Winners and Losers from Amazon’s Toe into Real Estate

Technology companies from A to Z – or Amazon to Zillow – bank on the creative disruption of formerly staid industries. Real estate is no exception.

Amazon demonstrated it last week, entering a new partnership with Realogy Holdings, one of the largest US real estate brokerages. The companies created TurnKey, an innovative real estate service that shares prospects and sales commissions.

Amazon refers prospective buyers to Realogy, which pays Amazon a per-lead fee and then evaluates them. It sends serious buyers to sales agents with one of its companies, Coldwell Banker, Century 21 or Sotheby’s. If the prospect actually buy a house, Amazon gets a share of the commission and an opportunity to sell smart devices, home furnishings and services to the home buyer with a credit for up to $500.

For Amazon, the deal launches it into the lucrative world of real estate commissions, with a niche for online sales in an area that has relied on humans.

Realogy, in exchange, gains a home sale and share of the commission. The agent who negotiates the deal through hours of showings, financings and closings likely receives a reduced commission.

Getting Into a $100 Billion Pot

The deal represents the latest move by the online giant to get a piece of the annual $100 billion US spend on real estate commissions.

Other online companies, such as Redfin and Zillow, have already spent a decade chasing these commissions by offering better deals than agents.  Mortgage brokerage Redfin, for example, started with the idea of replacing real estate brokers but found the market difficult because most buyers prefer agents.

“More than 90% of homebuyers use the Internet today when shopping, and half do it from a mobile device, according to a survey by the National Association of Realtors,” the Seattle Times observedOpens a new window . “Yet the Internet hasn’t killed demand for real-estate agents: 88% of buyers in NAR’s survey bought their home through an agent, up from 69% in 2001.”

One Percent Commissions

Redfin has moved to lower seller’s commissions. In 2017, it guaranteed a 1% seller’s commission to houses listed on its site – far below the typical 2.5% to 6% of the sales price collected by listing agents. It reduces the seller’s fee by replacing the full service agent with itself.

Its database of extensive listings still gives the potential buyer options to browse through, guaranteeing it will collect the buyer’s fee in a sale.

“Redfin pays you to do more work and helps you with some tools,” consumer journalist Jim Wang saysOpens a new window . “(But a) rock-solid full service agent cannot be beat. Someone who is hungry, attentive, and knowledgeable will beat out every single time.”

Zillow – which began as a listing company alternative, providing more additional information than agents about valuations of surrounding homes and the neighborhood – has moved further to become an integral part of the home-selling business. It now offers the chance to sell directly to Zillow in what it calls an instant sale option.

Zillow sellers don’t have to put up with the inconvenience of showings, open houses and sticky closing dates, says real estate journalist Ellen ParisOpens a new window . She adds: “Need a quick 21-day escrow, Zillow will accommodate. Need to lease-back for a few weeks if you are buying another house and can’t close simultaneously, sell to Zillow.”

Zillow, however, like Redfin, has found that completely removing the agent is not popular with home buyers, and has instead focused on ensuring that its agents oversee the buying process, which also guarantees that it gets a cut of the commission.

Others’ Solutions: Cut the Agent Out

Other online real estate companies including Opendoor and Offerpad have tried to cut agents out altogether but interest in this kind of model will likely depend on the real estate market’s intensity. A lagging market could leave them with an oversupply of housing – or sellers feeling the service is too costly.

Like its predecessors, Amazon’s not trying to replace the invaluable services of a human agent. Rather, it’s trying to tilt the transaction to further sales for Amazon – its smart home devices, such as AlexaOpens a new window and Doorbell, for example.