Reinventing Real Estate Closings
Cobert, Beth F., Kenworthy, Catherine, The McKinsey Quarterly
$30 billion in economic value could be created
And many players could participate
Buying a home without a realtor or lawyer
In the united states, 25,000 residential real estate transactions are closed every day. Each of these complex deals requires the participation of a broad group of businesses: law firms, real estate agencies, lenders, title and home insurers, and a host of other ancillary service providers for home furnishing, remodeling, power supplies, telephone, cable TV, newspapers, and alarm systems. While a home buyer views a closing as a single (and often stressful) event, none of these providers does. Each supplies its own service, and it is up to the buyer, sometimes with the help of a realtor, to bundle them all together. Our research shows that much of the stress for home buyers stems from this lack of integration. At the moment, though, no one sees residential real estate closings as a service in itself.
Therein lies the opportunity. Just as The Home Depot emerged as a new channel for home remodelers, and Staples meets the needs of the home office, there is a huge opportunity to serve the home buyer better at the time of purchase. In 1995, real estate closings generated $110 billion in revenues. This is the equivalent to roughly $20,000 for the average consumer, not including property taxes or the financial institution's cost of mortgage funds borrowing. At $110 billion in directly affiliated revenues, this industry is bigger than the entire soft drink industry, approaches the size of the telecommunications and grocery store industries, and is half the size of the computer industry.
The largest piece of the revenues from this latent channel, just over one-third, belongs to real estate brokers [ILLUSTRATION FOR EXHIBIT OMITTED]. They are closely followed by the retail and institutional investors that fund mortgages, either by holding them in their portfolios or by buying mortgage-backed securities or other mortgage-based financial products. Completing the pie with stakes of 10 percent or just below are homeowners' insurers, mortgage originators, and servicers (institutions that collect payments from borrowers and transfer them to mortgage investors and insurers). Interestingly, players with a high nuisance quotient for home buyers, such as attorneys, title/escrow providers, and appraisers, have small stakes (around 2 percent of the total each).
What consumers want
The current system - if it can be called a system - fails to give consumers what they want in terms of price, speed, and service. A real estate closing is in many ways the prototypical PFS transaction. The findings from our research into consumers' views on home closings echo many of the themes from our other research into PFS purchases. Price is important to mortgage customers, but perhaps not as important as many companies think. Though price is a key concern for the majority of consumers, rare is the individual who selects a provider purely on the basis of price. Moreover, most consumers view price in an unsophisticated way, often focusing exclusively on rate and seeking a rate that is merely close to that of other providers, rather than the absolute lowest. Our research shows that "close" can mean anything from 0.25 to 2 percentage points above the lowest rate available.
As our PFS consumer research revealed, consumers value face-to-face relationships; they engender trust and provide information and guidance through often complex and daunting real estate transactions. Most consumers rely on realtors to provide them with a shortlist of lenders, insurers, and other providers. Yet our research indicates that consumers actually perceive loan officers as the critical players in the real estate transaction, and scarcely even notice the other parties involved. To some extent, this perception is encouraged by realtors, who would prefer to have loan officers (rather than themselves) viewed as the transaction gate-keeper - the person who can deny your mortgage and snatch away the keys to that perfect home. …