Farewell Foxtons

(FSB Magazine) -- What a difference a few years and a plunging real estate market can make. When FSB profiled Foxtons back in October 2003, the West Branch, N.J. real estate company seemed poised to revolutionize the staid brokerage world by charging just 2% commission instead of the standard 6%.

"There's absolutely no way they can compete with us," said founder Glenn Cohen of his rivals at full-service brokerages. That was then. On September 28 Foxtons (foxtons.com) announced that it was shutting its U.S. operations and said it might file for bankruptcy protection. The company said it had laid off 350 of 380 employees.

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"The plain fact is that we have been battling against a real estate market that recently has turned into a sharp decline, and the company no longer has liquidity to operate," said John D. Blomquist, the company's senior vice president and general counsel, in a statement that was emailed to news organizations.

Cohen launched the company, originally known as YourHomeDirect.com, in 2000, with splashy ads claiming that full-service brokers were "overpaid." He argued that most owners could use the Internet to sell their homes with little help from a broker. Foxtons agents received salaries and benefits, but only a 2% commission. For that price Foxtons did little more than list properties on its website, leaving sellers to handle steps such as holding open houses and attending closings.

The model worked well as long as real estate prices were climbing and houses selling quickly. In 2004 the U.K.-based Foxtons, which had a similar business, bought a majority stake in YourHomeDirect.com. Cohen renamed the company and announced plans to expand nationally.

But with rising interest rates and slowing growth, the booming real estate market started sputtering throughout the country. Home prices sagged and inventory soared, squeezing players throughout the industry.

"Discount brokerages rely on volume in order to succeed," says Blanche Evans, editor of Realty Times (realtytimes.com) in Dallas. "So if sales are down, they are not going to achieve profit."

Frank Cook, publisher of the Real Estate Intelligence Report (reintel.com), argues that a 6% commission is not unreasonable given the amount of work that traditional agents put into selling a home. By the time Cohen left the company in late 2004, Foxtons had already decided to raise its base commission (to 3%) and boost services.

But the travails of Foxtons don't necessarily invalidate its model, says Jeremy Conaway, president of RECON Intelligence Services (reconis.com), a real estate consultancy in Traverse City, Mich. Conaway points out that real estate commissions have been dropping steadily in recent years, largely because so much market information is available free online.

Because the discount model was so new when the housing bubble burst, those companies that weren't able to secure a strong foothold in the real estate market faltered, says Conaway. He predicts that some of Foxtons' competitors, such as California based ZipRealty (ziprealty.com), will survive the real estate slump. And when the market picks up, discount brokerages will return to their "natural place."

Foxtons did not return calls for comment.