Generating Additional Revenues from Your Real Estate Business

by Stefan Swanepoel

What do today’s homebuyers want?

It is undeniable that the Internet has brought a world of options within everyone’s grasp and has forever changed consumer-buying habits. New Internet empowered buyers are now more savvy, more sophisticated and more demanding than ever before. They now require the best price, greater efficiency in their transactions, and in some cases instant gratification.

Retail has created a “24 x 7” mentality intertwined with a one-stop approach and enhanced customer service. In most major cities individual grocery and liquor stores, butcher shops and more recently even drugstores; have gradually been incorporated into the mega retail chains. Stores have more, they are open longer and prices are lower.

When we transfer that philosophy to real estate it becomes important to try and define what it is the consumer might expect us to offer as the “total home solution.” Should it mean all off and online services that integrate sales and settlement services together, facilitate the entire home purchase transaction; manage the process before, during and after the closing, while offering a home and “lifestyle concierge” service for the entire home ownership period?

Many industry leaders acknowledge that the next three to five years will witness the demise of “stand-alone” residential real estate companies, as we know them today. There is, however, considerable debate as to details of how the transition will take place and the specifics of the timing. There is however, consensus that this new model will most likely see real estate brokerages offering a much broader base of services.

Compensation Master, a leading financial consulting company, has researched hundreds of real estate brokerages in an effort to determine the most optimum cost structures and profit levels. According to CEO David Cocks the average real estate brokerage today makes between 1-3% net profit. That would mean that the average profit per transaction ranges between $44 and $132 based on the average sales price for single-family homes. (According to National Association of Realtors® the average sales prices in 2001 was $151,800). This sounds like an industry teetering on bankruptcy. David Cocks further states that real estate brokerages that provide ancillary services, without changing any other aspects in their companies such as compensation plans, have considerably higher net profits of between 4 - 7%, or $132 to 309 per transaction.

Simply stated – it is not only our job to figure out how to meet the changing demands of sophisticated consumers that are demanding a more comprehensive and superior service at a lower cost, while still providing a practical, real world, profitable business model in which all components prosper, it is a prudent and wise business decision.

How do we give the consumer what he wants?

The most effective way to participate in this new consumer-centric model is for existing real estate brokers to re-engineer their existing traditional business by overlaying it with a larger selection products and services. The real estate broker must remain the first and key point of contact with the client, from the beginning, throughout the transaction, as well as during the client’s ownership of the home. Without this commitment to the customer, the broker will surely lose out to other service providers in the great game of customer satisfaction.

One indispensable element is personalized service. Realtors® have to maintain a strong component of their existing brick and mortar operations but must add, and continue to add, increased ancillary and online transactional capabilities.

Real estate brokerage companies have a high probability of remaining the primary gatekeepers of the home purchase transaction. However, the shift will have to be from gatekeepers of the information to gatekeepers of the process. If Realtors® don’t make this transition they may find their role, as we know it today, decreasing and maybe even disappearing.

Where do you begin?

As a Realtor®, you have most likely been recommending the services of electricians, moving companies, home inspectors and so forth. Isn’t it time you create a more personalized “concierge type” service - one in which you have more control over and maybe even actually make money from?

The first step is to answer three simple questions honestly as the answers will affect the actions you should take to implement the new service. Although it might appear that the questions are isolated, successful implementation depends on which combination of choices you make.

Decision 1 – The WHAT?

Are the services that you will add to your existing portfolio a “must” (Category A - Important) to remain competitive or to keep the customer? Or are the services only a “value-added” (Category B - Optional) to have, but not critical to customer retention and basic service? Services frequently considered important include mortgage, title, escrow and insurance. Services usually placed lower on the list and therefore considered more optional would include services that play a smaller role in the home buying transaction or have less probability of interfering with your relationship with the customer - such as pest inspection, appraisals services, repairs etc.

Decision 2 – The WHY?

Why are you offering the specific service, and how do you wish to have this specific service positioned in your company? Category A - Income refers to additional service if it is being introduced as a primary revenue source that will one day become a major source of income. Category B - Support is when a new service has as its goal to only support your existing core services and protect your customer base, and you really don’t mind too much whether the service is profitable or not.

Certain services, such as mortgage and title insurance, tend to fall very easily into Category A. These are both core services of the home buying transaction and both have the potential to generate fairly significant revenue income. On the flip side, the profit margins on, e.g., pest inspection and appraisals is fairly small and customer loyalty is generally low. As such, they would most likely fall into Category B. The importance of determining whether a service is in Category A or Category B will determine the level of your investment and commitment to offering that service.

Decision 3 – The HOW?

Now that you know what services you are adding and why you are offering them, you can focus on how you are going to offer them. If the services falls in both previous A categories (Important and Income) you will most likely lean towards doing it yourself (Category A -. In-house). If the services again are both in the previous B categories (Optional and Support) you will most likely lean towards finding an alliance that can help you offer those services (Category B - Partner). The many other variations such as AB or BA usually can be equally satisfied by either an in-house or partner solution.

This article does not even begin to contemplate all the variations that exist, or could be offered in the complete home ownership life cycle. (See the home ownership circle diagram). As the diagram shows, a real estate professional could become involved in any one, or any number of services in any of the categories. To illustrate how this could work in reality, lets look at a company that went through this thought process.

In 1997 a three-office typical and traditional real estate brokerage in San Diego, Coldwell Banker Associates Realty, decided to venture into ancillary services. The company decided they wanted to become secure the company’s future by becoming less dependant on a single revenue source. After many months of deliberation and evaluation of the above processes it was ultimately decided to add four ancillary services namely mortgage, title, escrow and insurance services. It was decided to target all four services as income producing (Category A) services with two being offered in-house as wholly owned subsidiaries (Category A) and two services in association with outside partners (Category B).

Today, five years later, the company is still owned by the same shareholders, but that is where the similarities stop. The company operates one of ten largest mortgage brokerage companies in the nation owned by a real estate brokerage, as well as thriving and growing escrow, title and insurance companies. In 2001 the company, for first time, earned more than half (51% to be exact) of company EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization) from ancillary services. What makes this incredible achievement even more astonishing is that the revenue of the brokerage side actually increased almost fourfold during the same time and sales last year surpassed one billion dollars for the first time.

In Summary

Coldwell Banker Associates Realty is an excellent example of how, when correctly adding ancillary services, you can strengthen and build your company for the future. It is however no simple task, and those that have walked the path before, will caution you to prepare in advance and execute with commitment. As take away I leave you with the following guidelines to help through the process.

• Do your homework well. Make sure you know what, why and how before you begin with a new venture.
  
• Share your vision with your management team, admin personnel and the sales force.
  
• Show everyone that you are committed to the project and that it is an important and equally integral part of the total company.
  
• Motivate those you expect to participate in driving the new program on a regular basis, especially your sales force.
  
• Remember to cross-sell and cross-pollinate your services everywhere, all the time, in brochures, on business cards, websites, sales rallies, etc.
  
• Manage the roll out by setting targets, obtaining meaningful regular statistics, monitoring progress and correcting inefficiencies.
  
• Ensure that one person has the primary responsibility of championing this vision and has real authority to make it happen.
  
• Give existing managers in other divisions/departments additional incentives to participate and ensure the projects success.
  
• Always continue to promote change, share and inform your team about the ongoing changes and trends in the real estate industry while rewarding new ideas that initiate growth and success.

To Learn More

Additional information about ancillary services, including questions Stefan recommend you debate and consider can be viewed at www.RealSure.com It is also wise to ensure that you remain within the boundaries of the Real Estate Settlement Procedures Act (RESPA). This is not an easy issue to deal with and there are many different “expert” opinions floating around. However, for those willing to acquire a working understanding of RESPA and with the counsel of a good RESPA lawyer, one can navigate the rules to both their own and the consumer’s advantage. The original text of all of the HUD documents and related opinions are available on the HUD web site