10 golden rules for preparing to buy or sell a mortgage trail book
Buying or selling a mortgage trail book need not be a difficult or angst-ridden process. All buyers and sellers really want is to increase the certainty of a sale proceeding and speed up the time to completion, so as to help avoid any nasty surprises.
With that in mind, here are our top 10 golden rules for selling or buying a trail book.
How to create additional value in your planning practice
2020 has been a strange year to say the least. With the fate of the economy at large in flux, it has never been as important to future-proof your business. Whether you’re looking to attract new talent, secure additional funding or exit the industry gracefully, it’s worth putting a few tangible strategies in place to enhance the value of your practice
We’ve already looked at the factors that influence practice value, now here are our seven tips for creating additional value in your practice.
How one mortgage broker grew his business through ingenuity, diversification and smart funding
Back in 2015 Craig Vaughan had an idea. Already running a successful mortgage brokerage (since 2007) he knew there had to be a better, smarter, more efficient way to write more business and create a better client experience without being insanely overworked.
Given that his concern was fairly universal for mortgage brokers, Craig decided the solution was a workflow engine specifically for brokers, geared around enabling teams to effectively allocate, time and track tasks to enable efficiencies and greater loan volumes to be written within agreed SLAs.
Understanding the factors and what they mean for your financial planning business
For financial planners, like most industries, 2020 continues to present a litany of challenges that colour the future with a particular shade of uncertainty that appeals to only the most hardened opportunists. And that’s just the pandemic part. With the transition of financial planning to a profession with massively increased educational and regulatory burdens, the planning industry is under more pressure than most.
As the industry rapidly consolidates, how are the smartest and most adaptable financial planning practices adjusting to the myriad challenges being presented? And where are the opportunities to turn these challenges into upside, build resilience and create additional value in your business?
Understanding the drivers and what they mean for your brokerage
For the mortgage broking fraternity, like most industries, 2020 continues to present a litany of challenges that colour the future with a particular shade of uncertainty that appeals to only the most hardened opportunists.
If we get down to it, how are the smartest and most adaptable mortgage brokerages adjusting to the myriad challenges being presented? And where are the opportunities to turn these challenges into upside and create additional value in your business?
Navigating the valley of death
One thing we have learnt from businesses who have teetered on the precipice and successfully navigated through the valley of death and out the other side, is they often emerged far stronger – and done so by embracing change not just once, but again and again. Think Lego, Apple, Disney and Amazon. Each has used setbacks as catalysts for innovation, reinvention and disruption.
Mortgage brokers have also had to overcome their share of market shifting adversity over the last decade – be it threats to trail, regulation cuts, a Royal Commission and an ever-heavier compliance and educational burden. So those that are still standing have already had their resolve tested and proven their resilience. COVID-fuelled recession is just another round of fire, albeit an unprecedentedly heavy one.
Where is the value?
So far, we have not seen any notable negative impact on the value of trail book and mortgage brokerages from the current COVID-19 market maelstrom. But there has been a clear split in the pack with an increase in brokers leaving the industry. As a result, we’ve seen an uptick in stronger brokers approaching us for larger loans to fund book purchases as they sniff out opportunities.
We have identified seven drivers of trail book value and what you need to look at when buying a book or preparing your own business for sale at the optimal value:
1. Seasoning. This is the length of time individual loans have been on the book. The longer they’ve been in your book, the higher the value.
2. Underlying run off. This looks at how quickly the book is losing loans. Focus on embedding those relationships.
3. Arrears and clawbacks. Frequency with which clients slip into arrears or loans are clawed back. A potential challenge in the current market.
4. Growth in underlying loans. Growth in the number and value of those loans. Hold tight to the loans you do have.
5. Growth in trail. A growing trail book is a valuable asset, particularly in a time of uncertainty. Tap into gaps in the market.
6. Not all loans are equally valuable. A properly structured investment loan, for example, could be a more valuable asset than a residential loan. Write loans where you haven’t previously.
7. Underlying spread of lenders, borrowers and products. Focus on the mix and diversity. Concentration risk is a negative.
And a dollop of better, smarter, faster will not go astray
Innovation is not necessarily about scrum masters and setting the world on fire. It can be as simple as getting the basics right. If you look hard enough, there are quick wins out there both from a resilience and value-building perspective. Check out our five tips to help prepare your business for what comes after COVID-19.
Take two minutes to get a sense of your trail book value
Check out our free trail book valuation calculator to get a sense of the value range for your trail book today.
You can also download our valuations flyer for further information.
Within hours of the Hayne Royal commission’s final report being handed down, I was inundated with calls from clients and interested parties, all of the mortgage brokers. Although their words were different, there was a common theme: “Should I be worried? What has happened to the value of my trail book?”, they asked uneasily.
With the Commission recommending the abolition of trail commission on new loans – and the sitting Liberal Government pledging they will enact this recommendation from July 2020 – it’s no surprise that mortgage brokers are concerned. But brokers needn’t panic.
Brokers can take comfort in the knowledge that our valuation methodologies have always focused on the value of the trail in force; with no presumption of the new trail being earned after the valuation date. At times that conservatism may have seemed draconian; now it feels justified. As long as the existing trail is ‘grandfathered’, it continues to exist and therefore remains a source of value and at this time no changes have been made to valuations algorithms.
But what multiple will people pay for that trail? That is a question of supply and demand. Market forces always trump theoretical valuations. In the rising bull-market we experienced over the past few years, books often changed hands at premiums to valuation. This is no different from what we’ve seen in the property market. If there is panic selling or a rush to exit, books may trade at a lower price for a while.
At the same time, it’s important to remember that the Commission’s recommendations are just that: recommendations. Until the Senate passes new laws, their commendations are not binding; politicians can change their stance depending on constituent pressure (think Malcolm Turnbull and climate change); and with elections looming we don’t even know which party will be in power, let alone what will be traded, as politicians wrangle to be elected.
In the meantime, as long as funding lines don’t dry up, it’s business as usual. We continue to receive calls and emails from brokers seeking guidance, funding and exit options and buying opportunities. Brokers are resilient beasts (they have no choice!) so I expect that most will adapt rather than succumb.
I’m proud to share that only today we issued an agreement to acquire a book at a valuation agreed last year– so we are standing our ground and supporting brokers as they face the changes and transitions likely to arise out of the Royal Commission.
2019 is likely to be a challenging and scary time for many in our industry. And Australia may – depending on political manoeuvres – join most other countries in not paying trail commissions to brokers. While this could become our sad reality, it is not the end of the road for well-resourced and well-capitalised brokers. On the contrary, those brokers who are able to adapt are likely to flourish, as struggling participants exit, or are absorbed into larger groups, and the market thins out. Those with the means and the will to persevere will not only survive but very likely emerge larger and stronger.
Unlike the fictional Chicken Little who created hysteria with her scaremongering -“The sky is falling!” – I am confident that the Hayne Commission’s findings do not spell the end of the broking industry for all.