The Paperless House Closing

Baldwin Louie — Mon, 15 Jan 2001 17:00:00 -0500

Dressed in a karate outfit, Stuart Wolff is swinging a sword and stabbing a toy dragon in his front yard. It's not a distinguished pose for the CEO of a 2,000-employee company with a market value of $1.5 billion, but Wolff isn't worrying about being respectable. Even as the Internet revolution has been widely discredited, his performance as a sensei in a training video for his firm is just one sign that this online real estate company is maintaining its new-economy attitude and ignoring the naysayers.

From Homestore's new Southern California headquarters, with its freshly painted purple walls and orange file cabinets, the 37-year-old Wolff continues to proselytize about the ways the Internet will revolutionize the buying and selling of houses. This quarter the company is beginning to roll out a Web-based platform that is supposed to help realtors and consumers close sales over the Internet - an idea so ambitious that one industry expert compares it to brokering a peace deal in the Middle East.

Homestore's initiative comes on top of the company's dominance in real estate listings. Homestore.com (HOMS) features more than 1.4 million listings - at least 90 percent of the home listings on the Internet - though many are duplicated elsewhere. That number could grow if Homestore succeeds in acquiring rival Move.com, the real estate portal for Cendant (CD), franchiser of the world's largest real estate brokerage system, including Century 21, Coldwell Banker and ERA.

What makes these aggressive steps so remarkable is that Homestore is taking them in the face of a Department of Justice investigation. Last spring federal officials began looking into charges that Homestore's attempts to gain exclusive control of home listings may constitute anti-competitive business practices. In October, Homestore announced its plan to acquire Move.com for about $761 million in stock, and now that deal must also be cleared by antitrust regulators before it can be completed. (Homestore shareholders are expected to approve it on Jan. 11.)

A green light from the government, which Wolff predicts he'll get in the next three months, will allow the CEO to continue building on his dot-com-style growth. He has established alliances with the biggest players in the industry, trading equity for their support. He buys out competitors, using his still-sizable stock-and-cash arsenal. And he isn't satisfied with controlling just one industry segment - real estate listings - but is looking to be the online agent for all facets of home buying.

"At some point the paper goes away [from home buying]," says Wolff."I think it will be an Internet transaction. The question is not if, but when."

Homestore started in the early 1990s with home-listing kiosks. The firm struggled until 1996, when it took over www.realtor.com, the ailing Web site for the industry's biggest trade group, the National Association of Realtors. Under Wolff's guidance, Homestore courted local multiple-listing services, offering stock in exchange for exclusive online access to their residential listings. Homestore also acquired other online real estate operations, like rental site SpringStreet.com and moving site Homefair.com. Its latest deal is the Move.com acquisition.

To compete with Homestore, other sites such as
HomeSeekers.com have gone through the painstaking process of asking individual real estate agents or offices for their listings, says John Giaimo, HomeSeekers.com CEO. But such efforts have not proved as successful. Homestore's 1.4 million home listings outnumber HomeSeekers' 1 million and HomeAdvisor.com's 800,000.

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Giaimo contends that Homestore's approach is more than just playing hardball. "Homestore's philosophy is to conquer and control," he says, adding that Homestore's efforts to lock in listing exclusives could some day allow it to overcharge consumers and realtors who use the data.

Still, some antitrust experts say the presence of other competitors, including Microsoft (MSFT)-backed HomeAdvisor and HomeSeekers, which has a partnership with eBay (EBAY), undercuts the idea of Homestore as a monopoly power. Wolff says Homestore's exclusive agreements with listing services is just like NBC's exclusive rights to the Olympics.

Homestore's advantage in the listings competition comes as consumers take to online house-hunting. In October, 41 million people searched for real estate information online, nearly double the number eight months earlier, according to a study by research firm Gomez and real estate news service Inman News Features.

And Homestore's lead in the listings department is paving the way for more than just transforming how consumers shop for homes; it also wants to change how they buy them. This quarter it will test its real estate transaction platform, eRealtor.com, with agents in the San Francisco Bay Area. The idea is to provide a site for all the parties in a real estate transaction - from the agent and home buyer to the title company and lender - to share information and exchange paperwork.

Homestore already has a solid customer base. In addition to the 131,000 agents who subscribe to its services, the company got Cendant to agree to promote eRealtor.com exclusively among its agents as part of the sale of Move.com. (In return, Cendant may become Homestore's biggest stakeholder with 26.3 million shares.)

Homestore is certain to face competition from HomeAdvisor as well as a number of smaller startups. The biggest challenge, however, could be getting the different parties involved in a house closing to abandon the old ways of doing things. "Bringing them together - what a nightmare," says Brad Inman, owner of Inman News Features. When buying a house three years ago, Inman says he signed 102 forms and spoke with 48 people.

Adds Nick Karris, a senior analyst at Gomez: "We're talking about a trillion-dollar industry that is technophobic in many ways. To say that one provider can satisfy all those different needs with the same platform may not be realistic." Complicating matters are the variations in state laws regulating home sales, though Homestore insists it can address this. Wolff concedes real estate transactions will not move to the Net overnight, estimating they will take five years to be accepted and perfected - about the same time it took for house listing searches to go mainstream.

Meanwhile, Homestore isn't burning cash. Although its share price dropped from a high of $138 a year ago to about $18 last week, the firm posted a small operating profit of $554,000 in the quarter ended Sept. 30, excluding noncash charges.

Other real estate dot-coms have died, but Homestore employees still talk about changing the world. Wolff, who received a doctorate in engineering from Princeton and has never worked as a realtor, is brimming with confidence."It would be a mistake to walk away thinking we're fun and games - It's work hard, play hard," he says, noting that the company has never received much hype. "It's an evolutionary model, not a revolutionary model."

Still, it remains to be seen whether the ultimate brick-and-mortar industry really can evolve.

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The Paperless House Closing