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Internet drives down real estate commissions

May 20, 2004

Report says e-revolution threatens 'information monopoly'

A rise in Internet research by prospective home buyers is lowering real estate broker commissions in certain parts of the country, according to a research team's findings.

The research team, which included Rolf Wigand of University of Arkansas at Little Rock, conducted a survey of 4,600 real estate agents, selected at random, according to the news report. Wigand, along with Kevin Crowston of Syracuse University and Steve Sawyer of Pennsylvania State University, have studied the use of information technology in the real estate industry through a grant project funded by the National Science Foundation. Researchers have received two grants worth a total of $360,000 from the science foundation.

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Researchers reported that the traditional real estate industry views online brokers and agents as a threat, especially since more than 70 percent of all home buyers begin their search for a new home on the Internet. Competition between new and traditional markets is not as fierce as many expected, though, and less than 1 percent of the 5 million homes bought and sold each year are closed online.

The researchers also found that several factors keep consumers from going totally virtual: there is a lack of "face time" with online agents and brokers; buyers aren't always happy to engage in house hunting alone; and there is a perceived lack of customer service since online brokers seem less motivated, working for a steady salary rather than uncertain commissions.

Wigand said, "There was a time when it was assumed that agents would be 'disintermediated' -- bypassed -- as buyers and sellers find each other on the worldwide Web. The previous information monopoly on the Multiple Listing Service (MLS), for instance, has been broken, giving the consumer the freedom to search the MLS and web-based market alone. But technology has not entirely replaced personal interaction with agents."

The paper-intensive process of closing a home could eventually lead consumers to choose paperless processes, though for now the consumers still appear to value the "human touch," researchers reported.

"Buying a new home, typically coupled with a move to a new city -- the average American family moves every 7.5 years -- is a rather turbulent and stressful life event," Wigand said. "Agents can make the move less stressful, offering help that can't be found on the web or in the Yellow Pages."

Traditional agents are lowering their commissions, and "unbundling" their services to keep up with the real or perceived online competition, researchers reported. An agent might agree to list a house for a total 4.5 percent commission rather than a 6 percent or 7 percent commission in some cases, researchers said, while offering services such as open houses and printed fliers for an additional fee.

"This research demonstrates that the Internet is changing how people look for homes, as well as how they buy and sell their homes," Wigand said. "These developments clearly show that they are changing the real estate industry and are making the residential home market more transparent."

"We're still finishing up the analysis of the survey data," Crowston said Wednesday. "It's revealing some interesting implications for what factors make Realtors successful, so I'm hoping we get it out soon."

In a pilot study, released in March 2001, researchers found that mobile communications technologies were more heavily used among agents than Internet and computing technologies, and that residential agents and real estate firms were "potentially threatened" by the introduction of new information and communication technologies that provide new ways for buyers and sellers to find one another.

"Web-based commerce is eroding the long-enjoyed information monopoly of real estate agents and electronic commerce applications have the potential to drastically change current practices in the real estate industry," the researchers noted.

Online brokers tend to demand lower commissions than traditional brokers charge, researchers also reported in the pilot study. The data for that report was based on survey responses from 153 real estate agents in a mid-sized city.

The research project is intended to show "how people and organizations in this industry work and how this work adapts and is affected by the use of information and communications technologies," according to a project overview.

The research effort is also intended to "provide a deeper scientific understanding of how work and (information and communications technologies) are interrelated and how organizations view information technologies as enablers of business goals," the overview states. "At the individual level, the researchers focus on changes in work design and social capital."

Copyright: Inman News Features



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