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Opinion: Mortgage joint ventures may be a lifeline in a tough market

A mortgage JV may be the most profitable source for ancillary income in the industry

As the real estate market continues to evolve, real estate brokers face significant challenges.
Ancillary income derived from affiliated services such as title or insurance may provide dependable revenue streams outside of their core business. The most skillful brokers have successfully incorporated these various affiliated revenue streams into their own company models.

However, perhaps the most lucrative affiliated service available to broker/owners is that of the mortgage joint venture (JV). The reluctance of some companies and teams to pursue a mortgage joint venture relationship is attributable to many factors — the complexity of the mortgage business, the potential compliance pitfalls, and simply an unwillingness to manage additional risks.

While it is true that the mortgage space is complex, highly regulated, and comes with risk, it is
also true that a mortgage JV is potentially the most profitable source for ancillary income in the industry. The proper partner will minimize these risks and manage the mortgage JV so that you can retain the bandwidth to focus on the core business of serving your agents.

When in discussions with potential JV partners, it is imperative that four key issues be addressed: cost, proof of concept, compliance, and timeline. Doing so will provide clarification about the misconceptions regarding mortgage JV’s and provide the best path forward to finding the ideal fit for your company’s needs.

1. Cost: “How much?”

Mortgage joint venture (JV) entities are typically either a lender model or broker model. Each model has its own specific challenges.

A lender model JV typically requires a substantial initial investment of at least one million dollars. It’s a more complex joint venture, as the lender model typically requires significant capital investment to properly accomplish the essential functions of a lender while remaining compliant and efficient. The overhead required of a lender to sustain operations can be quite burdensome.

A broker model JV requires a significantly smaller initial investment. State regulations vary,
however, but typically each state has a minimum net worth requirement well below the capital investment required for a lender model. In fact, most states require a minimum net worth of only $25,000. Therefore, your broker mortgage JV partner should only require a reasonable amount of initial capital to remain in compliance and have sufficient funds to launch a broker mortgage JV.

In addition, broker models rely on their approved lenders to underwrite the loans, thus minimizing the potential liability and overhead. In the broker model, the wholesale lender partner shoulders the significant overhead costs and retains most liability on the loan. This allows the broker to maintain a level of efficiency that is difficult for a lender model to match while also providing shelter to a real estate partner from potential liability on the loan.

2. Proof of concept: “Does it work?”

Proforma’s can be a helpful forecast. However, they can also be manipulated to produce
an unrealistic expectation. Past performance is the best indicator of future success. It may be
wise to request from a potential JV partner proof of concept via actual financials and/or profit and loss statements with sensitive identifying information redacted.

Avoid the risk of being a guinea pig for a new or failing model. Effective due diligence
while in the decision-making phase is critical. It may be a red flag if financials are requested, and a potential partner is not able to honor that request, either the new JV is the “guinea pig” or partners are making minimal profit or perhaps even suffering significant losses. Push this issue as this is not an unreasonable request. Any potential partner being considering should be transparent with financials.

3. Compliance- “Is it managed correctly?”

As an investor/owner of a mortgage JV, each owner will be held accountable to state and federal regulators. Compliance audits by these entities are initiated on a regular basis to
ensure the company is compliant. The consequences for failure may include substantial civil
fines and/or the possibility of jail.

Compliance should be a top priority. If the mortgage company is not compliant, the joint venture will fail.

The due diligence/vetting process when determining a JV partner should include
questions such as these: Has the model been through any state or federal audit process? Are there dedicated resources or employees to ensure that this complicated mine field can be navigated successfully? Is there an established quality control process for loan files? What is the track record in this area?

The mortgage arena can quickly become complex. The regulatory burden is complicated federal and state specific disclosures requirements, monthly and annual reporting requirements, and various marketing and advertising requirements require a partner with actual experience ensuring systems are in place to manage this vital component.

Having a partner who has successfully navigated this mine filed is critical to success.

4. Licensing & timeline: “How long will it take?”

Momentum is key. Once you’ve selected the right partner, positive energy must
continue to flow toward the launch date. The licensing process requires submitting a detailed list of personal and professional information. These applications are extremely thorough.

However, an experienced licensing professional should secure an approval within 30-60 days from the submitted application date. Many reals estate professionals who have partnered with various companies have waited 12 to 18 months to secure an approval. This will not only cost money, but will hinder the loan officer recruiting process and frustrate everyone involved. In addition, there is a possibility that you may lose the respect of real estate agents when the announcement of the new mortgage company continues to be delayed month after month.

Select a partner with a savvy and experienced licensing staff. Time is money, and every
day spent waiting on approval is equal to lost opportunity and money. Do not underestimate how critical it is to maintain positive momentum, especially in the launch phase of the process.

5. Volume considerations: “Is it for me?”

Risk is inherent with any business relationship. If real estate volume is sufficient to
justify a mortgage JV relationship, then your professional responsibility should be to pursue that avenue and evaluate the opportunities. An efficient joint venture model may turn a profit on as little as $2 million dollars in volume per month.

Models with significant overhead will necessitate significantly more volume. Analyzing your buy side potential will be helpful in determining whether your volume justifies a JV partnership — and which model would be best.

The main objective when exploring mortgage joint ventures opportunities is to vet
potential partners for experience, efficiency, and risk management. I’m hopeful these talking
points provide a helpful guide as you pursue this aspect of the industry.

Brokers without a JV are leaving money on the table. While owning a mortgage joint venture is not for everyone, when the right Realtor partner joins with the right JV partner, the
revenue stream can become quite significant. Performing due diligence before entering a JV
relationship may ensure that the only question post-launch is: “Why didn’t I do this sooner?”

Mike Jenkins, Esq. is an attorney and litigator who has served in various roles in Operations,
Compliance and Sales with a large lender as well as multiple broker joint ventures. He currently works for Movement Joint Ventures, LLC where he assists with partner acquisition, compliance and consults with potential and current partners on business strategy.

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