Risk Management in Real Estate Electronic Transactions

Article excerpt

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 2001 (Muhanna, 2000; and Brice, 2001). 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, 2000) 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 (2000) 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 (2000) 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, 2000; and Miller, 2000). 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. …