Abstract

In the recent past, both consumers and real estate service providers have increasingly used the Internet to improve trading effectiveness and efficiency in the real estate market. Although Internet usage has reached phenomenal levels, the pure real estate electronic transaction, where the process is totally completed through the Internet, is still very much in its infancy. This indicates that significant barriers and risks remain in applying this kind of technology. This paper develops a model to optimize the risk management of real estate electronic transactions and suggests methods to control the risks inherent in these transactions.

Introduction

The number of both consumers and real estate service providers using the Internet is growing significantly. According to the National Association of REALTORS® (NAR, 1999), the number of buyers in the United States using the Internet to search for homes rose from just 2% in 1995 to 23% in 1999, and to more than 55% in 2005 (Muhanna, ; and Brice, 2005). In addition, the real estate industry has embraced the Internet as a very attractive medium to conduct business. In January 1995, there were approximately 100 real estate websites that offered properties for sale. By the end of that year, the figure rose to over 4,000 sites and up to approximately 8,000 sites by the end of 1996 (Heller and Krukoff, 1997).

Even though the Internet is widely predicted to revolutionize commerce over the next few years, the full potential of electronic commerce (e-commerce) will only be realized if both buyers and sellers have sufficient confidence to trade electronically (Skevington, 1998). The results from a survey of e-commerce in the real estate brokerage industry (Muhanna, ) found that buyers' searching was the most impacted by the Internet, followed by property listing and property evaluating, while respondents believed that the impact on the negotiating and executing steps was limited. This indicates that there exist some barriers and risks in real estate electronic transactions. However, when these risks are carefully managed, electronic transactions provide potential benefits in terms of transaction costs, accessibility to market and speed of transaction (Westland, 2002).

To date, relatively few studies have focused on the risk aspects of electronic transactions in real estate applications. This paper examines the risk of real estate electronic transactions and develops techniques to mitigate its adverse effects.

Literature Review

The Internet and Real Estate

Past studies concerning the relationship between the Internet and real estate can be classified into a few dominating themes. One direction is how the Internet has become and continues to be a very important tool for marketing real estate and related services. Rodriquez, Lipscomb and Yancey (1996) identified four different types of real estaterelated sites, including those that offered both real estate for sale and real estate services, and provided an extensive list of these sites. Bond, Seiler, Seiler and Blake ( ) examined the explosive growth of real estate-related websites and determined the reasons why Ohio real estate brokerage firms did or did not use websites in their businesses, the information contained in their sites and the technical requirements that were necessary for maintaining them. Similarly, Muhanna ( ) examined how real estate firms adapted to the use of the Internet and assessed their perceptions regarding its potential.

A growing body of literature looks at the effect of the Internet on retail sales, property and service (e.g., Mander, 1996; Wheaton, 1996; Schwarz, 1997; Borsuk, 1999; Hemel and Schmidt, 1999; Baen, ; and Miller, ). For example, Bacn and Guttery (1997) examined how the Internet threatened the traditional relationship among licensees, real estate buyers and sellers, and how these developments would create savings for real estate consumers. Similarly, Thrall (1998) discussed the emerging trends and changes in the Internet for other real estate service providers, including lenders, appraisers and commercial brokers. Baen ( ) examined the impact of ecommerce on traditional retail sales, as well as its potential impact on commercial property values and percentage rents. Tse and Webb (2002) studied the impact of information technology on real estate brokerage in Hong Kong, using regression models to investigate how page "views" on the Internet affect real estate transactions and commissions. Finally, Lucas (2005) believes that since information technology facilitated the design of new types of organizations, institutions and partnering arrangements, its implementation would have second-order effects on demand for physical space of manufacturing, retailing and offices in the industrialized world.

Risks in E-commerce

An expansive list of studies examines the risks in e-commerce transactions (e.g., Jung, Ran and Suh 1999; Hsiung, Scheurich and Ferrante, 2005; and Chan, 2005). One focus is on how to develop technological methods to deal with these risks. For example, Skevington (1998) outlined some of the technologies that were developed to address security concerns and to apply them to facilitate trust in electronic trading. Atif (2002) described a proposal for a trust web model based on a distributed search algorithm and a network of trusted intermediaries that can establish a trusted channel through which terminal transacting parties deal virtually directly and risk-free with each other. However, the traditional models of trust between vendors and buyers fall short of the requirements for an electronic marketplace, where anonymous transactions cross territorial and legal boundaries, as well as traditional value-chain structures. To overcome this problem, Manchala ( ) introduced a notion of quantifiable trust to evaluate the transaction risk in such an environment.

Another direction of the literature focuses on the managerial perspective of the transaction risks of e-commerce. Using case studies, Lee and Clark (1997) presented suggestions on the analysis, design and implementation of electronic market systems by market-making firms. Brice (2005) discussed some of the risks and considerations involved in the use of electronic signatures. Westland (2002) developed a model for evaluating and managing transaction risk in e-commerce in the migration from brokermediated to electronic markets.

Real Estate Transaction Stages

Real estate agents and firms are essentially market intermediaries, connecting buyers and sellers and facilitating the real estate transaction process. Traditionally, real estate sales can be divided into five stages: property listing, buyer search, property evaluation, negotiation and execution/closing. With the development and popularity of information technology, each stage of this process has been affected profoundly.

Stage 1: Property listing. In the past, real estate agents listed houses and entered them into a Multiple Listing Service (MLS) database. The MLS is today an online network of properties listed for sale and supported by the NAR. In effect, the MLS created a cartel-like role in managing information and virtually ensures that the agent will have a pivotal role in the real estate transaction. However, this situation has since changed with the introduction of websites in the market that provide property listings. A survey by Muhanna ( ) found that about 23% of real estate agents actually list their properties on their own websites. In addition, Fletcher (1997) found that their owners were listing many homes for sale on websites. For example, on Microsoft's network system, Home Advisor (www.homeadvisor.msn.com), and national selling services, such as Abele Owners Network, any seller's listing can be posted for a nominal fee (Guttery, Baen and Benjamin, ; and Bond, Seiler, Seiler and Blake, ).