Home On The Net
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By Penelope Patsuris
The real action on eBay these days is homes. That's right - real estate.
Check out this listing: two-bedroom home with all the trimmings (sauna, stone fireplace, skylights), set on 13 acres of land near Syracuse, N.Y. It's listed on eBay for $250,000.
Is Hawaii more your style? Dig the three-bedroom house in Kailua Kona listing for $200,000. Wanna-be retirees may be interested in a $136,000 Miami waterfront condo listing.
For now, at least, the property auctions on eBay (nasdaq: EBAY) aren't legally binding; they're more of a means for buyers and sellers to meet. But the eBay frenzy points to the future: The Net is going to change everything about the real estate business--the way buyers look, the way brokers sell, the role (and fee structure) lenders and lawyers adopt, even the way lowly termite inspectors operate.
Residential real estate is a huge industry. The total value of just the homes bought and sold in the U.S. in 1999 was roughly $850 billion, according to the National Association of Realtors (NAR), a trade organization. Services associated with the buying or selling of a house--the fees charged by the myriad real estate agents, lawyers, building inspectors and loan officers involved--typically add up to 10% of the purchase price, or nearly $85 billion last year. Already 40% of all U.S. home buyers do research online before buying, taking virtual house tours at 360House.com, comparing mortgage rates at E-Loan (nasdaq:EELN) and doing records searches at HomeBid.com.
With so much residential real estate migrating online, the industry is beginning to look like a $85 billion jump ball.
Likely winners will be the real estate and mortgage sites that forge close relationships with the offline industry powerhouses, such as HomeAdvisor, Homestore and E-Loan have done. A very clear winner is the consumer, who now has easy access to detailed property information and mortgage rate comparisons that give him more control over his domestic destiny than ever before.
Of course, offline real estate pros--a notoriously feisty breed--aren't taking the Internet threat lying down. Take Realtor.com, NAR's official site. Realtor.com, which is operated by HomeStore.com (nasdaq: HOMS), attempts to harness the power of the Web without siphoning off existing sales. The basic idea is to create new revenue streams: Realtor.com is charging brokers a fee to create customized Web pages and experimenting with e-commerce.
Whether or not real estate sites take money directly out of an offline real estate agent's pocket, they will do much to change the kind of services the veterans offer and the way a customer is charged for them. It used to be that real estate agents could count on a 7% commission simply because they were the gatekeepers of key data like home listings and property specs. The Web has eliminated that role, and so to earn their keep agents will have to provide other, less commodified services. "One thing is clear: There will lots more alternatives of how a consumer and a Realtor interact, and how the Realtor is paid," says Robert Moles, chief executive of the Cendant-owned (nyse:) Century 21 franchise.
Mollie Wasserman, a Boston-based broker for the Austin, Tex.-based franchise Keller Williams, thinks the onus is on her profession to provide "sophisticated fiduciary counsel." "If a Realtor sees their job as an information provider," she says, "they are going to be out of business. They need to provide guidance." And objective advice isn't always possible when you charge commissions, she explains. If someone's paying a real estate agent by the hour for advice about whether he should remodel or sell, a flat fee like that of an attorney or CPA will elicit an honest opinion unmotivated by the lure of a sales commission.
Like real estate commissions, lending rates are getting squeezed by a more informed market. That's significant since the value of total mortgages issued climbed to $1.3 trillion in 1999. Although sites like Iown.com and QuickenMortgage.com make it a snap to shop around and compare rates, the law requires that every loan be completed on paper.
"The offline mortgage brokers feel a ton of pressure from the research provided by Web sites," says Domainia.com CEO Steve Kropper. "People come in and quote a rate they got from LendingTree.com and ask them to match it, which they do even though their processing costs are higher than a Web site's, and it means lowering their take."
Such scenarios will only become more common. This year 13.2 million borrowers will use the Web to shop for mortgages, according to Jupiter Communications analyst Rob Sterling. Sterling says $155 billion worth of loans will be initiated online by 2003.
The margins of mortgage brokers may be getting crushed, but buyers will always need mortgages. Not so with attorneys, who often charge "closing costs" for handling all the paperwork associated with a sale. Some states require a lawyer to preside over a closing, but many states don't, creating an opportunity to cut out at least one cost altogether.
"The Internet won't make lawyers any cheaper," says Sterling. "But lawyers are there to handle the complexities of all these deals, and if the Web simplifies and streamlines the process enough, lawyers can be taken out of the process altogether."
Indeed, rather than simply bringing the home buying process online, buyers will conduct the entire transaction in an entirely different manner when the legal issues surrounding electronic documents and signatures are finally ironed out. "Why automate paper-based systems at all if you don't have to?" says Forrest Pafenberg, NAR's director of real estate finance research. "You don't want to get parochial about replicating what we do now."
For instance, current law requires that real estate agents provide clients with written estimates of closing costs, but it has yet to be determined whether an e-mail is a legal document. And when electronic signatures become binding, will consumers be able to change the terms of their mortgages without touching a piece of paper?
"There will be a radically different mortgage and real estate platform, and the players will be different," says Pafenberg. "They'll be the companies who've invested in technology, but they probably won't be dot-coms. They won't have any money."
That's what the traditional industry players are hoping for.
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