There’s always something to howl about

Archive for February, 2007

Understanding Why Depreciation Isn’t Just An Add-on — Cost Segregation

What is cost segregation? In a nutshell it’s the process by which an investor can increase the amount of total depreciation taken on each investment property. It will deal almost exclusively with the personal property which is part of the real estate. These personal property assets include a building’s non-structural elements, exterior land improvements and indirect construction costs. This is usually the point at which investors begin to glaze over.

Not so fast write-off breath.

Once you fully understand the results of successful cost segregation, you’ll be a fan for life. The difference between what the average investor claims for depreciation and what’s actually available is staggering to most when they see it for the first time. If you want to try it out on your own, go here. I strongly recommend though, that you hire a firm specializing in this process, as the IRS much prefers that approach.

What’s the average? In my experience and in talking with various CPA’s over the years, the average taxpayer claims the normal building depreciation using the schedules requiring a 27.5 or 39 year life. Many will then add a few personal assets to the mix, but not nearly what is available to them.

Take a $500K purchase of residential income property.

Let’s say it was built a couple years ago, and you can support a land value of $100K. This results in the building being depreciated at $14,500 a year. Investors then will add a few items of personal property, depreciated over five years. Let’s say the average runs around $5.5K. They now have $20K in depreciation. At the blended tax rate of 33% state/fed, this results in a tax savings of just under $6,700.

However, if this investor takes advantage of cost segregation, his depreciation could increase dramatically. Typically, the engineers will literally look at every single part of your property. This includes but isn’t limited to driveways, landscaping, exterior stairs, HVAC systems, and on and on. It’s common for them to find roughly 6-20% of the purchase price, including land, in new depreciation. (They often find much more than that.) Using this example that would mean give or take $30K (6%) in additional tax shelter. Let’s forget the puny amount the investor was taking before. Let’s just add up what they found to the building’s figure of $14,500 a year.


You now have almost $45K in annual depreciation which results in about $15K in tax savings. That’s huge. And if you bought these units with a low down hoping to break even, you now have an after tax positive cash flow to enjoy. If you put 10% down plus closing costs, the total cash needed to close this property was about $62K or so. You now have a cash on cash return (after tax) of 24%!

Oh sure, now you’re paying attention. 🙂

This past week I was talking with a cost segregation expert, based in San Diego. He gave me a recent example of an investor who paid his company $9K for an in depth study of a purchase he’d made a couple years earlier. They found an addtional $450K of depreciation! It’s fully documented for the IRS, and the company will defend the investor at no cost, without even asking for travel expenses. Using that client’s blended tax rate, which was 40%, the use of cost segregation found an additional after tax income of $15K A MONTH.

And you can go back in time to benefit from this. You’ll have to file a modification of accounting method with the IRS.

I’ll be talking more about this on my own blog. Pay attention to this opportunity. It’s allowed many of my clients to completely avoid the use of tax deferred exchanges.

Of course, that’s a whole different can of worms, isn’t it?

24 comments RE.cast? Envisioneering a YouTube-like distribution system for podcasts . . .

The folks at Zillow Blog and Mike’s Corner have been working on a great new idea:

How about a YouTube-like system for distributing podcasts? Content originators would submit their podcasts to a server run by Mike Price’s MLPodcast, and then that content would be available from any weblog running a widget to be built by MLPodcast.

The benefit to individual weblogs? The demands on your file server and its bandwidth are off-loaded to specialized multi-media content servers. Plus which, your podcasts get a much wider distribution.

Is there a downside? People may find your content at other sites, which may be an issue for ad-supported weblogs.

There are big questions to be settled, so now is the time to speak up if you are interested:

1. What kind of content should be accepted, and what should be omitted? Feelings are running strongly against spammy or self-promotional podcasts — for instance, video virtual tours of listed homes.

2. How local is too local? Obviously I am strongly biased in favor of general-interest, nationally-focused and industry-oriented podcasts. Should locally-focused podcasts be accepted, and, if so, should any limits obtain on what kind of local content should be accepted?

3. What’s a good length? I personally prefer podcasts that run from 45-75 minutes, the length of a good workout. The Sales Success podcasts we’re putting together will run from 10-30 minutes. What do you think is a good length?

4. Finally, do you have plans either to create or to subscribe to real estate podcasts, and, if so, would a system like this appeal to you?

Other weblogs will be entertaining these ideas as well, so speak up if you want to be heard…

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Delighting customers and clients: Doing the thing that no one thought to ask for

As real estate professionals, our clients’/customers’ satisfaction with our service and the outcome of their transactions is unquestionably key to business success. In fact, I’d bet this has been true in every career you have ever had. It sure has been for me… beginning with my first jobs as babysitter, then as counter help at The Red Barn, and then throughout my various corporate positions in management, finance and information technology. Whether my customer has been internal, external, faceless or my very best friend, I’ve always done very well by doing very well for him and her.

And so it’s always been maddening for me to see someone or some organization fail to recognize that the “customer is always right,” or if the customer isn’t right to help the customer become right… at least to try to help. We all know the adage that a happy customer will tell someone else about his satisfactory experience, but an unhappy customer will tell the unhappy story ten times more often. Well, I want to tell you about great customer service that I was just the happy recipient of.

But first some background… It begins with Greg and me wanting to attract more clients than we were getting from reputation alone. Around the end of the amazing sellers’ market of 2004/2005, around the first anniversary of, we hoped to jump-start our business by giving someone who didn’t know us personally (or through referral) a reason to believe that we put our clients’ interests above our own. We wanted to offer something more tangible than a motto or a sincere-looking pose. We were doing well when we took listings, but we were turning down more listings than we were accepting, because home owners, who didn’t yet know us, didn’t yet believe us that the buyers were no longer willing to pay top dollar. So we figured we would try to attract buyers by offering to let them keep their money in their pockets — money they would be paying the seller to pay to us. We thought that once we got this word out, we would get a sensational response! So we took out ads in the Arizona Republic, and when we were approached by our national association’s fair-haired lad,, we took out an ad with them, too. While we were at it, we ordered a toll-free phone number to put into those ads.

Now, we had a relationship with the Arizona Republic, and we had one with, but I found the company who we ordered the toll-free phone number from through Google. I’m not even sure what the term was that I Googled on, because I’m not able to find their site through Google right now, so I’ll just tell you about them: The telephone number vendor is Budget800. I liked what I read when I found their site. We could chose from available 800 numbers, not just any 8xx toll-free number — I liked that. And our contract would be month-to-month — I liked that, too. And we thought their rates were fair.

Greg described the results of our marketing campaign to promote our extraordinary client-focused business model as “crickets chirping.”

Well. As I’ve said, key to a successful business is great customer service. Also key, is not going broke. We have an annual contract for our ad on We paid for the year up front, so though we haven’t enjoyed even one prospect from our ad on, we’ll play it out till it’s time to renew. We had an annual contract with the Arizona Republic, which we were paying for monthly. When it became clear that passive marketing isn’t bringing us prospects, we agreed that we shouldn’t throw good money after bad, so we paid the penalty to get out of the contract.

That leaves one vendor who we had hired to support our foray into advertising (as compared to marketing) for new clients — Budget800. I had forgotten all about them till I was reconciling our bank account this week. Then it occurred to me that we were paying $25 a month for 500 minutes… we were sooo optimistic! Turns out that we’ve used up a total of 56 minutes in the four months we’ve had our 800 number. We decided we still need to have an 800 number, and we might as well keep the one we already have. But a more realistic expectation of usage is the least expensive tier that Budget800 has — $5.95 a month for 100 minutes.

I called Budget800 and asked them to change our plan. I spoke to Nathan, who promised to make the change effective by our next billing date, and I was satisfied. But Nathan delighted me when he sent me confirmation of the adjustment to our plan. After our conversation he took a look at our account and when he saw that it hadn’t been used at all since the last billing date, he changed our plan to the less expensive one retroactively, giving us a credit balance that will be applied toward the next few months of our service.

Let’s hope that Budget800’s business plan is a profitable one, because here is a company that goes beyond great customer service. They are exceptional. I only wish that every vendor who real estate agents use could deliver such a happy experience.

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“You expose yourself to more resources so you can blog more. It’s a sickness, I think . . . “

That’s mortgage blogger Rhonda Porter in the third installment of the excellent Inman News series on real estate weblogging

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What’s Wrong with zipRealty?

Some readers here may be a bit concerned that some of the writers here on BloodhoundBlog don’t find and report enough negative comments about various discount real estate companies. Relax. There is more.

I received the following email today from Dave Marron. As you will see, he is a former executive for Zip Realty.


Hi Russell:

I saw that you posted on bloodhound about zipRealty awhile back. Did you see their earnings release the other day? I’m an ex-zip exec (and ex-KW broker) and I put my thoughts down on paper about the state of their company (see attached). Do you have any use for this? If not, it’s OK. I just thought I’d shoot it over to you in case you thought it was bloggable.



What’s Wrong with zipRealty?

Last week zipRealty released their “preliminary” fourth quarter results. I’ve been interested in this company since 1999 when I went to ZipRealtylogowork for them. I
spent over four years at zip performing numerous jobs including VP of Sales. A couple of things popped out at me during their “preliminary” earning release conference call that just don’t make sense. Here are my observations.

One of the initiatives zip’s leaders gave for how they are going to improve in 2007 was an increased effort on training. Stock analyst Wendy Snow asked the team what they intend to do differently in the training arena that will make a difference in 2007. To this, Management answered that their “ideal candidate” would have the qualities of a strong trainer and strong real estate skills. They’ll also consider someone with strong training skills who could be “pick up the real estate craft quickly”. Are they kidding? They would hire a trainer who can “pick up the real estate craft quickly”. Would Pilsbuy, Madison and Sutro hire a legal trainer who could pick up the law craft quickly?

After leaving zipRealty I sold real estate for several years and I’m now an owner in a real estate technology company. The way that I learned the “real estate” craft was by going out and selling lots of homes. It’s not something that you can teach someone to do unless they are willing to actually do it. If they are willing to hire a trainer without real estate sales experience, I sincerely doubt that their new training initiatives will have any positive impact.

Recruiting and retention is critical to zip’s success. The company said that they will “…focus recruiting efforts on specific candidates and areas…We’ll take a lasered approach to recruiting as opposed to a shot gun approach.” This is going to be a huge challenge for the company.

Here’s the problem the company has created, unsuccessful agents leave because they’re not making any money. Successful agents also leave because they’re not making enough money. Let’s break down the compensation plan of an average zipagent:

Avg Net Revenue/Transaction $7,400

Avg zipAgent Commission 50%

Avg Agent Commission/Transaction $3,700

Transactions/Agent/Month .60

Avg Monthly agent income $2,220

Buzz Lightyear couldn’t laser in on a quality agent with that compensation package.

High turnover has also been a big problem. Zip agents are employees of the company, not independent contractors. The company believes that as employees, their agents should do whatever the company wants. Things like working weekends, weekdays, holidays, nights, mornings, and sucking up to management is expected. The reality is that the agents may be employees, but they don’t get salaries and they pay their own expenses (board dues, mls fees, phone bills, gas, car payment, etc.). The promise of a steady lead flow and good technology (plus maybe 200 stock options) isn’t enough to compensate a good agent to make the kind of commitment zipRealty asks – not even with the $2,200 per month cash flow!

Now, I don’t like it when people criticize without offering solutions (I’m also not a big fan of anonymous critics). So, here’s what I think zip should do to improve performance:

1. Acknowledge that you are a real estate company and start behaving like one. This company has 1,796 agents (as of 12/31/06) and they spent over $15,000,000 on operating expenses during the FOURTH QUARTER. Here’s my take on their “preliminary” results:

Q4 Revenue 23,000,000

Cost of Sales 10,350,000 (about 45% as reported on the call)

Gross Profit 12,650,000

Operating Expenses 15,150,000

Loss 2,500,000

I had to back into some of the numbers because their “preliminary” (what’s the reason for “preliminary” results again?) results lacked detail. Why is a real estate company with fewer than 1,800 agents spending $15 million per quarter on operating expenses? They completed roughly 3,100 sides in Q4. To give you a frame of reference, they complete about as many transactions as Prudential Carolina Real Estate who has about 900 agents and completed about 12,000 sides in 2005. Do you think Pru Carolina spends $60 million per year on operating expenses?

According to, the company operates in 40+ markets. Each market is generally staffed by a district director, a broker and a staffing manager. That’s about 120 people managing 1,800 agents. Those managers and directors report up to the following team:

A VP of Business Development

An EVP of Operations and Business Development

An SVP of Planning and Operations

A VP of New Market Development

A VP of Online Marketing

A VP of Real Estate Sales (who has never sold a home)

An SVP, Chief Accounting Officer and Interim CFO (they’re probably looking to hire a CFO to take some of the load off of this fellow)

A VP and General Counsel

A VP and CIO

A President


That’s a lot of management for an-1,800 agent company. To my knowledge, there is only one person with a VP or higher title who has ever sold a home. My question is – why is it necessary to have all of these managers? Since their agents are selling 7 homes per year (.6 per month) they either have the wrong agents, the wrong management, or both.

2. Get rid of the rebate. The rebate is unnecessary. Zip rebates about 20% of their gross commission to their home buyer customers. They provide a similar discount to home sellers. In my experience, the discount/rebate attracts buyers and sellers at the low end of the market. I sold houses for zip and gave the required rebates. I also sold homes for traditional firms and never gave a rebate. Guess what happened when I stopped giving a rebate. My average home sales price went way up and so did my average revenue per transaction. Most of my leads were sourced online just like zip’s so, this is a relevant comparison.

3. Invest your shareholder’s money. Zip is currently sitting on over $88 million in cash and short term investments. Most of that money was raised at their initial public offering back in November 2004. I was pleased to hear that they plan to increase their expansion by adding 8 – 12 new markets this year. At an average investment of $500,000 per new market, that’s a $6 million investment. Good start, now what are they going to do with the other $82 million their shareholders trusted them to invest (besides hiring a trainer)?

I do believe that zipRealty can be a much bigger player in the real estate industry. They are the best in the industry at generating leads for their agents. They also have fantastic technology to help their agents convert those leads. Now is the time to make significant changes that will drive the financial results their investors and employees expected. Unfortunately, based on their latest conference call, it doesn’t look like they intend to do so.


Does have tougher agents or tougher clients? A challenge in Bloodhound red . . .

I represented the buyer in the sale of a home worth $450,000. Luxury home on the first tee of an exclusive golf course, right next to a million-dollar custom-home lot.

How much did we pay? $310,000.

Now the truth is, I had an ideally-situated buyer and we were working with an ideally-dys-situated seller. Fortune favors the well-prepared, but, in the end, we simply got lucky.

But if I wanted to, I could present that story in such a way that, by the time I finished warming your ears, you’d want to rename Wednesday after me. (Take that, Odin!)

And welcome to Redfinland. They’re determined to take a victory lap, and let ’em. As Kevin Boer said to me in email:

In all fairness to Redfin, if the numbers had come out the opposite, the would have been all over it, showing it as “proof” that they suck.

Indeed. And as much as CEO Glenn Kelman resists the characterization of as a discount real estate brokerage, it remains that their marketing appeal is based on saving clients’ money. It’s hard to doubt that discount-seekers would be discount-finders.

But, as I discussed last night, Redfin’s results are not a slam-dunk validation of its agents skills, zeal, rigor, vigor or charm. The much more likely explanation for the results it reports is that its clients — unlike swimmingly-besotted house-lovers — are congenitally low-balling INTJs and INTPs who do not focus on anything that can’t be expressed numerically.

Tougher agents or tougher clients? There is a way to find out for sure. Last night I made this proposal to Kelman:

I’ll make you a deal. Send me PDF scans of the 170 files. I’ll make a server available for FTP, and y’all can redact for personal details. I can reconstruct a transaction from the file, so I can vet the quality of the work in full, not just as regards price. For example, I can see how complicated the deals are, and how much Redfin’s buyer’s agents are bringing to the transaction. I’ll report my findings in detail, and you can get your incredible PR machine to promote them far and wide. What could be more fair?

I truly do not believe you can deliver the service you promise and promote, and I do not believe that ordinary buyers can adequately evaluate the quality of work you are doing, but I am completely prepared to be proved wrong — and I am never shy about admitting it when I am.

I don’t think they’ll take me up on this, but they should. I’m a real estate broker. I’ve read a lot of files — and I can tell a hawk from a handsaw. More importantly, I am an information broker with a hard-won reputation for hard-headed integrity. I can do a whole lot more for Redfin than the Seattle Times, if its praises are worthy to be sung.

So there’s my gauntlet. Redfin shared its raw numbers with us, but the numbers by themselves don’t tell me anything. (For example, if many of Redfin’s houses were egregiously over-priced to begin with, its Sales Price to List Price ratio would look impressive even if its actual results were awful.) Seeing the files wouldn’t tell me everything, but it would tell me a whole lot more — of which I would conceal nothing.

Kevin Boer and Pat Kitano keep coming up with off-the-wall cost-saving ideas, and, in that spirit, I will give this much credit: Omitting the cowbird practices, omitting the rebel-without-a-clue MLS rules violations, omitting the unrelenting antagonisticism (now that’s a religion!), the idea of a hierarchically-managed real estate marketing practice is not awful. In a world of haute cuisine, the idea of a McDonald’s or a Taco Bell might be anathema, but that doesn’t mean it can’t work.

So send me the files, Glenn. I could end up being your most vocal champion…

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Part II of Inman’s real estate weblogging coverage . . .

is here

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Comments are off for this post

Thinking skeptically to rain on’s parade . . .

I’m not a Jesuit, but I play one on BloodhoundBlog. The real truth is, I’m a roll-your-own Jesuit, more auto-didact than anything. I didn’t have Brian Brady’s inestimable advantage of having had the gift of reason literally pounded into me. Instead, I had to stuff it between my own ears by hand. But one way or another, lay student or Brother, if you walk in the path of Ignatius Loyola, you learn to think skeptically. Any affirmative claim is far more likely to be false than true.

This morning, posted a claim that MLS results “prove” that Redfin agents are better negotiators than other agents in the Seattle area. If CEO Glenn Kelman had made a claim like this in Brother Paul’s class, he’d be up late tonight writing a paper, striving either to prove or disprove it.

The problem is not that the claim is necessarily false. The problem is that that there are so many ways that it might be false that, to call it true without eliminating each one of these canards and false paths is an inherently tendentious statement — suasion, not persuasion.

Before I begin work on my much shorter paper on why the claim is dubious, I want to raise three meta-issues. First, I do not have access to the underlying data. If I did, I might write a much longer and much more conclusive paper. Second, I would have much greater faith in the mainstream media if more reporters were tuned to a Jesuitical tenor of skepticism. And third, the tabbed browser window is an excellent tool for organizing the resources to be used in an exercise like this.

First, Redfin claims that its results rebut the claim that a salaried (and possibly inexperienced) agent will not negotiate as aggressively as a traditional real estate agent working on a straight commission compensation plan:

After a year in the market, we decided to put our theory to the test, by querying the Northwest Multiple Listing Service for data on every home or condominium sold via a brokerage from February 6, 2006 (the date of Redfin Direct’s launch) through February 5, 2007. Since we didn’t offer a service for sellers or support areas outside King County until much later in the year, we limited the data to King County and we only evaluated our capacity as buyers’ agents.

But we still had the problem that Allan highlighted, namely that there is no “set base” price for a home.

So we compared what buyers’ agents negotiate for — the final price — to what the sellers’ agents ask for — the asking or listing price; some sellers’ agents may ask for too much, others for too little, but all King County brokerages are negotiating against the same set of asking prices (note that evaluating a seller’s agent is problematic, since the seller’s agent only competes against the prices she sets herself.)

The results were striking; Redfin customers paid on average under asking price, whereas customers of all other brokerages paid on average over asking price. The difference in negotiations was .9% of the home price, equivalent in King County to over $4,000, on top of a commission refund of nearly $10,000.

In greater detail:

  • Redfin King County customers paid on average 99.329% of the listing price while buyers with other brokerages paid 100.233% of listing price for a difference of .904%, for an average savings of $4,474;
  • The total Redfin Advantage, combining the negotiating advantage and an average Washington commission refund of 1.952%, was 2.856%. The total savings for an average Washington customer was $14,134;
  • 170 customers in King County bought a home through Redfin, 200 across Washington state;

The Seattle Times bought it, as did Inman News to a lesser degree. The Future of Real Estate Marketing weighed in, as did TransparentRE. There was coverage at Inman Blog and the Redfin cheerleader delegation was represented by Matt Goyer.

When Redfin’s post appeared this morning, I passed it along to Marlow Harris of 360 Digest for comment — she being a mathematically-adept agent with access to the NWMLS database. She sent back a PDF file from NWMLS showing numbers radically different from those claimed by Redfin. These were the figures cited in the Inman coverage. (More from Marlow.)

The first discouraging word was issued by Freakonomics Blog:

Of course, it is hard to know exactly what to make of these results. Redfin would like you to believe it is that they have crack negotiators doing the bargaining. Another possibility is that the home buyer that seeks out a discount broker is cheaper and more savvy than the typical home buyer to begin with. It is possible (although there is no direct evidence to support such a claim) that these homebuyers could have made even better deals if they had worked with a full-service agent.

It is not easy doing data-driven research that is completely convincing. This research is not completely convincing. I do think it is sensible and interesting, at least, so hats off to Redfin.

Although the data here do not show it, one of the legitimate fears a client should have when using a discount broker is that lower fees translate into even weaker incentives to do well for the client. This is why I think that the real-estate market is more likely to move towards a flat-fee system (where a fee is paid to list houses and then agent compensation is based on an hourly wage as opposed to a share of the sale price), rather than to a discount system which is still tied to sales price.

Glenn Kelman offers his demurrers to these concerns in the comments to this post.

With all that as introduction, let’s go through some reasons why’s claims to superior negotiating skills might be called into question by thoughtful Jesuits — and those who aspire to be thoughtful Jesuits:

  • Redfin agents may not be negotiating at all. The business model is based on the buyer driving the process. The lowball negotiators may be the buyers, not their Redfin agents.
  • Lowball offers tend to fail far more often than market-price offers. Redfin is measuring only closed transactions, not all those that might have failed due to failed lowball offers — and which might not have failed in the hands of better agents.
  • A salaried Redfin agent will have less incentive to keep difficult transactions alive, again skewing the results of closed transactions.
  • Redfin’s actual claim is that it “beat the field” in gambling terms. That is, its performance was better than average, which average would have been weighed down by the worst performers. “We’re better than the worst!” is not a persuasive boast.
  • By comparing itself to the field, Redfin avoids two more apposite comparisons: Against other discounting buyer’s agents (if there are any in Seattle) and against very experienced or very successful agents (which may not be possible, since experienced and successful agents tend to be listers, not buyer’s agents).
  • As Freakonomics notes, that Redfin might have done well with its clients does not imply that other agents might not have done even better.
  • The subset of clients attracted to Redfin may be so delighted by the idea of lowballing that no other consideration — e.g., getting the perfect house rather than the perfect price — compares in importance.
  • To my knowledge, there is no provision made for more complex terms and conditions. A complicated negotiation might result in a higher reported sales price but a better overall deal for the buyers — for example, repairs or even remodeling, seller concessions, no out-of-pocket costs, etc. These are the types of arrangements more likely to be made by more-experienced agents.
  • The data deployed by runs from 02/06/05 to 02/05/07. In that span of time, was ramping up production, so it is reasonable to surmise that its claimed production of 170 transactions was back-loaded into the latter half of the year. Unlike other markets, to the extent that Seattle has experienced a housing slowdown, it started much later, perhaps as late as July or August 2006. In other words, Redfin is very probably comparing its results in six buyer’s market months against what was for the market as a whole still largely a seller’s market.
  • In King County in 2006, 27,834 homes sold. Of those, something less than 170 were sold to buyers. Whatever claims Redfin might want to make from its results, at 0.6% of the Seattle market, Redfin’s results are statistical noise.

A controlled apples to apples comparison might yield more information. What Redfin has so far is a press release — one which does not bear up to thoughtful scrutiny…

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The Odysseus Medal: Inman’s real estate weblogging coverage

(I was going to award The Cheez-Whiz Prize to Google’s applications suite, but I decided not to bother. I do think it’s silly to go from centralized processing to distributed processing and then back to centralized processing, but I can understand why people might do just about anything to get away from Microsoft.)

This week’s Odysseus Medal goes to Matt Carter of Inman News for his four-part series on real estate weblogging.

Part I appears today, with the other three parts appearing later this week. The articles will go behind Inman’s pay wall, so if you want to see them for free, hop to it.

Dustin Luther at Rain City Guide writes about the series, also, along with details about a Blogger’s Connect later this year at Inman Connect.

Carter’s series explores real estate weblogging at amazing depth, and I would say so even if he hadn’t given BloodhoundBlog a big write-up. The articles explore work being done by many of the better-known names in the, including BloodhoundBlog contributors Kris Berg and Dan Green.

For my own part, my hat is off to everyone who got to be a part of this series, and to the as a whole. And most especially to Matt Carter, who has given us a lovely portrait of where we are now…

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Why The Traditional Real Estate Model Is Fading Away

Kris Berg and Brian Brady inspired me to add my eye witness experience to the subject of the traditional real estate company business model. Their recent posts on the subject were excellent as usual.

I’ve seen real estate from the inside since 1967. I was able to follow the owner of the most successful agency in San Diego at will. He answered any question I ever asked as fully and candidly as he could. It was an amazing learning experience for a teenager. Four straight years this guy closed more than 1,000 sides a year. And he did it with a maximum of 28 full timers and usually less than a dozen part timers.

If he did that now, he’d be making over $15Mil a year in gross commissions before paying his team. Oh yeah, his team. This broker never made less than 40% on any transaction. If you as one of his agents listed a home exclusively you were paid 20% of the listing side of the deal. If you sold the property you made 40% of the selling side. Back in those days a large minority of the listings weren’t exclusive right. Many were either open listings or what we called ‘agency’ listings back then. Opens only received 10% of the listing side, exclusive agency listings got 15%.

This meant that much of the time this broker made 45-50% of the gross commission. Today an average agent at a ‘commission split’ office makes 70-80% of the office’s commission. And the so called top producers are paid 90%. Is it a mystery that the desk rental model came into being? At least if they could hire enough bodies the broker/owners could, by sheer numbers, turn a profit. In some cities I’ve seen operations using this ‘desk rental’ model that employed literally hundreds of agents.

Just how the large firms clinging to the traditional model stay in business is a mystery to me. They’re operating with even higher expenses per square foot than brokers did 30 years ago, and getting a much smaller slice of the pie to boot. For awhile they stalled the inevitable by buying into their own escrows, lenders, and title companies. Since their model is doomed to failure, this only bought them a little time.

By the way, that broker, the one who brought me into his inner circle? The 1,000+ annual sides he closed annually were really 500+ double ends! He also owned the escrow through which they were processed. He received $50 for packaging FHA and VA loans, which accounted for 95% of the loans back then. And finally, he received absolutely legal kickbacks from the title company because of the volume he produced.

He wasn’t a member of the local Board of Realtors or their MLS either. That, shall we say, irritated them. You see, his company had more homes listed under $20K at any one time than the entire MLS. In San Diego these days that would be like having most of the listings under $500K. He was asked to join the local Board of Realtors all the time. The catch of course was that if he consented to join the Board, he had to join the MLS. And if he joined the MLS they would force him to split commissions with them 50/50. He said he’d join the Board but not the MLS, since he had already proven he didn’t need them, they needed him. (Of course, this was a truth better left unsaid, since it was so clearly the case.)

They ended up asking him to join three separate times. By the third time our guy was at the end of his patience, and told them they would accept him into the Board, AND the MLS. Furthermore, he would split 90/10 in his favor, and they would accept that. They knew they were headed towards the DOJ if they continued, so they relented.

A few years later he closed all but one of his offices, and scheduled a 12:15 tee time for the next 20 years. His profit margins have never been duplicated by any office of at least his size since. Why did he walk away? He was old school to a fault. He saw the first franchises on the horizon and said he’d never be a part of one, and that he’d not be able to compete for long against the kind of money they’d be throwing around.

He was dead on.

In the next 10 years Red Carpet and Century 21 did exactly what he’d predicted. In that same decade he lowered his handicap from 19 to 6. Not bad for a guy who couldn’t hit farther than 210 yards off the tee with a force five hurricane behind him. 🙂

He once told me that if I decided to own my own brokerage I’d fail if I used his model. He said that back in 1971! He said the only way to succeed would be to create synergy between partners, no hired agents. The alternative would be to simply be a one horse or family operation. Of course that was before I made the transition to the investment side of the business. When he saw me do that, he just smiled, raised his Jack on the rocks, and winked. “Even better” he said.

We had many talks when I was still young and knew everything. 🙂 After each of these sessions I’d come away thinking how much he really understood, and how little most in the business understood. It was scary. Looking back I think the most salient piece of wisdom he passed on was an observation he once made comparing his operation and what he thought he saw coming.

He said the agents he hired were the best he could find. He wouldn’t accept second best. (His judgment was uncanny, as more than a dozen moderate to large brokerages were started by agents who had spent at least three years working under him.) His prediction was that because management was beginning to give agents an ever-expanding share of the pie, they’d be forced to ‘dumb down’ there agent pool with less than excellent people. This would allow them to pay them much less, which would increase their bottom line.

He said the combination of the emerging franchise model and what he saw as the coming dependence upon inferior agents is what caused him to work on his golf handicap permanently. He said any time a business model is even partially based on the use of inferior people, he wanted nothing to do with it. He actually called it evil. His generation believed the pursuit of excellence was its own reward.

Purposefully courting mediocrity was anathema to him.

Since then I’ve seen his predictions come true one after another. He built his business through the pursuit of excellence. He won at everything he tried. And he just couldn’t understand building a real estate company on a foundation of mediocrity. So he retired — at 42.

And the only thing that ever beat him was Jack — on the rocks. Dad never understood Jack wasn’t his friend.


The Carnival of Real Estate . . .

…is up at The Real Estate Zebra. Host Daniel Rothamel is one of our favorite real estate webloggers, so it’s a double honor to have our own Kris Berg win yet again for The ABC’s of Agent Hiring – Oops, They Did it Again. This is Kris’ second win and the fourth for BloodhoundBlog.

This week’s Carnival of Real Estate Investing is at TheMillionairesBlog. We entered Michael Cook‘s Negotiation 201: Don’t Just Think about the Best Price, but it didn’t take first place, alas.

There is much good reading at both weblogs. Go take a look…

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The Sunday Real Estate Section Advertisement Problem

REMAX Listing Sheet from papersLet’s all agree on the following:

  1. Most home buyers begin their home search on the Internet
  2. Most home buyers use Web-based software to “preview” homes online
  3. Most home buyers receive regular email/web updates from their agent about new homes worth previewing

If we know all of this to be true, why does my local newspaper’s Sunday Real Estate section get larger and larger every weekend?

If it’s to reach home buyers, I am going to laugh. That’s like advertising White Sox Gear for sale in a Cubs fan magazine — your target market is not in the audience.

So, I think you can make one of two arguments about Sunday Real Estate advertising: that the advertising is there is to make the seller “feel good”, or that it’s there to promote the brokerage’s brand.

Either way, it’s worth a re-evaluation.

For the money that is spent on newspaper advertising weekly, real estate agents could be providing more personalized services for home sellers including single-property listing URLs with custom Web design, better videography of the home, and higher-quality signage.

These are all items to which a buyer would respond favorably. In theory, that should lead to higher sales volume and nothing builds a brand name better than having “SOLD” hanging from a listing sign.

Image courtesy: The Village News


The truth will set you free — but your chains are forged from sob stories . . .

I was at a party about 13 months ago, a going away party for one of my clients whose house we had just sold. I had sold the hostess her house, and somehow or another we started talking about 80/20 loans — nothing down financing. She had just refinanced to retire the second mortgage, so she had 20% equity in her home at next-to-nothing in out-of-pocket costs.

All around the room, people started nodding and saying 80/20, 80/20. They had all done the same thing, a room full of young homeowners with their homeownership made possible by the no-PMI piggy-back loan.

This is Peter Coy in Business Week’s Hot Property:

Is Your Mortgage Choking You?

For an article in BW, I’m looking to interview people who have subprime ARM mortgages and are feeling squeezed by resets.

A few weeks ago, Coy admitted that margins of error in statistical reporting render much of it meaningless. I have never worked with a sub-prime borrower, but I would expect that, among the stories of people being “choked,” there must also be stories of people who bought homes they would not otherwise have been able to purchase, homes they have subsequently refinanced with conforming loans.

“Proof by anecdote” is bogus in the first place, since anecdotes abound (and they’re much easier than real estate to improve). But surely there are countervailing anecdotes for almost any phenomenon. This might seem to argue for presenting “both sides” of the story. To me, it suggests a better approach. An anecdote in a news article is almost always a fallacious Appeal to Emotion dressed up as testimony. With two or three sad tales, the reporter implies that a situation that might be quite rare is in fact ubiquitous — and that the “solution” propounded requires no rational defense. Facts are facts, and surely thoughtful people can digest them without all that saccharine. Why not leave the anecdotes out altogether…?

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Sales Success Training?

Stack of $100 bills - smallerMost of the national real estate sales trainers training today are selling worthless crap. Want proof? Buy their stuff and see if you can apply any of it and actually make your business better.

Most of the real estate magazine articles that are chock full of “what agents ought to be doing” are written by well intentioned people who either were never successful at selling real estate for a living or never did.

One of the most high profile agents in the world endlessly promotes that he will share (if you sign up for his fabulous training program) how he became so successful. He is quite successful and it would seem logical that he could share quite a bit that would help. One of the main things he “shares” is a cluttered looking clone website that you can buy from him. I’m not quite sure how that website helped him so much as he was fantastically successful before the internet existed.

One trainer (rhymes with fairy) knowingly lies from the stage.

Most agents who enter the business (13 out of 14 by actual count) will be gone in a year or two. Can that be changed by “learning about success”? I really doubt it, as most of them didn’t have much commitment to ever really apply themselves. But that doesn’t include everyone – there are a LOT of people in the real estate business who want to do better and aren’t sure what to do next.

I’m planning on doing something about that. Over the years I have figured out what is involved – exactly – to go from “0 – 60” and I also know what is not involved. We are going to make that information broadly available. Free. Free, in the sense that we won’t be charging any money for any of it. Period. We won’t be endlessly attempting to get new people to listen to the audio or watch the videos because it makes us more money. Our only goal will be to see each person
who desires it to do better.

It will be fun. Please let me know any and all questions you might have. If I don’t know the correct answer I promise I will say just that.


Interviews Are Back on Track

I have two great interviews coming up this week; I think you’ll enjoy them. The interviews are with real, honest-to-goodness BROKERS.
Lenn Harley is an agent in the DC suburbs and runs a firm called Homefinders. I’m reading background about her now and her story about how she became one of the original “internet brokers” is compelling.

Sharon Simms is an associate broker with RE/Max in St Petersburg. FL. She started her real estate career at Merrill Lynch Realty (remember that experiment?) . She manages a team of agents (including her daughter and son). Her post about how architecture makes neighborhoods shows that she is hardly another licensed hack banging on doors.

I’ll be asking them both questions this week. Feel free to add any that you might have for them in the comments box.

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