Costco Branching Out Into Real-Estate Services

Along with fabulous deals on monster bags of dog food and family packs of waffles, how'd you like to get a 25 percent rebate on the cost of selling your home - plus discounts on several mortgage-related fees?

Betting you would, Costco tomorrow will unveil a pioneering real-estate program that industry insiders are predicting will - for good or ill - forever change the home-selling business.

Potential savings could be significant: For a deal in the $250,000 range, it could be as much as $6,000 on the cost of selling a home, then purchasing and financing another.

Washington state's Costco members will be the first in the nation to test the new program, a marriage between the Issaquah-based retailer and AmeriNet Financial Systems, a mortgage broker located in Denver.

Callers to a special Costco/AmeriNet 800 number will be hooked up with a John L. Scott agent, and through AmeriNet to a choice of mortgage (or refinance) products from any of 46 participating lenders.

Scott will pay AmeriNet a referral fee equal to 35 percent of the sales commission, and AmeriNet will then rebate 20 to 32 percent back to the customer, depending on the sales price of the home.

Those who get their mortgage financing through AmeriNet will get a refund of almost 1 percent of their loan amount and may also see savings of 10 to 35 percent on such costs as document preparation, appraisal and credit report.

It's one-stop shopping, which is exactly what buyers want, according to a survey of 800 recent home buyers commissioned by the National Association of Realtors.

"This gives Washington state residents probably the most aggressive rebate program ever given in the real-estate industry," said AmeriNet chairman and CEO John Pembroke. "The U.S. will be watching Washington to see how this program rolls out, how real-estate brokers, mortgage lenders and consumers react to it."

One reaction, Pembroke predicts, will be more breaks for the consumer as other real-estate firms respond to Costco's competition by cutting their own commissions, which generally are in the 6 percent range.

However local firms say they'll wait and see.

While affinity-group programs aren't new - joining various travel clubs, for instance, entitles members to savings on everything from auto rentals to meals and lodging - it's only recently that real-estate services have been considered for inclusion.

And while Costco's 15 million members nationwide make it one of the larger affinity groups around, its savings mostly have been on so-called "hard goods" like televisions and tires.

Thus it's a stretch to offer service-based goods, such as real estate, in which personal performance by a realtor is basically the product. This is something Costco President and CEO James Sinegal knows full well.

"We recognize we have a marketing issue," Sinegal said. "The advantage we have is they (Costco customers) have confidence in us.

"The disadvantage is people will say, `But this isn't a pair of tennis shoes, this isn't a barbecued chicken.' But we've been pretty successful at doing things that are far afield - like pharmacies in our stores - so hopefully we'll be able to do this."

Who can use the program

With 1,170,000 members in Washington, an estimated 60 percent of all households, Costco certainly has a large enough market on which to test that premise. If, for example, 60 percent of last year's home sales in King, Pierce and Snohomish counties had gone through Costco, that would have translated to a whopping 18,000 transactions.

Currently the number being advanced for first-year participation is 3,000.

Nationally, the 258-store chain has members in 27 states. If the real-estate program is successful, Costco will use AmeriNet to replicate it, first on the West Coast, then nationwide, always using large local real-estate firms.

All Washington members will be able to use the program. Those who already belong won't pay anything additional now. However, when their annual membership comes due, they'll have to buy a $100 "executive membership" in order to participate. New members who want the real-estate services will have to pay the $100.

Most of what Costco gets from the deal will come from this higher fee, Sinegal said. He doesn't expect it will attract many new members locally, but thinks it will on the East Coast, where Costco has a smaller presence.

In selecting John L. Scott as its sole local agent, Costco chose the nation's 11th-largest brokerage, one that in 1996 did $3.2 billion in sales. Eventually, John L. Scott also will carry the program to Costco customers in Oregon, Idaho and Montana.

In Scott's jumping on board, Jerry Moon, its executive vice president, likened the growing affinity-group movement to a train.

"We didn't build the train, or the track, but either we got on the train or we waited until the next one," Moon said. "We decided it was timely to get on the train.

"Increasing our customer base is our main objective. We anticipate this will be a good source of buyers for us."

Agents were wary, at first

Costco members whose homes already are listed with John L. Scott won't be eligible for this program, Moon said. However those who haven't signed yet but have chosen a Scott agent will be able to use that agent.

Those who don't have an agent will have one assigned to them. Because agents, who work on commission only, must agree to relinquish 35 percent of their fee, only those Scott agents who want to participate will do so.

When agents first heard about the program, "quite a few" thought it was a bad idea, Moon confided. But a training program turned many around, and now 65 percent are on board.

What changed their minds?

"The potentials of the program, the number of (expected) referrals, and the fact that Costco was going to do the program whether Scott was the referring agent or not," Moon said.

Still, one of Scott's top producers, who didn't want her name used, says many agents have misgivings.

"For a top-producing agent it does not work; for a new agent it may," she said, explaining that star producers often become that way because they hire assistants, and thus can't afford to discount fees.

There's also some concern, she says, that agents will try to make up the money with volume, which means clients may find themselves competing with many other buyers or sellers for their own agent's time.

Windermere and Coldwell Banker Bain also negotiated with Costco, but decided not to participate.

Windermere Services co-president Maria Bunting worries that customers will be ill-served if they have no choice of agents, and that both agents and customers will be ill-served if agents must give such a deep rebate.

"If they have to discount their fees, there's going to be an erosion of services," Bunting said, "which is reasonable to assume if you've got one customer paying full price and others paying two-thirds of the price."

In fact Windermere was so concerned that it tried, unsuccessfully, to get the state to forbid the rebate plan, arguing it violated state law.

This left AmeriNet CEO Pembroke incredulous. "What kind of company is trying to maintain the high cost of home ownership? Our whole motive is to get the fat out of the business."

Coldwell Banker Bain President William Riss also worries service will be compromised if smaller commissions mean agents will have less to spend for such things as marketing homes.

"When you buy two gallons of mayonnaise at Costco, it's not a big thing," said Costco-member Riss, "but buying or selling a home is one of the biggest financial decisions of your life, so do you really want discounted service? It's like would you go to a discounted physician? What part of the surgeon's services do you want left out?"

However, Moon is confident that a high level of customer service will remain. In fact, he expects Costco's discount customers will receive the same as those who pay full price because "one of the biggest costs is securing the customer," which is exactly what Costco's program will do.

"If you can cut the cost of that, and the time spent doing that, you can readily pass along the savings to the customer," Moon said.

No matter who is correct, both Riss and Moon agree that affinity-group real-estate programs will grow, and this will change the industry.

It's expected that major local companies, which in themselves can be affinity groups, may team up with real-estate firms to offer discounts to their employees. And it's possible that affinity deals may bring discounts on home inspections, pest control, even home warranties.

Consumers, Moon says, will demand it.