Rebates: A real estate rift

When it comes to real estate, the Internet sometimes seems like an electronic money-back coupon.

Numerous online real estate brokers now offer both buyers and sellers rebates as an inducement to get their business. It's one of the key strategies that several of the major Web-based services, such as ZipRealty Inc., Lending Tree, and Redfin, are using to try to compete against traditional commission-based real estate brokers.

Typically, these online agents will share a portion of the commission they receive in a transaction. ZipRealty, for example, offers customers 20 percent of the commission it receives for using the service.

"The savings to the consumer can be substantial," said Mark Sennott, chief executive of Sherborn-based HomeGift Realty Inc. "The buyer or seller of a $400,000 home can get a rebate of as much as $2,100 and still use a top agent from an established real estate company."

Sennott's firm rebates 70 percent of the referral fee it receives from the agents to whom it sends customers. HomeGift has an added twist to its marketing appeal: Customers have the choice of receiving the entire rebate, or donating all or a portion of it to nonprofit organizations such as Habitat for Humanity, WGBH, or other partners.

Rebates, however, are flash points in the sometimes vociferous debate between the real estate establishment and the Internet insurgents. A handful of states actually bar the practice of rebates, on the grounds they could be misused as kickbacks. The US Justice Department has challenged some of those bans, arguing they stifle competition among brokers.

Several states, indeed, repealed those bans in response to the government's pressure. But in Tennessee, regulators were on the verge of lifting its ban on cash rebates when, in June, the state Legislature, with the support of the realtors' association, voted the ban into state law.

In a May letter to the Tennessee House Speaker during the debate, a Justice Department lawyer said the proposed ban "would impede real estate brokers from competing on price, which in turn would cause Tennesseans to pay more in real estate broker fees."

Separately, the Justice Department has a long-running antitrust suit against the National Association of Realtors, alleging the group has a policy that allows brokers to withhold listings from Web-based agents, stifling competition and choices for consumers who use those online services.

"We believe our policy is lawful and that the court will find it lawful," said the Realtors group's general counsel, Laurie Janik. "There's no harm to the consumer and it's not anticompetitive; there are listings everywhere on Internet; consumers have no problem finding property listings on the Internet."

The arguments outside the courthouse and state houses are even more intense, some days.

The Web-based companies contend traditional brokers hate them because they offer wide access to the stock-in-trade of the industry -- listings -- and try to save consumers money by challenging the industry's model of 5 to 6 percent commissions; Redfin, for example, said it pays its agents a salary and a bonus based on consumer satisfaction.

The agency-based brokers, meanwhile, bristle at such attacks, contending they do all the heavy lifting on marketing and selling a home, and then have to share a hefty portion of its sales commission to Web companies for referring clients to sellers.

One of the lightning rods in that debate is Redfin chief executive Glenn Kelman, who in his company's blog, said of his critics: "They hate our model, and wish our customers would drop dead. Unfortunately, for those listing agents, our customers tend to be highly qualified buyers who are usually going to submit the best offer (especially since they have $10,000-plus in commission refund to sweeten the deal)."

But establishment brokers question whether a rebate really is in customers' best interests.

"Online rebates put cash in consumers' pocket, but what is the flip side?" asked Blanche Evans, author of The National Association of Realtors Guide to Home Buying. For those online brokerages that act only as a referral and not as an agent, Evans said the referral fee can limit the flexibility of the agent who eventually does handle the sale.

"Don't be surprised to learn that your agent can't negotiate a lower commission or may reduce the level of service they provide because they owe the rebate company 35 percent of their commission, for the pleasure of being introduced to you," she said. "Commissions are for the brokers; that's what they are working for. You could say that consumers ought to participate in all commissions, but why should they? If a consumer participates in a commission, that's less for the broker. And sooner or later, the broker has to cut back on something to stay profitable, and that is usually labor."

She said it may also be cheaper for buyers to forgo getting a rebate, and instead try to bargain the home-sale price down by a similar amount -- resulting in a smaller loan and faster equity buildup.

But Redfin, for one, contended its customers can have it both ways -- good purchase prices and money back in the form of a rebate. The company conducted a study of its customer transactions in the Seattle area, and said its buyers, on average, paid below asking price, and below what customers of traditional brokers paid for homes -- a study that, not surprisingly, is hotly contested.

Others suggest the whole practice of hawking rebates, the banner ads that are the blinking neon of the Internet, is undignified.

Michael Eggert, a Boston real estate attorney with Pinta and Eggert LLP, said: "The more of this stuff that goes on, the more the realtor becomes like a car salesman. It degrades the professionalism of the business."

Given that rebates have proliferated and are now taking many forms, not just in cash but gifts cards as well, some industry specialists said companies that offer them have to do a better job disclosing any potential trade-offs involved.

Jeremy Conaway of Recon Intelligence Services, a real estate consulting firm in Traverse City, Mich., said consumers need to know if companies have to cut back on the amount of service they provide because of the cost of providing the rebate.

"What impact is this having on the service?" he asked. "It's like signing up for a cellphone. You have no idea what you're getting."