The Internet Encyclopedia (Volume 3)

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196 REALESTATE

rent. Individual brokerage companies have complex Web

sites that provide information on the local area as well as

nationwide markets. New listing services have developed

that allow for database searches, both locally and nation-

ally, for suitable buildings or sites. In addition to nation-

wide databases of properties, a number of firms offer ca-

pability for online rental inquiries, as well as online lease

agreements.

The potential of electronic multiple listing services

raises, of course, the question of competition between tra-

ditional real estate agents and the new instruments of e-

commerce. This question is considered below.

Real Estate Auctions

Auctions have long been the center of a dilemma in real

estate markets. On the one hand, auctions would seem to

be highly efficient mechanisms for selling properties, by

giving all potential buyers easy and equal access to the bid-

ding process. For example, auctions are commonly used

in Australia and New Zealand (see Dotzour, Moorhead, &

Winkler, 1998). In the United States, on the other hand,

auctions are rarely used and are clearly dominated by the

traditional method of “listing” a property with a broker,

and then waiting until the broker finds a buyer willing

to pay a sufficiently high price to close the deal. What is

going on here?

The answer seems to be that, at least in the United

States, the traditional physical auction, taking place at a

specific location and a specific time, is too constraining

in terms of limiting the number of buyers that can actu-

ally participate in the bidding process. Thus, with certain

exceptions, sellers find that they obtain a higher expected

price using the traditional “listing” method. E-commerce,

however, provides the potential to resurrect the auction

and make it into a key component of many real estate mar-

kets. Electronic auctions, relative to physical auctions,

have the key advantages that the auction can be left open

for a considerable period of time, certainly a week, and

possibly a month, and during this time there is no need

for participants to be physically present. Other advances

in real estate markets that are provided by e-commerce,

such as large, automated databases, further enhance the

potential for electronic auctions. Nevertheless, as of this

writing, electronic real estate auctions have still failed to

capture any significant share of the market for real estate

transactions.

E-appraisals

Appraisals play an important role in real estate markets,

especially as a means for lenders to determine how much

money they are willing to lend to the new buyer. In the

past, appraisals have often been costly, time-consuming,

and inaccurate, significantly raising the costs of carrying

out real estate transactions (see Diaz, 1997). E-commerce

in the form of automated appraisals has the potential,

however, of significantly improving all aspects of the ap-

praisal process. The key factor here is that information on

comparable sales is the raw material for appraisals, and

this information can be most readily accessed and applied

using modern electronic database techniques. Already,

there is extensive use of electronic appraisal techniques by

government sponsored mortgage agencies such as Fannie

Mae and Freddie Mac, and it seems highly likely that these

techniques will come to dominate the entire market. This

raises the important question, however, whether the new

automated services will be provided by new e-commerce

firms, or whether traditional appraisal firms will be the

providers of these services.

Real Estate Finance

The premium on rapid dissemination of quality informa-

tion has made finance a very fertile field for Internet usage.

The range of real estate finance related Web sites extends

from online mortgage firms to those involved in private

project financing and equity placements.

Residential Mortgage Lending

Key features of residential mortgage lending that make it

suitable for e-commerce enhancements include

a. The need to reference large databases to perform credit

checks on the individual and the appraisal on the prop-

erty;

b. The timely nature of the credit approval process, since

the buyer will want authority to proceed with the pur-

chase as soon as possible; and

c. The large menu of choices for mortgage contracts, and

the need to update these daily to reflect the most cur-

rent market conditions.

From the consumer point of view, online mortgage

firms provide an efficient entry point in the search for in-

formation on mortgages, rates, and fees; see the survey in

Mortgage Bankers Association of America (2001). Mort-

gage lending, however, is highly regulated at the state level

in the United States, with the result that a one-size-fits-

all lending platform may well run afoul of various state

laws. This means that the economies of scale that might

be otherwise be available by scaling a single platform to all

50 states will at least be somewhat limited. The issue

here is not whether electronic methods will be used in

mortgage lending—virtually all lenders now rely on these

methods—but rather whether they will simply be efficient

tools used by traditional lenders, or whether they will

allow the entry of a completely new set of lenders, the

so-called “e-lenders.”

Commercial Real Estate Finance

The needs of commercial real estate finance are being

served by a host of Web sites that are bringing develop-

ers, brokers, investors, and lenders together. Developers

and sellers of projects and properties make their presen-

tations and solicit offers on these Web sites. The sites in-

volve variations on interactive meetings facilitating free

flow of information, and in some cases incorporate due

diligence filtering procedures. Mortgage backed securi-

ties sites offer data and information on ratings, duration,

spreads, delinquency rates, and upcoming offerings. Bor-

rowing from other, more general, finance Web sites, there

are now a plethora of sites catering to potential individual

investors in REITs and limited partnerships and on spec-

ulative property purchases. E-commerce has the potential