There’s a belief among top real estate brokers and coaches that, in the future, agent splits will increasingly shrink, forcing teams and brokerages to enter partnerships with third-party service providers such as mortgage, title and insurance companies.
With most real estate teams averaging 10-12% net profit and brokerages netting 3-6%, there’s often little room left for profit from the purchase and sale transactions alone, says Jeff Cohn, founder of Elite Real Estate Systems coaching company and the Team Building Podcast.
Commission compression at the broker-agent level has ramped up over the years with top-line gross commission income (GCI) on the decline, adds Craig McClelland, COO and Vice President of BHGRE Metro Brokers, Atlanta. GA.
According to McClelland, there’s a massive amount of capital being injected into real estate through IPOs and venture capital funding from organizations who are less focused on the $85 billion of total commissionable income in the industry and more focused on the “overall ecosystem of the transaction.”
“We have seen brokerage companies impacted by tighter margins, especially when the business is exclusively focused on the commissions from the house. But if I’m launching mortgage, title, insurance, home warranty, transaction coordinator services, lead teams and photography, the pressure for profit is no longer singly responsible to one part of the transaction. The additional lines of opportunity contribute to the success of the overall business model,” he says.
Cohn likens this revenue stream to the theater industry where movies serve as the loss leader. “Think of a movie theater, which breaks even on the tickets but makes its money on concessions.”
The challenge for teams and brokers then becomes how to find the right mix of third-party ancillary service providers and set up the right relationship format that will make the most sense for the business while getting agents on board with those choices.
By law, brokers cannot force independent contractor agents to endorse any of their service providers; therefore, it’s critical teams and brokerages find third-party partners who will deliver the greatest expertise, products and customer experience to engender trust and credibility among their agents and customers.
“These services have to not only provide a business benefit but also a shared customer benefit,” says Matt Vigh, co-owner of Prospect Boomerang a Tampa, FL-based real estate recruiting company focused on coaching brokers. “If both are in place, that situation will probably win as long as the business values are the same. If I am an agent and have the ability to call a plumber at 11 p.m. on a Saturday night to help out a customer with a burst pipe, then I am providing a convenience that helps build trust.”
“Top agents are like concierges… you can help them stay at the center of the ecosystem with their customers by giving them a chance to stay connected with those people during the entire lifecycle of homeownership.”
There are three basic partnerships teams and brokers can enter with ancillary service providers:
In a vendor relationship, a third-party provider pays a fee — typically around $50-$100/month to join a broker’s vendor list, which the brokerage’s agents can share with their buyers and sellers.
Also known as Marketing Service Agreements (MSAs), strategic partnerships step up the arrangement by including the provider on the brokerage’s purchase agreements and giving them access to the database for a predetermined fee. “If they’re paying for lead generation, they have to have access to where those leads go so they can work those leads as well,” says Cohn. “Typically, you’ll see teams and brokerages receiving around $5,000-$10,000/month for access to all the data on the backend of a CRM.”
Potentially the most valuable relationship but also the riskiest is ownership in these third-party entities. Brokerages who own mortgage and title and insurance companies can collect revenue directly from these entities, as opposed to a strategic partnership or vendor relationship, in which case they can only collect a set monthly fee in accordance with state and federal regulatory laws. Brokerage-owned ancillary services don’t necessarily have to only service that brokerage; they can also service other brokerages either within the state or nationally, given they meet all state and federal criteria.
Again, before entering any partnership, it’s absolutely critical that brokers and their prospective partners hire local legal counsel to ensure the deal meets compliance with the Consumer Financial Protection Bureau (CFPB), the Real Estate Settlement Procedures Act (RESPA), U.S. Department of Housing and Urban Development (HUD) as well as local state regulations.
For instance, if a mortgage broker is paying a desk fee to a broker to rent that office, there’s a specific process those partners need to follow to ensure the fees fall within approved guidelines, says Vigh.
“State to state can be vastly different,” he says. “So you need to check with local, state and federal licensing departments to decide which of these might work for you when it comes to settlement issues. For instance, some states require an attorney to preside over the closing, in which case it wouldn’t make sense for the brokerage to own a title company.”
“The people who get in trouble usually don’t know they’re doing something wrong,” adds Cohn, “That’s why brokers and their partners must seek legal counsel first.”
There are many different third-party providers, ranging from settlement-related services that directly impact the closing:
… as well as those that provide added value to the customer and fortify the agent’s long-term client relationship:
Each team or brokerage will need to vet the best mix of services that bring the most value to their business and provide services that agents are most willing to support. It’s a RESPA violation to require any agent to support the brokerage’s preferred providers, so it’s incumbent on the broker to find those services that can fill in any service gaps, deliver the highest service and bring value to the agents’ customer experience.
“The agent of the future, the agent adviser, will work as a true fiduciary and help to ensure that their clients are offered the very best in financial planning services, mortgage services, property and casualty insurance, title and escrow services and more.”
“Top agents are like concierges,” says Vigh. “You can help them stay at the center of the ecosystem with their customers by giving them a chance to stay connected with those people during the entire lifecycle of homeownership. Customers get tired of hearing from agents who only call with the message that they can buy or sell their house. But those who stay in front of their customers in the referral of ancillary services with messages like ‘Hey, I know a mortgage guy if you want to refi’ or ‘we just had a bad storm, how’s your insurance? Do you need a roof guy?’ Now they’re calling about the lifecycle of the home, and these customers will naturally call on those agents when they’re ready to buy or sell because they’ve stayed connected.”
Brokers will also want to evaluate the best mix of services that meet their business type and asset class. For example, a brokerage that serves single family, mid-level real estate with conventional or FHA loans may opt for relationships with mortgage, title, insurance and home warranty providers. Whereas, a brokerage serving homes in the million dollar or higher mark may find it less valuable to offer lending services in-house when most of their clients are bringing their own financial consultants to the table.
Those higher-end brokerages may specialize in concierge, premium services like drone and 3D photography, dog walking, city tours, private school registration, utility transfers and meal prep services.
Vigh recommends brokers and team leads also take a close look at the transaction side breakdown to help determine the service mix. “Let’s say you have 100 transactions a month and 90 are on the listing side and only 10 are on the buy side, or let’s say 50 out of 100 sides are cash because you sell lots of condos and the other 40 are listings, leaving 10 which are actual loans. So understanding the true buyer side opportunity is a big consideration,” he notes.
To win the agent’s endorsement and referral of any service provider, brokers and team leads need to ensure their ancillary partners will provide best-in-class service. Following are several tips to keep in mind when introducing new partners to the team or brokerage.
“How engaged is your staff in supporting your financial mission?” asks Vigh. “If you have an office of 100 possible transactions and it’s 50% buyers and 50% listings, but the buyers are on a huge team who already have a solid relationship with a mortgage broker, it might not bode well for your new investment. So it’s important to ask yourself, ‘How engaged are your agents?’ That’s where building trust and convenience kicks in.”
Naturally, third-party service providers who sit in-house assume a greater advantage in developing those relationships of trust than providers located off-site. “It’s hard to build those relationships when you’re not physically there, so the best way to get an agent’s support is to staff these services and place them in the same place where your agents and clients are,” says Cohn.
Team leads and brokers will also want to look at their agents’ existing relationships and identify areas where there’s opportunity to introduce new partners. “If you run an office and 80% of your units come from two teams who have strong, existing relationships with their mortgage brokers, you’re probably not going to break those relationships and have them endorse your new providers,” says McClelland. “Maybe look at home warranty or moving transaction coordinator work in-house. Or, if everyone’s ordering photography from people they don’t know, then maybe it’s bringing photography services in-house. Always start with these decisions.”
According to Cohn, the real estate agent of the future will be a tech-powered, hybrid (meaning they can perform their job virtually as well as in-person) agent adviser. This may require a mindset adjustment among a team or brokerage’s agents.
“No one thinks of their Realtor® when they think of property management, mortgage, title, term life insurance and investments. I think they should,” says Cohn. “The agent adviser isn’t there to only help a person buy and sell. The agent of the future, the agent adviser, will work as a true fiduciary and help to ensure that their clients are offered the very best in financial planning services, mortgage services, property and casualty insurance, title and escrow services and more. They should be of the mindset that, ‘Once you’ve closed your transaction with me, I’m going to send you emails every month about security systems, cable, internet and landscaping companies.’ We want to be advisers for life and to be the point person for everything related to the house.”
Third-party service providers who are based in-house will be in prime position to offer a foundational level of training, particularly for newer agents, which, in turn, will help spur more referrals, Experienced agents will also gravitate toward training dedicated to leveling up their business. “Not only will all of this training help with recruiting and retention, but it will help the brokerage get more business, in turn earning more top line revenue and bottom line profit,” Vigh says.
Before inking the deal on a partnership, brokers and team leads may want to include their agents, transaction coordinators and even other service providers in the vetting process to encourage all-around adoption.“If you have a mortgage person and a title person and are vetting a staging vendor,” Vigh says, “have everyone meet the prospective partner. Then, it turns into a business networking organization centered around your business and not just a new vendor hire. More buy-in means more profit for everyone.”
Once a brokerage or team selects their third-party service providers, dotloop offers a centralized workspace known as Trusted Local Service Providers (TSPs), which provides a convenient way to introduce providers to the client at each turn in the transaction. For instance, when an agent is setting up a listing contract, they can easily find a photographer or an attorney or a lender when it’s conveniently timed right with the transaction. For more information on how to add TSPs to the People section of a loop, click here.