Foxtons Is Redefining
Its Commission Approach

Foxtons, a real-estate brokerage firm operating in the New York area, made a splash in the business a few years ago by offering 2% commissions on home sales and using such ad slogans as "Beware of Sharks Charging 6%."

Now one of the industry's biggest "sharks," Van Davis, has joined Foxtons as its new chief executive officer and is refining the strategy.

Mr. Davis, 46 years old, until June was CEO of Century 21, which bills itself as the world's largest chain of franchised real-estate firms with more than 6,800 offices. Century 21, a unit of Cendant Corp., is a full-service company, meaning its agents generally expect commissions near the industry average of 5% to 6%. Mr. Davis now says that's too high for many consumers, particularly because the surge in home prices has inflated the fee. On a $500,000 home, the traditional 6% commission works out to $30,000.

"People say, 'Wait a second, I work how many months to earn that?' " Mr. Davis says.

A lot of money is riding on whether discounters like Foxtons can prevail over the more traditional firms. Commissions paid on sales of residential real estate totaled $59 billion last year, according to estimates by Real Trends, an industry publication, which puts the average commission at about 5.1%.

While Foxtons, founded four years ago, remains a regional player, it's one of the country's most ambitious discount real-estate brokerage firms and aims to eventually go national. Foxtons is based in West Long Branch, N.J., and operates in New York, New Jersey and Connecticut. Originally known as Your Home Direct, the company is about 75%-owned by Foxtons Ltd., a British real-estate firm.

More Service

One of Mr. Davis's initial conclusions after arriving at Foxtons in June was that the company had set its commissions too low to provide all the services most customers wanted. So he is offering more service and phasing out the 2% plan.

Under that model, the company required customers to show their own houses rather than having agents do that. The homes were listed on the Foxtons Web site but not in a multiple-listing service, or MLS. Houses that aren't included in an MLS tend to get fewer lookers. The new Foxtons plan calls for 3% commissions and includes listing in an MLS. Under this plan, agents are available to show homes and negotiate deals.

Betting on a Drop

Yet even with these changes, the company won't have an easy time inducing agents from rival firms to show homes listed by Foxtons.

A buyer's agent from a different firm would get just a third of that 3% fee, or 1%; Foxtons keeps the other two-thirds. Normally, buyers agents get 2% to 3% for their side of the deal. Mr. Davis admits some agents won't think it's worthwhile showing Foxtons homes for just 1%. But he's betting on a continued decline in average commissions that will force everyone to work for less.

Mark Lee Levine, a real-estate professor at the University of Denver, agrees that commissions will continue to erode, partly because of competition and partly because many people now do much of their own searching online.

Thomas R. Kunz, Mr. Davis's successor as CEO of Century 21, says there's nothing new about discounting. "It's like you've got the Kmarts and the Nordstroms," he says. The average level of commissions probably won't change much, Mr. Kunz says.

Mr. Davis rejects the Kmart comparison and says he can provide plenty of service for less. But he concedes that the original 2% model wasn't working, leaving Foxtons unprofitable in the U.S. "We know at 3% we can make a reasonable profit," he says.

Century 21 and most other U.S. real-estate firms use independent contractors as agents. They generally work only for commissions and get no salary or health benefits. Foxtons, by contrast, hires employees to sell houses, paying them base salaries and health-care benefits plus a percentage of the income they generate. After an initial training period, agents can choose one of two pay plans: one with a base salary of $37,500 a year and another with a base of just $25,000 but more scope for performance-related pay.

Mr. Davis says having employees gives him more control over his staff. At Century 21, he says, he was sometimes frustrated because he couldn't tell franchise owners exactly how to run their shops. And the franchise owners, in turn, couldn't keep a tight rein on agents who aren't employees.

Agents With a Specialty

Another difference: While many traditional agents represent both buyers and sellers and handle closing paperwork, Foxtons is splitting up those tasks and giving them to specialists. A buyer's agent will spend all of his or her time showing houses to potential buyers. Other people will prospect for customers and handle closings.

One danger with this model is that if Foxtons hires too many agents, it will have to pay severance in the event that it has to slim down. Traditional firms don't have to worry about finding themselves with too many agents. The ones who can't earn enough commissions to support themselves generally leave voluntarily.

To support its new model, Foxtons is opening more branch offices; it aims to have nine by the end of next year, up from two now. But Mr. Davis says he doesn't need an office in almost every sizable town, as Century 21 does. "We can live without that overhead and pass on some of those savings to customers," he says.

While he's pushing a new model for the industry, Mr. Davis says he doesn't plan any more ads describing rivals as sharks. "We have no interest in poking the industry in the eye," he says.

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