CABO SAN LUCAS, Mexico — Everyone talks about change in the real estate industry, and more than 75 executives representing a cross-section of real estate service providers met here last week to talk about the changes they see and about changes they are creating.
“You are all here because you recognize the value of execution,” Joe Drum, chief operating officer of United General Title Insurance Co., told guests at the invitation-only conference. The purpose of the conference, Drum said, is to bring together the industry’s “best and brightest” to talk about the business models they have created and the models they need to create to meet the competitive and regulatory challenges they face.
The first session of the two-day conference focused on affiliated business arrangements – a new but growing real estate industry response to the restrictions the Real Estate Settlement Procedures Act (RESPA) imposes on the payment of referral fees to and among settlement services providers.
Paul Wylie, CEO of Metrocities Mortgage Corp., whose company oversees more than 160 ABA relationships, described the criteria essential to ensure their success. That list begins, he said, with selecting partners with “a proven track record,” who recognize the ABA as “a core business” and not as “something trendy” or essential for their survival. Partners must also have the ability to influence management decisions and “affect the overall experience,” Wylie suggested, and they must be “passionate” about the business. “Without passion, the arrangement can’t be successful or sustained.”
Equally important in successful ABA relationships, Wylie suggested: A commitment to high-quality (he termed it “heroic”) customer service, the flexibility required to adjust to market changes, accountability at all levels, and written service level agreements, outlining the best practices expected and “describing what happens when things go wrong.” But the key, he emphasized, is selecting the right participants. “If you get the right people, everything else becomes easier to accomplish.”
Although more companies are developing ABAs or eyeing them, they still face a variety of legal hurdles, according to Kenneth Jannen, vice president, counsel and associate senior underwriter for First American Title Insurance Co., who described some of the issues he’s confronted in helping craft outsourcing relationships of various kinds. As long as the fees paid and the services provided are “reasonably equivalent in value,” Jannen explained, they will pass muster with RESPA. The problem is determining value. First American handles that by doing “time motion studies” to quantify “what it would cost us if we did that work ourselves.”
In addition to RESPA compliance issues, companies often confront state licensing laws and other requirements, which vary in different jurisdictions. For example, Jannen noted, some states define title examinations as the “unauthorized practice of law;” others require agents to be licensed in the state in order to obtain fees for services provided on transactions there, which could mean that agents would need a license simply to schedule closings or handle the escrow process. Companies developing outsourcing relationships must analyze these varying requirements carefully, Jannen said.
He also emphasized the need to select partners with access to a large network of closing agents and who have a healthy respect for regulatory compliance. For compliance purposes, he noted, a written service agreement detailing the services provided and justifying the fees paid for them is also essential.
The evolution of ABAs reflects an effort to reconcile the pressure to reduce the cost of home purchase transactions with the pressure to apportion real estate fees among varied service providers. But Robert Blount, CEO of RE/MAX Allegiance, suggested that it is unrealistic to assume real estate brokers will be enticed to join ABAs by the promise of earning small fees for the services they provide. “The idea of paying brokers pennies for their services when they have $8,000 commissions on the line is foolishness,” he insisted.
But title companies do have a hook with which to attract brokers, he said. “If you can bring a predictable closing process to the table, agents will line up for it, because consumers (will insist) that they deliver it.” The title industry has a “tremendous opportunity to deliver increased relevance to brokers,” whose relevance is being threatened by their loss of control over real estate information. The way to do that, Blount argued, is not by discounting the prices of settlement services, but by adding value to them – by guaranteeing approvals, closing costs, and closing dates. “People will pay for value,” Blount insisted. “And that makes a lot more sense than discounting.”
“Consumers don’t care about the divisions in our industry,” he emphasized. “But they do care about paying 5 percent for brokerage commissions and 6 percent for closing costs. We have to get together and figure this out. We must become you and you must become us.”
What should the future bring? “What makes sense,” Blount said, “is a system that spits out a message to the borrower that it’s time to refinance and lets them do that online, at which point,” he suggested, “it all gets very simple.”
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