Notes From Readers: Banks in Real Estate

April 1, 2001

Rule would destabilize world-class system

Letters have been pouring in over the proposed Federal Reserve ruling that would allow national banks to enter the real estate business. In this letter to the Fed governors (edited to fit our space), RE/MAX President Daryl Jesperson talks about why he believes the ruling would hurt banks and the banking system.

As president of one of the world’s largest real estate franchise organizations and someone who has been in the industry 27 years, I feel it’s my responsibility to share my thoughts on the proposed rule.

The key questions are (1) Will this rule make our banking system safer and more stable [a core element of the Federal Reserve’s mission]? and (2) Is it prudent for banks to consider entering the real estate brokerage, employee relocation, or real estate management business?

It’s my firm belief that the banking industry doesn’t have a full understanding of what’s required to be successful in real estate. The grass always looks greener on the other side of the fence. It’s only after you’re on the other side that you realize the lawn needs mowing, trimming, and watering.

Some facts to consider:

A well-run real estate brokerage averages about $150 per month pretax income per salesperson. I’m concerned that those favoring the rule are focusing on the commission line of the closing statement, a misleading number. Typically, commissions are split between two brokerages, and each broker gives a large percentage to the salesperson who shepherded the transaction to closing.

The real estate brokerage industry generates estimated annual profits of $1.3 billion. This figure represents 1.8 percent of the $71.7 billion in profits for commercial banks as indicated in the Federal Deposit Insurance Corp.’s 1999 report. A less than 2 percent improvement in banks’ current operations would represent more than all the profits generated by our industry.

Why put current profits into ventures that have lower returns than the business you’re already in?

An established brokerage has 12-20 full-time licensed salespeople. Do the math and you’ll see that a successful broker-owner makes a marginal income from operations. That’s why most of them also list and sell real estate and constantly seek other revenue streams.

Granted, banks already have the bricks and mortar to house a real estate services operation, but that doesn’t mean salespeople will stampede to work there. Hiring, training, and retaining salespeople are time-consuming and literally worlds apart from the management disciplines of banking.

Every study I’ve seen indicates most buyers and sellers have used or would use a real estate salesperson. The public is happy with the choices now available.

Real estate brokerages typically have two or more accounts at banks and refer customers to those banks for mortgages and other financial services. [If banks enter the real estate business], will brokerages redirect their mortgages to noncompetitors? You bet. Human nature won’t be changed by a new rule. It’s also unlikely that real estate brokers will roll over or throw in the towel should the proposed rule be adopted.

Most important, a true real estate professional deeply cares about each client’s happiness. How many of today’s financial services employees would provide 24/7 availability to customers who might have a question on, say, Christmas Eve, three days before a closing?

It might be interesting to learn why Countrywide Home Loans, one of the nation’s largest mortgage providers, has elected not to enter the real estate brokerage business. And there must be a reason banks in Canada, after many years of authorization under that country’s Banking Act to offer real estate brokerage services, have withdrawn from doing so. Research with our Canadian operations tells us that it wasn’t profitable and wasn’t likely to become so.

It’s my opinion the proposed rule, if enacted, would pose a very real danger to the banking system. I recommend that you not approve the proposed rule. It would surely prove costly to banks in the long run, upset the stability of our world-class banking system, and offer no valuable new services to the public.
—Daryl Jesperson, president, RE/MAX International Inc., Greenwood Village, Colo.

CHOOSING TITLES: ‘Counselor’ carries meaning

One of your readers has improperly suggested that a sales practitioner may carry the title “real estate counselor” (“Anything but ‘salesperson,’” January 2000, page 9).

The Counselors of Real Estate™, an affiliate of NAR that’s now in its 48th year, is an association composed of a select group of individuals who’ve demonstrated the highest levels of judgment, integrity, knowledge, and experience in their real estate counseling practice. Only members of the Counselors organization are permitted to use the “Counselor of Real Estate” designation and trademarked acronym, CRE . It’s therefore improper for sales practitioners who aren’t members of the Counselors to refer to themselves as “real estate counselor” or “counselor of real estate.”
Mary W. Fleischmann, executive vice president, The Counselors of Real Estate™, Chicago

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