Let’s face it: joint ventures (JVs) and affiliated business arrangements (ABAs) are all the rage in the residential real estate space right now. And why not? In times of depressed revenue, it makes sense to seek any and all reasonable paths to revenue.
In fact, there aren’t many mortgage lenders, builders or real estate brokerages that haven’t at least fleetingly entertained the notion. After all, a successful affiliated title operation brings not only the potential for new business but, done well, an opportunity to control more of the transaction, bringing with it the possibility for improved customer experience and better cost controls.
So why aren’t more commercial real estate (CRE) entities – investors, principals, banks, law firms or developers – seeking the same? Market conditions have certainly trended downward for residential or commercial real estate. CRE firms are also suffering through the highest interest rates seen in years. Unlike their residential counterparts, CRE JVs offer a real opportunity for increased profitability, making them an intriguing prospect. In fact, a well-run JV brings with it the very real possibility for a passive, seven-figure profit. One would think CRE businesses would be knocking down the door to harvest new forms of income. Instead, they’re leaving money on the table.
A significant opportunity
To be sure, there are title agencies eager to partner with CRE principals and funds. Traditionally, joint ventures have been perceived as a means to diversify revenue streams and expand market reach, primarily within the residential sector. However, with residential order volume down and competition fierce, owners and decision-makers are seeking new avenues for growth.
This quest for expansion has led to a pivot towards commercial real estate, where the potential for substantial returns beckons. However, unlike residential ventures, CRE transactions (whether involving a JV or not) involve a myriad of complexities, ranging from regulatory compliance to risk assessment, thereby requiring a nuanced understanding and specialized expertise.
Office buildings, retail spaces, industrial complexes and other CRE properties generally command higher price tags and offer greater revenue-generating potential compared to residential properties. That’s probably why so many title and closing firms have tried their hand at CRE business in the effort to diversify.
Rapidly advancing technology and data analytics have also revolutionized the commercial real estate landscape, offering scores of new avenues for value creation and risk mitigation. CREs need not go it alone. Title firms collecting and making use of advanced analytics and proprietary technologies can provide invaluable insights into housing market trends, property valuations, and risk assessment. They can be, in essence, the “boots on the ground” for investors and developers alike.
And yet, more than a few title agencies taking their shot at entering the CRE space, without proper preparation or experience, have struggled in that sector. Similarly, because of lack of expertise or experience, more than a few ABAs have closed their doors not long after being established. Not only title agencies that were unprepared, but lenders, brokers and builders have learned, the hard way, that building a successful, profitable ABA takes more than a brand name and the announcement that they’ve entered into a JV.
The challenges facing CRE JVs – all title agencies were not created the same
That could be one reason CRE firms hesitate when considering title ABAs. Another could be, quite simply, that they don’t recognize the opportunity. The title business is not truly or widely understood outside of the title industry – even among other real estate-related market segments. And, far too often, the few commercial businesses that do try to enter into title business don’t put sufficient resources into properly building the JV.
Not to mince words: title is hard. Title agents are tasked with playing the role of central communicator; compliance wizard, data (and fee) collector, project manager and technology curator in every single real estate transaction. Let’s not forget that compliance is not done just at the federal level. It’s a state-by-state; county-by-county and even city-by-city proposition. And it’s the title agent’s job to understand that and master it.
Now, let’s look at it from the title agent’s perspective. After all, while principals, investors and banks may not be clamoring to get into the title business for CRE transactions, not many title agencies do it well, and many of those only know certain markets. The ever-evolving needs of investors and developers seeking to diversify their portfolios and optimize returns only complicates that. Good CRE title firms know their clients; understand their clients’ clients and know the markets where their customers operate.
Right now, we’re generally seeing more mixed-use developments and multifaceted commercial projects. We’re seeing single-family residence investors hesitating as to when to get back into the game, but as we saw in 2021 to 2022. When they do, there will again be serious potential in that sector. Affiliated title firms taking their shot at specializing in CRE joint ventures absolutely must understand the transaction and the market, no matter how complex.
As challenging as a residential real estate transaction can be, there’s no doubt that CRE deals are much more complex. The participants in the process are generally less emotional and far better trained or educated in the process than many of their counterparts (e.g. buyers and sellers) in a residential deal. CRE assets are subject to a myriad of regulatory requirements, zoning laws, and environmental considerations that don’t apply to home sales, requiring thorough due diligence and compliance measures. Additionally, commercial transactions often involve multiple stakeholders with divergent interests and objectives, requiring deep negotiation skills and effective conflict resolution mechanisms.
Finally, the financing dynamics of a CRE transaction differ significantly from residential transactions, with larger capital requirements, longer investment horizons, and greater exposure to market fluctuations. Title agencies taking their shot at the CRE space have to understand and navigate the intricacies of commercial financing structures.
The potential return is worth the effort
Despite the inherent complexities, CRE joint ventures offer substantial rewards for title agencies willing to venture into this burgeoning market segment. With the potential for higher transaction volumes, larger deal sizes, and greater revenue generation, CRE joint ventures present a compelling opportunity for title agencies to diversify their service offerings and capture a larger share of the commercial real estate market.
The key to it all is, for CRE partners, to do the deep due diligence required for selecting such an important partner. It’s not enough for a title agency to hire a CRE-focused business development pro and hang out its new CRE shingle. It’s not even enough for a CRE-focused title business with ample experience in, for example, the Miami marketplace to suddenly proclaim itself comfortable with transactions in New York City or Chicago.
It’s also critical for banks, lenders, investors, developers and principals entering into CRE-related ABAs to realize that locating and working with title entities that have the expertise and experience necessary is just the first ingredient for success. All partners should be prepared to invest the capital and resources in the partnership that they would have building any other business from the ground up. It’s not as simple as flipping a switch. The JV will need the resources any other business would need to establish itself in the market and win business.
For title agencies and CRE firms alike, ABAs offer a very real and potentially substantial new revenue stream. While the first step comes with recognizing the potential, success also requires adequate due diligence to locate a partner or title entity that not only knows what it’s doing, but knows what the partner wants to do as well as understanding the markets in which they wish to succeed. Finally, it requires a legitimate commitment by all parties to supporting and sustaining the affiliated operation. Without these ingredients, all of the partners are simply throwing a dart. But with the proper effort and investment, the partners could well realize not only a revenue windfall, but a competitive advantage as well.
Matt Einheber is the driving force behind TitleEQ, a settlement services agency serving clients nationwide, and TitleBox, the developer of technology designed to streamline the settlement process.
This column does not necessarily reflect the opinion of HousingWire’s editorial department and its owners.
To contact the author of this story: Matt Einheber at [email protected]
To contact the editor of this story: Tracey Velt at [email protected]
