Competition in the real estate brokerage space has never been as fierce: Gross margins for all brokerage firms have dropped more than one-third in the last seven years, from 22% to under 14% today. The biggest challenge brokers will face over the next three months is pressure on profit margins.
Brokerages need to generate ancillary revenue streams to survive. Although an estimated 42% of brokerages offer mortgage, title, closing services and property insurance, most brokerages still do not.
A New Opportunity
A new ancillary revenue opportunity is emerging that aligns even more closely with standard brokerage businesses: income generated from new buyer solutions.
The emergence of power buyers such as Ribbon is creating new ways to help all buyers compete. Brokerages benefit from increased transaction revenue and new revenue streams.
Today, we are seeing three leading categories of buyer solutions:
1. Traditional ancillary services: Brokerages partnering or offering mortgage, title, closing and property insurance solutions. Each business provides additional revenue.
2. Cash offer programs for buyers: These solutions are like a modern bridge for sellers, but help buyers. The power buyer underwrites the buyer so they can make cash offers without a loan contingency. In some cases, the power buyers buy the home, and then the client buys it back from the power buyer. It’s another way first-time buyers can compete.
3. Rent-to-own innovations: Future buyers are first pre-approved and then find a home that the rent-to-own provider purchases. Next, the home is rented back to the prospective buyer, who will buy the home, typically within a few years. These programs help solve the No. 1 homeownership barrier: lack of a down payment. They also can help those with poor credit, providing potential buyers time and assistance to repair their credit.
These innovative solutions are designed to help the largest group of homebuyers: millennials.
Brokerages have long-established relationships with clients that these new solution providers seek. As a result, many power buyers offering these programs are willing to partner with brokerages and share some of the revenue. It’s a win for everyone: brokerages increase transaction and ancillary revenue, power buyers reduce their customer acquisition costs, and consumers who otherwise would be unable to buy a home become homeowners.
This emerging trend is growing so fast that some brokerages are beginning to offer their own power buyer services, expanding the reach of their brand and revenue sources.
Many of these power buyer firms are unicorns—billion-dollar valued firms—offering a new opportunity for brokers that is bigger than ever. By working with power buyers, brokers can create new revenue streams to re-invest back into the business, becoming a modern brokerage that offers all buying and selling solutions to their client base.
Lane Hornung is CEO/co-founder of zavvie, a technology company whose software platform enables the modern brokerage to offer all buying and selling options to consumers with the push of a button. Hornung is also CEO/founder of 8z Real Estate.