In a new white paper, Clareity Consulting & Communications, Inc. suggests that brokerages must derive revenue from ancillary services such as mortgage, title, closing services, home protection, etc. in order to remain in business.

The real estate transaction, says the paper, is a 'loss leader.'

Just as Burger King entices customers with a 99-cent 'Whopper' in order to upsell the more profitable French fries and soft drinks, real estate firms must add ancillary services to increase profits.

The result, suggests the paper is an evolution not unlike the way CPAs and life insurance brokers became full-service financial planners.

While gross volume sales prices have been record-breaking, points out the paper, brokers report 'razor-thin' margins. Currently, the average broker's profitability is $210 per transaction, much lower than 20 years ago due to competition among brokers for high-producing agents who demand a larger share of the commission.

Half the time, clients will choose service providers suggested by their Realtors, says the paper, yet agents frequently suggest service providers with no affiliation to the brokerage. Not only are brokers uncompensated for these referrals, they may be giving away the opportunity to set the terms for one-stop-shopping and other service expansion, leaving the way open for companies outside the conventional real estate industry to meet consumer demand.

Clareity suggests that companies such as First American, Stewart and Fidelity are actively seeking partnerships with brokers for settlement services. Set up as a joint venture, the title company and broker split the proceeds from the title insurance, with 15 or 20 percent paid to the title underwriter issuing the policy.

According to a poll Clareity quotes by Harris Interactive, there is considerable consumer demand for the one-stop-shopping experience, and that strategic alliances such as those suggested above would allow the consumer seek one point of contact.

Clareity predicts that online transaction management systems will grow, enabling consumers to fill out one application form online and order multiple services by the end of 2005.

Transaction management will also give brokers greater oversight into the activities of agents and the files and documents critical to the transaction.

Clareity recommends creating a business relationship with a service provider by developing a request for proposal which includes a description of the organization and the brokers' expectations of the relationship. After sending out the RFP to appropriate organizations, the brokers should review the responses, but make a decision based on product evaluation, service evaluation, and the proposed financial terms.

Published: March 3, 2004

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