The advent of internet technology is changing the residential real estate business on a fundamental level as technologically sophisticated discount brokers have started to take an increasingly larger slice of home sales pie.
Marketing a house involves the advertisement of information. Traditionally, brokers placed signs and flyers in front of homes and advertised in real estate magazines for each area. The glossy magazines were then placed at supermarket entrances and areas of heavy pedestrian traffic. The old-style advertisements were vague in offering information. Unless a prospective buyer was staring at a sign in a front yard, the buyer would have been hard-pressed to know where the property was located unless he was clairvoyant. The old print ads show a picture, and a faint description of the property heavy with adjectives.
The lack of information required a buyer to call the agent out of necessity. The agent then controlled access to the property, as well as the flow of information to the buyer offered by a seller.
Since laws regarding brokerage determine who is entitled to a commission based on listing and buyer representation contracts, and the answer to the question of who procured the sale, the traditional print ad helped to guarantee a broker would earn business. The broker was always in the loop. Multiple Listing Services were likewise designed to require that a prospective buyer contact the listing broker or a buyer’s agent in order to keep the broker in the business loop.
The discount broker has a different marketing model. Due to the fact that the internet permits a virtual tour of a property and exact pinpointing of a location by longitude and latitude, prospective buyers can perform a huge amount of research before ever calling the first real estate agent. For instance, Google has a map feature that permits a buyer to tour a geographical area looking for properties. Once you click on the listing ad, you then have access to photographs and videos, and as much information as the seller wants you to see. The discount broker’s website also makes it very easy for a buyer or seller to contract with the broker.
As part of the service, the discount broker uploads the home to websites including its own. The broker markets the home itself and the broker’s own website heavily. Once a prospective buyer Googles the area where she wants to buy her new home, she can find out a large amount of information from public databases including a local government’s Geographic Information System. In minutes, any buyer who can use a search engine can find the tax value of a house, the last sales price for the property, the value of improvements to the house, the zoning, and even the specific terms of any real property covenants on the house. Few in the last generation could find any of this information without a full service broker.
The sharing of information is encouraged, not limited, in the discount broker transaction. Instead of relying on the laws that grant a commission to an agent that is a procuring cause of a sale, the discount broker locks the client into a contract from the moment the relationship occurs. The old style broker had to get the client to sign a written engagement to help prove the existence of the relationship.
Some old-style brokers do not like the new model – to put it mildly. A better description would be to day they hate it. The reasons are varied. Part of the reason is probably because the internet model disfavors the technologically challenged. Also, the new model is threatening the old fee structure. Moreover, the discount broker is an information broker who controls access to the technology tools for marketing and finding properties. The very concept of what a real estate agent represents is at stake, and brokers that either do not understand why their profession exists in the first instance, or how to control the implements of the new technology, will go extinct. The new model is also threatening to eliminate a large number of brokers from the residential real estate profession because the efficiency of information sharing is now so great. One discount broker can service hundreds if not thousands of listings and literally replace a hundred brokers.
The commission disparity between the business models is an obvious source of rancor. Traditional real estate brokers charge a percentage based commission on the sale of a home. Brokers have charged a percentage of 7% for a typical sale of a single family home. If both the home seller and home buyer are both represented, the agents split the 7% commission. A discount real estate broker on the other hand typically charges a drastically lower fee – perhaps a flat fee of $500 to list a house, plus a 1% commission. Instead of having a $21,000 commission deducted from a $300,000 home transaction, the discount model could reduce the commission load to as low as $3,500.
This new invasion of technology into the residential real estate market will affect land use patterns and future market demands for residential properties. The only question is how. Residential land use over time is a function of market demand. On the one hand, technology may democratize the process of selecting desirable areas to live in some ways. “Steering,” which is the illegal activity of not showing a minority a particular area due to race, will be impossible in a world where the minority can easily circumvent the broker altogether, or nearly so. A contract can be made on a house without even the brokers ever seeing the buyer. What if race were always hidden behind the computer screen?
On the other hand, an opposite effect could also occur in that the digital divide may expand to influence the areas of who lives where. A person that does not have access to the internet, or refuses to participate in the new world, will either have to rely on a full service broker or live in areas where the digitally challenged will congregate. Will the new “ghettos” be areas where there is no wireless access and will the new real estate broker be a computer geek?
Atlanta Zoning & Development Examiner-Stuart Teague