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Low-priced Brokerage Is Shaking Up Real Estate
With his soft-spoken manner and carefully coiffed silver mane, veteran real estate executive Hal Ellis hardly fits the role of industry upstart.
But the 74-year-old founder and chief executive of CataList Homes Inc. is engaged in a well-funded and sometimes caustic campaign to upend the traditional way homes are sold in California.
His strategy: Charge home sellers half what most commission-based brokerages do -- 3% of the sales price instead of the standard 5% to 6% -- without scrimping on service.
Ellis' plan bucks the established brokerage system further by paying his agents as full-time salaried employees instead of independent contractors and using the CataList website as a consumer-friendly portal for all local housing-price data that until recently had been for brokers' eyes only.
"We knew that this kind of business model would be highly disruptive and evoke a response," said Ellis, who in 1958 co-founded Grubb & Ellis Co., a Bay Area commercial property management firm that grew into one of the nation's largest publicly traded commercial real estate services firms.
Ellis' goal is to make Hermosa Beach-based CataList a leading lower-priced, full-service alternative in California.
He says it is only a matter of time before the market forces down the cost of residential real estate transactions, as it did with securities trading and travel reservations. Ellis also is banking on pure pocketbook economics: As the housing market slows down and values stop rising as fast, home sellers may think twice about forking over a big chunk of their equity to a real estate agent.
But success will not come easily. Some competing agents are balking at showing CataList homes to potential buyers, and many home sellers continue to seek out better-known brokerages. With its lower commissions, CataList needs a large number of sales to turn a profit, , and it has had to spend a lot on marketing. Although CataList says it is profitable, it has declined to provide specifics.
The company has sold about 700 homes, mostly in the South Bay and Orange County, since opening its first office in Hermosa Beach in 2001. That is a fraction of the approximately 300,000 residential sales completed each year in Southern California. But CataList is gradually rolling out new office locations, with 10 in the Southland and plans for 40 more, including its first Northern California location, in the next two years.
Meanwhile, the closely held company says it is spending larger-than-average sums -- about $2,500 per customer -- to attract clients and promote its listings through slick brochures and expensive radio and newspaper ads. The goal, Ellis said, is to whittle the sum down to $1,000. By focusing on commission rates and free access to property listing information, CataList is taking on the real estate industry's hottest issues.
Soaring home prices and consumers' growing use of the Internet have spotlighted the high cost of selling a house. Realtors earned $60 billion in fees last year, and the industry standard commission of 5% to 6% has been the same for decades even as real estate agents have proliferated and more information is available for free on the Web.
Even the Justice Department has raised concerns about commission fees. The agency in September sued the National Assn. of Realtors over what it believes are anti-competitive policies that keep consumers' costs artificially high by hampering the ability of new competitors to join the real estate party. The Realtors group is vigorously defending itself, contending that its policies are fair and that competition in the industry is healthy. As it turns out, CataList is a member of the Realtors association even as the company challenges the industry's business model. Many CataList rivals declined to comment on the upstart.
Comparisons to other low-cost business success stories are never far from the lips of Ellis and his team, especially as they seek new rounds of investment to fund expansion. As they tell it, CataList is no different from Charles Schwab & Co. and Southwest Airlines -- companies that have attacked entrenched commission-based business models to become low-cost leaders.
"The parallels for real estate brokerage are almost perfect," said Dan Leemon, Schwab's former chief strategy officer who is a CataList board member and strategy advisor.
Before the rise of online discount stock trading, Leemon said, "the typical stockbroker would charge high prices and hoard information." Today's full-commission traditional real estate brokers are doing the same thing, he said, except that they are having a harder time controlling the key service they are selling: access to property listings. That, in Leemon's mind, is making their commission rates harder to justify.
"Schwab recognized that hoarding information and treating clients like children was a bad business model, and the same is true in the realty business," Leemon said.
The Realtors' group, which represents 1.2 million licensed professionals, maintains that changes in the market are already driving down commission rates, which averaged 5.1% in 2003, according to industry newsletter Real Trends. More recent statistics are not available.
To be sure, lower-priced real estate brokerages are nothing new. Help-U-Sell, Assist2Sell, ForSaleByOwner.com, ZipRealty Inc. and similar concerns all charge sellers flat fees or reduced commissions while offering varying degrees of service. Lately they have been using technology to share listings information with consumers on the premise that better informed customers will nix paying the standard commission and seek out alternative firms.
CataList's model is designed to bridge the gap between low fees and full service. A seller gets a detailed marketing strategy, including slick color brochures, prominent newspaper ads and a flashy presence on Realtor.com, one of the top free listings websites. The high-profile promotions are paid for by CataList, in contrast to the traditional brokerages that require their independent contractor Realtors to pick up the tab for marketing clients' properties.
That approach worked for Kathryn Lemon. She interviewed agents from several brokerages before settling on CataList to list her Marina del Rey townhome in August. Even though similar models were priced above $800,000, Lemon said CataList's market analysis determined that pricing her unit just below that amount would net a deal quickly and possibly spark a bidding war.
Within 10 days, her townhome was in escrow at $780,000, $1,000 above the asking price. Lemon began making plans for a fall cruise with the money she saved.
"The beauty of it was that you can price your house appropriately and still make money because you're not worried about all the out-of-pocket commission costs," Lemon said.
Increasing its odds of surviving in the long run, CataList has corralled a stable of top-flight private investors, largely because of Ellis. Real estate investment firm Marcus & Millichap has an 8% share. Strategic consultant Bain & Co., for whom Ellis' son Steve is worldwide managing director, has taken an equity stake in lieu of fees. Two Silicon Valley venture funds also have chipped in.
Steve Murray, an industry consultant and editor of Real Trends, said CataList's strategy of undercutting rivals on price represented a "particularly vicious" new form of competition that was threatening established brokerages. But in the end, he said, what matters is whether customers respond.
"If Hal Ellis sticks to his knitting and recruits well, provides good service and goes right to the consumer, the consumer will figure it out," Murray said.
So far, the collective market share of the nontraditional brokerages comes nowhere near that of the dominant, full-commission players. Prudential Real Estate, ReMax International and Cendant, which owns the Century 21, Coldwell Banker, Sotheby's and ERA brands, share more than 50% of the national real estate market and control the majority of Southern California property listings.
Their dominance is a problem for CataList, which tends to be lumped in with other low-priced brokers and is dismissed by the local leaders as a "discount" firm that is less than full service. Better-known brands have an easier time attracting clients.
Another problem is CataList's meager commission split. Despite any industry changes taking place, one practice that has not changed is how agents are paid. When a homeowner sells his home, half the commission goes to his listing broker and half goes to the brokerage of the agent who brought him a buyer.
By offering 1.5%, CataList is not winning over many of the region's full-commission buyers' agents.
"There's zero networking with other agents. Nobody wants to work with you because you're the bad guy," said Terri Dunn, a former CataList agent who worked at the brokerage for more than three years. She left in September after becoming disenchanted with the company's sellers-only business model that limits agents' income because it does not work with potential buyers.
She says that the lack of agent enthusiasm for CataList's listings is hurting its customers.
"You will have twice as many buyers looking at your home if it's not a CataList home," said Dunn, now an independent contractor with Shorewood Realtors, the largest brokerage in the South Bay that pays buyer-side agents a minimum of 2.5%.
To CataList executives, that is exactly the reason the traditional system is headed for a big change.
"Agents spend more time marketing themselves than providing the best possible service for their clients," said Michael Davin, CataList's chief marketing officer.
Open disdain for the traditional brokerage business is part of CataList's marketing strategy. Aggressive statements about "unscrupulous real estate agents" and their practices pepper the company's website, and its radio ads openly mock high-commission rivals.
For his part, Ellis encourages such anti-establishment fervor.
"You have to have that kind of passion," he said. "It's essential to our model."
Despite his long business career, Ellis still considers himself an entrepreneur who finds risk-taking a welcome challenge. After leaving Grubb & Ellis in 1992, he formed Ellis Partners, a San Francisco-based office development firm, with his children, Melinda Ellis Evers and James Ellis.
"There isn't any rocket science in our model. It can be copied," Hal Ellis said from his San Francisco office overlooking the city's storied financial district. "Our premier advantage is being among the first."
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At a glance
Company: CataList Homes
Headquarters: Hermosa Beach
Chairman and CEO: Hal Ellis
Year founded: 2001
Number of employees: 45
Number of offices: 10
Transactions since 2001: 700
Source: Times research