Real-Estate Brokers Step Up
Rebates to Home Buyers

By James R. Hagerty
from The Wall Street Journal Online

As the real-estate market continues to cool, a growing number of brokers are doing what was until recently unthinkable. They are giving most of their commissions to buyers.

This novel pitch is catching on in some of the priciest real-estate markets in the country. In February, Seattle-based Redfin launched a service that offers to rebate two-thirds of the commission it receives for representing a home buyer. Redfin currently operates only in the Seattle area but plans to expand to San Francisco in May and to Los Angeles, San Diego, Boston and Washington later this year.

Meanwhile, BuySide Realty Inc., a new company based in Chicago, is expected to announce today the launch of a service offering home buyers rebates of 75% of the commissions it earns as a limited-service broker. The closely held company will initially operate throughout Illinois, Florida and California and aims to cover 39 states by the end of 2008.

People selling homes typically pay commissions of 5% to 6% of the price, which is split between brokers representing the buyer and seller. On a $300,000 home with a 3% cut for the broker representing the buyer, BuySide would earn $9,000 and pay 75% of that, or $6,750, as a rebate to the buyer.

These new rebaters join a long list of entrepreneurs who over the years have tried to reinvent the residential real-estate business, which generates more than $60 billion a year in commissions. A small number of real-estate brokers already offer cash rebates on their commissions as a way to attract customers, but the idea has never gone mainstream. The new firms are trying to make the idea more compelling by dangling bigger rebates, though they also offer significantly less service.

Consumers often grumble about real-estate commissions, particularly because the surge in home prices over the past decade has pumped up the amount pocketed by agents. Many small firms have begun offering to help owners sell homes for a flat fee, usually a few hundred dollars, rather than taking a percentage of the sale price.

But the traditional model has proved resilient. That's partly because buyers pay nothing directly to agents (the seller pays agents on both sides of the deal), while sellers tend to assume that a smart agent will fetch them a fancy price for their home.

Still, discounters keep hacking away at the traditional model, and some hope that the recent rise in interest rates and the housing-market slowdown will help them. Because buyers face pricier mortgages, they may be more eager to seek a rebate to help them afford a home, and with lower prices, sellers may be less willing to pay a standard commission.

Traditional brokers counter that consumers need more service in a weak market and are willing to pay for it. Indeed, agents from BuySide and Redfin don't drive buyers around to see houses. They leave the search work to their Internet-savvy customers, but help with making offers, negotiations and other technicalities of getting a real-estate deal done.

Some sizable firms -- notably ZipRealty Inc. and LendingTree, a unit of IAC/InterActiveCorp -- already promote rebates, and many small firms in the Los Angeles area advertise them heavily. But the idea of getting a rebate on a home remains little known elsewhere in the country. Fifteen states, including Missouri, New York and Oregon, ban or heavily restrict rebates on real-estate commissions.

One of the biggest problems for rebaters is persuading consumers that the offers are legitimate. "People often think it's too good to be true," says Daniel Rubén Odio-Páez, a real-estate agent who works in the Washington, D.C., area and operates a Web site, RebateReps.com, that connects buyers with agents willing to provide rebates. BuySide and Redfin hope to build up nationally known brands that would give rebates more credibility.

Ren and Jason Fuller of Bellevue, Wash., just received a check for about $12,000 for buying a three-bedroom house through Redfin. They found the house on their own but got help from Redfin in submitting the offer and coordinating the closing. "I liked being in control," says Ms. Fuller, who concedes that the bare-bones Redfin service might not have worked so well for someone moving from far away who needed help choosing a neighborhood.

BuySide's founders are brothers Joseph and Avi Fox, who in the 1990s set up an online stock brokerage firm, Web Street Inc., which was sold to E*Trade Financial Corp. for about $45 million in 2001.

Joseph Fox says he and his brother got the idea for BuySide a year ago while shopping for a home together in Santa Monica, Calif. Mr. Fox says they approached a real-estate agent who advised them to first look at homes online before spending time with the agent. Mr. Fox recalls asking, "Why are we doing his work?"

The premise of BuySide and other rebaters is that many consumers nowadays find the homes they want to buy online and should be able to share in the commission paid to the agent that helps them complete the transaction. BuySide customers will view homes on their own rather than being driven around by agents. The BuySide agents, to be paid salaries rather than commissions, will be available to answer questions and help guide the paperwork by telephone and email. The firm has 45 employees and offices in Chicago, Miami and San Diego.

"We're not for everyone," Mr. Fox says. Some first-time home buyers need lots of hand-holding, he says, and people relocating to a new city often want an agent with intimate knowledge of local schools and neighborhoods. But Mr. Fox believes a large number of people will embrace BuySide's limited service because it comes with a big rebate.

One possible hitch: Some agents who list homes for sale may be reluctant to deal with home shoppers who don't have their own agents to open lockboxes and show homes. Mr. Fox argues that home sellers will want their homes to be viewed by all potential buyers, especially in a cooling market. And some listing brokers also might offer a smaller slice of the total commission to BuySide than they do to more traditional firms.

As for the possibility of a backlash from traditional real-estate brokers, Mr. Fox says, "if we're not stepping on toes, we're not doing anything big here."