Tech or Touch? Business Model Showdown

Another round in the employee-independent contractor debate takes center stage at Real Estate Connect.

September 1, 2001

It makes a great story—straight out “High Noon.” On one side, the fiercely independent real estate salesperson, standing for the traditions of local market knowledge and years of personal contacts to provide top-level service to customers. On the other, the brash new kid in town, an employee of an Internet-based real estate company, offering the speed and reach of technology, but removed from the high level of personal service that is the industry’s pride. The full-commission sheriff and the discounting gunslinger square off on Main Street for the right to rule real estate sales.

But like many stories, a little truth has been added to a lot of fiction to enhance this drama. At least that seemed the case on the Main Street of the recent Real Estate Connect conference in San Francisco, where a CEO-heavy panel discussion of a business models that promised a showdown revealed more similarities than differences between the full-commission independent-contractor and the reduced-commission employee ways of selling real estate.

“People don’t want reduced services, but many feel that the compensation level [of current commission structures] is out of synch with actual service provided,” noted Russell Capper, CEO of eRealty, which offers Web-based sales options and licensed sales employees at commissions between 3 and 4.5 percent. Capper believes this changing attitude results from the increased business savvy of a consumer base that is more acquainted with business profit centers and corporate profit-and-loss statements. Capper was quick to point out that a lower commission price doesn’t necessarily mean the lowest price, only one consumers perceive as fair for the hours worked.

Nor are discounted commission structures limited to Internet-based brokerages. One large franchise that is trying to embrace both worlds is Coldwell Banker. In a separate presentation during the Real Estate Connect conference, President and CEO Alex Perriello gave the attendees details of a new limited service brokerage model called Blue Edge, which is being tested in Pittsburgh and Peoria, Ill. Blue Edge offers a two-tiered commission structure—2 percent, which includes a property listing on the Blue Edge Web site, but not on the local MLS; and 2 percent plus, under which the seller agrees to compensate a buyer’s representative if the property is sold through the MLS. If launched nationally, the limited-service business model will employ salaried, licensed “property marketing consultants” to list and promote homes as well as in-office support personnel to handle paperwork and move the transaction to closing. According to Perriello, the new company will be owned and operated by existing franchisees and will be targeted to the FSBO market.

And it’s not as if consumers have to give up all live assistance to gain a low fee structure. The faceless Internet discounter is hardly the reality. All three of the companies represented on the panel—eRealty, zipRealty, and YourHomeDirect—have licensed sales associates, who assist in marketing properties, as well as support personnel to track paperwork and get the transaction closed.

“We try to use high tech to provide high touch,” said zipRealty CEO Eric Danziger. Capper concurs, noting that his company’s clients want a live salesperson’s assistant at critical points in the transaction—setting a price, negotiating a purchase contract, and interpreting comparable sales figures.

The degree that consumers can and will shoulder the selling burden is still an unknown part of the reduced commission-full-service equation question. “There’s almost too much information out there on the Internet. Consumers need a broker to filter the data, as well as to hold their hands. They also need someone who knows about negotiation, disclosure, and getting the transaction closed,” said Ron Peltier, CEO of Homeservices.com, a full-service real estate companies with 165 offices.

“Time starvation” may also work against the model of consumers’ willingness to do more work in return for lower fees, noted Earl Lee, president of The Prudential Real Estate Affiliates. “Most people only do a few real estate transactions in their lives so they may not want to take the time to learn all the necessary tasks, even if that information is available on the Web.”

Inertia may be another powerful factor in keeping the traditional real estate model alive, said Lee. “The Internet has empowered consumers, but people don’t change their behavior easily.”

Ultimately, the move toward using an employee-reduced commission model may be less about consumers’ desire to save money than about brokerage companies’ desire to make some. “Brokers are only averaging $150 a transaction,” said eRealty’s Capper. “That’s not enough of a split.” Companies that rely on employee-salespeople such as e-realty retain a higher percentage of the transaction profits than is currently the norm in more traditional, independent-contractor based companies. In recent years, sales associates are usually receiving a higher percentage of the commission split than was the custom a decade ago. The result has been less money in brokerage coffers even during a real estate boom.

Diminishing margins and rising expenses for technology and other costs are squeezing brokers, agreed Peltier, who noted that the increasing interest in ancillary services among brokerage companies is a reflection of the need for more cash flow. “The ‘traditional’ brokerage company that only sells real estate is already dead. The margins are too narrow when compared with the cost of labor and the costs of doing business.” Peltier’s company offers mortgage origination and title insurance as well as sales and has plans to branch out further into maintenance and other home-related services.

And again, the online and traditional brokerage business models are not that far apart. E-realty, too, derives added income from ancillary services. “We have strategic alliances with a variety of allied service providers, and our salespeople direct customers to them for related services,” says Capper.

In the end, perhaps, “it’s not just the right business model; it’s the right real estate salespeople that make the difference,” concluded zipRealty’s Danzinger. As technology continues to affect the way people look for, buy, and sell homes, it seems increasingly like there’s room on real estate’s Main Street for everyone.

Mariwyn Evans

Mariwyn Evans is a former REALTOR® Magazine writer and editor, covering both residential brokerage and commercial real estate topics.

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