Best Practices: Is It Time To Grow Or Contract?

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RISMEDIA, Feb. 13, 2007-Most real estate companies continue to be challenged with significantly reduced bottom lines. The silver lining is that market adjustments similar to our current economic cycle are typically the best time to weed out the bad companies from the good.

It is now important to assess all the key variables that materially impact your respective markets and company. A solid understanding of the current market landscape, the existing and projected challenges, and their root causes is crucial to your future success.

Now that many real estate markets have rapidly softened, we're faced with a slew of unseasoned real estate professionals and mortgage brokers that are trying to do anything to survive. This overcapacity environment has caused many firms to realize that their fixed overhead exceeds current revenues and they are not able to reduce expenses rapidly enough to preserve their cash reserves.
Fortunately, interest rates have remained at relatively low levels and current indications from the Federal Reserve's Open Market Committee is that they are taking a "wait-and-see" attitude toward interest rates.

As the number of available transactions decreases, many mortgage lenders are engaging in a price war in an attempt to maintain their volumes. This adjustment to pricing is having a major impact on the profitability of the mortgage industry. We are seeing mortgage bankers' margins decrease 25% to 50% and mortgage brokers' profits almost entirely erode.

Slowing real estate markets have increased the pressure on broker/owners to create sustained net income through alternative revenue streams and has increased the need for financial discipline. One topic that resonates across the board in the real estate industry is the importance and need for broker/owners to generate significant positive cash flows from their non-real estate core services.

These revenue streams aren't a "nice to have" anymore; they have become a necessity as many real estate companies are struggling with maintaining positive cash flows on a consistent basis. For the well-positioned companies, the additional cash flow can often make the difference in allowing these organizations to make strategic acquisitions during market contractions.
Now is a very important time to be focused on ensuring that your core services are truly integrated into your real estate company. By fostering a culture that embraces a "family of homeownership services," you will be in a much stronger position than firms that only have one core business.

The leading firms are achieving north of 35% mortgage capture, 70% title capture and 40% homeowners insurance. On average, most realty firms are only achieving one-third to one-half of those rates at best. On average, most in-house mortgage operations and mortgage partnerships are achieving a fraction of their projected returns.

It is never too late to start adopting and/or refining the best practices of running a world-class company.

This growth strategy-along with the right plan, fiscal discipline and resources-should significantly improve your opportunity to gain market share, smooth out the cyclical earnings stream of the real estate business and better manage the growth of your firm.

- Jeff Mandel

Jeff Mandel is the founder and president of Prism Professional Solutions (Prism). For more information, please e-mail jmandel@prismprosolutions.com (www.prismprosolutions.com).

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