In his keynote at Inman Connect Las Vegas, Brad Inman described a broker-owner who was planning to charge a 0 percent commission on his company’s transactions. The real estate transaction would be a loss leader for the mortgage and title part of his business. Before dismissing this idea, this trend is already in play as brokers, lenders, and the portals battle it out to reach the consumer first and capture these fees.
Soaring agent splits and operating costs have left many brokerages struggling to stay afloat. Many of the brokers I’ve spoken with for over the past 15 years have reported profits as low as $125-$225 per transaction.
At Connect, Walt Tamulinas, broker-owner ERA North Orange County Real Estate, explained that when he first became a broker, 80 percent of the profit was from commissions and 20 percent from affiliate services such as mortgage and title. Today those numbers have flipped: 80 percent of his profit is from affiliated services, and 20 percent — and he mumbled, “if even that much” — is from commissions.
This fact has driven the explosion of virtual brokerage models to decrease overhead as well as 100 percent commission models that charge a monthly fee coupled with a transaction fee.
The battle for who will reach the buyer first
Brokerages that have mortgage and title services would like to keep the entire transaction in-house. This can be difficult due to RESPA requirements as well as agent reluctance or inability to persuade the buyer to work with their broker-affiliated services.
Lenders and the portals are now in the game as well. The company who captures the mortgage business often also controls agent referrals, usually with a 30-35 percent referral fee attached. They may also profit from title fees as well. Examples include Quicken Loans, Rocket Mortgage, as well as mortgage offerings from realtor.com and Zillow.
IBuyers are a third source of competition. This takes two primary forms. The first is the traditional iBuyer that purchases the property, updates it and resells it.
The second iBuyer model allows buyers and/or renters to pay all cash for a property by
- Purchasing the property for the buyer and selling it to them when their existing home sells
- By providing a new breed of bridge loan
While many iBuyer companies offer agents a full commission, Greg Schwartz, CEO and co-founder of Tomo, identified a potential pitfall for consumers: at least one company is charging 4 percent for the equivalent of a 30-day bridge loan. Nevertheless, this still may be cheaper than selling with using the traditional iBuyer model once you add up their fix-up and marketing fees.
Fintech: the promise of quick closing dates, new ways to qualify buyers, all at a lower cost
Greg Schwartz explained how he has spent time with Realtors and homebuyers all over America. Based upon what he has heard, the mortgage is “the catastrophe of the real estate transaction.”
According to Schwartz, the mortgage industry currently originates $2 trillion in loans annually. Tomo seeks to upend the existing mortgage model by doing the following:
- Reducing the application-to-approval time down to only 18 days.
- Reimagining the appraisal process. Schwartz repeatedly said he was going to “fix the appraisal process.”
- Incorporating two new Fannie Mae guidelines. Fannie Mae now allows recurring rent payments to be used in the underwriting process. Second, when there are two or more borrowers, they will be able to use a mean average credit score to qualify. (The mean score still must meet the Fannie Mae 620 credit score minimum to qualify.)
- Take the pain and worry out of not closing on time by never missing a closing date. If there is an issue, they will take responsibility and handle it post close.
- They will only provide purchase money loans. Their goal is to provide the “best of breed” mortgage service working in concert with the very best agents.
Tomo has already received $70 million dollars in seed funding and has launched in Texas and Washington. Florida will come on board soon.
The impact of fintech on profits from mortgage and title fees
Billions of dollars are being poured into financial technology aimed at simplifying and reducing the cost of the transaction, especially in mortgage and title. Assuming this effort succeeds, brokers will no longer be able to look to revenue from these sources to drive profitability at the same rate they have in the past.
Agents still have the best opportunity to meet the buyer first
The “2021 NAR Home Buyer and Seller Generational Trends” report shows that 67 percent of the buyers and 77 percent of the agents only interviewed one agent that they hire. Moreover, only 13 percent of buyers found their agent either by inquiring online or on a website; 60 percent found their agent through a referral.
The bottom line — a zero percent commission model is unsustainable on a long-term basis
Innovative fintech models will result in buyers being able to close more quickly with less hassle and significantly lower fees. Consequently, brokers who rely on mortgage and title fees to stay afloat may have to look to other revenue streams to remain profitable.
One of the best places for brokers to look for revenue is their own agents. Based upon the numbers above, agents must make meeting face-to-face with the buyer or seller a priority as soon as they generate the lead. They must also be able to clearly delineate the value they bring to the transaction. This is still the best option for to earn a full commission and for all involved to be more profitable.
Bernice Ross, president and CEO of BrokerageUP and RealEstateCoach.com, is a national speaker, author and trainer with over 1,000 published articles. Learn about her broker/manager training programs designed for women, by women, at BrokerageUp.com and her new agent sales training at RealEstateCoach.com/newagent.