Buying down rates is a race to the bottom, writes broker and trainer Greg Williamson, laying out his plan for swimming against that tide
Of course I know that maybe one of the hottest topics in our industry today is about buying down rates. I can say this plain and simple, buying down rates as an entrepreneurial mortgage professional operating a one-person business or a small team is a terrible strategy.
I think, in part, the reason people get sucked into buying down rates is because they are focusing on the wrong metrics in their business.
Since the very beginning, mortgage professionals have gauged their success on their mortgage volume or, second to that, their number of transactions. I think that worked when banks’ aggressive pricing and the online rate discounters were not squeezing our margins.
I think what will work infinitely better in the coming years will be to focus on your sales conversion ratio, and most important, the dollars earned per transaction.
This shift to buying down rate can happen so slowly, but it is so incredibly damaging to a business that if I do one thing in this industry this year, it will be to help brokers see this more clearly.
If brokers have a moderate slip in their sales conversion, because clients are shopping them after they present, my experience is that brokers don’t even realize it is happening, or they say to themselves, “Oh, well, I will just go get more leads.”
What happens, though, if, given their current commitment to marketing, the number of leads in 2013 also slips?
Now what happens if in two out of the four deals a broker wins this month, he or she has decided to buy-down rates, or take a “special” rate with less commission from lenders, to compete and win the deal? I encourage all brokers to change their focus in 2013 by considering the consequences of that very real scenario I’ve just laid out.
Before
10 Leads, 5 Deals at full commission
After
Leads Slip 10%, Conversions slip by 4 deals and Gross Revenue falls from $12,500 to $8,000.
This scenario, that I think is playing out everyday in our industry results in a whopping 56 per cent drop in revenue. Brokers who have been caught in this trap likely have been thinking, “It seems I have been working as hard or harder than I ever have, but yet I am making less money and I have no idea why.”
If this scenario is speaking to you, well now you know why. The next obvious question is “What will you do about it?”
My position is that many trainers and other well-intentioned people offering help to brokers are often still espouse a get-more-leads mantra, which, of course, I think is really important, but not until brokers fix their sales conversion and sales mix problem.
Even if I thought that getting more leads was going to be easy in 2013, which I don’t think it will be, the problem lies in bringing more leads into an already broken system. It simply does not work. You run the risk of getting caught in the never-ending spiral of working twice as hard for the same money. I think this ultimately leads to a lack of personal fulfillment, passion and motivation for your business and the sense that the business owns you, instead of you owning the business.
So, what to do then? If you actually got better at closing the leads you already get, and learn to present solid mortgage strategies that people will pay more for and you use the best secret weapon of all – to confidently add 10-year mortgages to your sales mix – then you will have a shocking and dramatic effect on your business in 2013.
Now, let’s revisit that earlier example.
Today
9 leads and 4 deal
Tomorrow (with renewed focus)
9 leads , 6 deals and gross revenue of $19,200
OK, I’m speaking directly to you, the broker reading this right now and saying “Yah, whatever; clients only care about rates.”
I hear this a lot in online chats and comments, and the truth is that’s a story lazy mortgage brokers make up to justify why they will not invest in themselves and just get better at selling.
Of course, the easier road is to just buy-down rates and race to the bottom with everyone else. The scary part is what if I win the race to the bottom?
Alternatively, start on the game plan I’m laying out: Go back and check your data for 2012. Take the number of leads you got and divide that into the number of closed deals you had. This is now your baseline. Track this number religiously on a weekly or certainly a monthly basis.
Next, take the amount of money you earned in 2012, and divide it by the number of deals you did. This is your other important baseline figure.
If you see either of these numbers slide, then correct course immediately. These are leading indicators for the most important measurable that any business should have: what is my revenue going to be?
