The Last Stand of the 6-Percenters?September 3, 2006The Last Stand of the 6-Percenters? By DAMON DARLINSeattleWHEN David and Annette Wolf decided that their family was outgrowing its Seattle area home, they also decided that they did not need much help finding a new one.They combed Internet listings of homes for sale until they spotted a four-bedroom house on a cul-de-sac with a three-car garage and 2.5 acres.But the seller’s agent refused to show it to them. Why would she turn away an eager buyer? Not because of the Wolfs’ race, creed or color. Instead, Mr. Wolf, a software engineering manager at the online directory InfoSpace, said he and his wife were shunnedonce the agent learned they used an online broker called Redfin.Mr. Wolf said they turned to Redfin because it gives two-thirds of its sales commission (which is usually 3 percent of the sale price) to its customers. “I didn’t want to pay 3 percent for the opening of a door,” he said. But customers like Mr. Wolf — affluent and comfortable with the Internet — are a frightening prospect for real estate agents who, as agroup, reap at least $60 billion a year in commission income.Redfin and other innovators, including ZipRealty and BuySideInc.com, are using technology to reduce costs and to save time for their brokers. Agents don’t find and recommend homes — customers do that on their own, using Internet listings — and that enables agents to charge less for the services they do provide, chiefly handling the paperwork and negotiations.The Internet has radically changed the way consumers buy books and airline tickets, tradestock and learn news. But the real estate industry has resisted change — and protected its commission structure — by controlling the information on its Multiple Listing Service database of properties for sale. “You can find out more on the Internet about an eBay Beanie Baby than you can about a $1 million house,” said Glenn Kelman, chief executive of Redfin, a licensed broker in Washington State and California.The M.L.S. is the only place that contains nearly all the homes for sale in a community. Only brokers can post there, but agents can also display selected information about a listing on their own Web sites and on Realtor.com, a site that works with the National Association of Realtors. Traditional agents still firmly control the M.L.S., which allows all participating brokers, including Redfin, to view almost every home for sale in a particular area, even those being offered through competitors’ agencies. But the typical 6 percent commission, paid out of the seller’s proceeds and split between the seller’s and buyer’s agents, is under attack because, as economists note, it does not serve consumers well. Economists who have studied the current system say that it also does little for most agents — except for a few stars, whose impressive earnings give hope to the large majority of less-successful agents and thus encourage them to protect the status quo. Rivals on the Internet say they do this by refusing to cooperate with buyers using Web-based brokers and by denying M.L.S. information to some online firms.THEY have not, as yet, fought back by reducing their commissions. And Paul B. Goodrich, the managing director of the Madrona Venture Group in Seattle, an investor in Redfin, says he thinks that they are unlikely ever to do so. “It will be hard for the real estate industry to change the way it compensates its agents,” he said. “If Coldwell Bankerannounced it was paying 1 percent commission to its agents, there would be a mass exodus.”As it turned out, the Wolfs’ offer was the highest of five bids made for the house they wanted, and they were able to buy it despite the balky broker. (They toured the house with a friend who is an agent.) They also received a $16,300 commission rebate from Redfin and became firm believers in online real estate brokers.But as the couple’s story shows, people who want to use Web-based brokers often have tofight to do so. Many are, and there are growing signs that they are succeeding. BuySideInc.com, an online buyer’s broker in Chicago that offers a 75 percent commission rebate, said that at one point 12 percent of its customers reported that traditional agents had refused to show houses to them. The rate is now down to about 6 percent, perhaps because of responses like this: One client who was denied a showing made an offer anyway that was contingent on getting a tour — a move intended to alert the seller to the refusing agent’s actions.“I’d like to have been the fly on the wall for the conversation between that seller and his agent,” said Joseph J. Fox, chief executive of BuySide and a founder of one of the earliestonline stock brokerage firms, WebStreet. “The amazing thing,” he added, “is that the selling agent still got paid and made $15,000 to $20,000.”In many cities, real estate agents have tried to restrict access to M.L.S. information or to limit its use on the database. Some have asked state legislatures to pass laws forcingbrokers to offer certain levels of service, a move that Mr. Kelman sees as intended to squeeze out discount brokers. “It’s a thousand tiny shackles on innovation,” he said.The Justice Department and the Federal Trade Commission have fought these tactics in Texas, Kentucky, Tennessee and Oklahoma, among other states, and the department is suing the National Association of Realtors, the powerful trade group of agents and brokers, over what it calls anticompetitive rules. “Where it comes to our attention that significantly anticompetitive state laws or regulations are under consideration, we approach state officials to advocate that they take into account the benefits to consumers of a more competitive approach,” said J. Bruce McDonald, deputy assistant attorney general for the antitrust division of the Justice Department. The battle by the traditional agents reveals how vulnerable the broker’s 6 percent commission has become. Agents are quick to point out that the average commission may be closer to 5 percent — a 17 percent decline over 10 years, they say — but no one knows for sure because no one collects data on that.In many cities, of course, even a one-point drop in commissions has been more than offset by soaring sale prices in recent years. In 1994, for example, a home in San Francisco that sold for nearly $500,000 earned a total of almost $30,000 for the
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