How will these innovative business models affect the real estate industry?

by Ward Lowe   All innovative real estate business models possess a common denominator: they must pass the consumer test. If customers don’t like the idea, they’ll ignore it. For example, realty dot-coms sprung up like weeds on the Internet, but supply exceeded consumer demand, and many closed shop.

While the world of real estate may not be ready for some innovations, change is inevitable. Traditional brokerages will continue to dominate real estate for some time, but people are finding new ways of doing business, and some are catching on. The question is, Which ones are going to make it? Only consumers can say for sure, but here are a few alternative real estate businesses that think they pass the test.

I could do that, but it’ll cost you extra

Texas Discount Realty (www.texasdiscountrealty.com) specializes in flat-fee, limited-service listings, which broker/owner Aaron Farmer estimates comprise 95% of his business. For $495, a seller gets a six-month listing in the local MLS and on the company’s site, a lockbox for his door, and a sign for his front yard. Other services, such as an option for an agent to review contracts, cost extra.

Farmer started the service last October, basing his business model on now-defunct Homebytes.com. "I describe Texas Discount Realty as a hybrid between a FSBO and a listing with a real estate agent," explains Farmer. "It’s an exclusive agency listing, so sellers can still sell it themselves and don’t have to pay commission, and they also get it in the MLS."

Currently, Farmer employs three agents, one each in Austin with about 35 listings, Houston with one listing, and San Antonio with about 10 listings. The agents work out of their homes, which minimizes the company’s overhead, helping it compete with larger organizations. But Farmer likes the niche he’s carved out.

"There are a lot of sellers out there ... who are experienced and know how the process works. Those are the people that come looking for us, and those are the people we’re going after."

Honey, I’m going down to the store to look at houses

Homebuyers exclusively rule at San Francisco-based Soma/Living (www.somaliving.com). The real estate services company, which was launched in 1998, wants to be a one-stop shop for buyers’ every need. This so-called concierge approach attempts to build customer relationships that go well beyond the closing date.

The unique Soma/Living experience begins when a buyer walks into one of the company’s six Bay Area stores. Inside are Internet kiosks where buyers can browse through listings and navigate a host of online homebuyer resources.

If the buyer is ready to speak to an agent, he signs a buyer’s rep agreement and sits down with a member of Soma/Living’s HomeTeam, comprised of a buyer’s agent, transaction manager, and managing broker. All members of the HomeTeam are salaried and receive bonuses based on the service provided to customers, not the amount of the sale. However, homebuyers still pay a real estate commission that Soma/Living splits with the seller or his agent.

The buyer’s agent shows listings and works to find the buyer a home; the transaction manager ensures no details are overlooked in the buyer’s purchase; the managing broker handles contracts and negotiations. In addition, Soma/Living is a licensed mortgage broker and offers to manage other third-party services for the buyer.

Soma/Living wants to empower homebuyers and strives to make the homebuying process fun, hoping that buyers will return for their next home purchase. And this month, the fun will be spreading across California with three new locations opening their doors. In addition, Soma/Living claims that stores are coming soon in Boston, Chicago, and New York.

Technology’s neat, but I like people, too

Pioneers of Web-based realty services found that man cannot live by Internet alone. Most consumers don’t want exclusively Internet-provided services, but rather a combination of traditional brokerage and online tools–a.k.a. "bricks and clicks." These hybrid models entice customers with low commissions, sales rebates, and a la carte services.

ERealty.com (www.erealty.com) hopes its business model equally appeals to both buyers and sellers. Launched in Houston in 1999, eRealty attempts to balance Internet technology with traditional REALTOR® expertise, putting consumers in control of the real estate transaction.

"The technology gives clients the freedom to do some of the work in advance, but also enables us to provide a higher level of customer service," asserts Kenn Stearns, director of e-business. On eRealty’s Web site, homebuyers can browse listings with virtual tours, find neighborhood and school information, and register to be notified via e-mail when a new listing matching their criteria appears. The company also offers a 1% cash rebate for buyers who close using an eRealty agent. And sellers are offered what the company calls a low commission to list with eRealty.

Whether someone’s buying or selling, eRealty wants to move at the customer’s pace and level of technological comfort. Clients can meet face-to-face with an agent early in the transaction or never; it’s up to the customer. "What people really like is the freedom to get a REALTOR® involved when they’re ready and when it’s right for them," says Stearns.

ERealty’s agents work on salary plus full benefits and sales incentives based on productivity, not dollar amounts. Plenty of customers have responded to eRealty’s service; for example, the Houston office in May 2001 closed 51 transactions and has 74 current listings. The company is committed to keeping real estate agents involved in the process. Stearns emphasizes that "eRealty ... does not have a FSBO hybrid or fee-for-service alternative. Ninety-seven percent of the transactions we closed in 2000 involved a co-op fee to a non-eRealty agent or broker."

Sold! To the REALTOR® in the back row

The Internet provides the ultimate medium for data sharing, but a feasible platform has yet to emerge that directly links buyers and sellers. However, homesbyAuction (www.homesbyauction.com) has devised a unique way for REALTORS® to share information and maintain their presence in online transactions. While not the first company to auction homes online, homesbyAuction schedules regularly occurring auctions and requires REALTOR® involvement.

HomesbyAuction, which is owned by Keller Williams Realty, enables REALTORS® to auction homes on behalf of their sellers and bid for homes on behalf of their buyers in an online auction. Right now, only Keller Williams listings are eligible for auction, but any REALTOR® can bid on behalf of a client on the listings after registering and attending a training class. (Both are free.)

The homes to be auctioned are available for viewing during a defined preview period, usually beginning no more than seven days before the auction. In addition to touring homes, this time gives buyers a chance to review seller inspections and any conditions imposed by sellers. Once underway, REALTORS® submit bids online and sellers’ agents can monitor the bids in real time.

HomesbyAuction has successfully conducted multiple auctions in El Paso and Austin, and expects to run regularly scheduled auctions in these markets. This month, the company will run its first auctions in Houston and San Antonio.

According to Vice President of Business Development David Tennant, what makes the auction process successful is that REALTORS® decide how it’s going to work. "REALTORS® are empowered to define their own system," says Tennant. "We bring the mechanism that the agents use for the auction, but they get to decide who they need to include in the process and when they need to include them."

Eventually, homesbyAuction wants to include listings from non-Keller Williams agents and hopes that the auction technology becomes a tool that all agents can use like MLS.

"Our system is really no different than the process REALTORS® use now, except that it helps them organize it and put together a better buying and selling process," explains Tennant. "Real estate agents still have to make it work."

You bring the printer, I’ll bring the paper

Just as innovation influences the systems real estate professionals use, it also affects the places where they conduct business. REALTORS® work from their offices, their homes, and sometimes between the two.

Austin’s Real Estate Alliance (www.re-al.com) has 29 licensees working out of an office that’s less than 1,000 square feet. No, the agents aren’t stacked against the walls; they all maintain home offices equipped with computers, fax machines, and other business tools. Real Estate Alliance runs GoldMine contact management software to keep employees informed of transactions’ status and client leads, and the agents synchronize their computers to the program across the Internet. A company server uses the agents’ cellular phones as their office extensions, so callers can contact anyone via a central phone number.

"People have always talked about using technology to create a virtual office, and I feel that no one has ever really done it," asserts President/Broker Joe Bryson. "I think we’re as close as you can get to a true virtual office."

Real Estate Alliance does maintain four workstations in the main office for agents to meet with clients, as well as a huge media room that serves as a theater for virtual tours. Bryson admits there is a technology learning curve at Real Estate Alliance not often seen at other brokerages, but most of his agents are "techies" willing to invest time in training.

In the future, Bryson plans to expand his operation and is currently upgrading his three servers to handle the anticipated increased demand. "Technology’s just a tool, and we’ve taken that tool and advanced it further than anybody I’ve seen," says Bryson.

Technology and the Internet may facilitate alternative business arrangements, but they’re not an essential element to every innovative business model. Real Estate One in Midland operates as a limited liability partnership comprised of 10 brokers–all under the same roof.

Each of the 10 offices does business as an independent broker with their own staff; however, they share a receptionist, utilities, office supplies, and other overhead. The cooperative is managed by a team of three of the 10 brokers with one of the three replaced every January. The management team is responsible for the accounting, office operations, and advertising, which is done both collectively and independently.

While their arrangement isn’t based on technology, Real Estate One has invested in the latest phone systems and computer networks. But technology can’t replace personal dynamics, as R.C. (Skeet) Doss, one of the 10 brokers in the co-op, explains: "There’s a lot of give and take in a deal like this. Who we picked to participate and how it’s set up has made it work."

The future of real estate

Ideas for business models that represent a more radical departure from traditional brokerage also exist–though they are still in the theoretical stage. The so-called NASDAQ (National Association of Securities Dealers Automated Quotations system) model involves the direct exchange of assets–real estate, in this case–between a buyer and seller through an electronic intermediary.

Brokerages or financial institutions would maintain an inventory of homes by directly buying them from sellers. Buyers would select homes from this inventory and purchase them from the brokerages. All of these transactions would happen electronically like commodities, lowering transaction costs.

But the NASDAQ model still exists only in theory and would require massive review and new regulations, not to mention entities with the capital to buy large numbers of homes without prospective buyers.

Whatever form future real estate transactions take, it’s going to evolve slowly. Today’s radical new idea may be incorporated into traditional brokerages, or it may begin a new way of doing business. Nobody knows. But the gradual evolution of the real estate business won’t happen without consumer and REALTOR® input.

Change is inevitable, but many new trends and innovations will come and go before the best ones are adopted by the real estate industry. Until then, consumers will determine if a new idea passes the test.

Photo illustration by Joel Mathews; photos © Corbis Images.

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