Doing it alone in the real estate market isn’t easy anymore. Competition is fierce, and profit margins are thinning, making it almost impenetrable for many real estate firms to enter the market.
Today, it’s not enough to offer clients access to exclusive listings and top-notch marketing services. Real estate companies need to expand their services to include mortgage, escrow services, insurance, home warranties, relocation services, or all of the above. This requires levels of capital and technology investments that aren’t realistic in today’s market for many real estate firms.
For real estate brokerage firms to survive and thrive, having long-term reoccurring revenue stream is no longer a nice-to-have, but a must-have. Today, options are yielding varying degrees of success. The traditional approach is through a mortgage-related marketing service agreement (MSA), also called an advertising services agreement. In this type of agreement, a lender hires a real estate company to market its services to the customer base. Over the years, these types of arrangements have faced increased scrutiny by regulators, particularly the Consumer Finance Protection Bureau (CFPB), which enforces the laws of the Real Estate Settlement Procedures Act (RESPA). Aside from the regulatory risk, lenders may come and go in the relationship, leaving the brokerage susceptible to the loss of that revenue.
Compliance with MSAs can also be a dicey path to navigate. Run afoul of regulations, and your business could face fines and potentially devastating negative PR. Staying in compliance can be an arduous process, requiring money and time spent filling out paperwork and proving and verifying that you did what you are being paid for. Ink multiple MSAs, and you can spend more time on compliance than closing real estate transactions.
Another way of building this revenue stream is through a mortgage joint venture with a company that has the experience, infrastructure, and technology. Together, both companies share in the resulting profits. In our opinion, this has proven to be far more lucrative than a marketing agreement.
There are significant benefits to this way of doing business for everyone involved in the real estate transaction. The joint venture partners close more loans, which means more profit; agents can expand their offerings, and buyers have access to more services.
Real estate firms that go it alone in a true mortgage banking platform have to either invest a great deal of capital in the business or be a mortgage broker where they lose material revenues and direct control over the customer experience and services. A joint venture model requires much less capital, which frees up money to pursue other growth opportunities. Partnering with a firm that has deep pockets also means the ability to offer customers unique mortgage programs that can expand a firm into new markets and their agents to sell more homes.
Those who choose to go the joint venture route also get access to cutting-edge technology that can speed up the entire transaction, which means agents are paid more quickly. Consumers have grown accustomed to easy applications, quick answers, and top-notch customer service, whether it’s via digital or human means. Loyalty is now earned, not a given. Real estate firms that can deliver all of the above stands to benefit more than their go-it-alone rivals.
Real estate is transactional, meaning repeat business is the holy grail for many real estate professionals. By engaging in a joint venture, real estate professionals can access digital origination, co-branded customer relationship management tools, and marketing resources. While a joint venture can’t wholly mitigate risk, the expertise all of the parties bring to the business certainly can minimize it.
A variation on the joint venture model is the consortium venture. Geared toward firms that don’t have enough scale or capital or don’t want to go the full joint venture route initially, a consortium venture is created when a few real estate companies combine and share in the profit based on their percentage of shares owned. Players can be located across town or the country, all accessing the same tools and support of a standalone joint venture, while still maximizing the returns without having to invest large amounts. This model can be an option for a brokerage of almost any size.
Real estate transactions are complicated, but when they start to move sideways, it is often related to the mortgage. Unless you are the direct lender, you have little to no control. That’s long been a problem in the industry: you’re always at the mercy of someone else. With a joint venture, that’s not an issue. The real estate firm gets to control the transaction from start to finish. That usually translates into higher retention and conversion of leads and a better customer experience which increases referrals and repeat engagements. This can be the key to a thriving real estate business.
Randy VandenHouten is Senior Vice President Joint Venture/Retail for NewRez. VandenHouten joined NewRez in 2014 as Chief Financial Officer of Shelter Mortgage Company Retail division. He’s been with the Shelter companies since 1998 and has extensive knowledge of this industry and the Joint Venture segment.
Al Miller is the Vice President, Business Development - Strategic Relationships for NewRez. Miller joined NewRez in 2016 as part of the NewRez/Shelter Mortgage Company team focused on growing our Joint Venture business channel. Miller has been a broker-owner of a residential real estate firm and is a frequent speaker at industry conferences.
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