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THEINTERACTION OFE-COMMERCE ANDREALESTATEMARKETS 193Table 1Internet Characteristics and Real Estate FirmsInternet/Web Feature Type of Real Estate FirmSearch Capability; Graphics, Listing/Matching & Brokerage
Virtual Tours Online Mortgage
Online Communities & Markets, Project Development, Project
Multilateral Coordination Finance
Interactive Transactions Property Management
Capability
Online Tracking, Database Consulting Firms; REITS
Access and AnalysisIn addition, the Web possesses three features that are
of particular relevance to the real estate industry:1.Graphics/visualization capability: In its most state-
of-the-art form, Web sites now allow prospective buyers
and renters to take virtual tours of homes, resorts, ho-
tels, and convention centers. Virtual tours are designed
with the objective of bringing about a decrease in the
number of properties physically visited before the final
sale or rental.
2.Increased geographical reach: A unique feature of
the real estate industry is that real estate is, of course,
locationally specific. A physical and local presence,
therefore, has generally and traditionally been critical
for firms providing services for real estate transactions.
E-commerce has the potential to reduce and in some
cases even eliminate the need for a local presence. For
example, property sales data were previously available
primarily in hard copy prior to e-commerce, requiring
a local physical presence for access. Large amounts
of these data are now in electronic databases, mak-
ing access independent of location. Not only service
providers, but also buyers and sellers of a specific prop-
erty, can now be represented electronically, without a
physical presence. This affects the structural composi-
tion of the industry as a whole and impacts individual
firms and their organizational makeup. Although the
“local” aspect of real estate will perhaps never be whit-
tled away completely, there is no doubt that inquiries
about properties can now emanate from far away to a
much greater degree than before. This, in turn, poten-
tially increases the market’s size and depth, making it
more efficient.
3.Collaborative and interactive features: The estab-
lishment of new kinds of firms in the real estate sec-
tor, which deal with development and predevelopment
sites, has been made possible by the multilateral, col-
laborative platform provided by some Web sites. Large,
complex projects create logistical and coordination
needs of a wide range of professionals, such as archi-
tects, engineers and subcontractors who collaborate
and interact on a continuous basis. These needs are
met by firms that provide Web sites acting as infor-
mation clearinghouses, and through which all the par-
ticipants in the project can coordinate their activities
and keep abreast of the latest changes in plans, bud-gets, and blueprints. The Web-attributable features that
make this kind of value addition possible are instanta-
neous comparability, interactive capability, online cal-
culations and communication, and efficient informa-
tion management.General Features of E-commerce and Their
Relevance for Real Estate Markets
Reductions in transaction costs are the most important
general feature of E-commerce for real estate markets. As
a closely related matter, new services will emerge where
it was previously not cost effective to provide them at all.
The two most important economic aspects of e-commerce
that lead to reductions in transaction costs are network ex-
ternalities and economies of scale; see Shapiro and Varian
(1999) for a general discussion of Internet economics.Network Externalities
Network externalities occur when the value of a network
to each user rises as the total number of users increases.
A telephone network is an example of this demand-side
economy of scale. A telephone has limited value if only a
small number of people are connected to the phone net-
work. But as the number of people with connections rises,
the value of the telephone network to each one increases.
While wires physically connect the nodes on a traditional
telephone network, there arevirtual networksas well. Vir-
tual networks, and the related membership group of a
virtual community, are key mechanisms through which
e-commerce creates value for real estate markets.
A good example of the need for a real estate virtual com-
munity is the process of selling residential properties in
a particular community. Efficiently matching buyers and
sellers in such a market is a complicated, but obviously
critical, activity. Traditionally, it has required the phys-
ical presence of buyers, sellers, and a real estate agent
who brings them together. The physical presence of these
parties raises the costs in terms of both time and money.
E-commerce, however, can readily create a virtual com-
munity, in which each potential buyer sorts through the
features of the available homes, and then takes a vir-
tual tour of the most promising homes. In this way,
e-commerce can eliminate a significant proportion of the
search costs.
Another example of a real estate virtual community
consists of all the participants in a large-scale commercial