutionLowLow

High

Selling Agent

Delegator
Middle Road
Do It Yourself
SearchLowLow-MediumHigh
Negotiation
LowLow-MediumMedium
Execution
LowLowHigh

Based on our analysis, the highest risk of disintermediation occurs within the Do-It-Yourself category. For example, Do-It-Yourself sellers will conduct a search for potential buyers on their own by listing the home, creating signs, posting newspaper ads, and hosting open houses. On the other hand, a Delegator benefits from a realtor’s professional marketing skills including high gloss advertisements in prestigious magazines, connections to buying agents, and MLS access. From the buyer’s side, a Do-It-Yourself buyer is willing and able to perform the search for a home on her own, although there may be a need for expertise to negotiate the final price and conditions with the seller.

The Broker of the Future

The emergence of online discount brokerages, unbundling of services, and disintermediation are three trends that will continue to challenge the traditional role of the real estate broker. We anticipate that consumers will increasingly prefer to choose the specific services they wish to obtain from a brokerage and pay a fee accordingly. As a result, the role of the agent will become fragmented, customized, and inevitably more transparent. As consumers demand more customization, new business models will emerge that offer brokerage services in à la carte mode, where the client chooses from a menu of services. In this manner, the real estate broker of the future will suit both the self-service and full-service needs of clients.

First movers will ultimately force the industry to transition into re-intermediation strategies to avoid disintermediation. Fueled by entrepreneurial ventures, we foresee the development of online brokerages that empower clients to self-select the level of service that they want. The successful first movers and players in the industry will:

  1. Create a business strategy based on customer segmentation, analogous to our breakdown of sellers and buyers into Do-It-Yourselves, Middle-of-the-Road, and Delegators.
  2. Empower buyers and sellers by allowing them to choose the level of service they desire in each phase: search, negotiation, and execution.
  3. Develop a fee structure that is tied to the bundle of services selected by the customer.
  4. Use advanced online technologies to develop online à la carte mechanisms that provide the client a transparent set of choices and fees to select from.
  5. Track online competition closely as emerging strategies and tactics continue to change.

In the short-term, traditional brokerages may be somewhat shielded due to the demand for expert agents that can collaborate with banks to sell the massive amount of bank-owned and short-sale homes in the market. However, we predict that in the long-run, innovative new entrants will gradually carve market share from MLS distribution. Traditional players will be forced to morph their business models and information sources, or they will become increasingly irrelevant. We are already seeing some partial competitive responses. The MLS has developed new quantitative and statistical tools that are only available to licensed agents, although some can be potentially replicated by discounted brokerages. Some brokers like RE/MAX have incorporated open access to MLS listings and advertise this service to the public in television media campaigns. However, those who do not embrace à la carte brokerage and unbundling techniques will become lagging followers and eventually they will be dis-intermediated.


[1] Yahoo! Real Estate, “Embracing the Online Real Estate Market,” 2008: http://l.yimg.com/d/lib/yre/embrac_the_online_re_mkt.pdf.

[2] Granados, N.F., Gupta, A., and Kauffman, R.J., “The Impact of IT on Market Information and Transparency: A Unified Theoretical Framework,” Journal of the Association for Information Systems, 7(3), (2006): pp. 148-178.

[3] White, Lawrence J., “The Residential Real Estate Brokerage Industry: What Would More Vigorous Competition Look Like? NYU, Law and Economics Research Paper No. 06-16 (2006). Available at SSRN: http://ssrn.com/abstract=895713.

[4] Crowston, K. and Wigand, R., “Real Estate War in Cyberspace: An Emerging Electronic Market?” Electronic Markets, 9(1 & 2), (2009): pp. 37-44.

[5] Palmeri, C., “Online Real Estate Brokers Retool,” BusinessWeek Online, 2009: http://www.businessweek.com/bwdaily/dnflash/content/apr2009/db2009042_138337.htm.

[6] Buxmann, P. and Gebauer, J., “Internet Based Intermediaries: The Case of the Real Estate Market,” Proceedings of the 6th European Conference on Information Systems, 1998, Aix-en-Provence, France.

[7] Granados, N. F., “IT-Enabled Information Transparency: A Strategic Approach,” Graziadio Business Report, 11(3), 2008: https://gbr.pepperdine.edu/083/transparency.html.

Authors of the article
Alexis Lieb, MBA
Alexis Lieb, MBA,

, is a candidate for a doctorate of Nursing. She received an MBA from Pepperdine University’s Graziadio School of Business and a BA from the University of California at Santa Cruz, with an emphasis in business administration and accounting. She has worked in public accounting providing audit and advisory services to public and private companies in the health, technology, and real estate sectors.

Tracey Nicholson, MBA
Tracey Nicholson, MBA,

, earned her master’s from Pepperdine University’s Graziadio School of Business and a BS from the University of Colorado at Boulder, with an emphasis in marketing and a certificate of Entrepreneurial Excellence. She is a real estate agent for a major real estate brokerage company in Orange County and previously worked in marketing at an investment management company.

Nelson Granados, PhD
Nelson Granados, PhD,

, is an associate professor of information systems at the Graziadio School of Business and Management at Pepperdine University. He received his PhD in information and decision sciences, M.S. in applied economics, and MBA from University of Minnesota. His research on market transparency has received multiple awards, including the 2007-2009 Julian Virtue Professorship, the “Best Publication of the Year” by senior scholars of the Information Systems field, and the “2006 Best Paper of the Year” awarded by the Journal for the Association for Information Systems. His work has appeared in multiple IS journals, including MIS Quarterly, Information Systems Research, Journal of Management Information Systems, and Decision Support Systems. His research has also appeared in premier news outlets such as the Wall Street Journal and Financial Times. Prior to his academic career, he worked as an airline revenue manager in Japan, the U.S., and Europe, and was also a product manager for enterprise systems at IBM Colombia.

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