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The Post Refi-boom Cliff
by Robert Franco
 | 2007/04/10 |
When the refi-boom was in full swing many clients began asking for lower prices in return for the volume of work they were sending their abstractors. It was easy to accommodate that kind of request when work was plentiful. And, as many found out, if someone refused to lower their price, there were many others out there willing to work for less to "expand" their business.
Now that the volume has declined, how many of those clients have called you to ask you to raise your prices? Obviously, that is a rhetorical question; we all know the answer is zero.
A smaller profit per order may have worked out well when you had enough work to make it up, but now that things are slower, the smaller profit margin is not feasible. Still, how many abstractors are willing to raise their prices and risk losing what precious little work remains? Another rhetorical question.
I warned about this in a post on the Source of Title forums on May 31, 2006:
The problem with that arrangement is that when their "volume" drops off, like has happened to many companies recently, they don't want to pay you more. It is hard to raise prices again - since there is NO loyalty in this business anymore they will just drop you for someone else who is willing to pick up a few more orders at the discounted price. When things slow down, someone always needs the work.
Besides, do you think they offer their consumers a discount when they are busy? I don't think so.
Hypothetically speaking, if you need to make $200 a day, just to pay your bills, you can do that with four current owner searches at $50 each. If you can get ten current owners a day at $35 it may make sense to lower your fees. Thus, when a company offers more volume for the lower fee, many may jump at the chance.
Source of Title Blog ::
However, when the volume is no longer there and you are back to doing only four searches a day, because the refi-boom is over and the housing market is slowing down screeching to a halt, you are only making $140 per day. That is no longer enough to pay your bills, but what can you do about it? Now you need the work more than ever - can you risk raising your price and losing more work?
I warned of this even earlier, in a post on the Source of Title forums dated November 16, 2004:
This is one of the biggest problems with lowering fees for volume. Once business slows down it is very difficult to raise them again, especially if the competition has had to come down to meet the lower prices. Also, when things slow down, you need the money more than ever, so its hard to risk losing ANY client by raising fees.
It is logical though, that when volume drops - fees will rise. It will take more money per order to cover fixed costs. Its just going to be tough to be the first one to do it.
I hate to be the one to point this out, but abstractors, as a group, are some of the poorest business people on the planet. What other business has such little regard for their services and value that they allow their customers to dictate very aspect of their business? Clients demand, and often get, lower prices and faster turn-around times. Clients tell the abstractors how to do their jobs and require them to carry professional liability insurance. Clients impose their own standards on abstractors despite the well established legal standards that exist.
As a prime example, one company has announced a "restructuring" where they have informed their abstractors that they will not be able to pay delinquent invoices until 2009, and to get paid at all you have to agree to their terms. Rather than insist that this is unacceptable, and cut them off to begin collections actions, some are actually going along with the plan.
From a post on the Source of Title forums dated April 8, 2007:
If you don't go along with their restructuring, you get paid nothing. I would rather not lose the $1500they owe me, but rather continue to do work for them and be able to keep them on a short leash with the 5 day payment system and recoup part of the receivables in the long run. If they owed us more, it might be a different story.
Going along with an absurd "restructuring," such as this one, is damaging to the entire profession. It helps a client, who cannot pay their abstractors until 2009, to remain in business and continue to do work that should be going to a more reputable company that actually pays their abstractors. It makes absolutely no sense to empower a client to continue to abuse their abstractors when there are clients out there that could do that work and provide revenue to hard-working abstractors. And for what? A chance that they will still be in business in 2009 and maybe make good on their promises?
Abstractors have very little foresight. They choose to disregard all the warning signs and focus their attention on today. It is almost as if most expected the good times to last forever and they failed to plan ahead. With so many abstractors demonstrating such little business sense, abstracting prices are at a dangerous level. This will be the year that we see a major correction as many will be forced out of business. The current volume at the current prices cannot support the number of abstractors in the marketplace.
Abstractors decided a couple years ago to go base jumping off the post refi-boom cliff without a parachute. The time to think about safety was back when the clients began demanding lower prices, when their feet were still planted solidly on terra firma. Now that they are in free fall, I hope they have enjoyed the ride. Its almost over!
Robert A. Franco
SOURCE OF TITLE
rfranco@sourceoftitle.com
Categories: Abstractors, Billing Issues, Competition
1344 words
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