Realtors engage in turf battle with discounters

Facing competition from discount firms that offer similar services for as little as half the price, real estate agents in the United States are promoting themselves with a familiar mantra: You get what you pay for.

If they hire traditional Realtors, customers will "have someone who knows how to market a home, who knows how to complete a transaction, not just someone who throws up a sign," says real estate agent Dusty Showers, who serves the Tampa, Fla., suburb of Palm Harbor.

But rising commissions, which have gone up with home prices, may boost arguments that Realtors are overrated and overpaid. "A lot of people are looking at that and going, 'What has changed so much that justified me spending literally tens of thousands of dollars to conclude a deal that I did just five years ago for half that amount?' " says Van Davis, chief executive officer of Foxtons, a discount brokerage in the Northeast.

At stake are the pocketbooks of the millions of Americans who buy homes each year, and the careers of the estimated 1 million real estate agents in the US.

Although Realtors facilitate transactions between homebuyers and homesellers, they've always been optional. You can buy or sell a home on your own, with no middleman, and the Internet has made it easier for buyers to check out once-secret lists of properties for sale. No longer do potential buyers have to rely on classified ads or neighborhood drives if they want to search for available homes on their own.

But doing it yourself is still hardly a cakewalk, says Todd Sinai, assistant professor of real estate at the University of Pennsylvania's Wharton School. Individual homesellers typically can't advertise on local versions of the Multiple Listing Service, the most influential database of homes for sale, and therefore may not attract enough potential buyers to start a bidding war, Mr. Sinai says. When Realtors get involved on the selling side, "the real big, useful thing they do is get the word out. If no one walks through your house, no one's going to make an offer for it."

In addition to providing access to listings services, Realtors offer market knowledge and negotiations savvy. "An individual buyer might buy a home once every five or 30 years, not very frequently," says economist Cynthia Kroll, who studies housing at the University of California at Berkeley's Haas School of Business. "A Realtor will be involved in many transactions each year."

But Realtor services aren't cheap. Typically, the two agents involved in a purchase divide the commission fee. In recent years, the average fees have gone down a bit to about 5 percent of the sale price of the home.

In some cases, Realtors may essentially pay for themselves by stirring up interest and negotiating a higher price, Sinai says. But there's no guarantee. "Are they less valuable when the market is hot and foot traffic is being drummed up anyway? Absolutely. Are they more valuable in softer markets where their network becomes more valuable? Absolutely."

As home prices go up in many parts of the US, commissions for real estate agents have risen, even as commission rates have dipped. A 5 percent commission on a $500,000 home in the overheated southern California market, for example, might top $25,000, compared to $15,000 if it had been sold several years ago at half the price and a 6 percent commission.

Into this market have come bargain-priced firms like ZipRealty, which refunds 20 percent of its commissions to homebuyers, and Foxtons, which advertises 3 percent commissions. Like any self-respecting discounter, the companies claim their commitment to efficiency lowers prices but doesn't hurt their services.

Foxtons, for example, assigns agents to buying or selling, not both, allowing for specialization, says Mr. Davis, the CEO. The buying agents average about 40 deals a year, says Davis, more than four times as many as the typical agent in the industry.

Critics of traditional real estate agents have embraced the discounters, saying they offer a more reasonable price considering how much legwork customers can do on their own for free. "Certainly, most people realize that a 6 percent commission - or even 5 percent - is nuts, given that e-mail alerts, Web-based home tours, and other services can easily give buyers and sellers as much information as their Realtors," wrote Douglas Gantenbein, a correspondent for the Economist, in a commentary for the online magazine Slate.

Some Realtors are certainly feeling a chill from the competition. But not Mr. Showers, the Florida Realtor, who says he has no intention of bargaining on his commission rates. "If someone doesn't see the value of working with me, I turn them down as a client," he says.

Showers adds that his home-selling customers get more than just a guide through the process. They also get a kind of filter. "You're dealing with serious buyers when you have a Realtor," he says. "When you're selling on your own or with a discounter, you attract the kind of people who go to a garage sale, looking for a discount."

Yet he acknowledges that full-cost Realtors aren't for everyone. "If [the owners] are not under any pressure to sell, then there's not anything to lose by trying to sell on their own or by using a discount broker."

There's no one right approach for everyone, says John Baen, professor of real estate at the University of North Texas. He advises home buyers and sellers to examine three options - a discounter, a traditional Realtor, and a do-it-yourself arrangement. "They need to search their heart, and find out which one they feel most comfortable and confident about."