Original article published on forbes.com
Necessity is the mother of invention, and the profit margin compression coming in the real estate markets for builders, lenders and real estate brokerages are already creating the need for innovation. LoanDepot’s CEO is already on record with CNBC about their overcapacity. If you are looking at ways to survive the next cycle, consider leading your real estate-based company to partner, acquire or otherwise embrace a few strategies intended to help you brace for the storm.
Blockchain technology is coming and we will continue to hear more about its various benefits. Housingwire reported that Figure Technologies is merging with a mortgage company to bring their blockchain-powered loan process to a larger audience and several mortgage companies have announced research into accepting cryptocurrency payments. These announcements represent a significant shift in how blockchain technologies are perceived and how safe the technology is. As early as 2018, Housingwire was reporting that blockchain improvements will impact the title insurance with increased efficiencies and reduced cost. In addition to speeding up the mortgage and title process, the real estate market wire transfers trillions of dollars annually with each wire transfer taking up to three days. This friction could be removed by using instantaneous blockchain transfers and reducing the need to pay interest on money in transit.
2. Vertical Integration
Vertical integration isn’t a new concept, but up until now, it’s been optional. Consumers are going to continue to get smarter and will demand more services for their hard-earned dollars. Savvy shoppers will likely drive up the cost of client acquisition and put additional pressure on margins. The easiest way to combat this is to offer multiple services, reduce the margin on all offerings and effectively spread out the cost of acquisition between multiple transactions and tranches. The a la carte system of choosing a separate real estate agent, builder, lender, title company, home inspector, insurance provider, home security and solar company may not dominate the market in the future. Buyers can choose a brand and a system to work with in order to obtain the “bundled” discount pricing. We have long heard the advice from personal finance experts about creating multiple streams of income, but most businesses still rely on one primary source of income. Vertical integration gives a business the opportunity to create multiple streams of income, which can lead to a more stable bottom line.
3. Fractional Ownership And Shared Equity
Real estate investment trusts (REITs) were introduced by Congress and signed into law by President Eisenhower in the early 1960s, so the idea behind fractional ownership isn’t new. The first timeshare unit was sold in 1974, so that concept isn’t new either. What is new, is the idea of combining both and redistributing the wealth created through real estate. When talking about fractional ownership it’s important to note that a typical real estate transaction is likely to have real estate agent fees of 5%-6% and lender fees of 3%-4% and additional costs such as home inspections and moving fees that are another 2%. All of this means more than 12% of the cost of buying a new home could be going toward fees and not the actual homeowner who is selling the property. These fees look larger than they are in a margin-compressed industry. This option may work for real estate companies already investing in properties.
There are two ways to participate in fractional ownership: property specific and investor specific. Property-specific methods will list a single home and many buyers will pitch in to purchase the home with cash and lease the home out or hold and realize potential profits if the home appreciates. All participants split the revenue based on a percentage of ownership. The investor-specific approach allows a single investor to choose an index-style product to invest in and spread out their risk over many properties. These investor-specific options typically have a secondary marketplace available for liquidity so investors can quickly move in and out of such funds.
For the homeowner, fractional ownership could be a great way to tap into home equity without going into debt. It’s possible to sell a percentage of equity, pay a flat fee for processing and zero interest because it isn’t a loan. As a builder, lender or real estate agent, it could be very important to tap into this market and provide additional services to a client.
Fractional ownership platforms and partners offer one way to add a vertical integration and differentiate your business. Imagine being a builder that partners with a platform that only needs buyers to finance 20% of the purchase price instead of 80%.
My prediction is the next five to seven years will be about innovations that reduce costs and increase efficiencies. Consumers and businesses that adapt early and grow will ultimately benefit.