Saturday, 30 May 2020

Addressing Real Estate Brokerages Shrinking Bottom Lines

Written by Posted On Sunday, 29 March 2020 13:36

The following call for traditional residential brokerages to redefine their businesses to address their shrinking bottom lines is excerpted from Swanepoel Trends Report 2020 

Trend 06: The Diminishing Financial Viability of Traditional Real Estate Brokerages


 It is clear that the traditional, commission-driven residential real estate brokerage model is being squeezed on all sides. A closer look at the financials and profitability of this model reveals it is under major financial pressure. As commission splits rise in favor of agents and teams, and the commission rates consumers pay continue to compress, brokerages are left in a tightening vice. Given that these are a traditional residential real estate broker’s two primary revenue channels, these firms must redefine their businesses to address their shrinking bottom lines.

By tracking key business metrics, brokers can identify the causes of their business challenges and determine what improvements to make to increase their profit margin. Brokers also must know which financial line items are causing the most financial pressure on their business and what strategies and best practices they could implement to improve those key metrics.

Increasing Profits

Brokerages have a variety of options to increase their profit margins. The first step involves carefully reviewing their profit-and-loss statements, analyzing their performance relative to local companies with similar business models and then revamping their company’s operations to improve efficiency. Next, they should consider providing ancillary services if they do not already offer them and consider building out company-generated business initiatives to provide additional streams of income.

To really face the challenges of real estate’s new era and grow profits to a meaningful and sustainable level, brokerages not only need to know their numbers, but they also need to add or increase revenue from ancillary businesses and consider developing a refined company-generated business program.

Add Ancillary Services 

Real estate transactions are just the tip of the real estate iceberg. When consumers transact, they need title and home warranty insurance, escrow (in states where it is practiced) and many need mortgages. Brokerages are in a natural position to take advantage of the ancillary service opportunity. Many of the nation’s most successful brokerage companies — such as Realogy, HomeServices of America and Howard Hanna Real Estate — already have well-established ancillary businesses. 

If executed well, a brokerage can maintain slim profits but really shine with higher bottom line profits from business fed to brokerage ancillary business units. The real estate transaction is the engine that drives all of these other opportunities. 

Ancillary businesses can be structured in a variety of ways: 

• Marketing services agreements (MSA). These are easy to set up and to dissolve but produce the lowest return. 
• Joint ventures. These involve becoming a part owner — with a known mortgage or title provider — in a new company. 
• Ownership. Not as easy and not dramatically more profitable. 
• Brokerages can legally own a mortgage broker under a real estate license in most US states. For other ancillary services such as insurance, the rules vary by state, and often require state licensing. 

Escrow 

If brokerages operate in escrow states and do not have an escrow business, they are missing a significant source of additional revenue. Escrow is perhaps the most straightforward and easiest ancillary business to create. Brokerages can capture approximately 60 percent of the clients they help on the transaction side as escrow clients. 

Mortgage 

Operating or participating in a mortgage venture as a mortgage broker or mortgage banker can be relatively easy, although brokerages will have to make sure to stay on the right side of RESPA. The law allows brokerages to operate a mortgage company. Some brokerages have marketing service agreements with mortgage companies; some just have mortgage officers in their offices and receive rent, which, according to RESPA, must be market rate.

Brokerages who decide to go full-blown mortgage broker can really synergize their transaction and mortgage businesses. If successful, a mortgage unit can capture 35 to 40 percent of the buyers the brokerage represents on transactions; that is a high, but achievable rate. 

Homeowners Insurance 

Homeowners insurance or property and casualty insurance is a longer-term play because brokerages really make money when they start receiving the residual income provided by these financial products. 

Title Insurance 

If they choose to do title insurance, brokerages should operate their own shop. Title insurance is very lucrative, but it takes a while to ramp up. Brokerages can capture their transaction customers at a rate of 40 percent fairly easily, and if they have rigorous policies in place, can capture up to 60 percent. 

Home Warranty 

The amount brokerages can earn from providing home warranty services varies by state. Regardless, it is a relatively small number, in the ballpark of $50 per transaction, so volume really matters if brokers decide to participate in this business.

Build Out Company-generated Business Program 

By developing in-house systems, acquiring and delivering leads, brokerages can charge higher referral fees or higher splits with agents. This requires significant investment and systems and an agent population that supports it. Usually, newer agents function as great team members. As they mature, they spin out and become productive agents, but still benefit from the team’s operational support they still need as their sphere-of-influence-business grows. 

Brokerages can adopt this by training up a special e-team of agents trained to handle the leads the brokerage delivers. Of course, the brokerage needs to efficiently acquire leads, have tight processes to follow up and respond to them, such as a highly trained inside sales operation, and consistent training on conversion. 

Inside sales agents serve as lead managers who incubate and convert company-generated leads. When ready, they distribute them. Conversion rates have been shown to significantly improve when a team is tightly managed, for example: 

• 1 percent or worse when leads are sent to individual agents 
• 2 to 3 percent for agents on an e-team with some systems in place 
• 4 to 5 percent when an agent team holds weekly accountability meetings and has complete systems in place 

Traditional brokerages face daunting times. The ground is shifting under the industry’s feet, and without movement, brokerages who have operated under the rules and guidelines of a previous era, will likely not remain standing. Whether brokerages begin offering refined lead-generation programs or add to or start their ancillary services, they will need to adapt to realize business-sustaining profits.

One thing is certain: without a rigorous analysis of their financials and some smart, aggressive adjustments, their businesses may no longer be financially viable. 

To help with that analysis, T3 Sixty has compiled 33 key brokerage business metrics, organized into eight categories in Chapter 6 of the widely acclaimed Swanepoel Trends Report 2020..

 

Click here for Trend #7.

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Saul Klein

In 1948, doctors told my father that his life aboard submarines on war patrol in the South Pacific and the depth charging he experienced had rendered him sterile. Although controversial and not widely applied, he was treated with an Ayurvedic therapy called “shivambu.” If you are unfamiliar with this term, I recommend you Google it because against all odds, I came to exist.

That was a loony segue into my life but is a fitting precursor to a career that would be just as incredible.

Like my father, I joined the Navy. However, due to a medical inconvenience, I was honorably discharged after 6 years of commissioned service, all on Sea Duty. This was an opportune misfortune that led me down the path to a successful career in real estate. Both my father and grandfather flirted in real estate brokering and flipping part-time, and I followed suit but making a lifelong career out of it.

With over 40 years in real estate, it is impossible to talk about my experiences in this small window. But I can proudly say that I am well-recognized as an industry pioneer, especially in real estate syndication and education, and one of the few luminaries that paved the way for real estate’s transition to the online world.

Some highlights of my life’s work:
● Co-created ePRO, technology certification course that certified 70,000 students
● Created the first online communities for real estate professionals to network, learn, and sell
● Created "Opt Out" Listing Syndication, aggregating over 1.4 Million Listings in 18 months
● Built the #2 National Listing Syndication Service, Point2 Technologies, sold to Yardi in 2010
● Founder of the California Association of Buyer’s Agents
● Member of the first REALTOR.com Team, pre-IPO, responsible for obtaining first 500,000 listings
● Helped Zillow and Trulia build up their MLS data inventory

Today I continue to lead efforts that bring new technologies to the real estate industry. Feel free to reach out and learn more.

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