New Jersey-based Foxton's just found out the hard way that undercutting other brokers' commissions as part of its business model is a good way to get whacked. Yet hope springs eternal among discounters as Iggy's House thinks it will go public and make lots of money ... for its founders, not for you.

Foxton's just announced that it is letting 350 out of 380 employees go as it attempts to wind down its business without declaring bankruptcy.

In a press release, Foxtons senior vice president and general counsel John Blomquist said the company had been "well run, very efficient" (wasn't our fault) and had "a great team that has pioneered a new model in the real estate business (discounting is new?) -- a model which has proven itself and, we believe, will have lasting influence on our sector." (Then why are you going bankrupt?)

The press seems surprised at Foxton's demise. Newsday lauded Foxton's as "the 800-lb gorilla in the 2 percent market."

After all, in the site's early years, says Newsday, Foxton's had "more than 1,000 employees and more than 10,000 homes for sale." Further, "Foxtons created a huge advertising splash, spending close to $12 million a year on television, radio and billboard ads. It even used buses, bus shelters and subway platform ads to attract customers."

That's a lot of expense for one and two-percent commissions.

The real truth is that the business model was laughable for a number of reasons, none of which require hindsight:

1. The margins were too thin to make a profit.

2. Cooperating brokers are not required to show homes of competitors, particularly when paid less than market rate (And don't give me that ethics guff. Between ethics and eating, eating always wins.).

3. One percent (two percent) commissions was the foundation of Foxton's business model. But it was unrealistic to impose their 800-lb gorilla selves on other brokers and think they wouldn't push back.

4. Discounting is always the path of least resistance to the a. new business, b. unimaginative business, c. unneeded business, d.nefarious business, and e. IPO-bound business.

5. Discounting is a bet on seller's market tailwinds. When housing slows, discounters can't hope to achieve the volume necessary to overcome too-low pricing.

Need any more? Here's one I'll bet you didn't think of.

Discounting in New Jersey is like thumbing your nose at the Sopranos. While California-based discounters can occasionally report some mild success, that's because California is Disruption Central. Venture-capital-based start-ups are a dime a dozen out there, and the first pitch to Wall Street is that I'm-new-and-can't-make-it-without-your-money and-pretending-to-be-Realtors'-friendDOTCOM is going to be the ram that brings down the impervious real estate industry.

Stupid Wall Street just gobbles that stuff up and throws money at it in the arrogant hope that it will happen.

But it doesn't always turn out as planned:

• eRealty, a precursor to Foxton's, sold for pennies on the venture-capital dollar to Prudential. All they got was a whiny ex-president who is expert at tattle-taling to the Feds, if nothing else, and some pretty good technology, I hear.

• Proving that starting in California doesn't always work and that discounters need sellers' markets for wind, zipRealty has bled red ink in 2006 and 2007 after showing a profit in 2005.

Noting zipRealty's continuing losses through second quarter 2007, The Motley Fool, a contrarian and disrupter itself before it pied-pipered millions to lose trillions in 2001, is unimpressed. "The real estate brokerage specialist is disrupting an industry that could use a little cage-rattling, but last night's preliminary fourth-quarter report may find you opting for a catnap instead." zipRealty started life as a public company at over $16 a share in 2004, and currently trades around $6 a share.

Losing money isn't the way to rattle anyone's cage, but that doesn't stop companies from trying.

Now Iggy's House is seeking an $15 million IPO. They probably will go public successfully because Wall Street never gets it about the real estate industry, and it never will.

Iggy's House is based in Chicago, and their innovative take on discounting is to offer free admission to sellers to the sacrosanct MLS. (Funny how all the discounters want into the MLS, isn't it?) Where they make their money is by representing buyers with deep discounts.

According to a report from one of our erstwhile competitors, this isn't the founders' first time at the circus. Joseph and Avi Fox started an online stock brokerage company in 1996 and sold it to eTrade two years later.

Could that be what they're planning for real estate? Get in, make some noise, cash out and get out?

Like many other young IPO-bound companies, Iggy's House isn't showing a profit, and doesn't expect to for some time to come.

According to an SEC filing, the company confesses, "Since our inception in 2005, we have a limited operating history and a history of losses from our start-up operations. As of March 31, 2007, we had an accumulated deficit of $7.6 million." It goes on to say that it expects "significant future expenditures related to the development and expansion of our business," and "we will have to generate even more revenue to become profitable."

No kidding. Ya think?

But by then, it won't matter. The aptly-named Foxes and their VC buddies will be laughing all the way to the bank, as Iggy's House leaves its shareholders devastated.

And you'll be left explaining to uncomprehending consumers why you charge so much in commissions.

Published: October 2, 2007

Use of this article without permission is a violation of federal copyright laws.

Blanche Evans is the award-winning senior editor of Realty Times, the Internet's leading independent real estate news service. She is featured daily on the Realty Times Video Network in the "Realty Viewpoint" segment. Blanche has been named one of the "25 Most Influential People In Real Estate" by REALTOR Magazine, and has been twice recognized as a "notable." In 2005, she was named "Top Reporter Covering the NAR" by Delahaye-Bacon's. Blanche is a renowned author of five real estate books. Her newest, Bubbles, Booms and Busts: Make Money In Any Real Estate Market, McGraw-Hill, was rave-reviewed by The New York Times. She was also selected from hundreds of real estate experts to contribute to Donald Trump's book, Trump: The Best Real Estate Advice I Ever Received: 100 Top Experts Share Their Strategies, Rutledge Hill Press, and is featured on page 68. Order Now Review - Honors In 2006, Blanche was selected among scores of candidates to author two consumer real estate guidebooks for the National Association of Realtors: The NAR Guide to Home Buying, and The NAR Guide to Home Selling, Wiley & Sons. She is currently planning two new books for the NAR and its members.       Known for her keen insight into real estate industry issues and for her ability to make complex subjects easy to understand, Blanche is a sought-after keynote and continuing education speaker. Real estate organizations from MLSs, to brokerages, to franchisors, to associations hire her to provide up-to-the-minute analysis of real estate industry news and advice on how to improve revenues. Her passionate delivery, peppered with stinging wit, is a huge hit with audiences and fans. Don Klein, CEO Greater Nashville Association of Realtors, Blanche Evans, Richard Courtney, president 2007, GRAR "The GNAR membership meeting last week featured Blanche Evans as the keynote speaker. Her comments and insights resonated extremely well with those in attendance and we have had many requests for copies of her PowerPoint Presentation. She was a terrific part of the membership meeting and convention program!" - Don Klein, CEO Greater Nashville Association of Realtors Coverage from WSMV, Nashville - 8-14-2007 That Interview Guy - Get Inside The Head Of Today's Generation 2007 AE Institute Session - To purchase 2006 AE Institute Session - Parts 1 2 3 4 5 6 7 8 9 HouseValues Mastermind call - Parts 1 2 Blanche's fireside chat with Jeremy Conaway, HAR - Click here. To contact Blanche, email her at . For more articles by Blanche, click here.