Online brokers challenge traditions of real estate.

Just as ForSaleByOwner.com, an Internet based real estate company that provides tools to help consumers buy and sell homes without a traditional broker, was making inroads into many markets, the company got a letter from the California Dept. of Real Estate demanding that it stop operating in the state.

The reason? The state agency said companies could not advertise homes for sale without a real estate broker's license.

ForSaleByOwner.com sued California and won.

But its victory was just the tip of the iceberg.

In states across the country legislatures are passing legislation and local realtor groups are instituting policies to limit and block Internet-based real estate companies from operating in what their new competitors say is a futile attempt to hold back the wheels of progress.

Just as it has transformed many other industries, the Internet is changing the way that real estate is bought and sold, say these emerging Internet-based companies, and they believe they are being thwarted by traditional brokers seeking to maintain their hold on the industry.

"The reality is they're trying to find a way to stymie information and stymie growth," said Patrick Lashinsky, senior vice president for product strategy at Emeryville-based Zip Realty. "And they're trying to do it through anti-competitive means."

A range of companies, from Zip, which provides a hybrid brokerage service, to ForSaleByOwner.com, which utilizes the Internet exclusively, have cropped up to challenge the traditional industry. While their business models may differ, they all have one thing in common--fees and commission rates that are significantly lower than what traditional real estate brokers charge.

The newcomers believe that the resistance by the traditional industry boils down to dollars and cents--as these alternatives become more popular, they will force down the commissions of traditional brokers.

Not so say traditional brokers, who argue that selling a home requires a lot more skill than planting a placard in the front yard.

"My own personal philosophy is to provide a high level fiduciary relationship and you deserve to be paid for that," said Ron Ario, regional director of Keller Williams Realty's Central Southern California region based out of Woodland Hills. "When you really look at what agents do to earn their living, I think sometimes people would be quite surprised. You're going to have some sales that are easy, but you have some that are very complicated, and agents earn their keep."

Last year home sellers paid out about $60 billion in commissions, most of that to traditional brokers who charge an average of 5.5 percent for their services.

Traditional brokers say that as home values soared and buyers literally lined up for homes in the past several years, it may have sometimes looked as if the role of the broker was minimal. But they believe that as the market cools they can bring value to sellers that the discounters cannot.

"The number of real estate licensees and members of NAR (the National Association of Retailers) have doubled in the last three years," said Jay Belson, president and owner of Re/Max on the Boulevard, whose offices stretch from Studio City to Agoura Hills. "So once the market slows down and it takes a little bit more of a normal time to sell a house, the sellers are going to need someone who really knows the ropes and can get a deal on the table and get it closed. At that point, the strong, experienced agents will get their commissions and people will drop out of the business like flies."

Requiring services

Still, through their lobbying efforts and their policies with respect to property listings, many say, traditional broker groups have been trying to reduce the effectiveness of Internet-based real estate services, often by requiring brokers to provide a full menu of services in order to gain access to the MLS, multiple listing services that are used to match buyers with sellers.

In October, the Department of Justice filed an anti-trust suit against the NAR, a powerful lobbying group for the industry, charging that the group is attempting to hinder competition from discounters and other new broker models by allowing brokers to "opt-out" of the MLS listing.

"The NAR policy allows a broker to target his Web-based competitors and prevent them from displaying their listings on Web sites," said J. Bruce McDonald, deputy assistant attorney general in the DOJ's antitrust division, during a conference call. "You could see that it won't take long for a Web based broker's customers to realize that this broker's Web site is not too attractive if it cannot show all of the houses the customer might consider buying."

The NAR counters that it represents all real estate brokers, whether they operate on the Internet or not, and their concern is simply to make certain a broker and home seller can control the way the home is marketed.

"The listing broker has a fiduciary responsibility to that homeowner to market that property as they wish," said Steve Cook, a spokesman for the NAR. "If he loses that authority to do that on the Internet then the system breaks down. The MLS is not a public utility. It's a private data base of information about properties designed for professionals."

The group is expected to file a motion to dismiss the lawsuit today.

But the newcomers say that the group has an agenda that goes well beyond controlling a homeowner's right to market its property.

"The NAR is making two aggressive efforts to try to protect its turf," said Colby Sambrotto, COO of ForSaleByOwner.com. "One is the right of realtors to control whether listings appear. The other is the limiting of people like us to do this reduced commission listing. The NAR may not be scheming, but on a state-by-state basis representatives are making an effort to pass legislation that makes it harder for consumers to gain access to our services."

These newcomers believe that the pressure now coming down the pike from traditional brokers relates in part to what most see as a coming slowdown in the real estate market. They point out that, with fewer homes to sell, brokers will need to capture more of the business that does come on the market.

"The stakes are higher because there's probably going to be a slowing down in the total number of transactions," said Lashinsky. "For businesses to retain volume, they have to increase market share."

At the same time, these companies say that consumers will become more and more interested in less expensive alternatives as the real estate market stalls and home prices begin to fall.

Sambrotto points to the company's recent performance in Detroit, where, he said, the real estate market has slowed considerably.

"Real estate prices are depreciating, and we've never done better," Sambrotto said. "In a real hot market, there's a mindset that I'll just stick a sign in the yard and the house will sell itself and they may be right. When things are a little harder and it sits out there longer, they still don't want to give up that five or six percent commission so they'll turn to us."

SHELLY GARCIA

Senior Reporter