How can brokers learn from auto dealers?

April 25, 2019

Real estate brokers are always on the lookout for ways they can boost their brand and profitability at the same time, and it's simply not always an easy task. With that being said, they may want to look to other types of businesses for inspiration on their next attempts to improve their bottom lines. They might be wise to start with auto dealers.

One of the big ways in which car dealers improve their incomes isn't by holding seasonal sales on their automotive offerings or through continually pushing their salesmen to increase sales every quarter. Rather, they do so by offering vehicle service contracts or warranties that boost their profitability while also providing drivers with added confidence that they will be able to protect their investment should anything go wrong.

A closer look
Data from the National Automobile Dealers Association highlights the situation quite well: 18 percent of all revenues generated by dealers' service departments in 2018 came from jobs related specifically to warranties.

That amounted to nearly $9.9 billion in revenues for service costs and $12.3 billion for part sales for the entire industry last year, making warranties the second-biggest revenue driver for this department. But without warranties, those costs for consumers would have likely been much higher, and the added protection may have also made them more likely to seek services they otherwise might not have made use of.

What about real estate professionals?
Brokers, then, may be able to take a similar tack when it comes to offering home warranties to buying or selling clients because of the ways in which they help insulate both parties against financial risk if something were to go wrong with their home systems before, during or even after the sales process. The investment banking firm Colonnade Advisors recently highlighted home warranties as a great area for growth, meaning there's likely significant future value for brokerages.

As of 2016, the home warranty market was worth $2.3 billion dollars and, as the market has taken steps forward, so too has the willingness among consumers to invest in these protective products to save themselves if any repairs - or even replacements - are needed for major systems or appliances. Currently, though, only about 10 percent of homes are covered by these products, indicating plenty of room for improvement for enterprising brokers and agents.

Indeed, it's also worth noting that of those billions of dollars in revenues, nearly two-thirds of that comes through millions of homeowners renewing their coverage, rather than new sales. That indicates how much value people see in the offerings once familiarized with them.

Often, these products don't cost much more than $500 to $700 per year (only about $60 a month at most), meaning that this is a relatively low-cost layer of protection, giving clients even more options to be satisfied with the entire real estate sales process. And with millions of homes being sold without warranties, brokerages or agents that offer them could help themselves when it comes to standing out from the competition.