(MONEY Magazine) – In New York City, the Foxtons ads are everywhere. On the radio, in the newspapers, plastered all over train stations and bus stops--even on the corner hot-dog stand. Indeed, if you live in N.Y.C. or its environs, you would have to be a shut-in not to know about Foxtons and its full frontal assault on the real estate establishment. "At 6%," reads Foxtons' most provocative, if ungrammatical, billboard, "are you using your friend in real estate or are they using you?" * Foxtons is just one of a new breed of agencies taking dead aim at real estate's golden goose--the 6% commission. "As far as I'm concerned, this is the most vulnerable industry in America," says Foxtons CEO Glenn Cohen, a onetime land broker and technology entrepreneur who founded Foxtons (originally called Your Home Direct) in 2000. Flush with a $45 million war chest, Foxtons has embarked on a $12 million-a-year local ad campaign aimed at convincing consumers that Foxtons can do for 2% what the neighborhood agent does for 6%. * The stakes are huge for agents and consumers alike. Brokering homes is a $60 billion-a-year industry. On a $400,000 home, the difference between 2% and 6% is $16,000. For Foxtons and similar firms like California's ZipRealty, breaking the traditional agents' fierce hold on the housing market won't be easy. But regardless of whether Cohen succeeds at becoming the Charles Schwab of real estate, the 6% real estate commission may be going the way of the $200 stock trade. Already, since 1998, the average commission has fallen from 6.1% to 5.1%, according to industry consultant Real Trends. * For traditional brokers, a price war could not come at a worse time. Despite the red-hot housing market, many real estate firms are scrambling for business. The inventory of existing homes for sale has sunk to the lowest level in 20 years, according to the National Association of Realtors. As a result, the nation's 1.6 million licensed real estate salespeople now average a mere half-dozen transactions a year. "A lot of brokers are scared right now," says Ira Goldenberg, a real estate lawyer in Westchester County, N.Y. "They're starved for listings, and on top of that, you've got Foxtons."

REAL ESTATE'S BIG FREEZE

It turns out that the standard 6% real estate commission is as distinctively American as baseball and apple pie. In most Western countries, commissions are closer to 2%. Norm Miller, professor of real estate at the University of Cincinnati, says that given the scarcity of new listings, he doesn't see how real estate brokers can sustain their high prices much longer. "We'd be annihilated if we charged anywhere near 6%," adds John Hunt, managing director of Foxtons London, the big U.K. agency that invested $20 million in Cohen's venture and lent it its name. "We think the American market is wide open for a lower commission model." He's not alone--big home builders Toll Brothers and K. Hovnanian are also Foxtons investors. * Of course, discount brokerages of one kind or another have been around for at least 20 years in the U.S., but they haven't made much headway up until now. What's made the 6% commission so resilient? The multiple-listing service is a prime suspect. MLS databases, run by regional Realtor associations, are the real estate equivalent of a stock exchange. Because of the MLS, the market is probably more transparent and less fragmented than in other countries. A buyer with a Century 21 agent can easily hook up with a seller who uses Re/Max. That's the upside. The downside is that commissions have to be high enough to pay both brokers.

Because of the way MLS is set up, brokers depend on each other for business, which tends to discourage them from undercutting each other's commissions. According to Larry White, former chief economist in the U.S. Department of Justice's antitrust division, agents have been known to quietly boycott those who won't play ball. "My strong suspicion is that the MLS has helped buttress the 6% commission," says White, now a professor at New York University. "It makes it very easy to freeze out anyone who tries to cut their commissions."

Cohen has tried to solve this problem by bypassing the MLS, turning Foxtons' website into a competing listing service--for consumers, not rival brokers. That's why Cohen is spending so much to tout his brand. Foxtons has to get big fast if it's going to work; buyers need to see a wide selection of homes on the website, and sellers must believe that buyers will see the listings. Cohen is confident that his expensive strategy will pay off and predicts that Foxtons will turn a profit in 2003. "If you're buying a house," he says, "you're damned sure going to come to our website."

"WE ARE A HUGE THREAT"

Traditional real estate agents scoff at the notion that the 6% commission is some kind of conspiracy. They provide a personal service and, hey, that costs real money. And Foxtons customers give up a lot to get that 2%. Foxtons will take pictures of your home, print up spec sheets for prospective buyers and advertise the listing in newspapers as well as on Foxtons.com. But you won't get an entry into the MLS unless you pay an extra fee--and if that means that fewer buyers see your listing, you might end up getting less for your house even after you figure in the savings on commission. You also don't get a broker to show the house to prospective buyers or an experienced negotiator to help you drive the hardest bargain. Still, sellers who list with Foxtons say they're perfectly willing to run their own open houses if it will save $10,000 or $20,000 in commissions. "With the market the way it is, why should I pay 6%?" says Gary Cushman, who is selling his Milltown, N.J. home through Foxtons.

So how big is the demand for Foxtons' cut-rate service? Big enough that some traditional agents are clearly feeling threatened. When homeowner Joel Simon informed his regular Coldwell Banker agent that he'd be selling his Tenafly, N.J. home and a nearby apartment through Foxtons, he says the agent retaliated by backing out of an earlier agreement to find a renter for the apartment. "She told me it was nothing personal," says Simon, "but 'we just don't want to do anything to help Foxtons.'" The agent, Andrea Wei, hung up the phone when MONEY called her. Maureen Passerini, president of Coldwell Banker Residential Brokerage in New Jersey, says the contract was voided only because Coldwell doesn't allow landlords to rent through Coldwell but sell through another broker. Passerini's company has recently run radio ads criticizing discount brokers, though without naming Foxtons.

Other agents are dismissive of the upstart. Jacelyn Botti, a senior vice president with New Jersey's top broker, Weichert Realtors, says there's been no discernible impact on her firm's bottom line. Ditto for Bob Becker, the president of NRT, which is Coldwell Banker's company-owned branch network and a division of real estate giant Cendant. (Cendant has its own discount site, BlueEdge.com.) Yet it's hard to reconcile such claims with the large number of homes--4,200--currently listed on Foxtons.com. Cohen says Foxtons sold 7,000 homes in 2002, with 8% market share in New Jersey and 5% share in New York City and its eastern and northern suburbs. "We are a huge threat to Cendant," he says.

Steve Murray, president of Real Trends, is skeptical. Murray won't enter any broker's unaudited sales data into his database. So far, Foxtons hasn't provided audited numbers, leading Murray to say that he'd be "highly surprised" if Foxtons' market share is as impressive as Cohen claims. "I don't want my competitors to know how much volume I'm doing," responds Cohen.

From the consumer's perspective, it almost doesn't matter whether Foxtons turns out to be the next big thing in real estate or the next big dotcom flop. Just ask a stockbroker. Ten years ago, full-service stockbrokers thought they could ignore discounters. "That's not my customer," they'd say. For the most part, they were right--most Merrill Lynch clients were never going to ditch their adviser to day-trade with Schwab. But the discounters didn't just offer investors an alternative. They showed everyone just how much brokers were soaking clients by charging $200 a trade. Well-heeled investors who'd never balked at their commissions before suddenly felt emboldened to ask their broker for a 50% price break. ("Hey, if Schwab can do it for $30, can't you do it for $100?") The big brokerages ultimately brought full-service commissions down to about $70 a trade.

The bull market in homes, just like the bull market in stocks, has made people savvier about how the system works. So has the Internet--and the in-your-face marketing by firms like Foxtons. If 10 years ago the typical consumer wouldn't have known a lower commission was possible, today's seller can try to play one full-service broker off another. "More buyers have figured out how to get a better deal," observes Murray. How much lower can the average commission go? Maybe not as low as 2%. But Murray says one thing is for sure: "We haven't seen the floor."