In 2015, according to RealTrends data, gross margins were at 16.4% for the largest brokerage companies in the United States. Today, they’re at 13.5% for 2020, down from 13.8% only one year ago. Why? The first cause of the decline is the growth in competition for productive agents and a variety of new brokerages.
“Another factor is that leading market-share brokerage firms now get as much, or more, of their earnings from mortgage, title insurance and other core settlement services,” says Steve Murray, senior advisor to RealTrends. “As such, [brokerage] strategies often go to capturing share of the brokerage business, not just for the sake of brokerage profitability, but to drive transactional volume and profitability through these related services.”
Consumer demand is driving the growth of these related services. In a 2019 National Association of Realtors and Harris Insights study of recent home buyers, knowing that an agent’s firm offered one-stop shopping has a positive impact on buyers’ selection of an agent (86% in 2019).
In fact, of recent home buyers who used a real estate agent, there has been an increase in use of agent-affiliated services, including: home warranty (47% in 2015 vs. 57% in 2019); home inspector (34% in 2015 vs. 56% in 2019); and, homeowner’s insurance (22% in 2015 vs. 36% in 2019). There is a similar trend among home buyers who used a mortgage lender, with an increase in use of lender-affiliated services, including: home warranty (32% in 2015 vs. 50% in 2019); home inspector (21% in 2015 vs. 43% in 2019); and, homeowner’s insurance (25% in 2015 vs. 41% in 2019).
What’s changed since 2019 when this study was published? An explosion of financial options for home buyers and sellers. While iBuying and bridge loans aren’t new concepts or ideas, the way they are marketed is new and consumers demand them. With Zillow shuttering its iBuying division, questions abound about the viability of iBuying as a business model. However, other financial options from companies such as Knock, Ribbon and Redibs, are partnering with brokerages and agents to offer bridge loans and other innovative financing options.
it occurs to us from talking industry leaders who are engaged in some of these services that, coming soon down the road, we’re going to have a new type of brokerage company — a new brokerage model emerging. One that doesn’t just offer services for the agents. This new model offers traditional services for buyers and sellers to negotiate the deal, find a mortgage, arrange for inspections, arrange for household goods movement. But, leading brokerage companies of all brands, sizes and shapers will need to bring in their own bridge financing, possibly iBuying capabilities and more so that agents can offer more value to buyers and sellers. Consumers are interested in options.
“Leading brokers are going to embed these services into the base services that all of their agents are encouraged to offer and make buyers and sellers aware that they have these capabilities, whether the brokerage is providing the financing themselves or not,” says Steve Murray, senior advisor to RealTrends. “Partnering with other companies to offer these services suffices, but we think that — particularly leading brokerage companies and market share leaders — will need to incorporate these services in their everyday offerings to buyers and sellers.”
For brokerage leaders, that means training. Many of these offerings are confusing and will need a new level of skill, implementation and training. “After 40 years of watching brokers adapt, retrain, re-gear and reinvest, I know that leading brokers are up to the task,” says Murray.
The brokerage model is evolving. There’s innovation around every corner that will require real estate brokerage leaders to pivot and adjust quickly. Pay careful attention to what homebuyers and sellers demand as that will drive your services going forward.