TheNicheReport.com
Real estate agent & broker Edition
For the serious real estate professional
Issue 003/March 2012
How Zillow changed an industry, with CEO, Spencer Rascoff Page 18
10
When Disaster Strikes The worse the news, the more people you should tell and the quicker you should tell them.
12
Golden Rules of Flipping Real Estate Always be on the lookout for that next deal and study hard.
26
Office Efficiency in the Cloud Real estate agents and brokers with a whole new level of access.
28
What an Investment Property Analysis Should Answer for Investors Five questions to ask yourself and your investor.
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CONTENTS
Issue 03
March 2012
Publishers Robert Pegg robert@thenichereport.com David Pegg david@thenichereport.com MANAGING EDITOR Rick Roque Rick@thenichereport.com
18 10 12
When Disaster Strikes Joshua Weinberg The worse the news, the more people you should tell and the quicker you should tell them.
Golden Rules of Flipping Real Estate
Associate Editor Cathy Johnson info@thenichereport.com
How Zillow Changed an Industry With CEO Spencer Rascoff Rick Roque
38
Karen Deis
40
joe goodrich Always be on the lookout for that next deal and study hard.
26
Office Efficiency in the Cloud Eric Lichtenheld Real estate agents and brokers with a whole new level of access.
28 30
What an Investment Property Analysis Should Answer for Investors
Protecting Tenants from Foreclosure Mitchell Reed Sussman
DEPARTMENTS
06 14 32
james kobzeff Five questions to ask yourself and your investor
35 41
Is Flipping Illegal?
43 46
Alex Everest A breif history of flipping and title seasoning.
How the Mortgage Acts & Practices Rules Affect Real Estate Agents & Builders, Part I
note from the Editor Market conditions and analysis straight up with j predovich online lead generation service provider classifieds Advertiser DIRECTORY BRINGING UP THE REAR
Web COPY Editor Aileen Marshall info@thenichereport.com ACCOUNTING MANAGER Shawna Ingram shawna@thenichereport.com Advertising Director Jessica Grizzle Jessica@thenichereport.com Advertising sales Heather Bopp Heather@thenichereport.com Production Manager Henry Suchman henry@thenichereport.com Production Assistant Dawn Exner dawn@thenichereport.com Cartoonist Martin Bradford COLUMNISTS & Contributing Authors Martin Andelman Karen Deis Alex Everest Joe Goodrich James Kobzeff Eric Lichtenheld Jocelyn Predovich Chaibia Sarhrou Mitchell Reed Sussman Joshua Weinberg TheNicheReport.com
5
note from the Editor
Real estate agent & broker Edition
We were very fortunate to have had the opportunity to interview several industry leaders for The Niche Report magazine, with many more on the horizon. There’s a strategy to their success and it’s important for every brokerage firm and real estate agent to understand this. Any single individual, who is committed to their profession, can be very successful in Real Estate. This will be a trend that you will see in each of our publications. To continue this pattern, I sat down with Spencer Rascoff, the CEO of Zillow Inc, a technology pioneer himself who is the industry leader in real estate technologies. Zillow provided a ground breaking method of shedding light on one of the most difficult and yet important aspects of the purchase or sale of a home, and they are the consumers value and transaction history of residential property. Zillow remains to be the go-to web portal for consumers and real estate professionals for this information. Economists primarily agree, that we have about 12 more months of property value depreciation; perhaps another 7-10 percent. In each issue, I am going to be interviewing Real Estate Agents you’ve never heard of because they are too busy serving their clients and working on each deal. These are the anonymous players, the professionals who truly make up the industry. These agents may not be #1 in their marketplace, but they are consistent, customer centered and hard working. They are single moms, second career Dads and everyone in between. They are exactly like the readership of this publication, which simply look toward industry experts and their peers for strategies and new approaches to the market to gain that extra deal a month. To kick this off, I interviewed a successful agent, a professional, married mother of three. She’s now a young empty-nester. After raising her three children she decided on a second career in Real Estate which has now gained traction. After two years in the business, she is serious, focused and is producing results. Her name is Pauline Craven of William Raveis Real Estate, the largest Real Estate Agency in New England. Raveis is the largest family-owned real estate firm in the Northeast, the third largest family-owned real estate company in the United States and ninth largest real estate firm nationwide based on sales volume. Mark your calendars for the Pacific 2012 Northwest Housing Summit on April 19th, in Seattle, Washington at the Emerald Downs Racetrack. I was asked to speak and moderate a panel that has a number of nationally recognized Mortgage and Real Estate figures, top producers and of course those who excel with cutting edge marketing strategies. Be one of the 500+ to attend, call Martin E Lough at (253) 381 0933 to register. My goal for The Niche Report, RealEstate Edition, is to provide useful insights into the real estate economy and how real estate professionals can grow their business in today’s challenging environment. Remember, if you want to learn more about what we are doing, I’ll jump on a plane and come visit with your team! Once again, thank you for being a part of something very unique in our industry. I encourage you to email or call me directly if you have ideas you want to share, opinions to our commentary or just talk about the housing market. My direct line is 408-914-5895. Thank you and I look forward to your hearing from you!
Rick Roque Managing Editor
6
March 2012
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MEMBER
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letters to the editor
Letters to the editor I just finished reading, cover to cover, the January issue of The Niche Report for Real Estate Agents and Brokers. As a Sales Manager overseeing 80+ Agents, and an Educator that travels the state of Texas instructing new and experienced Agents, I have to say this is one of the most thorough, well written, and intelligent publications I have come across. Kudos to you for a fantastic job and I look forward to your next issue. Andy H, Broker-Associate, CRS, GRI
I just wanted to commend you on an excellent first edition to your new publication. What I found most useful is your market update and as a Broker Owner, REO broker/ investor was your "Market Conditions"
editorial, Eric Lichtenheld's article and the article on LinkedIn. Kevin Borland, Principal Broker in Oregon
GREAT NEW MAGAZINE! I have been listing and selling homes for well on 40 years, having my own successful office for over 21 years, and have yet to read so many powerful articles in one magazine! Keep up the good work. Just this afternoon, I think I read or perused just about every article. Terrific compilation in one book! Gloria, President, Gloria Zastko Realtors
I enjoyed Mr. Sussman's discussion on "safely" walking away from a mortgage. But he seems
Letters to the Editor may be e-mailed to info@TheNicheReport.com or faxed to 703-991-2362. Include your full name, email address, and daytime phone number. We are unable to publish all letters and may edit letters for length and clarity. Visit us online at www.TheNicheReport.com to subscribe to our magazine and/ or eNewsletter. Or call toll-free at 866-964-2695 for more information.
to miss the land mine that is the forgiveness of debt under the IRS code. The code does not care if the bank goes after the borrower or no but the lender can issue a 1099 up to three years after the event, giving the borrower phantom income liability. This makes making "walking" a loan pretty scary in my mind. Tony Dimond, Elk Grove, CA
I got your first issue of The Niche Report AND I LOVE IT. I plan to subscribe. I am a Real Estate Broker in greater Dayton Ohio. i specialize in short sales and in the marketing of church buildings for sale. They are my niche. Thank you for a great publication!! Michael Royce
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When Disaster Strikes The worse the news, the more people you should tell and the quicker you should tell them By joshua weinberg
W
e’ve all heard the phrase, ‘When disaster strikes, will you be prepared?’ but many don’t often associate it with a real estate loan or purchase transaction. One of the secrets of a seasoned professional, however, is to be prepared and know the steps to take to make sure the transaction and closing are impacted as little as possible.
Location, Location, Location There are two clichés of real estate that I’ve learned are far more than cliché, and are in fact almost Universal Truths of our industry. The first is, everything is about relationship. The second is, location is the top three important factors to consider when selecting a property. Interestingly, these Truths also hold true when it comes to navigating a transaction after a natural disaster occurs. It is critical to have solid relationships with your Team, which includes the Realtor, Loan Originator (both the individual and the company he works for), appraiser (or Appraisal Management Company - AMC), Title and Closing Agent. And, the specific location of the property will have a huge impact on what’s required in the wake of the disaster. Only a group that works together can quickly adapt to what is required to validate that the property was not damaged by 10
March 2012
the disaster, or come up with a plan of action to address the damage inflicted by the disaster and how to work with the seller.
The Calm before the Storm Having a plan and knowing the steps to take following a natural disaster will allow you to be a valued facilitator and a rock of solace in an otherwise extremely stressful time. The good news is almost every lender has a defined process for what is required to issue the loan. If you find they don’t, it’s an indication that it may be a good idea to start thinking of trying a new partner. While the loan is not the only part of the transaction, it is probably the one most likely to hold up closing. Therefore, it’s certainly wise to contact the Loan Originators if they haven’t already reached out to you to assess the situation. There are a couple of things you can also do on your own to be proactive and gather as much information as possible. The first is check if the Federal Government has declared the disaster and if the property is in the declared disaster area. The Federal Disaster Management Agency (FEMA) provides an online resource for all declared disasters. The list for 2012 can be accessed here: http://www.fema.gov/news/disasters.fema. Fortunately there have been no declared disasters yet this year. FEMA also provides a list sorted by year: http://www.fema. gov/news/disaster_totals_annual.fema.
The second step is to determine whether the appraisal has already been completed. If a disaster is declared by FEMA, and the appraisal has already been completed, additional action must be taken to document the condition of the property.
Recovery in Action Disaster’s struck. You’ve done your research, your Team has sprung to action, and it turns out the property is in the disaster area. Now what? First, designate who will contact the client. Providing information and a plan of action will reassure them you’re the right person to be handling the transaction, and give you the most realistic insight into the future of the transaction. The Real Estate Settlement and Procedures Act (RESPA) officially includes Natural Disaster in their definition of a “Changed Circumstance” (found in § 3500.2). What that means is any increases in costs are legally allowed to be passed along to the borrower/buyer, as long as the costs are associated with the disaster. Our clients need to know an unexpected event has occurred and they’re going to need to budget for some additional expense. Even if the property is not damaged, expect at minimum that the property will need to be re-inspected by a licensed appraiser to validate the property was not damaged (presuming of course the appraisal has been completed – if the appraisal hasn’t been completed then the appraiser must state in the original appraisal that the property wasn’t damaged). The sooner the re-inspection is ordered, the less likely delays will occur. Re-inspections are not a small issue. Especially given the changes to our industry and the number of qualified appraisers remaining, sometimes the turnaround time for a re-inspection can exceed 14 days. Think about it, if you live in a small town, there are probably fewer people serving the appraisal market than there were three or five years ago. If your town happens to be struck by disaster, every transaction in process at the time is going to need attention. Since the Home Valuation Code of Conduct (HVCC) and now the Appraisal Independence Requirements (AIR) have forever changed the appraisal process, the days of calling your friend the appraiser and asking for a favor are pretty much out the window. If you happen to be in a big town, the number of properties affected is likely step-in-step with the higher number of appraisers in the area. The first people to schedule the re-inspections are likely to benefit from the shortest turntimes. One other factor to this scenario is if the lender you’re working with is large enough and does enough volume to have leverage over the AMC (not in a way to influence values or the opinion of the appraiser, but enough to get orders
fulfilled before other smaller lenders). If repairs are required, it’s even more important to take quick action. However, depending on the type of disaster, waiting may be inevitable. If a flood or hurricane has caused water damage, the water must recede and the mess must be cleared before any estimates of repairs can be made. Similarly, if there’s a fire, obviously, repairs can’t begin until the fire is out and Fire and Law Enforcement have declared the property and area safe and accessible for inspection. Once the property is ready to have the damage assessed it needs to be determined if, when and how the seller will participate. Next, a licensed contractor or similarly qualified professional should be consulted to determine the cost for repairs and how long the repairs will take to be completed. Once those steps are finished, the purchase contract should be extended and provided to the Lender so they can communicate any additional requirements specific to the particular loan scenario. Once the repairs are completed a Certificate of Completion (commonly referred to as a 442) must be issued and reviewed by the lender’s Underwriter to make sure the work satisfies their guidelines. At the end of the day, any natural disaster will be chaotic, stressful, and likely add an unexpected wrinkle into real estate transactions. More than any individual step I’ve outlined above, I can’t stress enough how important it is to have clear and frequent communication. You’ll notice there are a couple of themes I mention in almost every piece I write. Prime among them is communication. The worse the news, the more people you should tell and the quicker you should tell them. With good communication, you deservedly earn the trust and admiration of your clients and your business partners. The hundreds of transactions that close smoothly tend to blend into the history of our career, but the transaction we were able to save that almost slipped away like a foundation demolished by a mud slide, will be remember by you and everyone else in the transaction for years to come. Joshua Weinberg is a nationally recognized speaker, author, consultant, and leader in the real estate industry, specializing in integrating compliance and technology. He is currently Director of Compliance for First Choice Bank, a State Chartered and FDIC Insured Depository institution, and Senior Vice President of Compliance for First Choice Loan Services Inc., its subsidiary. Previously he was one of the owners and COO of a real estate services firm in San Francisco, CA providing real estate sales, mortgage brokering and property management services. He can be reached for consultation or questions at jw_mortgage@ sbcglobal.net TheNicheReport.com
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Golden Rules of Flipping Real Estate Always be on the lookout for that next deal and study hard By Joe Goodrich
S
ince the economy turn, the real-estate market has turned into a "Buyer’s market." Investors everywhere are grabbing up properties at discounts unheard of in previous years. Thousands of "How-to courses" are sold via TV, internet, seminars, or promoting "Buy with little or no money down." A person makes the commitment, purchases the program, reads the books, gets familiar with the process... suddenly they're faced with a major problem: Where do I get the leads? Where do I find deals? How do I know a deal when I see one? Not everybody can become a world-class Real Estate Investor like Donald Trump. Who has that kind of money? Who has that kind of time? How would I even start? Don't feel bad. When I first started in the real estate 12
March 2012
business, I knew absolutely nothing. I mean nothing. Never bought a house before, and I’m sure I couldn't tell the difference between a good deal and a bad one. I didn't know much, but what I did know is if I didn't know about it, I better learn how to do it or hire someone to do it for me. I spent thousands of dollars and years learning everything I could about writing effective real estate offers. You can easily get lost in this field as everyone has different opinions of what works and what doesn't. I researched all of the successful "Gurus." I studied sample offers and became a student of the work of people like Carleton Sheets, Donald Trump, Dolf DeRoos, and many others. As I learned something from each of the people whose work I studied, I realized something was missing. It seemed like everyone knew how to close a deal, but it would be easier to win the lottery than it would be to find a real deal. Right? If you want to start buying and selling houses, or just want to find a good deal to invest your money, you are
going to want some pointers in the right direction. I developed my own style of buying and selling real estate. But most importantly, I followed these three golden rules of real estate flipping.
1. TIMING By far the most important thing in real estate is timing. One day on my way to the store to get a soda I drove past a house that showed the telltale signs of a house going into foreclosure. I stopped and knocked on the door. When the owner answered the door, through the doorway behind her I could see boxes. This was her last day in the house. If I hadn't stopped that day, I would've missed out on that one. Never pass on a possible deal. In short, I got the house. And the refrigerator, the lawn mower, a ping-pong table… Timing. 2. IT’S GOING TO COST YOU MORE THAN YOU THINK. I cannot tell you how many deals I've done where I knew the repair costs, down to the penny – and inevitably it cost twice my original estimate. That's just the way it works. If you plan for this one rule, and buy your house accordingly, you'll save yourself a ton of heartache.
3. HAVE AN EXIT STRATEGY It doesn't matter how perfect the deal is. It doesn't matter how little repair it needs. It doesn't matter how great the neighborhood is. It doesn't matter how cheap you bought it. If you can't get rid of it, it’s worthless. Time and time again, I speak on this one subject. Oil still in the ground is not money. Gold in an inaccessible mine is not money. Don't fall in love with the house or the circumstance that you bought it in. The rule is, know what you're going to do with it before you buy. If you are unsure you can sell it, don't buy it. You've seen... Real Estate Riches, Rich Dad, Poor Dad, No Down Payment, and the Art of the Deal. These all tell you how to close a deal, but none will find it for you. Always be on the lookout for that next deal and study hard. You will be ready for it when you find it. I wish you Success Joe Goodrich is a realestate wholesaler, entrepreneur, and creator of the "Real Estate Pro," a software program that actually finds your real estate deals for you. Http:// realestateprousa.com
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Market Conditions and Analysis
Market Conditions and Analysis By rick roque
The Year of the Political Economy Housing Update & Real Estate Agent Updates I attended an internal Mortgage and Real Estate Mortgage Conference in Albuquerque, New Mexico, hosted by PrimeSource Mortgage. While there, I had the pleasure of spending some time with Doug Duncan, Chief Economist of Fannie Mae. Over a glass of wine (ok, perhaps a few bottles), we discussed both the opportunities and labors of the housing market, challenges that face Real Estate Agents, and when/if mortgage lenders can reduce overlays and improve their service levels amidst the onslaught of new Consumer Financial Protection Bureau (CFPB) regulatory, disclosure and auditing requirements. If you’ve ever met Mr. Duncan, he is down-to-Earth, smart, and has an extraordinary sense of humor. Yes, I am speaking of an Economist – and if you’ve ever been to 14
March 2012
an Economist conference, be prepared to make plans after around 8pm because you’ll be free by 7pm with an opportunity to take a nap. Duncan breaks the mold with his smart and witty analysis of the housing markets, much needed given the criticism of Fannie Mae and the GSEs. Duncan is a small-town Minnesota kid who grew up on a farm who simply looked at the farm versus his studies, and like most kids in rural Minnesota, went to North Dakota State University. Interestingly, he is one of 2010’s fifty most powerful people in real estate, as labeled by Bloomberg/BusinessWeek, and didn’t come from Harvard but from a small Midwest university. I wanted to ask him about this but I forgot somewhere in between the third and fourth glass. Duncan earned his Ph.D. in Agricultural Economics from Texas A&M University and has deep relationships in Washington DC that enabled him to build deep relationships politically while he served as the head economist for
the Mortgage Banker’s Association from 1992 to 2008. He is an honest, Midwest intellectual, easily approachable, and given the complexities of the housing market, he spends the time with his audiences to make sure people understand enough about the trends to translate them into tangible actions for their respective real estate or mortgage businesses. The goal of this article is to review a few trends from Duncan and to stay on top of them as they change. The one thing in economic and market forecasting is there are always ‘in course’ corrections, which basically means that those of us researchers in housing and real estate are looking at the same trends and interpreting them, and hopefully there are a few things we agree on. It will amaze you to understand the forecasting variance that economists and researchers have across one another, and that is just about as predictable as debates in an election season. A few 2012 Housing Trends & Forecasts:
Market Conditions and Analysis
Consumer savings is on the increase, which is good for consumers but bad for our economy which grows based on consumer spending, not savings. This has been in part based on the uncertainty of the future of our economy and the need to have a rainy day fund of three months of your expenses, and secondly in order to purchase a home, given the poor state of the average consumer’s credit score, in order to get the monthly payment down lower, consumers need a larger down payment of 10, 15 or 20 percent of the overall purchase price of the home. This isn’t all that bad however; if you are a real estate agent, be prepared to develop relationships with your clients while they prepare their finances. The best relationships you can establish will be with credit repair organizations and, of course, your mortgage lender in order to keep your name, brand and business top of mind, so when it is the right time to purchase a home, your client calls you back and not the next agent they run into.
The decline in the overall mortgage forecast to around $1B (economists are split over ranging their forecasts from $0.6B to $1.1T) is largely due to a predicted decline in refinance activity. There is a great deal of uncertainty around HARP 2.0 given the not-so-surprising lack of success by the Federal Government to assist homeowners who owe more on their mortgage than the property is worth. It is worth noting, however, the feedback is relatively positive on HARP 2.0 with the prospect of helping the millions of homeowners who are upside down. Therefore, if you are in Midwest markets – St. Louis, Minneapolis, Des Moines, Oklahoma City, Dallas, Indianapolis, Denver, Kansas City – as a real estate agent, your business will effectively remain unchanged if not experience some growth. But if you are In the states that make up New England, and states such as New York, New Jersey, Florida, California, Arizona, Nevada, Georgia, Pennsylvania, Ohio, West Virginia, and Michigan, your business will remain tight and identifying more aggressive strategies to get business will be warranted. Look for changes in the Virginia, DC and Maryland markets as federal bureaucracies are eliminated (and the jobs that go along with them) and reductions in the armed forces take effect. This will create inventory issues as well as property price pressures. Baby boomers will help fuel the distressed property purchase business in Arizona, Florida, and North Carolina, and no-state-income-tax states like Florida (again), Tennessee, Texas, Nevada and New Hampshire will remain attractive for the business that does take place.
The issuance of new building permits will remain flat through 2013; however this may depend on the outcome of the Presidential election, the mortgage rate environment (which is expected to remain aggressively low), and the mood of the U.S. consumer.
This chart is fascinating, and if you are a real estate professional looking at this, you see the changing face of your client. Since over 30 percent of new home purchases are all cash, this represents that the 2544 year old demographics are driving the home rental or rental property business, and baby boomers, ages 55-74, are the ones purchasing the homes. Interestingly enough, many of these home buyers are purchasing homes for their adult children in their 30’s and 40’s because they don’t have the money, credit score or stable income to purchase a home for themselves. Real estate agents who cater to these types of transactions should work closely with their mortgage lender to provide a broader awareness of these types of options for borrowers who are having a difficult time qualifying, or existing home owners who have the extra cash to purchase a second home outright. This is a dramatic shift and should be understood and translated into marketing requirements and strategies for your business.
TheNicheReport.com
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Market Conditions and Analysis
The U.S. homeownership rate remains very high at just over 66% for a western industrialized country. Owning a home is a symbol of freedom and ownership of private property as Americans. My Father was a cold war Pilot and a high-ranking member of the U.S. Air Force in the 1960’s and 1970’s, and the thought of renting for his generation, and the baby boomers thereafter, was a symbol of communist regimes where due to high inflation, poor wages and an overly regulated economy, citizens were forced into large government-built apartment facilities. If anyone has been to East Germany before the Berlin Wall came down, they were all over the country, while just across the Berlin Wall /border into West Germany, you see a respect for property rights, an infrastructure that had lending programs, and an economy that supported individual families who purchased their own homes. Fueling new purchase sales is the fact that over 30 percent of all purchases are cash transactions. Correlating with this trend are the purchase of distressed or short sale property (32percent) – this remains consistent through 2012 and into 2013 as housing inventory continues to be purchased.
Top Agent: Pauline Craven William Raveis Real Estate, Longmeadow, Massachusetts, USA Representing Raveis Real Estate, New England’s largest family-owned real estate agency, third largest family-owned agency in the United States and the 11th largest by production volume, Pauline represents a new wave of Real Estate Agents who have entered the business in recent years. Just over two years into the business, Pauline is making her mark in her local market. A native of Western Massachusetts, her local market knowledge helps her clients find a home that fits their personal and financial needs. With the average age of a real estate agent and broker at 56 and 57 years of age respectively, Pauline is a young, second-career professional who is an ‘empty nester’ at the young age of 41. Her husband Eric, an Engineer by trade, is a property investor who owns multi-unit properties in Chicopee and is a highly skilled craftsman in the New England
16
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tradition. What makes Pauline unique are three critical success factors for any real estate agent in today’s market. Pauline understands her “story,” she understands her properties, and she is successful in her approach to the market. First, when someone asks Pauline why she is in real estate, her response revolves around
something deeper than real estate; it revolves around her family. Pauline remembers when her parents purchased their first home and how excited they were, and how it provided a level of stability and security for their family. As a young mother and newly married, she remembers when she was 23 years old in 1994, when the real estate agent she was working with showed her every home she didn’t want to buy because the sales process revolved around the agents needs and not around Pauline’s young family. As a result, her passion is connected to listening to her clients, understanding how they live today, and the importance of staying in budget but stretching a property to be more than a transaction but the purchase of a comfortable home to fit her client’s needs. Given her life experience, Pauline has a tremendous amount of empathy with her clients and
Market Conditions and Analysis
she walks them through the process every step of the way. Secondly, Pauline understands the deep history of her properties. Longmeadow, Massachusetts was founded in in 1644 and it was at the center of the American Revolution, sending local “Minutemen” to support the colonists in 1775 at the battle of Lexington and Concord. She and her husband purchased a stately New England Farm House, owned by Judah Cooley, a button factory heiress. Similar to many homes in historic New England, there is even a friendly ghost named “Tom” who resides in the home, something she attests is
true. Pauline’s husband is a current board member for the Longmeadow Historical Society as their home is one of the oldest in the community. These are the types of stories she knows well as they are central to the reason why people buy homes in New England. Her ability to tell these stories and to link home owners to the great colonial tradition is a cornerstone to her client relationships. Third, Pauline takes a very academic approach to the market. She never misses a class to learn more about the housing market, trends and new regulatory requirements that could impact her
clients. Her studious approach gives her clients a sense of reassurance that she is not simply relying upon her reputation or extensive relationships to get a deal done; she is relying upon an understanding of the market in order to help her client’s identify what is in their best interest given current market factors. For information on Pauline Carven and her home(s), email her at pauline.craven@raveis.com Any questions or feedback on this article, email Rick Roque, Managing Editor of The Niche Report Real Estate Edition, at rick@thenichereport.com or call him at 408.914.5895.
2012 Interview Series
How Zillow Changed an Industry with CEO, Spencer Rascoff by Rick Roque
I
f you are a consumer looking to buy a home, you use Zillow. If you are a seller looking to understand where to price your home, you use Zillow. If you are a Real Estate agent, you use Zillow. If you are a curious neighbor seeking to know information about the homes nearby, you use Zillow. Zillow.com is both a professional tool and a guilty pleasure. If you aren’t familiar with it, they revolutionized how we easily track, keep up to date and stay on top of property values. It is more than a website; it is a repository of information about millions of homes. Property values, taxes, purchase events – it is all there within Zillow. The origins of this improbable company have talented and highly innovative roots, amidst the shadows of Microsoft and the rolling hills of downtown Seattle. I had the opportunity to sit down with the CEO of Zillow Inc, Spencer Rascoff. It was a great opportunity to gauge the present and future technology direction of real estate. Rascoff is an innovator; his background comes from the heart of heralded technology folklore - a Harvard graduate in liberal arts (Government), Wall Street M&A and co-founder of Hotwire.com, a leading internet travel company. The only thing better than his academic and business pedigree was seeing how much he enjoyed talking about his kids and their habit of writing on the walls of Zillow’s conference rooms. Speaking with him it was clear that the growth of Zillow isn’t as much about the money as it is about creating a lasting legacy and mark within an industry. That is the beauty of how children see the world. Children want to see the world as fun, colorful and useful. It doesn’t matter how much money you have,
your background, degrees and accolades. What matters is the kind of person you are, how you lead others, and your ability to make those around you better at what they do. I am, admittedly, taking some poetic license, as these aren’t things that Spencer actually told me. However my view of Spencer seemed to be summed up in the beautiful simplicity of his children coloring on the high-tech walls of Zillow’s conference rooms, overlooking some of the most breathtaking views of Seattle. It was the second time that I’d been at Zillow. I was in Zillow’s former headquarters in the Wells Fargo building in downtown in Seattle in 2009. A friend of mine, introduced me to Lloyd Frink, co founder of Zillow and founder of Expedia.com, another internet travel company and former competitor of Hotwire (The parent company of Expedia purchased Hotwire in 2003). Lloyd gave us a walking tour of the corridors of Zillow’s headquarters; it was like taking a walk down a lovely Seattle neighborhood. Each hallway had a street name and everyone’s office was their ‘home.’ It was decorated like a neighborhood with street lamps, signs and the construction that gave the appearance of a quaint neighborhood. The positive and fun culture of a Silicon Valley startup company was radiating through its walls – the only difference - it wasn’t burdened with the excesses of Silicon Valley. It had the lovely backdrop of the Needle overlooking Puget Sound. Rich Barton and Lloyd Frink started Zillow in early 2005, and Zillow launched in early 2006. The concept was an evolution of ideas that resulted from his search for a home and how difficult it was to collect information on homes – taxes, historical purchase data, valuation information, etc. With this, Zillow was born, housing (no pun intended….well, maybe just a little) data and information was made readily available about millions of U.S. homes. Rascoff joined the company from the beginning, in 2005, and was on the original team that left Expedia to help get Zillow off the ground. “Strategically and thematically, the Zillow story hasn’t changed much,” Spencer reflects. “The goal is to empower consumers to make smarter decisions with easy access to information. We’ve spent the last six years delivering on this, and we will spend the next sixteen years doing much of the same.” Spencer goes on to say “Our first product was Zestimates, which tried to educate every consumer on the value of homes. We started with 40 million homes.”
Zillow CEO Rascoff (C) with Co-founders Barton (L) and Frink (R)
I asked Rascoff what was his experience at Zillow in the beginning? And he responded, “I had such a close relationship with Lloyd Frink, one of the founders of Expedia who acquired Hotwire. Lloyd had left Expedia to start a real estate tech company. He introduced me to Rich Barton, Zillow’s co-founder. To have a team like that get behind a technology company, my response was simple - whatever it is, I want in!” Rascoff ’s first role at Zillow was the Chief Marketing Officer and they consolidated the role (as many startups do) to head up Finance. “I didn’t know anything about marketing in the beginning,” quipped Rascoff. “Because of my private equity background, I gravitated toward the finance side(s) of the business but it became apparent, I needed help. It was then, I turned to Amy Bohutinsky from Hotwire to come over to Zillow to help; she is our marketing officer to this day.” What I noticed in talking with Rascoff, is his entrepreneurism, he’s an innovator, a white collar, technology executive with a roll-up the sleeves, blue collar spirit. Now that Zillow is profitable and a publicly traded company (a first time for Rascoff ), I had to ask - What if Zillow loses that small, startup type feel? “As CEO, the culture of Zillow is in my control. It is possible to maintain an innovative culture in medium to large companies so long as management operates this way. We are doing some really exciting and innovative things like establishing new product lines, platforms expanding our rental category and we are
TheNicheReport.com
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always on the look for acquiring other companies.” What are Rascoff ’s goals for Zillow and what are the results? Let’s review this and give a little background. Upon talking with Rascoff and his executive team, the goal for Zillow is to make the process of searching for a home more democratic, accessible and transparent. They are succeeding. With over 50,000 ratings and reviews on Real Estate Agents, over 10,000 reviews on mortgage lenders, Zillow has over 4 million listings for homes for sale. Whether it is buying, selling, renting, leasing, remodeling or financing a home, Zillow empowers consumers with the information possible to make decisions about housing and real estate. “The company we resemble the most in both strategy and business model is WebMD, the leading healthcare website. They shower you with information and articles. We do much of the same thing. We make money from advertising similar to the way WebMD makes money” states Rascoff. Rascoff ’s competence in the subject matter is both serious and tangible. Hotwire, the company he cofounded, was sold in 2003 for $685M. It is worth mentioning that he was six years from graduating from Harvard; not a bad 20
March 2012
start to his working career. He was humble about this, almost uncomfortable reviewing this history with me. It is such a remarkably successful start to a working career and at such a young age. Rascoff quickly replaced his youth with experienced results. Zillow is one of the most recognized real estate brands and most visited real estate websites on the internet. Its iPhone app is the most popular real estate app downloaded on iTunes marketplace, used over 8 million times per month with more than 41 million visits to home detail pages. Zillow collects data and information on nearly every home in the United States, roughly 100 million homes and counting. Zillow has crossover appeal, enabling visitors to search homes for sale, homes for rent, recently sold homes, Make Me Move homes and more. Through their separately branded Mortgage Marketplace, borrowers are able to search mortgage products and lenders that are right for them, while potential buyers and sellers can find housing professionals in their real estate directory. If there are questions that arise, the visitor can ask questions and find answers in Zillow Advice. Homeowners can browse remodeling ideas in Dueling Digs, or browse the latest real estate trends in their neighborhood via Zillow’s local data pages. Erin Lantz, Director of Zillow Mortgage Marketplace, explained to me how borrowers connect with lenders, She states “We are successfully empowering borrowers to compare mortgage rates in a transparent fashion. We have hundreds of lenders that price out consumer inquiries for a mortgage, based upon configured criteria; borrowers are able to do so anonymously.” Zillow successfully integrates multiple Product & Pricing engines – NYLX, MoreTech, etc. Regardless of which pricing engine a lender uses, they can integrate their respective mortgage operation into Zillow’s platform. “The
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borrower makes apples-to-apples comparisons between lenders and mortgage products.” Truly, Zillow is the Expedia for Real Estate in the method of which it aggregates information, but Spencer was quick to point out, “We are different than Expedia because Expedia sells tickets while we sell information and advertising.” Additionally, Rascoff is realistic about where Zillow is currently and the accuracy of its information. “It is a starting point; it is not a formal appraisal of your home. Just like WebMD is just a starting point to investigate an ailment or physical issue, Zillow provides that first look. If you want a more specific appraisal then you should be working with a Real Estate professional.” The information is a conversation starter between the agent and the consumer with Zillow. Rascoff calls this the “Triangle of Tension.” Zillow works closely with consumers and with Real Estate Professional to make sure that the value is correctly positioned. They clearly would like to get it right all of the time. Zillow trains agents around the country to address concerns they may have when speaking to the variance in perceived property values. Rascoff was correct to point out that the Zestimates are on tens of thousands of agent websites as a portal to provide consumers with a way to
How we see it
gauge the value of a home. This is clearly an indication Zillow is winning in the housing market with Real Estate professionals as their partners to providing this service to consumers. How does Zillow make money? “Revenues are broken down between two main components,” Rascoff reviewed with me, “The Agent Market Place and the Lender Marketplace; about 60% of our revenue is Market Place revenue – local real estate revenue, premier agent business and the Zillow mortgage market place. Forty percent is display advertising, national brands, etc., who have a connection to the process. That revenue segment is growing but not as quickly as the Market Place revenue which has grown over 200% year over year.” “To illustrate this further, Zillow manages approximately 300,000 loan requests per month. These are consumer-controlled inquiries, and if a consumer likes what they see, they can choose to speak with the lender of their choice. We make revenue from these leads as they are distributed to the mortgage lender,” Spencer is quick to point out. “We’ve tried from the beginning and we will continue to reinforce this point in everything we do, and that is here we empower consumers in making the most important and difficult decision of their financial lives and, while doing so, we have a business model to make money in the process.” But where does Zillow go from here? “Mobile. It is all about mobile. Mortgage calculators, REFI calculators, refreshed mortgage rates streamed to a consumer’s mobile device – mobile has been an accelerant to our growth. Between 25-30% of our usage is on mobile; 50 homes are viewed each second using mobile apps.” Spencer elaborates further by emphasizing, “We have a business model that works on mobile already where most internet companies are struggling with this conversion.” The mobile usage at Zillow is intuitive and it is inherently mobile. The Zillow business model is selling exposure to Real Estate agents, and this is a very dynamic process. It is clear that Zillow will remain on top of this growing market and yet, with only 1 percent wallet market share of advertising from real estate agents, this is just the beginning for what is already an incredibly successful company, led by one of the most talented internet innovators in the market today.
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Office Efficiency in the Cloud Real Estate Agents & Brokers with a whole new level of access
By Eric Lichtenheld
T
here is a lot of confusion in the real estate industry regarding the whole concept of the cloud and how it applies to one's office applications and strategy. The majority of agents and brokers seem to be comfortable using several Google applications offered as cloud services, or are using photo sites and other third-party services as integral parts of their technology strategy. Many seem to use this technology without considering some of the consequences of relying completely on third-party services. Although many work with cloud services such as Dropbox effectively, there are several concerns about a technology strategy that relies strictly on cloud applications. Below is a list of key concerns every real estate agent and broker needs to consider. They focus on cloud services offered by Google or other cloud storage options provided by companies such as Amazon or iCloud: • What will you do when a new employee accidentally deletes a file folder in one of your cloud applications? • What kind of confidentiality can you offer to your clients about sensitive nonpublic personal data? 26
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• What are the costs associated with 100 to 200 GB of cloud storage? A paperless office can easily have more than this storage requirement for their document archive. • If all your data is stored on the cloud, what is your backup strategy? It is very difficult to geographically desegregate your data among the cloud service provider servers if you are not a large customer for them. Some offices have been using network attached storage devices (NAS) and have seen a dramatic change in the sophistication of applications supported now by the NAS devices. NAS systems in the office initially functioned primarily as redundant file storage devices but now, with the introduction of features such as e-mail server support and built-in VPN functionality, are easily used to implement an internal office cloud while adding a whole new level of technology support to current office systems. These systems have built-in "time machine" shadow archive capabilities that allow agents and brokers to protect their data archive from accidental deletions. NAS system and time machine features can be used to archive a snapshot of data set every two hours, or
scheduled as needed, for the prior two-week period, and then conserve a daily snapshot of the data archive for an indefinite period of time. This can only be limited by the size of your NAS system – I have seen daily snapshots of data sets that go back over the last two years, which have been indispensable on several occasions. The creation of a private cloud is facilitated by the ease of the NAS systems in creating a VPN for an office. The VPN is a public web address that is linked directly to your storage system with password protection that you can use to tap into your office database from anywhere in the world. Agents and brokers can access the data with confidence that they can control the redundancy strategy and backup of data. If there is a data set above 100 GB in size, an investment in a NAS system will be recovered in a short period of time, leaving an agent or broker with options to make their office information technology even more robust. An office could have several different NAS systems functioning in many different capacities. E-mail server capabilities can be dedicated to one system which can provide a backup e-mail archive for all of the users in an office. The system can also be useful in re-creating e-mail communication between a real estate agent and a buyer that mortgage
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may have been deleted on the real estate agent’s computer but was necessary to clarify issues in a transaction. If real estate agents or brokers have not thought about creating their own private cloud, it is definitely worth investigating the new technology offered by NAS systems to incorporate into their office technology solution. Not only will the system provide short-term benefits, but it also builds a framework to implement other web application packages to further expand the services offered to clients. This could include client-specific photo portals that allow the agents’ clients to login and view the inspection photos taken by the property preservation team. The greatest benefit in relation to this technology is that a real estate agent does not have to be an IT administrator to set it up and employ the system. Real estate agents and brokers should explore their options and the advantages regarding NAS systems – clients will be glad they did. Eric Lichtenheld is president of Integra Group Real Estate LLC, a brokerage firm specializing in the management, preservation and marketing of REO, HUD and distressed properties to underserved demographics in Southern Arizona. For more information, visit www.IntegraTucson.com.
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What an Investment Property Analysis Should Answer for Investors Five questions to ask yourself and your investor By James Kobzeff
A
n investment property analysis gives real estate investors a basis for setting rent schedules and estimating income and operating expenses, and provides a detailed description of the rental property's physical layout and marketplace position. Fair enough. So let's take a look at five questions that an investment property analysis should consider and address before an investor makes a real estate investing decision to purchase. 1) Where Does the Property Fit in the Market? This is a fairly straightforward assessment where you would consider how the property is currently being used and then compare it with other similar-type properties in the local market. If the subject is a multifamily apartment building, for example, then you would want to know how it compares to other multifamily apartment buildings. Is it just as good, inferior, or maybe head and shoulders above good (whether in its current condition or with minimal alterations)? 2) What Do You Expect of the Property for the Time You 28
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Plan to Hold It? This concerns your investment objectives and the period of time that you expect to hold the investment. Whereas some real estate investors, for example, might simply want to add value by increasing the rents and then re-selling for a profit immediately, others might have their sights on retirement and are looking for long-term ownership as a means to generate future supplementary income. 3) What are the Physical and Economic Characteristics of the Property? This concerns the type of rental agreements already in force that might impede or inhibit you from making substantial improvements to the property. Whereas month-to-month rental agreements might not feel as financially secure as longer term agreements, for example, at the same time they offer you an opportunity improve the space when it becomes vacant and seek out tenants willing to pay higher rents perhaps on longer-term leases. Likewise, when long-term leases are already in effect, you get some amount of financial security but essentially cannot as readily make improvements that might warrant higher rents and perhaps add value to the investment property.
4) How Does the Property Compare to the Competition? In this case you are comparing the location, age and type of construction, condition, size of units, and amenities and features with an eye upon specific differences. Does the subject investment property stack up well against other properties, or not so well? Along these same lines, could minor changes to, say, property management, for instance, improve the property's position in the market? Or are there issues like location, for example, that are unchangeable and will continually present challenges for you to keep the units occupied at market rents? 5) What Are the Operating Expenses? This, of course, is vital for you to know when real estate investing because operating expenses directly affect cash flow and profitability. In this case, you want to be sure to include those expenditures that keep the property in operation such as cost of utilities and trash, repairs and maintenance, advertising expenses, licenses and fees, and so on. But equally important is to be sure you use realistic numbers for your investment property analysis projections. Whereas the current owner might indicate an operating expense ratio of 40%, for example, you might discover upon closer examination that the operating expense ratio would be more realistic at 44%. James Kobzeff is the developer of ProAPOD Real Estate Investment Software. http://www.proapod.com.
How we see it
Back on Track
In 2008 we shared the effects that the Home Valuation Code of Conduct (HVCC) would have and the risks associated with that system… many listened yet have been dramatically affected by the ‘unintended consequences,’ We learned that devaluation and foreclosures were going to change the market, fraud was going to reveal itself in many and varied ways, and only by banding together to ‘tough it out’ would the licensed professionals survive…we had to be courageous to succeed for another year
In 2009 we came back to see what we had learned and how far we had come…we found we’d only seen the ‘Tip of the Iceberg’ and reality was not what we had expected… We had legislators in the room with us, regulators, and consumers. The forecast was unchanged and uncertainty was the projection. Social Media was starting to make inroads with Twitter, Linked In and Facebook changing the way we talked to each other.
2010 told us the ‘Light at the End of the Tunnel’ was still the train of events with foreclosures, unemployment, strict regulations, and uncertain oversight…we weren’t out of the woods! Rather we needed to take the offensive and go back to strict basics…we had to prove we could keep doing it right!
2011 has come and gone, we’re here succeeding, building for tomorrow, and making things come together again. It’s the time to revisit what we do together, learn what we’ve done right, and build the legacy that speaks to the next generation and say we made it work…we got it back on track!
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Is Flipping Illegal? A Brief History of Flipping and Title Seasoning
By Alex Everest
F
lipping, the technique of buying properties and quickly reselling them for a profit, is one of the oldest and most widely used real estate investing techniques. Yet, people unfamiliar with flipping often ask, isn't flipping properties illegal? The answer is - it depends. If you do it legally, it's legal. If you do it illegally, it's illegal. Let's examine one of the many perfectly legal ways to flip a property. An investor buys a fixer upper at a bargain price. Then, he improves the property and makes it marketable to retail buyers. Finally, he finds a buyer who is willing to pay fair market value for the property. The buyer qualifies and obtains financing from a retail lender. The buyer gets a nice renovated property and the investor makes a profit for his time and investment. There is nothing illegal about this method. It's a perfectly legal and ethical form of flipping. Now let's examine how illegal flipping usually works. An investor buys a fixer upper. They usually do not buy it at an appropriate discount. They also typically do a subpar rehab to the property. Then, the investor lines up a naive buyer (although oftentimes the buyer is in on the scheme too), an appraiser, a mortgage broker, and a closing agent. The investor conspires with the appraiser to artificially 30
March 2012
inflate the value of the home and the closing agent facilitates the transaction, oftentimes giving the buyer a "kickback" for his cooperation in the scheme. In fact, all parties usually get a piece of the fraudulent gains. In these schemes, the buyer obtains financing through a lender who is unaware of any manipulation in the appraisal or misinformation provided during the loan application process. Since important facts were misrepresented to the lender, the parties have committed bank fraud. As a result, this type of flipping is illegal. The result of this situation is that the buyer paid too much for the house and is stuck with a mortgage he cannot afford. The bank is ultimately forced to foreclose on the house and incur a sizeable loss when they sell it. So now that we have shown that flipping properties can either be done legally or illegally, we have illustrated that flipping, in and of itself, is perfectly legal. Flipping is only illegal when bank fraud is involved. Otherwise, buying low and selling high is perfectly legal and ethical. In fact, taking on substantial risk and being rewarded with a profit for your efforts is the American way. So don't let an uninformed person tell you that flipping is illegal or unethical. When fraudulent flipping schemes began taking place, the media began loosely referring to these deals as "property flipping schemes," when in reality these deals were simply bank fraud as illustrated above. Over time, as the public became repeatedly exposed to these stories, it associated
flipping properties with being illegal. In the absence of these schemes, flipping properties is neither illegal nor unethical. However, it is important to understand that due to these fraudulent schemes committed by a small number of individuals, lenders were forced to initiate ways to protect themselves from fraudulent transactions. One of the ways they did this was to require what is called "seasoning of title" before they would consider lending money on a property. Title seasoning is the length of time a particular lender will require for a seller to have been on title to a property before the lender will fund the transaction for the buyer. The extent of "seasoning" required by a particular lender varies, but is usually between three and twelve months. As a result, many conventional retail lenders have strict requirements regarding how long a seller must have "seasoned" a title. While there are benefits to the lender (and to the entire marketplace) for requiring title seasoning, it also places limitations on legitimate real estate investors when buying, fixing, and reselling a property for a profit. If a real estate investor attempts to sell his property to a buyer who is using a lender with seasoning requirements, the lender may feel there is something wrong if the investor is selling a property for double what they paid for it, even though the investor may
have put $50,000-$70,000 worth of work into the property. This is why it is important for real estate investors to keep accurate records that document the transaction. A smart investor will be able to show proof that he bought the property at a discount from a motivated seller and that the property needed work (evidenced by a listing sheet and before photos). He should also have proof that a legitimate rehab was performed (evidenced by receipts and invoices). When armed with this documentation, investors are able to support the increased sales price in such a short amount of time. In some cases, the lender may decide this documentation is enough to waive its seasoning requirement, and may require a second appraisal to be sure. In other cases, lenders may not bend on their seasoning requirements no matter how much documentation is provided. In that case, it may be necessary for the investor to bring the buyer to a lender who has no seasoning issues. Alex Everest, Founder and President of Deal Maker Library http://www.dealmakerlibrary.com, is a nationally known real estate investor, author, speaker, and advisor from Minneapolis, Minnesota. He specializes in the areas of wholesaling, rehabbing, owner financing, and land trusts for residential real estate.
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straight up
The Next Niche in the New Market
I
’m going to tell you something you do know, tell you something you don’t know, tell you what you need to be doing, tell you why and tell you how. Easy enough??? Let’s go - this is Tough Realtor Love: 101. You may not want to hear this, but turning things around is all up to you.
News Flash (Well, not quite) The pool of buyers has been shrinking steadily for the last few years. Potential buyers have been scared by the media into believing that either A: they will never be able to buy a house due to shaky financial histories, B: they should be able to buy any house they want for next to nothing because the market is “down,” and/or C: they shouldn’t have to “settle” for anything less than perfect if they do have a good credit score. Annoying? Yes. Surprising? Not at all. The only thing the buying public has to go on are news reports that often rely on scare tactics and sensationalize to capture an audience’s attention, or horror stories from 32
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friends (or most often, friends of friends). Think about it...we aren’t taught the most important life and financial skills in school. Buyers who could be buying homes from you are left in the dark due to one thing.......LACK OF EDUCATION.
So, Here’s What You Need To Do You need to educate them - plain and simple. Again, annoying? Maybe to some of you. A requirement? Absolutely! It’s up to us – Real Estate Agents and mortgage brokers - to educate the public on the truth. The freakin’ truth. Novel idea right? Yes, this will initially be more work, but who better to do it? Is this charity work for you? Absolutely not, because here’s the most important part to all of this… While you’re serving the public with invaluable education on how to buy their next property, they come to know you, trust you, and (naturally) want to work with you. No objection handling, high-pressure maneuvers or any other cheesy sales crap needed. Tough love time...read the above paragraph again. Let it sink in. Now one more time. Okay, if you don’t get on board with this and figure it out, you’re done - case closed.
straight up In Case You Need a Little More Convincing or Just a Kick in the Butt The majority of our market is FHA, right? Look at the following chart of monthly payments (not including taxes or insurance) at various interest rates. This is based on a purchase price of $200,000 with 3.5% down, on an FHA loan. Interest rates are INSANELY low right now. Down to 3.5% on an FHA loan. Say interest rates climb back up to 5%. The same house would cost $172 more per month in interest. For every $10,000 more your clients borrow, their monthly payments increase by about $50/ month. At a rate of 3.5%, your clients can purchase $30,000 more than they would be able to at a rate of 5%. Yikes, what if they climb back to 6%? That’s a $300 more per month payment for the same house. SO right now they can buy $60,000 more of a house than they would be able to buy at 6%. Do you think you might be able to get people motivated with this? This doesn’t even go into the cost of borrowing the money over 10, 5, even 30 years. Staggering!
Interest rate
Monthly Payment
3.5% 4% 4.5% 5% 5.5% 6% 6.5% 7% 7.5% 8%
$1057 $1113 $1170 $1229 $1289 $1351 $1414 $1479 $1545 $1612
(including P, I, MI)
Do you know of a few people renting or where to find people who are currently renting? With the cost of rent increasing (based on supply and demand) and the cost of buying decreasing, rent versus buy is in our favor like never before! Pair this with showing them how to buy and fix up a property by leveraging the bank’s money through an FHA 203k loan to build instant organic equity, and I think you may have a winner (link to January’s article on how to build a business around FHA 203k loans).
Turn Inexperienced, Uneducated Buyers into Confident Investors What’s the difference between a buyer and an investor? Well, buyers rely exclusively on your education to guide them, making the final decision primarily on emotion. Investors on the other hand know the facts, have a strategic plan, and work with you to acquire equity and assets that may or may not become their home. An investor knows how to buy with minimized risk. An investor knows what their financial foundation looks like, what position it puts them in to buy, why owning a home is the least expensive option and whom they can trust to make things happen. So analyze your area and figure out a lesson plan. You need to educate yourself first and foremost. Start by interviewing appraisers, investors, financial planners, mortgage professionals, contractors, etc. Select a team of people to help who have the same mindset (don’t mess with people who don’t get it, there are too many that will). The Niche Report is a great resource for gaining
straight up all the facts you need to become an expert. The search bar on the home page guides you to a Pandora’s box of information.
No Excuses (and a Special Enticement) The moral of the story? You’re not just a Real Estate Agent anymore. Your days of slinging houses to folks who would take the plunge based on emotion are dead and gone. You are now an equity-creating ninja who is responsible for creating a future of financially literate Americans. The truth is, most people won’t do this. It takes time, and it requires patience and making absolutely sure you are staying up to date on everything. Let me sweeten the deal though...people who have had a foreclosure are required to wait 3 years before buying again. People who have had a bankruptcy have to wait 2 years before buying a home. There is a BOATLOAD of people reaching that
2- and 3-year mark every single day. They are ready to buy a home, but they need to be shown the right way. People are starving for a fiscally minded leader (grounded in common sense) that can teach them the right way to buy a home. Are you the leader your buyers desperately need? If so, I guarantee you will add an extra ‘0’ to your income in 2012.
Jocelyn is a progressive entrepreneur who has established herself as a leader in the real estate, mortgage & technology realms. As founder & CEO of Limetree Lending Group she has created a lending company that is consistently named #1 out of all of the 100+ mortgage bankers under the Universal Lending Corporation umbrella in Colorado. If you would like more information on this program, join our weekly webinar. Contact me at jocelyn@limetreelending.com for registration details.
How we see it
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online lead generation
Facebook Ads for agents and brokers – Part 1
P
eople treat Facebook as an authentic extension of their daily lives. This is a place where they connect with their friends, family and coworkers. They talk about their likes and interests, and they share what’s on their mind. People don’t come to Facebook to get a home loan or to look for homes for sale. That doesn’t mean that you cannot get them interested in what you have to offer, you just have to do it the right way. Many people might not realize this, but Facebook has reached an estimated $4.27 Billion in advertising revenues in 2011. This evidence reinforces the fact that there is money to be made with Facebook ads. If this weren’t true, marketers would not be spending their time and money on it. This article is packed with information that you need to know about Facebook Ads. After reading this, you will have a new appreciation for the advertising power that Facebook offers you. Let’s get started! I stated above that people don’t come to Facebook with a ‘buying mindset’. However, when done right, you can still get them interested in what you have to offer. Now, you might be asking yourself, “What does she mean by ‘when done right’?” Let me use a brief analogy…
Facebook is like a huge party. Imagine you’re at this party, hanging out with your friends and you’re having a good time. You came to this party to get your mind off of work and to connect with friends. You are in a conversation with a friend and all of the sudden someone comes to you and says, “Hey, my name is Steve, I’m a very honest loan officer. I’ve been in the industry for 20 years and I can get you pre-qualified for a home loan.” Now, even if you were interested in buying a house, you would probably not hire him because you don’t know anything about him, other than the fact that he’s a stranger who disturbed your conversation in order to sell you his product. Now, imagine if the same person went to the host of the party (Facebook) and found out everything about you. He found that you’re in your thirties, married, and that you like the movie “The Godfather”. Basically, he found out everything he could from what the host knows about you. In this scenario, Steve comes up to you, and starts talking about what really interests you. You’re in the middle of a conversation, when he makes you an ‘offer you can’t refuse’. He says, “Let me treat you to a drink. Oh, by the way, I also have this free report that’s a real life saver, if you ever TheNicheReport.com
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online lead generation are looking to buy a house in the near future. Also, I’d love to send you some cool tips from time to time, if you’re interested.”(Basically, ask for the prospect’s email address.) Do you see the difference? This is exactly what separates a successful Facebook Ad campaign from a failure. In order to get a Facebook user interested in what you have to offer, you have to show interest in them first. Show them that you care. Give them value, engage them, and prove that you’re not just another sales person trying to get their money. Having this approach will help you get their interest, which will lead to sales. Goal: Before you place your ad, you need to have a clear idea of what you want out of it. Do you want to increase your page ‘likes’? Do you want to create buzz around an upcoming event? Do you want to get buyer leads? Targeting: You must be very clear on whom you want your ad to be displayed to. Let’s say you specialize in first time home buyers. You need to do basic research to learn more about your target market. I found a study that was focused on ‘First Time Home Buyers’. It shows that 46% of first time home buyers were married. Also, 51% of them were between the ages of 25 to 30. The good news is that Facebook allows you to laser target this exact group of people. If you just closed a deal with someone who works for a certain company, for example. You can create an ad that targets their co-workers, and then drive them to a page that has a video testimonial of their happy coworker in his new house. Do you think that will generate some interested prospects? Laser targeting is not only more effective and displays only to people who are more likely be your future clients. It’s also a lot cheaper than advertizing to a broad audience. Designing the ad: Now that you know your goal and your target audience, you can start designing your ad. To run a FB ad, you need to have an account. If you don’t have one, then you need to create a user or a business account. To create your first ad go to http://www.facebook.com/advertising/ Click on “Create an Ad” button to get started.
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This will take you to a page where you start designing your ad. Destination URL: The first thing you need to do when designing your ad is to decide on the destination. Where do you want to direct your prospects after they click on your ad? You can choose to send traffic to an external web page or to an internal Facebook destination. That can be your page, group, event or application that you administrate. Depending on what destination you choose, the input field displayed to you will be changed. So, make sure to choose the destination before you start filling out the other fields. Here is a small trick, I always choose an external URL even when I’m sending visitors to my Facebook page. Here is why: when you choose an internal URL, Facebook will automatically make your page name the title of the ad. You definitely don’t want that, you will understand more when we talk about how important the title is to your ad. So, basically I choose an external destination, and I copy and paste my Facebook Page URL in the URL field.
The market is saturated with advertising. Your target has been exposed to thousands of advertising messages from direct mail to TV commercials to email ads and the list goes on and on. All of them are trying to grab your prospect’s attention. For your ad to grab the user’s attention, it should be very COMPELLING!! Let’s talk about the 3 parts of your ad starting with the most important: Image: The image is the ad for the ad. Its role is to capture the user’s attention in a fraction of a second, interrupting whatever he / she is doing and making them curious to see what the image is about. You can’t expect that to happen from a plain, regular image.
online lead generation Remember, not everybody will respond to the same image. Try to get multiple images and test them to see which one gets more clicks. There are a lot of royalty free image websites where you can find free images. For example: www.freedigitalphotos.net and www.sxc.hu. It has been proven that pictures of attractive women have a higher response rate by both men and women. Basically, you can’t go wrong with choosing an attractive woman as your image. Title: Now that you have grabbed their attention with the image, you need to get them interested in reading the body of your ad. You only have 25 characters to do that. You can talk about a benefit, a problem that they need solved, or something they’re passionate about… Get creative and always test. Body: The body of the ad should have an offer and a clear call to action. Offer a white paper, free report, free video series, etc and then ask them to take action. “Click here for immediate access,” as an example. After they click on your ad, they will be directed to your landing page, where you have to deliver your promise. Supposing that you direct them to your Fanpage, you should have a very clear call to action for them to “Like” your page so that you can keep communicating with them on Facebook and sending them your status updates. However, you must also have an opt-in form to capture their name and email address so that you can put them into your sales funnel. This part is critical and can’t be overlooked! I have clicked on many ads that have taken me directly to a Fanpage’s wall. There was no call to action for me to ‘like’ the page. Also, there was no way to capture my name and email address. Basically, the business owner was just wasting his money running those ads. Take a lesson; this is a perfect example of what NOT to do. It is very important to have a custom designed landing page on your Fanpage if you’re driving traffic to it. This is not only for branding, authority and credibility… but, also to have the opt-in form I previously mentioned for list building. Facebook will ask you to target your ad, we’ve already touched on this. You can target by location, demographics, interests, education, work, relationship, language, education, or workplace. Next, you need to decide on your campaign budget. I suggest starting with $10 per day, if you’re new to
Facebook ads. This will place a limit to what Facebook will charge your account per day. Choosing between CPM or CPC. Cost Per Click (CPC) is the maximum amount you will be paying every time someone clicks on your ad. Cost Per Impression (CPM) also called Pay Per View (PPV) is the maximum amount you will pay for getting your ad to be viewed 1000 times. I suggest you start with CPC, that way you only pay when someone clicks on your ads. Once you start seeing a good number of clicks, then switch to CPM. Remember that when making your bid, you’re bidding against other advertisers; Facebook will display the ads of whoever bids higher. They will give a suggested bid; try to go 2 or 3 cents higher than the minimum suggested bid (it works for me!). Facebook will give you an option to create a similar ad. Try to create at least 5 similar ads where you only change the image, the title, or the body at a time. That way you can see which combinations are working better and improve them. The more clicks your ad gets the more Facebook will reward you and reduce your CPM or CPC. Once your ad is approved, Facebook will send you a notification email with a link to your ad manager. Try to regularly login to see how your ads are performing. The key here is to test, test, and test again! I know that Facebook Ads can be a little intimidating, so I wanted to leave you with a valuable resource that I know you will appreciate. My ‘Facebook Ads Checklist’ is a quick reference to all of the critical elements of your Ad. It can save you hours of stress and hundreds, if not thousands of dollars in mistake ads. Get it NOW at: www. cssocialmedia.com/fbads . Thank You and Good Luck!
Chaibia Sarhrou is the CEO of CS Social Media, an Online & Social Media Marketing company specializing in the Mortgage and Real Estate industries. She has consulted with many top producing agents and speaks at Real Estate and Mortgage companies to educate them on monetizing their Social Media efforts. Chaibia can be contacted at chaibia@ cssocialmedia.com TheNicheReport.com
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How the Mortgage Acts & Practices Rules Affect Real Estate Agents & Builders – Part I By karen dies
T
he name is deceiving: Mortgage Acts & Practices law. You’d think by the name, it’s just another law that affects the mortgage industry. Well, don’t let the name fool you because it equally applies to real estate agent and builders. What it really does is to give even more clarity to the “mortgage advertising rules” (the official name is Regulation Z – see article from last month’s issue in the Niche Report), especially if you, as a real estate agent or builder, mention anything, and I mean ANYTHING that refers to mortgages. For example: • If you mention an interest rate or any mortgage terms, the rate needs to be “real” and “available” and you’ll need to back it up with documentation from the lender. • If you mention that FHA or VA or USDA financing is available, you’ll need to disclose that you are not affiliated with those agencies. • If new construction and property taxes are listed, 38
March 2012
the tax amount needs to be correct (no guessing). • If your ad claims that you are an “expert” (let’s say you specialize in helping clients invest in rental property), you’d better have the credentials to back it up. • If you quote a monthly payment, you must let the client know if taxes, insurance and PMI insurance are included. Here’s the list of people who this rule applies to: • • • • • • • •
Real estate agents and brokers Mortgage lenders, brokers and servicers Advertising agencies Home builders Lead-generation companies Telemarketers Mortgage servicing companies Exempt: Banks and federal credit unions that fall under Federal Trade Commission jurisdiction.
So, what this means is that if you work with an ad agency or marketing company who is creating your ads, websites, or listing layouts for Homes Magazines, THEY too are subject to the same rules and regulations that you
are. If you employ telemarketers, you’ll need to monitor to make sure they comply too. Here are the “definitions” that have been painstakingly spelled out in MAP. • Consumer – Natural person to whom mortgage credit products are offered • Dwelling – 1- to 4-family homes, including condos, townhomes, co-ops, mobile homes, manufactured homes, trailers • Mortgage credit products – Credit secured by real estate • Person – Individual or group, unincorporated associations, limited or general partnerships, corporations or other business entities • Mortgage terms – Fees, costs, obligations, loan conditions, product availability • Deception – Misrepresentation, omission of information that is likely to mislead the consumer to act under reasonable circumstances. Within MAP, they clearly define whom this applies to
and what they mean by “mortgage terms” and “deception.” To be clear here, MAP is about the “solicitation of business” and using “deceptive practices” to get leads and bring the business in the door. This is basically an “add on” piece of legislation to the current advertising rules (Regulation Z). If you are working with a loan originator who is providing payment information, mortgage terms, and annual percentage rates (APR), ask them for the backup documents because you’ll need them if you are ever audited. Stay tuned for Part Two, where I’ll outline the “definition” of the word “communication.” It’s a big list – and I’m sure some of them will surprise you! There are some pretty tough record-keeping requirements that you, as a broker owner AND real estate agent, must retain. Written and contributed by Karen Deis of Mortgagecurrentcy.com. Provided monthly by www. mortgagecurrentcy.com – interpreting the Rules and Regulation Changes for loan officers, processors, underwriters, and owners/ managers. Mortgage Talking PointsTM, charts and checklists included.
Protecting Tenants from Foreclosure By Mitchell Reed Sussman
W
ith the collapse of the real estate market and the resulting bank foreclosures on hundreds of thousands of residential rental properties, often tenants residing as leaseholders in residential properties become collateral victims and are forced to vacate their leaseholds, often with minimal notice. As a result, one of the most frequently asked questions posed to real estate lawyers today is, "What are the rights of a tenant when the property they are occupying has been foreclosed by the bank?" In response to this problem, the Obama Administration enacted and approved a bill in May of 2009, known as the Protecting Tenants at Foreclosure Act of 2009, as part of Title VII of the Helping Families Save Their Homes Act of 2009 and codified at 12 U.S.C. 5220. Enacted during a period when unprecedented numbers of foreclosures were occurring across the country, the Act ensures that tenants receive appropriate notice of foreclosure and are not abruptly displaced. Under the Act, a lender or other immediate successorin-interest, generally the purchaser who acquires residential real property by virtue of a foreclosure sale on a federally related mortgage loan, must provide bona fide tenants residing in the property with notice to vacate of at least 90 days. 12 U.S.C. 5220 (a)(1) 40
March 2012
Moreover, if the tenant in possession has in effect a valid and existing bona fide lease, the purchaser at the foreclosure sale takes the residential real property subject to any remaining term of the lease. These provisions, however, do not apply where the purchaser at the foreclosure sale is not the bank or an investor but a purchaser who intends to occupy the property as a primary residence. Additionally, to fall within the Act, a bona fide lease must be entered into prior to the date of the notice of foreclosure, which is defined as ''the date on which complete title to a property has been transferred to a successor entity or person as a result of an order of a court or pursuant to the provisions in a mortgage, deed of trust, or security deed.'' A bona fide lease is one in which: (1) The mortgagor or the child, spouse, or parent of the mortgagor under the contract is not the tenant; (2) the lease or tenancy was the result of an arm’s-length transaction; and (3) the lease or tenancy requires the receipt of rent that is not substantially less than fair market rent for the property. 12 U.S.C. 5220 (a)(2) The protections provided by the Act will be in place till December 31, 2014, when they are set to expire. Mitchell is a California real estate attorney specializing in real estate, foreclosure and bankruptcy. His website is http:// www.palmspringslitigationattorney.com.
Service Provider Classifieds
Service Provider Classifieds broker opportunities EXIT Realty Corp. International 877-253-3948
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TheNicheReport.com
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marketing & lead Gen
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Path2Buy is a turnkey system designed to move the renter off of the sidelines. When Tom Ward, the founder of the Path2Buy system, did his research he identified 7 1/2 roadblocks that hold back renters from becoming today’s new homeowners. When mortgage professionals enroll as coaches in the Path2Buy program, they will individually address these obstacles as they relate to each homebuyer.More than 1-in-5 homebuyers we enroll, Path2Buy helps clarify the homebuying decision and they discover they are ready to buy after all. Is your lender Path2Buy Certified? Find out more at www.path2buy.com.
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March 2012
LENDER AND RESOURCE DIRECTORY
a la mode Websites and marketing tools for real estate professionals www.alamode.com 1-800-ALAMODE info@alamode.com
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EXIT Realty Corp. International EXIT Realty is Real Estate Re-Invented! www.exitrealty.com Tami Bonnell 877-253-3948 tbonnell@exitrealty.com
In Touch Today Low minimums, industry specific marketing products (such as digital newsletters, e-mail blasts, postcards, and print newsletters), competitive pricing, and custom craftsmanship are accessible for B2B or B2C clients. www.intouchtoday.com Carol Knaack 800-433-3755 cknaack@intouchtoday.com
Pillar To Post Professional Home Inspection Pillar To Post is North America’s leading home inspection company, whose professional inspectors work with both the real estate community and the buyer or seller of a home to provide on-the-spot inspection reports. www.pillartopost.com Jay Gregg, Director of Marketing 416-620-3567 jay.gregg@pillartopost.com
Path2Buy, LLC Path2Buy is a system designed to turn today’s renters into homeowners www.path2buy.com Tom Ward 877-866-9273 sales@path2buy.com
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BRINGING UP THE REAR - continued from page 46
return… so, we now have $110,000. Then one day, I mention that I have a rich uncle from whom I can borrow whenever I want or need to with an interest rate that’s only one percent. My idea is that we borrow let’s say $900,000, so we can invest $1,000,000 instead of only the $100,000 that we brought to the game. So, we invest the million dollars, and once again, we earn a 10 percent return, which is $100,000… and voilá … we’re superstars… we’ve doubled the money we’ve invested… and so we repay my uncle plus one percent interest, and then pay ourselves huge bonuses while telling each other how smart we are. But what happens when our chosen investments not only fail to produce 10 percent returns, but their value falls by 10 percent. If we had invested only our own $100,000, then we’d lose ten grand, lick our wounds and get ready to fight another day. But if we had invested the million bucks that included the $900,000 we borrowed from my uncle, we’d lose $100,000… and be entirely wiped out because we only had $100,000 in the first place. Now consider that we’d borrowed 40:1… so our $100,000 fund becomes $4 million we can invest… and now, should we lose 10 percent on our investments, we lose $400,000… but don’t worry ‘cause we’re too big to fail and the American taxpayer will pick up our $390,000 tab in order to make sure that we don’t threaten the entire global banking system. And that’s precisely what occurred in September of 2008. The banks had derivative securities called collateralized debt obligations or CDOs that they had valued themselves using their own internal models, and then they borrowed against them. When their value collapsed, and their payments came due… we deemed them too big to fail and invented TARP… and we’ve been inventing other, shall we say less televised ways to pump more than $16 TRILLION into those banks ever since. It’s money that our children and perhaps our grandchildren are going to be paying back for a long time to come. Leverage, however, is like financial crack. Once you’ve been on it and experienced its highs, it’s hard to go back to investing money the old fashioned way… especially when you know you’re too big to fail. The temptation must be impossible to resist because it might interest you to know that in 2011, margin debt 44
March 2012
on the NYSE climbed to its highest levels since February of 2008… right before the S&P collapsed in half. And the only time in history net leverage has ever been higher than it is today was back in June of 2007, which was the absolute pinnacle of the most devastating credit bubble the world has ever seen. And that, my financially minded friends, is what is meant by the term, “MORAL HAZARD.” To Credit Suisse’s Bail Bestoff… no, that’s wrong… I meant, Dale Westhoff… we would create moral hazard were we to write down the principal balances of mortgages that are hopelessly underwater. Dale seems to feel that if we did that, everyone and their brother-in-law would immediately start defaulting on their loans in order to get their balances reduced. And before you knew it… we’d have… what’s the word I’m looking for… oh yeah… prosperity? People making mortgage payments again? An actual housing market? Economic recovery on Main Street? Consumer spending? A positive GDP without fudging the numbers? What Dale… what is it you fear, my lad? Earlier this year, in the latter part of January, Dale told Bloomberg… “Reducing mortgage balances is a risky idea that hasn’t been shown to keep borrowers who owe more than their property’s worth in their homes.” Well, gosh Dale… you are obviously quite the research expert aren’t you? That’s true, isn’t it? Did your research point to any reasons why that would be the case? Would you mind terribly if I were to just throw out a guess just for fun? It’ll be like a game show… I’ll take, “Because we haven’t tried it! And make that for $200, Alex.” Dale also said… “We’ve never done this before; we don’t know what the risk is.” Brilliant, Dale… that’s my boy. So, I guess reducing principal balances hasn’t been shown NOT to keep people in their homes either, isn’t that right Dale? Did you forget to tell Bloomberg that part, Dale? How about this for a headline in an upcoming story I’m working on now… “Non-recognition of Losses and 0% Interest Loans Don’t Help Banks.” Suspending accounting rules is a risky idea that hasn’t been shown to keep banks that borrowed more than their assets are worth from becoming insolvent, according to Credit Slush Fund PIG.
BRINGING UP THE REAR Are you feeling me, Dale? Here’s the thing, my boy… I think you’re the moral hazard here, would you like to know why? Because although you failed to mention it, I happened to be doing some reading the other day and wouldn’t you know it… Credit Suisse was in a bit of news. Nothing earthshattering or even unexpected, mind you… but news nonetheless. Apparently, right before you made your foolish comments about homeowners and moral hazard, saying that principal write-downs won’t save homes, Credit Suisse had just won the bidding process and as a result bought $7.014 billion in face value RMBS (“Residential Mortgagebacked Securities”) from the Federal Reserve Bank of New York. The New York Fed bought the securities from AIG and had them in their Maiden Lane II, which is the New York Fed’s… what do you call that sort of entity… shell company? So, when Maiden Lane II bought the assets, their face value was $39 billion… and they paid $20.5 billion. Now their face value is just over $7 billion and Credit Suisse paid… oh dear, wouldn’t you know it… darn the luck… the NY Fed says the actual price you guys paid won’t be disclosed until April 16, 2012. Why is that, Dale? Why can’t the Fed disclose how much the Credit Suisse bid was until April 16, 2012, when the sale was made on January 19, 2012? I’m sure there’s a perfectly good reason don’t get me wrong… I’m sure it’s just something to protect the interests of U.S. taxpayers. Always looking out for us, aren’t you, Dale? So, I hate to even mention it, but does the fact that you guys at Credit Suisse are running around like vulture investors trying to scoop up distressed residential mortgage-back backed securities at bargain basement prices bother you at all… I mean, considering that at the same time you’re publishing supposed “research” under headlines that include the one I’m referencing now, “Mortgage Principal Cuts Don’t Help Homeowners, Says Credit Suisse?” The only reason I’m asking is that Laurie Goodman of Amherst Securities was quoted in that same Bloomberg article and she said… “Amherst’s (Laurie) Goodman says that principal reductions are needed to avoid 8 million to 10 million more distressed-property sales.” See, she said that, I’m pretty sure, because she felt it would be a bad thing to have 8-10 million more distressed property sales, but it looks like Credit Suisse wouldn’t
actually mind at all if there were lots more distressed property sales, since Credit Suisse is scampering about in the night buying them for pennies on the… no, that’s not right… for some undisclosed amount to be disclosed on April 16, 2012. The suspense is killing me, Dale. I wonder if Credit Suisse overpaid for the distressed assets they bought? Any guesses on how it will turn out? Care to know what else Laurie Goodman said about this topic? Me too… she said… “We have shown that, even controlling for all other factors, principal reductions are more effective. Realize also that banks are doing it on their own portfolios and have been for years. Why would they continue if it was not more effective?” Oh, Dale, Dale, Dale… so the banks have been doing principal write-downs for loans in their own portfolios for years, isn’t that fascinating? So, it must be that principal reductions are only an effective methodology for preventing foreclosures when we’re talking about portfolio loans on a bank balance sheet. The whole moral hazard thing only makes principal write-down ineffective when the U.S taxpayers are on the hook for the losses… and when Credit Suisse might get a chance to buy the distressed assets at pennies on the… ooops, forgot… can’t tell until mid-April. Congratulations, Dale. As rear ends go, you have no peer.
Martin Andelman is a staff writer for The Niche Report. He also writes an almost daily column on ML-Implode called Mandelman Matters. He also publishes a Monthly Museletter and you can follow “Mandelman” on Twitter. Send your responses to Martin@TheNicheReport.com.
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BRINGING UP THE REAR
Bringing Up the rear Dale Westhoff, Credit Suisse Group AG BY MARTIN ANDELMAN
I
t takes brass petunias to be a banker these days and come out in opposition to writing down mortgage balances for homeowners hopelessly underwater because of “moral hazard.” And yet, that is precisely what Credit Suisse’s global head of structured products, Mr. Dale Westhoff has done. In January, he was interviewed for a story on Bloomberg.com under the headline: “Mortgage Principal Cuts Don’t Help Homeowners.” The term, “moral hazard,” just so everyone understands, is a term used in economics or finance, and it’s what can occur when one party is making the decisions about investment risk, while another party is on the hook for the losses should those decisions go awry. You know, like if I were deciding where to invest money, but you had to cover my losses when I chose to invest in Lehman Bros. and Bear Stearns. I’m trying to think of a good example that everyone will understand… hmmm… there must be something that would work… oh wait, I know… exactly like today’s banks… the ones that have been deemed too big to fail, and too big to jail.
Today’s too big to fail banks know that the government won’t let them follow Lehman’s path to bankruptcy, so they take on more risk than is prudent. And when their leveraged bubble du jour pops, we-thepeople spend years trying to get their gum out of our collective hair. In the parlance of Wall Street, taking on risk means taking on leverage. Leverage is Wall Street’s euphemistic word for borrowing or debt, so when a Wall Street banker says his firm is leveraged, what he means is that the firm is investing using borrowed money. As long as the chosen investments are increasing in value, or at least can be reported as increasing in value… everything’s fine. When the market realizes what’s happening, investors start to get nervous, so they start moving money out of riskier investments into more defensive positions, which in turn increases the risk of staying put to other investors, and at some point everyone rushes to get their money out before there’s no money there to get. Here’s a quick example, just to make sure we’re all on the same page about this topic. Let’s say we pooled our money and came up with $100,000 in order to invest in the stock market. And we make a nice 10 percent - continued on page 44
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