The Economist.com – 29 November, 2014
The internet hasn’t wiped out estate agents. But some online firms are still trying
STEP into an estate agency in small-town America and it is as if the internet had never been invented. Prospective buyers pop by in person to pore over printed floor-plans; fax machines cough up contracts; and viewings are set up by telephone.
The internet was supposed to be the great disintermediator. And of all the middlemen it should have wiped out by now, estate agents are among the least popular. This is especially so in America, where realtors, as they are called there, are far more expensive than in other rich countries. They charge sellers around 6% of the value of their homes, typically splitting this fee with agents representing the buyers. Yet most sellers still use them, and websites, like ForSaleByOwner, that offer to put them directly in touch with buyers have had limited success. Last year only 9% of home sales in America were conducted without an agent—down from 13% in 2008.
So far the most successful online property firms are “aggregator” websites, which bring together listings from many estate agents, charging them fees for hosting the ads. They are thus a further layer of intermediary, taking the place of the local newspapers that used to carry such ads.
In recent months there has been a bout of aggregation among the aggregators. In July the largest such portal in America, Zillow, bought its nearest rival, Trulia, for $3.5 billion. In September Rupert Murdoch’s News Corp, which already owns big aggregators in Australia and South-East Asia, spent $950m buying the parent company of Realtor.com, another big American portal. This week News Corp bought a stake in an Indian website, PropTiger, which has so far specialised in newly built homes.
In Britain, after an earlier consolidation, the property-aggregator business is dominated by two portals, Rightmove and Zoopla. A group of estate agents, disgruntled at the fees they have to pay this near-duopoly, is seeking to bust it with a new, agent-controlled portal, OnTheMarket, which starts in January. As in America, there have also been various attempts by online businesses to cut out the agents and link sellers directly to buyers. But, again, the agents—who typically charge less than 2% commission—have held their ground.
However, hope springs eternal, in the online world as in the property business. Auction.com is a website that has so far mostly auctioned portfolios of properties in, or close to, foreclosure, on behalf of lenders. It now hopes to persuade individual Americans to put their homes under the hammer. Few American or British householders sell their homes at auction, though it is a bit more common in Australia. The firm will launch its new service next year. Rick Sharga, an executive at Auction.com, confidently predicts that online auctions of homes will become the norm in America within a decade. He expects estate agents to remain involved in some form, though he says there will surely not be room in a transaction for both the 6% agents’ fee and the 5% his firm will charge to buyers.
Opendoor, an American startup which raised almost $10m from Silicon Valley investors in July, has a more radical proposal: answer some questions about your home, and we will make you a cash offer on the spot. The website, which will soon launch its service in Phoenix, Portland and Denver, will be taking substantial risks. It could be left with properties it cannot shift. If its valuations are too generous, it may have to sell at a loss; if they are too stingy, homeowners may spurn them. And the firm will need continued access to cheap credit as it buys homes that may take months to sell.
Estate agents’ chances of fending off competition will be stronger if they use the internet and information technology to become more responsive, efficient and cheap. That has been the strategy of Redfin, a Seattle-based property agent founded in 2004. It attracts most of its clients through its website, which offers 3D virtual tours of properties and lets buyers schedule viewings instantly. Most conventional agencies’ staff work on commission, and many are part-time; Redfin’s agents are full-time and salaried. All this allows Redfin to charge sellers around half the standard fee.
Other “digital-first” agents are springing up. Urban Compass, a New York-based startup, began by focusing on apartments for rent. Tenants pay several percentage points less than the standard fee of 15% of the annual rent, and can book viewings on a slick smartphone app.
The chances are that estate agents will still be around a generation from now. Sellers and landlords will still be moaning about them, but will still rely on their local knowledge, their help in arranging everything from viewings to finance, and their ability to drive a hard bargain. But the agents most likely to survive the threat from cheaper alternatives will be those that make the leap into the internet age.