By now everyone knows the Internet hasn’t lived up to its early promise of “changing everything.” But to those who are watching closely, it is quietly setting up a seismic event in how the American dream of home ownership is achieved. A little-noticed survey released last month by the California Association of Realtors reported that last year, for the first time ever, more than half of all home buyers used the Internet “as a significant part of the home buying process.”

For those of us reading the proverbial tea leaves, this is a major turning point. After all, the collective service businesses that serve home buyers – including real estate agents, mortgage brokers, attorneys, title insurers, contractors and others – collectively represent more than a trillion dollars of U.S. GDP annually and are the lifeblood of the US economy.

As technology increasingly empowers buyers to learn more about all aspects of buying a home and gives them the ability to “shop around” for the best deal, certain things truly are changing dramatically. More than ever, savvy home buyers are using the internet to research everything from the MLS to mortgage rates to neighborhoods where they might like to live. What will follow this trend is a fundamental change in the way real estate and related services are marketed and sold to consumers.

One place where this trend will create waves sooner rather than later is with the services of real estate agents. As buyers use the internet to search for their homes, the value of a real estate agent is shifting from finding a home to closing the deal – providing valuable advice on bid offers, contract negotiations, home inspections, mortgage shopping, etc. For an agent, this means all clients are not created equal. For instance, the California Association of Realtors survey shows internet home buyers buy their homes four times as quickly as a traditional buyer after contacting an agent.

But even as buyers are doing more of their own research on the internet, agents’ compensation remains the same. With a fixed commission, agents earn money regardless of how much or little time they spend with a client. The agent who sells a $200,000 home might work just as hard as the agent who sells an $800,000 home but typically earns 75% less. If the way in which the internet has altered competition in similar service industries holds true for real estate, that commission structure may be a thing of the past.

Some agents are now seeking out the new, more educated home buyer and rewarding them by working for compensation that reflects the level of service provided. Discounted listing fees have long been available to sellers, but now buyer’s agents are presenting educated buyers with cash rebates at the closing table. Since these buyers take less time to find a home, agents can move more quickly in closing the final stages of the transaction.

Travel agents had a similar experience with the Internet. Travel websites gave consumers the ability to search for tickets and accommodations on their own, creating a new era in affordable business and leisure travel. Airlines were forced to compete by scaling back the share of money paid to resellers of their tickets. By cutting costs of the “middle man,” the entire industry was able to lower prices. In the end, consumers benefited greatly. Successful travel agents now have to compete by providing unique advice and information to their clients beyond shopping for the lowest price tickets and accommodations.

Likewise, home buyer rebates hold promise to bring a new era of low-cost, efficient and value-added services to the real estate industry. By teaching home buyers to use internet-based tools that were previously unavailable to them, agents will specialize in the aspects of the deal which the buyer can’t easily perform themselves. The most successful agents will embrace this model of client service because educated clients will make better choices, be easier to serve and generate repeat and referral business.

Rebating part of the commission to today’s more educated home buyer will breathe new life into an industry where agents have clung to an outdated compensation model for far too long. The agent compensation model in place today was devised when home prices were far below today’s levels. For sure, many agents are well worth the compensation they are paid. But very soon, they should prepare to justify it to their clients. Just ask a travel agent.

Published: August 12, 2004

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