The nation's four largest title insurance companies are competing to develop technology capable of delivering complex commercial real estate transactions with just a few clicks of the mouse.
The prize? A larger market share in the highly profitable commercial real estate space.
As a market, commercial real estate transactions are relatively small, comprising only 10% to 15% of the value of all real estate transactions. Residential sales make up the rest. Yet commercial transactions produce an estimated 20% of title companies' profits. By expediting the processing of commercial transactions, technology can squeeze more profits from a title company's existing commercial business, and perhaps help title insurance companies grab market share.
Called transaction management technology, these systems will eventually manage the entire commercial transaction process, from offer through closing. They will automate title research, property appraisals, engineering reports and organize hundreds of documents related to transactions.
By maintaining current versions of documents along with records of the revisions made to each, transaction management systems will promote accuracy and ensure that each party is using the most current information pertaining to the deal. In addition, such systems will disperse documents electronically, eliminating the costs and delays associated with mail and overnight deliveries.
According to title insurance executives, transaction management systems will make it possible to start, manage and close transactions electronically with parties working online from their own offices.
To be sure, all the major title insurance companies plan to automate their commercial real estate transactions. But the company that reaches the finish line first will have an early strategic advantage.
Officials from the two largest title insurance companies — Fidelity National Financial Inc. of Santa Barbara, Calif., and First American Title Insurance Co. of Santa Ana, Calif. — have emphasized that automation strategies are critically important to future growth.
The third and fourth ranked title insurance companies — LandAmerica Financial Group Inc. of Richmond, Va., and Stewart Title Guaranty Co. of Houston — see technology as a way to steal a march on their larger competitors. “This technology will enable us to move commercial transactions to higher levels of speed and accuracy,” says Janet Alpert, president of LandAmerica.
Stewart Title expects transaction management to strengthen the firm's foothold in the commercial arena. “Our new system will show that we are a strong commercial player,” says Ernie Puglisi, vice president of Stewart's national title services division.
|Gross Revenues||Net Income||Net Income (as % of Gross)|
|Fidelity||$2.7 billion*||$3.9 billion*||$108 million||$305 million||4%||8%|
|First American||$2.9 billion*||$3.8 billion*||$82 million||$167 million||3%||4%|
|LandAmerica||$1.8 billion||$2.1 billion||$80 million||$60 million||—||3%|
|Stewart Title||$1.3 billion||$936 million||$49 million||$600,000||4%||.06%|
|*Includes title insurance premiums plus significant revenues from other services related to title insurance such as appraisals and environmental reports.|
|Source: Fidelity National Financial Inc., First American Corp., LandAmerica Financial Group Inc., The Stewart Title Guaranty Co.|
Technology companies also are in the race. TransCloser LLC, a Laguna Niguel, Calif.-based company, has developed an independent system that automates commercial real estate transactions. TransCloser operates as an application service provider (ASP) available to all title insurance companies. “Transaction management is a huge new business tool for our customers,” says Gilbert Barnes, president of TransCloser. “Title insurance companies that use our service tell us that a lot of new business is coming in because of it.”
Frank Willey, vice chairman of Fidelity National, believes there is a correlation between a title insurance company's operational efficiency and its net income. In 2001, Fidelity earned $305 million, or 8%, on its gross revenues. The other three major companies earned between 3% and 4% (See chart above). “I think you can attribute a large part of that margin to our operating disciplines, one of which involves our deployment of technology,” Willey says.
Ready, Set, Go
In 1998, Fidelity started the title technology race in the residential sector when its subsidiary Fidelity National Information Solutions formed RealEC Technologies, a business-to-business exchange that automates the delivery of title insurance and related products for residential transactions.
Its RealEC system automates the process of selecting vendors and placing orders for title insurance, appraisals, credit reports and other services connected to selling a house. The system has taken off among real estate agents, and now receives an average of 200,000 orders per month.
While almost all of these transactions involve residential real estate, Fidelity plans to extend the capabilities of RealEC to commercial transactions. “This is our commercial platform,” says Willey.
First American, LandAmerica and Stewart all use RealEC to offer vendor management for residential transactions. Stewart and LandAmerica also hold minority interests in RealEC.
In addition, First American has introduced its own vendor management system, called First American VMS, which competes with RealEC.
While Fidelity officials believe that RealEC can be enhanced to offer commercial services, the other title companies contend that vendor management technology is not robust enough for complex commercial transactions, particularly those involving multiple sites. They are addressing the commercial side with new and separate technological concepts.
Defining Transaction Management
Residential real estate agents can use vendor management Web sites to order and track services from a host of vendors. But that's as far as vendor management goes. The systems neither send out invoices — agents receive bills directly from the vendors they've employed — nor do they send transaction data to the title insurance company, its agents or the residential broker handling the deal. In short, vendor management technology does not manage entire transactions.
Transaction management systems will. They initiate deals by automating the selection of vendors, and automate the rest of the transaction through closing. They also will maintain historical records along with revisions for all parties to review at any time.
The systems will connect with back-office computers at the title companies, push deals through settlement and ultimately move data into a title company's accounting system for billing and financial analysis.
Bringing All the Parties Together
Buyers and sellers that use the TransCloser Web-based system can place orders and negotiate terms. If users prefer, they can simply monitor and comment on the progress of the transaction, dealing by phone, fax and mail with the title coordinator, who will update the information stored online.
To accomplish tasks online, customers click on file folder icons labeled “title,” “escrow,” “order detail” and “conversation log.”
For example, a $600 million transaction with a major institutional investor is currently wending through TransCloser. Clicking the “order detail” icon for this transaction brings up a chart detailing 123 orders related to the deal. Suppose a buyer's attorney wanted to check the status of an appraisal related to one of the sites involved in the transaction. The attorney clicks on the appropriate order number. After reviewing the material, the attorney types comments into a conversation log, which advises interested parties via e-mail.
During a transaction, the involved parties may comment on and revise the documents related to the title, appraisal, environmental condition, engineering analysis and escrow. The system speeds negotiations by making document revisions instantly available to everyone involved.
Four Transaction Management Strategies
TransCloser might be called a front-end transaction management system. To win or at least survive the technology race, title companies need more than a front end. They must also figure out how to move data into their back offices where the underwriting work occurs.
The Fidelity transaction management strategy aims to enhance the front end of its existing RealEC vendor management service to accommodate collaborative commercial real estate tasks. Next, Fidelity must connect its front end to the back office. If that can be done efficiently, the company may find itself with a competitive advantage. Hooking up RealEC to the Fidelity back office would thereby connect all of Fidelity's 1,300 direct title insurance offices and 1,000 agents to the system. That's the goal, anyway.
First American is rolling out a commercial transaction management system called FAST. The company-wide platform will allow First American offices to talk to one another electronically. As an online system, FAST will enable both employees and customers to pull up title commitments, issue policies and review endorsements and coverages related to individual transactions. “We don't know of another system as comprehensive as FAST,” Johnson says.
To date, First American has equipped its back office and 800 of its 1,100 domestic and international direct title offices with FAST. According to Johnson, 95% of the company's direct offices will be using the system by the end of this year, but only certain agents will be integrated during the initial rollout. First American will eventually have to develop a front end for customers to access the system.
LandAmerica's current commercial transaction management technology is up and running in eight of the company's 18 commercial title offices, with the remainder due to come online by the middle of next year. The system, called LandAmerica Commercial Connection, provides Web-based access to customers and links internally to the company's title production and closing systems. “We have plans to expand beyond these 18 offices,” Alpert says. “But we're rolling out these 18 because they have the most commercial expertise.”
Stewart has begun its transaction management efforts in the back office. According to Puglisi, the company is installing a vendor management system to farm out document orders to agents, appraisers, survey companies and other vendors. But Stewart's own back-office staff will use this system to respond to customer orders placed by phone, fax, e-mail and regular mail. While the system will have a Web portal for customers to initiate orders, Stewart believes customers will want title insurance companies to do the work from the front end to the back.
Puglisi's task includes designing a new back-office system that will automatically pull data from the ordering system into a title production system. Other pieces of the Stewart system will track transactions, crunch settlement numbers, handle internal accounting, store documents and connect to agents' offices.
Although title insurance companies are counting on transaction management systems to boost market share, technology isn't enough to win the race. Barnes of TransCloser emphasizes that technology can't take the place of a strong core of employees — the underwriters, attorneys and supporting staff that help close transactions. However, if that employee base is in place, Barnes says, “Transaction management technology is a new business development tool that can differentiate a company in the marketplace.”
Mike Fickes is a Baltimore-based writer.