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Amid a slower housing market, Scott Thomas Sr. thinks he has found a real estate model that will quickly catch on in Greater Des Moines.

The 14-year real estate broker is starting a Homes By Owner franchise that will offer a range of services, including a listing on the multiple listing service (MLS) and an advertisement in a new magazine for flat rates under $1,000.

But he’s not the first to try a fee-for-service model instead of the traditional full-service commission-based model that dominates Central Iowa’s real estate market. One firm has found success despite some friction with the Des Moines Area Association of Realtors (DMAAR), which runs the local MLS, and another has used it as a way to get more commission business.

“The concept is not new,” said Art Cox, head of the University of Northern Iowa’s real estate program, though it has been slow to catch on here.

“I’m sure there’s a need,” Cox said. “But it’s probably a smaller niche than it is in some other markets, especially large markets where the relationships are not as well established between the consumers and real estate firms.”

New competition

Thomas believes his model is unique in that it offers home sellers access to the MLS without paying commission. He also will feature their properties in a monthly magazine, which he claims is the only real estate publication that will accept advertisements from people who are selling their own homes.

His packages are cheaper than those of other flat-fee brokerages in town, with the most expensive being $957. All of the packages include a yard sign, a Web site and magazine listings, a personal number potential buyers can call for a recording providing details about the home, a kit on how to sell a home and help with forms, contracts and disclosures. However, sellers are responsible for actually selling their home, such as hosting open houses, and have to negotiate the buyer’s agent’s fee.

With the slowing economy, Thomas said not paying the 7 percent commission out of the purchase of the house could make a big difference. “I felt like there was a huge niche that wasn’t being used here with this hybrid model,” he said.

Thomas has placed more than 90 listings on the MLS since opening the franchise a few months ago. His first magazine is scheduled to come out in August with 40 to 60 listings, and he has more than 550 listings connected to his Web site.

He came up with the “for sale by owner” model after seeing it work well in Kansas City to the point that the franchise owner there has opened three retail stores. He bought the Homes By Owner franchise rights to bring creditability to his firm and will expand the concept in Iowa, with franchise rights to the Cedar Rapids and Iowa City markets.

Some resistance

The average commission rate nationally is 5.2 percent; Iowa’s average has remained steady at about 7 percent. Some argue that this is a result of large commission-based companies, such as Iowa Realty Inc., stifling alternative business models.

Next Generation Realty, the area’s longest-standing flat-fee brokerage, which has been in the market 14 years, has only 3 to 5 percent of the market. Flat-fee brokerages in major cities account for 20 to 40 percent of the market, said Tom Franklin, co-owner of Next Generation.

“It’s just the players in town don’t want to see something new come along and affect the market,” he said.

Brennan Buckley, vice president of marketing for Iowa Realty, claims the commission-based model has proved most effective. “A la carte pricing, many consumers find it confusing,” he said, “and people are really looking for somebody to help them get their home sold, and the full-service brokerages that offer the full complement of marketing are really what people are looking for these days.” Iowa Realty opened EquiSave, a flat-fee brokerage, a few years ago, and then closed it shortly thereafter.

A report by the Federal Trade Commission (FTC) and the U.S. Department of Justice (DOJ) released in April 2007 questions the commission-based model. It claims that with the advent of the Internet, home buyers and sellers are performing some of the tasks that only real estate brokers could do in the past. And though many still contract with a broker that offers the traditional range of services, many prefer to use brokers with alternative business models.

The DOJ antitrust division’s Web site says: “Consumers who want to perform some of the steps involved in selling a home can reap significant savings by purchasing only those real estate brokerage services they actually want.”

According to the report, part of what discourages discount brokerages from starting are state laws, such as Iowa Code 543B.56, that require all brokers to perform a minimum number of services. Consumers who don’t want those services still have to pay for them, the report said.

Also the MLS is an important database that helps agents know what homes are on the market and pass that information to buyers. However, a dominant group of brokers can control it and pass rules that favor them. The FTC and DOJ recently have challenged some MLS rules that they claim stifle competition.

Among the DMAAR’s officers and board of directors, 14 of the 20 members are with Iowa Realty, Coldwell Banker Mid-America Group Realtors or Re/Max Real Estate Group.

In 1999, Next Generation filed a lawsuit against Iowa Realty, its affiliate firms and the DMAAR claming that Iowa Realty monopolized the market, refused to share commission fees and used its influence to kick Next Generation out of the MLS.

The case was dismissed in 2003, but it revealed Next Generation’s business model of primarily posting “office-exclusive listings” on the MLS, which meant other agents couldn’t sell these listings. Still, it wanted a commission if a Next Generation agent brought a buyer to a property listed by Iowa Realty. The DMAAR implemented a fee for office-exclusive listings and later expelled Next Generation from the MLS for not paying those fees. The lawsuit claimed that the office-exclusive listing fee principally affected Next Generation’s business practices. At the time of Next Generation’s expulsion, Iowa Realty became the controlling party on the DMAAR board.

However, court documents filed also revealed that Iowa Realty’s market share actually decreased between 1996 and 2001, while Next Generation’s share was estimated to grow.

Cox of UNI said other flat-fee brokerages across the country have faced resistance from organizations that run multiple listing exchanges. “That’s a really hot topic,” he said. “There have been brokers that have tried to sue because the (flat-fee) firms tend to be smaller. Because they’re a start-up, they don’t have the financial resources to fight a legal battle and oftentimes end up going out of business because they can’t sustain the fight long enough to win.”

New models

Iowa Realty continues to dominate the market, with 3,000 to 4,000 active listings, compared with the area total of 6,666 active listings in May.

But as the Internet has allowed consumers to do more research and perform other tasks real estate agents traditionally handle, Iowa Realty has had to increase services, such as investing in technology that makes its Web site easy to find and use. Based on several tracking services, Buckley said Iowa Realty’s Web site is visited 10 to 15 times more often than any other Des Moines real estate company’s site.

Next Generation focuses on direct marketing to consumers, with a television show on KDSM television on Sunday mornings, a lot of print advertising and a Web site that gets close to 1 million hits a month, Franklin said. The Internet has made this business model possible, he added, and Next Generation has franchised its name and techniques to people in California and Missouri.

“The MLS is just another way to sell homes,” Franklin said. “It’s a good way, but our way with direct marketing is a good way as well. It’s just different. We’re not relying on other agents to sell our properties.”

But after 10 years of rapid growth, Franklin admits Next Generation’s business has tapered off under current market conditions. Still, he believes more flat-fee and other discount brokerages will emerge as the market improves. “There’s such a need in the marketplace for people to spend less money to sell their homes,” he said. “People don’t have as much equity as they did for many reasons.

“What we like about the flat-fee option is that it’s a fair program. It’s what we deem a fair fee for what we deem is a fair service as opposed to the percentage-based companies, which is an ability-to-pay system, meaning the more your home costs, the more you pay for the real estate (brokerage services).”

Cox of UNI said the flat-rate model is especially attractive to people selling more expensive homes, because the cost savings are greater. But at the same time, this demographic can afford the 7 percent commission to hire an agent to sell the home for them.

Peoples Co. has found that the fee-for-service business it conducts through its DealYourOwn.com division, started in 2003, actually attracts more customers to its commission-based business. “When they understand you do your own open houses, own showings, own advertising, things like that, a lot like to go with the full-service model,” said Steve Bruere, president of Peoples.

Peoples has about 40 properties in its DealYourOwn program now, compared with 400 properties listed with its commission-based business. It offers access to the MLS for $500 up front and another $1,000 when the home sells.

Peoples does not invest a lot into its DealYourOwn business, Bruere said, because it’s not as profitable as the commission-based business. The flat-fee model is based on gaining more transactions rather than making more money on a few sales, but the Des Moines market’s relatively small size limits the number of transactions.

Thomas said starting his Homes By Owner firm has been a big investment, especially in putting together a magazine, which required hiring two part-time salespeople to sell advertising and a couple of graphic designers to lay out the pages.

“It’s pretty expensive to join the MLS as a broker and get signed up,” he said. “Mainly you have to have the confidence and the courage to know that you’re going to be able to sell homes without a national Coldwell Banker, Re/max, Iowa Realty-type company backing you.”