While there were many threads of thought that could turn into policy when Congress is presented a proposal in January 2011, I rub my Conjecture Ball and foresee:

The Government sponsored artists currently known as Fannie and Freddie shift from hybrid private/Government controlled entities to straight up Government controlled.  OK, it’s not really speculation when Timmay Geithner states: “We’re not going with a system where private gains are subsidized by taxpayer losses.”  Anyway, they abandon the practice of implicitly guaranteeing (~90% of all) mortgages today in favor of an explicit guarantee that reads like an insurance policy.  So, the Government will provide mortgage insurance for a fee instead of the Freemium model currently enjoyed by financial institutions.  That model didn’t work out real well for anyone except big ass banks.  Our Government hasn’t been real savvy when it comes to financial engineering…free really shouldn’t be the new business model, with all due respect to Chris Anderson.

Government Sponsored Mortgage Insurance (GSMI).  This is interesting, really.  The premiums for something like GSMI would be paid by the individual mortgage holder and the policy would insure the actual asset, not the business entities that hold them…suitably addressing Mr. Geithner’s statement above.  Fannie and/or/nor Freddie can thus go back to performing the duties they were essentially created to carry out: To create affordable housing for the masses and mitigate risk on their behalf.  They could still maintain, even increase their influence on the market whilst scaling back on the actual buying of mortgages…insuring parts thereof instead.  Theoretically this shift would provide enough incentive and security for the private sector to gradually re-enter the mortgage space and fill any vacuum created by the Governments very, very gradual decrease in purchasing mortgages.  A new fee like GSMI means other fees and current tax deductible benefits currently innate to a mortgage take a hair cut…like the mortgage interest deduction.

The powers that be are focused on providing suitable, affordable housing…just not necessarily through home ownership.  As such, rental market dynamics are being primed for adjustments. Multi-family housing loans made accessible and desirable due to favorable GSMI terms seems highly plausible.  There are likely to be other subsidies into the rental market from initiatives like PETRA to help shore up this sector of affordable housing.

If you continue to listen closely and look closer, the landscape is being primed for The Ultimate Fix…

“The only way to fix it is to flush it all away.”

One of my favorite bands goes by the name of Tool.  They create deep, dark, complicated music, but they are an acquired taste…not for everyone.  The following is a verse from one of their songs appropriately named ‘Aenima‘  **Bad Language Warning**  Skip down if you are offended by profanity.

Some say the end is near
Some say we’ll see armageddon soon
I certainly hope we will
I sure could use a vacation from this
Bullshit three ring circus sideshow of  Freaks
Here in this hopeless
fucking hole we call L.A.
The only way to fix it is
to flush it all away
Any fucking time, any fucking day
Learn to swim, I’ll see you
down in Arizona Bay.

So, nix the reference to Los Angeles and ‘Arizona Bay’, fill in metaphors of choice and it sounds like they’re waxing philosophical about the economy, the housing market specifically.   Rather prophetic too since this is whats about to happen…actually its already started.

Over the next six or so months the housing market will continue to tank as financial institutions release huge amounts of distressed (shadow) inventory into the market creating supply that far exceeds the ability to consume.  This will exert extreme downward pressure on property values.  The number of banks will continue to contract.  Homeowners will continue walk away from their houses.  The National Association of Realtors will continue to tell anyone who is listening that its a great time to buy.

These sour conditions will be amplified with the seasonal slowdown to such a point where everyone is clamoring for additional Government ‘intervention’ or stimulus or Print More Money!!  Except I don’t think there will be much, if any, of that.  There really isn’t much left to be done except to allow the existing system to flush itself and prepare for what comes out the other side.

Whats on the other side of this economic enema?  Explicit Government guarantees via the artists formerly known as Fannie and Freddie to keep the cost of credit within reach of the qualified rather than the entitled, increasing private money participation, and a retooled rental market system to support all the displaced homeowners.  Dead inventory will be channeled off through a series of initiatives like HomePath.  The housing market and property values drop below this ‘double dipped’, false floor we’ve been dancing on for almost 2 years…and there is no where to go except up.  Which equates to a real recovery and sustainable growth which will lead to inflation and all those other problems that we can worry about that sometime post 2012, assuming that whole Mayan prophecy thing doesn’t absolve us of any future responsibilities.

This painful process constitutes a necessary de-leveraging of an economic system thats based on a debtor society which has been taught to borrow/spend beyond it’s means.  While it may hurt and otherwise cramp our very American style, its really not the end of the world as we know it.

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The Ultimate Fix

John Paulson was an interesting figure in the whole SEC vs Goldman Sachs stink-eye contest, which ultimately ended up with Goldman getting slapped on the wrist with a fine and restitution to damaged investors for ‘making a mistake‘.  Looks like J-Paul managed to stay out of range of any collateral damage and made billions by helping build the elegant piece of financial engineering that enabled Goldman to make their ‘mistake’…directly contributing to the housing bubble and subsequent *pop*.

Former Treasury secretary and Goldman Sachs exec Henry ‘Hank’ Paulson (of no relation to John) donned his 20/20 hindsight glasses for the Financial Crisis Inquiry Commission.  Too bad he didn’t practice what he preached while he was in the middle of it all…

Ben Bernanke the Federal Reserve Chairman warned about warning of pending warnings as to what the Feds future economic policy changes may look like.  This ‘no surprises’ strategy is intended not to spook investors and/or cause knee jerk reactions.  Unfortunately well prepped domestic policy changes wont do much to reduce the anxiety of investors as global headline news continues to cause such spooky, knee-jerk reactions…but thanks for the warning ahead of the warnings about your read and react strategy Ben.

More in line with the real estate (and mortgage) markets proper, I started a series about how some real innovation was required in the aspects of business and cost modeling for the industry’s to change in meaningful ways.  New sexy search UI’s and social media are fun and all but they do little to address the core problems at hand.  Beauty is only skin deep and the insides of these industries are nothing short of fugly.

Politics tend to get in the way of meaningful change when it comes to the real estate industry, evidenced by the strong aversion from real estate professionals to offering consumers a peek into their professional track records or ‘report card‘.  The Houston Association of Realtors (HAR) launched an Agent match product that was by most accounts very benign in regards to the information being displayed for public consumption.  Nonetheless they had to take the product down within 48 hours of its official launch because inmates run the asylum in real estate-land.  Thats sad.  I applaud Bob Hale of HAR for having the guts to push for this type of initiative and believe he is 100% correct when stating: ‘It will happen outside of the industry, and everybody will be mad’.

Another Captain Obvious moment- Alan Greenspan.  The former Fed Chairman really stepped out on a limb recently by prognosticating that another dip in home prices could cause a double-dip in the overall economy.  Never mind that no one can agree on what really constitues a double dip recession, outside of the notion that the economy shrinks, then grows, then shrinks again, then…doesn’t the economy do this all the time?  Double dip, W-shaped, recession, depression, correction…all economic semantics for:  Our economy is going nowhere fast with long term issues like high unemployment, shadow inventory and mortgage underwriting standards so tight you couldn’t pull a pin out of a lenders ass with a John Deere tractor…

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All real estate, economics and the unimportant aspects of life aside-

A dear friend, peer and overall great human being passed away last evening.  Joe Ferrara may have lost his battle with cancer but he won the hearts and minds of countless people through his unselfish nature and consistent nurture.  While I mourn your death, I celebrate your life.  Rest in peace Joe…

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Honest Mistakes, 20/20 Hindsight, No Surprises, Real Innovation and Double Dip ‘Psycho-Semantics’

In the spirit of taking action to reverse the negative stigma around the industry, there has been a spike in conversation recently around the cause of ‘Raising The Bar’ (#RTB) by real estate professionals, including an REBarcamp session before Inman Connect NYC, Twitter-speak, blog posts, podcasts and blog talk radio shows.

With lots of conversation comes lots of ideas, including:

• Raise the barrier to entry (Keep out the stupid, poor agents)
• Kill the barrier to entry (Increase competition)
• Increase continuing education requirements and ethics standards (Create smarter, more ethical agents)
• Only hire honest, empathetic, generally good people who have a strong work ethic (Make the consumer LIKE me into doing business)
• Acquire pretty technologies and engage in Social Media best practices (Apply the Laws of Attraction)

All of these ideas focus on the top of the industry funnel – marketing, messaging, advertising, massaging, allure, the ‘easy to manipulate’ aspect of reputation management…they are too far removed from solving the real issues at hand.

The common thread I’ve heard is that the industry must increase its ‘Professionalism.”

My Notorious partner posed ‘The Single Question to Rule Them All‘, all Lord of The Rings style:

“Is professionalism a competitive advantage in real estate or not?”

In short, Rob says if this is the case, the riff-raff will eventually be driven out.  If it isn’t the whole RTB exercise is anti-competitive in nature and generally deceptive.

Robs logic is sound, but there is very little context to the question, so it’s just that…logically correct with alot of ambiguous conjecture and talking heads spewing esoteric, self-serving opinion around the definition of professionalism and how to raise That.

Rewind— REBarCamp San Francisco 2009.  Sitting in a group of well respected real estate ‘thinkers’, Rob Hahn asks:  ’What is the next big thing in real estate?’  With my head focused on the cornucopia of tech related products and services, I didn’t have an answer and admitted to such.

Today–- My answer is pulling the veil back around performance related metrics relative to market baselines for practicing real estate agents.  Establish a Bar, establish accountability, demand greater transparency and Raise The Bar along the way.

So, I propose ‘The Single Question To Rule Them All’ then becomes:

‘Is Performance a competitive advantage in real estate or not?’

Rob’s logic applies to this question and fits like a rubber glove.

If Performance is a competitive advantage, the riff-raff will eventually be driven out.  If its not, then the whole RTB exercise is anti-competitive in nature and generally deceptive.

Performance is a competitive advantage.  I trust I don’t have to write 400 words to explain why.

I’m not sure that the greater industry is ready to RTB…it can be done in pretty straight forward fashion but there are substantial ramifications.

Lets begin…

Social Media Can Help Raise The Bar.

Generally speaking, Social Media provides a two-way conversation medium that ideally compels some level of engagement between two parties.  There is an emotional connection that Social Media taps into for people and it works (very well) when implemented thoughtfully and engaged consistently…a good strategy here will drive potential clients.

Social Media should not be postured as a chronic popularity contest where thou with the most ‘friends’ wins.  The term friend has a diminished meaning in the world of  5000 Twitter and FaceBook ‘followers’. Being named to ‘influential’ lists and the such amounts to little more than superficial ‘pat on the back’ contests amongst inter-industry professionals and is of little value to a consumer…I digress.

Where Social Media really stands to help RTB is rooted in the caveat of the medium:   If you don’t follow up your dynamic online persona with performance driven results, consumers are likely to wield Social Media against you…As stated, its a two way street and bad news travels fast.

Set The Bar With Transparent Access to Relative Performance Metrics.

Open the MLS data vaults to establish a baseline (or bar) around local market performance metrics such as:

• What is the average Days on Market for a $Xk to $Xk house in my market?
• What is the average List to Sales Price difference for similar homes in my market?
• How many sides did an average agent close in the last 6 mos, 12 mos, 24 mos?
• What is the average # times a listing re-priced or re-listed in a given market?
• What is the average final Sales to List price ratio?
• What is the average commission charged on a property within my search criteria?
• How do REO’s and Foreclosures affect a property in a given area?

Once I have a flavor for how my market is performing on average and a Bar has been set, the second and more important question is:

Which Agents/Offices/Brokerages/Franchises Outperform These Averages and by How Much?

You can’t argue with real, empirical data.  You can’t fake the grades on your bell curved report card.

Allowing consumers to evaluate which real estate professionals outperform local averages (Baselines or Bars) that are important to the specific consumer would go a long way toward increasing the likelihood of a positive experience, as well as aid in improving consumer perceptions and expectations.

In addition, consumer access to performance based information (currently locked under MLS data use Rules and Regulations) would:

• Drive out the under-performers or force them to do what it takes to raise themselves above the Bar
• Spur innovation in the sector of commission reform <–A big deal to consumers
• Increase good competition

I can hear the arguments:

‘Just because Sally transacted more sides, doesn’t mean she’s a better agent.’    Very true.  Johnny could have sold 4 properties to Sally’s 20 over the past 12 months, but Johnny sold each one in far less time than the market average.

‘Billy took, on average, 30 more days to sell a property.’  Yes, but he did so at a List to Sales price that was well above market averages.

‘My consumer wouldn’t listen to me and insisted I list the price way above market value, thats why I had to reduce the price 3x and it sat on the market for 462 days.’   Well, you should have passed on taking that consumer as a client.

There are many such what if scenarios.  Performance based data isn’t of much value when analyzed in a vacuum.  It becomes very valuable when compared and contrasted against market averages and considered in conjunction with a unique consumers wants and needs.  Throw in consumer ratings, other forms of feedback on some level and now you’re serving steak instead of sizzle.

Evolve The Traditional Real Estate Commission Model

I know, its not supposed to exist, ‘there is no set commission model’- humor me.

The fundamental issue in the ongoing consumer vs. real estate professional beef is the gross misalignment of performance for consideration.  Consumers generally have a negative opinion of real estate professionals because they believe they overpaid for services compared to the value received.  This is likely because the agent they ended up retaining had poor performance metrics or their positive metrics didn’t align with the consumers wants/needs.

Access to such transparent performance metrics relative to a baseline would blow a hole in the bow of the traditional real estate commission model. Underperforming, inexperienced agents could no longer ride the coat tails of top performing seasoned agents.  Top performing agents could set new pricing models, justify a retainer for services, charge for services using a ‘cost plus’ model…they could make MORE money instead of subsidizing Ron the part time Realtor who botched his last three listings, yet scored a listing that would have otherwise been yours because his college friend Bill said something about needing a real estate professional on FaceBook.

I can’t think of another industry that pays entry level employees on the same scale as long standing executives.  Consumer confidence and perception could rise substantially if they knew who they were paying for up front rather than after the transaction closed, didn’t or worse.

If you’ve followed along to this point I’m sure many are screaming that something like this will never happen, because…:

MLS’s are funded by and thus beholden to the agents they serve.

If an MLS decided to adopt some crazy cavalier attitude and turn this performance based data consumer facing, many agents would likely get upset…read: violent rebellion amongst natives, loss of revenue, mass firings at Cowboy MLS.

Since MLS’s are generally for profit enterprises and the people that run them probably like the fact they have a job, this type of a mass public outing is a non-starter.

So, what about a version that displays all the pertinent individual performance metrics and how they rank against the given baseline/bar, but leaves the agents personal information anonymous?  The only time an agents personal information becomes available is when a consumer pays for the privilege.  Unlimited access to all agent profiles wouldn’t be prudent for obvious reasons…rather a set amount, say 5 profiles per subscription. Those below The Bar remain anonymous and left to think about how to raise their Bar.

In the alternative, Stan finds a real estate professional on Facebook, Blogsite, Zilow, Trulia, IDX, ActiveRain…pick your Social Media outlet.  They like the personality and now want to check how deep the beauty runs.  Dial up the agents performance related data and get a holistic view of who you might retain to handle the largest transaction of your life.  Think Carfax for real estate professionals.

Shame on the agent or broker that would threaten to pull out of an MLS for offering this anonymous data for public consumption, that would be like saying you want the industry to remain in the gallows of consumer perception, deceptive beasts of no prestige.  And if shame isn’t enough, I’m sure there are other incentives to keep everyone submitting their data…

In the ugly and very likely circumstance that agents and/or brokers still balk at the idea, make it opt-in only.  No personal information available unless you as an agent give the MLS the express right to do so.  Pay agents to opt-in, every time their personal profile is requested.  Share the wealth a little.

The big question is always:  Where is the money?  I’d be willing to bet that (ALOT of) consumers would pay for access to such information presented in an intuitive UI-sortable and searchable by what metrics are important to their situation (much like Diverse Solutions did).

This isn’t some pipe dream that would take millions of dollars in development or years to implement.  It could be done quickly and at relatively little expense.  In fact, the primary reason this data isn’t already available is due to simple economics and complex politics…there is alot of money in keeping the data under lock and key…economics rules politics, so where there’s a bigger dollar there is a way.

There are Agent ranking systems out there.  Most allow the agent control over what information is displayed and/or claimed…rendering the system and information skewed at best.  This type of agent rating system must have a very complete set of market data and be maintained by 3rd party providers that simply maintain its purity and integrity.

Diverse Solutions has created the closest product I’ve seen to a tangible, working model using MLS direct data.  Agent Scouting Report was the result of a 48-hour developer competition at the Inman Connect conference in San Francisco last summer.  In its current edition Agent Scouting Report doesn’t work because it shows every agents stats…effectively ostracizing those that happen to fall below the Bar.  I don’t think they’re far off, their product was well thought out given the limited time they had to develop it..a few turns of the dial and some thoughtful considerations in how the data is displayed (see above), and..?

As an agent or broker would you be adverse to this?  Why?  :)

The Broker/Franchise Perspective.

I own a brokerage or franchise and want to fill my office with agents who exceed certain performance metrics for certain property types in certain areas of town.  My brokerage is conducive for these types of agents to excel.  As a broker/owner, I would pay to know who these agents are.  This would be an immensely valuable tool in analyzing my own brokerage as well as my competition on key performance indicators.  I could derive all sorts of actionable data to use as a recruitment and retention tool.

So is everyone ready to Raise The Bar?

It depends on if those who talk the talk about Raising The Bar are indeed serious about doing so and walk the talk.  It will take open minded professionals from MLS directors, their boards as well as the brokers and agents they serve.  I’ve laid out some top level ideas on how economics could cut through the politics, there are more.

The upside for the industry is huge from customer service, commission model and perception standpoints.  It risks shaking the long standing economic model right down to its core, which is a good thing.  In the right hands this very well could and should be the next big thing in real estate.

Comments, opinions, thoughts, flames?

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Is The Real Estate Industry Really Ready To Raise The Bar?

The industry of real estate doesn’t quite lend itself to those conditions.  Its generally a loose, revolving door, part-time hobbyist infected environment that yields a highly uncontrollable and thus poor product.  As a result the biggest Brand in the space, ‘Realtor’, is currently in epic fail mode.  Corporate Brands like Coldwell Banker, Re/Max, Keller Williams etc. mean far more to agents (favorable commission schedules, franchise fees, tools provided) than they do consumers.

A Brands persona will not change (or continue to mean anything) in the consumers eyes until the underlying business model, day to day practices and purveyors of such are commanded/committed to such.  For too many traditional Brands, this is just not possible without the risk of alienating a majority of their contingency.  To which I’d say:  Good riddance.

With this in mind, a more relative comparison between Brands in the real estate space would be between the traditional names and Redfin, the Great Satan of real estate Brands. Redfin does what few others in this space do, they define their Brand through Business Strategy:

• Focus (and follow up) on exemplary customer service.  Hold agents accountable for their actions, or lack thereof.
• Provide rich, relative, intuitive data. Consumers fundamentally are searching for listings first, all of them.  Redfin provides many types:  Traditional, For Sale By Owner, MLS and Bank listed foreclosures as well as Sold data.
• Employ consumer centric business and revenue models based in logic rather than antiquity.
• Remain unusually nimble and open to change, as opposed to standing still and posturing into irrelevancy.

Any agent that flies under their flag is bound by these principles…The Fin tightly controls this environment, developing  an overwhelming positive experience for professionals and consumers along the way.

Can any other traditional Brand represent a 97% consumer satisfaction level?  Do they even know how to measure such?  Are they willing to try?  Me thinks no.  Is there great opportunity for those that dare?  Absolutely.

While there are individual agents and brokers that practice and achieve success employing similar business ideals, they are far more the exception than the rule and are often lost amongst the ‘rest of the crowd’ in such a way that Corporate Brand actually diminishes their efforts, having to instead build and rely on Personal Brand.

When Redfin launched, many industry folk quickly dismissed the company as ‘another discount brokerage’ doomed to failure.  Others have made it their personal vendetta to see that they stumble and fall…spooking, steering and slandering the Company as an impostor, a heretic…which must cause Mr. Kelman to smile more than just a little bit.  Despite all the mud-slinging Redfin apparently is turning a profit (in a ‘down market’ nonetheless), coupled with their high consumer satisfaction ratings, they’ve become a testament to building a Brand via business strategy and the greater industry can’t stand it.

The real estate industry would be well served to study and implement the major aspects of what Redfin is proving out, as opposed to perpetually denying their validity.  I’m not suggesting everyone breakout the Redfin blueprint and copy it verbatim, rather study their successes in comparison to the consumer voice which generally says that Realtors Suck.  Too idealistic?  Probably.  Why?  As suggested above, it would banish ~80% of actively licensed ‘real estate professionals’ to another industry because the bar would be raised off the floor.  Not to mention that too much coin would be left on the table in the near term for many short sighted C-Suite traditionalists to stomach, though continuing down the current road is a proven path to irrelevancy and ultimately insolvency.  Alas, suggesting that a business be run like a business is apparently crazy-talk…

While all the current rage resides with selling strategies that permeate the landscape with noisy propositions using ‘Social Media’ as some magic bullet to more business, what’s really broke and needs to be fixed first is The Business.  Dumping time and dollars into Social Media, SEO, a new website or the next cool shiny thing to (re)define Brand in hopes of more business without refining the core to become more in-line with the changing, demanding, educated marketplace is just plain ignorant.  They are utilities in the marketing tool belt, not long term solutions.

My 13 year old cousin could be a Social Media pundit.  Wordpress (many a blogsite platform actually) provides 85% of the SEO, design elements and disparate data portability one will ever need…the rest is pimping out your ride…accessorizing, if you will (which is fine).  Consistently refining fundamental business strategies, setting the bar higher with regards to agent acumen level, transparency and accountability will positively define a business, a Brand and an industry with an identity crisis.

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Defining a Brand Through Business Strategy

Searching Wikipedia, Transparency has no less than 17 definitions; focusing on the ‘Economics’ classification:

“In economics, a market is transparent if much is known by many about:

1. What products, services or capital assets are available.
2. What price.
3. Where.

A high degree of market transparency can result in disintermediation due to the buyer’s increased knowledge of supply pricing.

Transparency is important since it is one of the theoretical conditions required for a free market to be efficient.”

I was going to delve into it’s philosophical definition and application, but that would cause too many peoples heads hitting their keyboard out of boredom.

‘Web 2.0′ is all about augmenting the speed and lucidity of delivering #’s 1-3.  The very expensive technologies that ‘disintermediated’ traditional commodity brokers on Wall Street are now readily available at far less cost to most any industry that deals in information, this much we know.  I can today, while being out of the industry as a practicing mortgage broker, monitor what’s going on in the industry better than I could when I was in the day to day grind.  Much of the valuable information that was available in ‘expensive’ short supply just 2 years ago is now readily available in buckets.

To a great degree, the resourcefulness of the trusted crowd in the re.net space allows me to maintain a keen perspective about the industry in a fraction of the time.  Any consumer who reads the mortgage websites indexed under my re.net tab could assimilate 90% of the knowledge they need to select a mortgage product that is fit for their personal situation.

It makes me smile when I read affluent bloggers post about how valuable their advice is as they simultaneously give it away.   Here’s six figures worth of advice, for free.  I’ll even expound on Roberts advice:

Next time you take out a mortgage, commit yourself to making the payment a 30 year fixed amortizing loan yields (20 or 15 year fixed payments are even better if you can afford it) that your situation qualifies you for.  Execute a 5 year ARM Interest Only (or ‘cheaper’) product, take the difference between your ‘qualifying payment’ and your actual payment, and invest it.

Thats valuable counsel, now its out there for free…I just disintermediated myself

The mortgage industry, with it’s migration into the Mortgage Backed Securities arena of Wall Street, is square in the same cross hairs that pre dot bomb ’stock brokerages’ found themselves.  The environment is strikingly similar: market has recessed substantially, quality information is getting easier and cheaper to find, and its ‘brokers’ are fighting for their careers.

Remember when stock brokers repeatedly uttered how ‘people need my advice’ to choose the right investment vehicle?  If someone would have told them then that they would be selling mortgages (or real estate) in the near future, they’d have laughed so hard at you they’d cry.  Speculative investment vehicles are far more difficult to evaluate risk in compared to a mortgage, yet I hear many of todays current mortgage practitioners repeating the same ‘people need my advice!’ jargon.  Mark Twain said, ‘History may not repeat itself, but it does rhyme’…this is straight-up Nursery style.

Brokering information inherently gets easier, faster and cheaper.  If you’re in the mortgage business and you can’t deliver more information to consumers easier, faster and ideally cheaper than your competition, your value is diminishing.  The quicker a mortgage (and real estate) professional learns to become an uber resourceful information broker, the more ‘future proof’ you and your business becomes. Banks have already clued into this, they’re positioning themselves to crush the small to mid size shops, continuing to keep Washington in their pockets by lining it’s pockets, to keep the unscientific disclosure laws in place.

How does one compete in an industry that has disparate transparency/disclosure rules?   Get lean, efficient and be more transparent than the next guy.  It’s always been about survival of the fittest, today is no exception…you must offer more information, be quicker, better and cheaper than your competition.

Mortgage professionals had best stop trying to refine their image on the outside and instead get real personal with how they do business internally, or it’s on to yet another career…

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The Economic Realities of Transparency for The Mortgage Brood

A fact worth reiterating about Zillow before addressing the wants and needs of the other half of this community, the mortgage professionals, is that Zillow is an advertising and media company.  Advertising and media companies are keenly interested in the demographical nature of their traffic, the more refined this data is the more valuable it becomes to their paying customers: 3rd Party Advertisers.

By collecting and ‘cookie’ing’ the web-browser of (almost) anonymous members relatively succinct financial and credit information, Zillow is aggregating some very valuable data for sale, just not to mortgage originators.  Advertisers will pay a premium to appear in front of people who represent they can afford and are likely buyers of their products.  Very well thought out by the brass in Seattle.

Mortgage originators on the other hand seem to be less than enamoured with Zillows offering for reasons identified in my last post…they will likely have to farm through a mountain of rate voyeurs to find a client.  Some well respected Mo-Pro’s feel that consumers should be held accountable to a degree of transparency as well.  I’m a staunch advocate in transparency for the mortgage industry (read my very first post from 19 months ago, not the best written piece but I’ve left it unedited for effect) and agree the sword must cut both ways in order for a ‘transparent marketplace’ to work.  Both sides must open the Kimono.

The dilemma with transparency has traditionally been: ‘How can one be transparent without being taken advantage of?’ For too long consumers have been forced to strip in front of a consortium mortgage originators, ZMC switches this around, making Mo-Pro’s disrobe first, and they don’t like it.

Things have obviously changed, so here we are today pointing fingers, losing business and otherwise trying to figure out the best way to make a business a successful one out of the business that’s left.

For their own clever benefit, ZMC is turning the transparency buzz into advertising dollars.  If ZMC does nothing else, it increases traffic to their domain.  They’re pleasing the consumer and pissing off the top notch Mo-Pro in the process.  This may work for awhile but it would appear to be a matter of time before the good Mo-Pros turn their head to ZMC because the lead pool is deemed a dead pool, even though it has all the attributes of viable transparent marketplace for consumers and originators to conduct good business. As stated, Mo-Pros simply don’t have the capacity to work within ZMC very effectively, yet.

An ideal form of transparency, one that serves both consumer and professional, is akin to being naked with a bag on your head.  You get to see all the goods but can’t put a face to the…well, you get it.

Take the time to read Mortgage 2.X and the concept called C2B (Consumer to Business) marketing.  The company that was tooling with this concept is now out of business but was ahead of it’s time.  In 2003, during a time when mortgage (and interest) rates (in general) were plumeting, transparency wasn’t even a thought because Mo-Pros could charge four points and lower a consumers interest rate by 2%.

So here’s where the novel idea comes in, for all I know Zillow may have already considered what I’m about to suggest, if they haven’t…I’m not in a position to do anything with the thought and someone might as well…

The consumer transparency theory…

In order to enter the ZMC a Mo-Po must submit some verifiable information to prove they are viable.  Coupled with the promise of anonymity, the dynamic is very alluring to a consumer.

Zillow can require something similar of consumers.  Offer two levels of consumer participation, the current low barrier level and an ‘authenticated’ designation.

Upon enrollment into ZMC from the consumer side, validate their credit score by having them acquire their ’score only’ from the repository of choice, all three offer this service for free to the consumer.  This is often the biggest unknown from a consumer standpoint, I can’t tell you how many times someone’s self-estimated vs actual credit scores were off by over 100 points.  I’ve had people tell me they’ve had credit scores ranging from “one hundred fifty, I think” to “one thousand something”.  Zillow wouldn’t be privy to a members social security number under this scenario either, the information goes straight to the repository, score returns, consumer fwd’s repository doc (minus ss#) to Z…

Have consumers send over signed verifications of income, assets, type of employment et al (could all be done electronically).  Although these aren’t meant to replace the docs what a mo-pro will require in any way (see Zestimate), the docs would foster a stronger commitment level and code of coduct enforcement policy by consumers.

The prevailing thought here is Zillow could substantially firm up the quality of consumer information to the community and still insure their anonymity.  From a business model position this would be a brilliant move for Zillow as they could then represent the same to both mortgage originators and advertisers.

Quality mo-pro’s would flock to the marketplace to serve this quality of ‘lead’, consumers would be incentivized to provide the information based on the increased likelihood of attention an ‘authenticated lead’ and (most importantly to Z) advertisers could be compelled to spend more $$ for uber-high quality consumer financial and credit demographic placed ads.  There is an opportunity here for Zillow to become the trusted marketplace to begin a mortgage transaction and make a lot of $$ in the process while holding to their current business model.

Theoretically, this would create a quality of mutualism and transparency not available in any other online mortgage community.  From an advertisers standpoint, one would think they wouldn’t mind paying to promote their products and services in front of such refined, targeted eyeballs.

For fundamentally the same reasons mo-pros can’t effectively service ZMC today, they would have a tough time servicing this Zutopian marketplace as well.  Most mo-pro shops are not equipped for volume based loan production, thus cannot afford to charge less per transaction.  Typical mortgage industry business and commission split models make the economics of only charging $2000 in broker/banker fees impractical…this another thread for another post, although the topic has been covered previously on this site.

Zillow could be on the cusp of something special…an anonymous transparent credit and personal information eXchange between mortgage professionals and consumer, to create a highly trusted mortgage transaction community…and they could make a lot of money doing it without charging for ‘the good leads’…

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Zillows Mortgage Community, On The Cusp of an Anonymous Transparent Credit and Personal Information eXchange Between Mortgage Professionals and Consumer?

Very few will argue that we are in the midst of an historical era of change, largely leaving the Industrial Age heading steadfast and firmly into The Age of Information.

Transitions between era’s have traditionally taken anywhere from 100,000,000,000 to 100 years, with each succeeding ‘period’, ‘time, or ‘age’ shrinking rapidly compared to the prior by a factor of ~10.

If the above is true then it’s not contrived to think that we may be passing through multiple periods of relative historical significance during our own life, whereas prior such ‘times’ have lasted for >10 generations.   This is a remarkable reflection if you really consider it. Change is happening at a far faster pace than any of us are used to because it can.

‘The Times’ change so fast they now call it Real Time (as in the time before real time was fake time, or something like that).

Change is also something that does not feel natural thus most don’t adapt to it well, especially over very short periods of time.  Over 10,000 years?  Sure.  Over 5 years?  Maybe.  6 Months?  What just happened..?

People within a society affected by change can be generally classified as:

•    Innovators
•    Adapters
•    Adopters
•    Laggards
•    Haters

The Moral:  Business is moving, evolving, changing faster than ever.  Real estate and mortgage used to resist such rapid change, today embracement is necessary for survival.

It’s pretty well accepted that in the Information Age, withholding information for money has diminishing value.
It took real estate and mortgage (to a greater degree) longer to understand this, which is evidenced by the initial industry aversion to sites like Zillow et al (Innovators).  Many agents understand that wider distribution of their inventory is in fact a good thing (Adapters and Adopters); placing ones product in a place where there are a lot of potential buyers is likely to increases the chances of selling that product.  Other agents are just now realizing and acting on the same (Laggards).

New technologies start big then get smaller and better.
Zillow launched in February of 2006 offering tools and services that draw in consumers and feed participating professionals using intuitive user interfaces (UI’s).  Trulia evokes similar qualities; single site with all the tools (and the list goes on).  To one extent or another Zillow, Trulia et al have exponentially improved the real estate Search experience over the past two years.  They’ve blazed a wonderful path.

They’ve also raised and spent capital that exceeds some Nations GDP to foster a technological paradigm shift towards information transparency coupled with uber-intuitive UI’s with regards to real estate listings, a map and other relevant local data (also called a mash-up).

Today the same tech driven mash-up UI’s that drive gobs of traffic to the Zillows and Trulias of the world are available and affordable to individual real estate professionals (rePros) at pennies on the dollar.

Different Agenda’s
Zillow and Trulia are advertising/media websites.  Their business models depend primarily on traffic so advertising may be sold for a premium and each have numerous vehicles for an agent to spend their money on.

They’re kind enough to offer tools (widgets) that add a coolness factor to an agents individual site and create social conversation forums to leverage participating agents experience/knowledge for the community as a whole.  But make no mistake; they depend on the traffic a rePros personal knowledge and information draws to embolden their respective brands.  Every tool provided is inherently designed to increase their traffic first, yours second.

Other real estate Search sites like Roost will re-skin, redisplay and replace your current ugly IDX then charge you for the privilege of the traffic they direct back to your site. This is certainly a better alternative to what’s been available in the IDX market and more importantly another step towards blending technology seamlessly with an individual rePro’s Brand…yet not quite ‘there’.

In most every case, a top level domain real estate Search portal seeks to profit from advertising and by building their Brand first, yours second.
Roost claims that they ‘Support Your Brand’:

1. Your brand is prominently displayed at the top of the search results
2. You receive a virtual card with your contact information and links to your listings
3. You receive your own URL on Roost

Claim #3, receiving your own URL on Roost, isn’t the highest and best way to support your brand.  This also leads to a similar experience outlined above where a consumer is bedazzled with one slick UI, only to eventually fall into a foreign place called your website.

Roosts business model message:

• Performance-based and transparent
• Pay only for the clicks you receive to your own site
• Target people in specific geography (town, zip code, etc)
• Buy only as much traffic as you want in any given month.
• Your Roost dashboard will make it easy to manage your spend and track performance.

Very Googleicious…carefull, if you don’t keep the traffic tank monetized, it’s possible to be the Star one minute and invisible the next.

Where is there?
When consumers begin their quest for a home, they’re after one thing: listings—all of them.  Trulia, Zillow, Roost et al face a perpetual problem with the ‘available to in-house listings ratio’.  Big players in this space like Realogy and Prudential are picking sides, contributing listings to one site or another.   Some agents choose to contribute their listings while the vast majority do not.  This leaves consumers with a choice between bad and worse: Try and search all the listings with inferior tools, or perform cutting-edge searches on ~20-30% of the listings available in a given area.  Thats not an acceptable ratio in my book.  Pretty soon we’ll have an aggregator of the aggregators, and so on.

From Joel at FoREM:

It seems ironic though, with all these brokers now lining up in different camps to feed their listings to the big consumer search destinations on the Internet, that it’s ultimately the consumer that suffers from these alliances being formed.

If I’m trying to search for a house in Portland, I still have to have to go to multiple destinations (Frontdoor has X, Zillow has Y, Trulia has X & Y but no Z) just to get an accurate picture of the complete inventory available on the market.

and Dustin:

Either way and any way, this would be another big win for Trulia, but as Joel notes, Michael agrees, (and I’ve said before), it is note self-evident that at the end of the day, the consumer wins with broker-fed listing sites.

While penning and researching this post, I came across the above snippets and couldn’t agree more:  A viable solution could be a website that hosts robust Search UI’s and engages social networking as well as SEO strategies under a rePros personally owned and controlled domain.

BlueRoof360.com is about as close to ‘there’ as I’ve seen.  The only aspect that I question (and this is being very nit-picky) is the platform that they are using…is it proprietary or open source?  In other words, can I snap pieces in and out?  If I don’t like the property search UI, can I swap it out with a better one?  Can I add plug-ins and other features vis-à-vis Wordpress?  Realivent and Incredible Agent deserve mentions here as well.  

As a rePro on the Listing side of the relationship, if you are going to ‘give’ your listings to the Zillows of the world, your personal website had better be on par with the site that the link came from, otherwise that ‘link’ will likely leave your site and go back to more beautiful and userfriendly pastures.

As a rePro on the Buyers side of a potential relationship, a website with real time information and a solid property Search UI is mandatory for future survival.

RePro’s can offer consumers via their personal websites a vital claim that the big players will always chase:  100% of the information located within a local MLS’ database.  Days on market, sold data, and a glut of other valuable information to consumers that currently is not available on the big players sites can be displayed on a licensed pro’s site.  Regardless if one person (consumer or professional) thinks that such info is important or not is irrelevant.  Someone does, it’s the long tail consumerism that dominates the current and future markets terrain.  In any case, the more information you make accessible the larger your potential audience.  Redfin gets this, they offer their agents and consumers best of breed technology and information.

In case it’s not evident i’ll point out that consumers are getting smarter about how the real estate industry internally works due to this new real time access to information phenomenon thingy.  Better to be deemed transparent and open rather than a shifty salesperson.

To keep in line with change in real time, the best strategy is a likely mash-up of all of the above, sprinkled with a little bit of this and that.

1. License great looking, highly functional, scalable technology to display your products through, and seamlessly build your brand.  Keep in mind that you get what you pay for, don’t go for the cheapest solution by any means.
2. Push and maintain your listings with the big aggregators: Trulia, Zillow, Google Base etc for the exposure.
3. Blog incessantly about topics that are local to your listings.  Need a blog and the proper education to go along with one? Check out The Tomato.
4. Participate in Social Networks, optimize your Social Networking Optimization.  Participate in conversations on ActiveRain, update your professional profile on LinkedIn, create a group on Facebook.
5. Seek to learn: Knowledge speaks, wisdom listens…Attend some of the current seminars like 4RealzED, BHBU, and if you’ve got some extra coin, Inman Connect.  I’ve personally been to three Connects, registered for Dustins preso in Orange County on April 17th, and plan to attend BHBU schedule permitting.
6. Prepare to change, upgrade and sharpen your tools often.  Today’s rage is tomorrow’s fizzle, stay razor while you shine.

Also See:

DarWidgetry…

New Marketing Strategies…

The Effect of Transparency…

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Real Time Paradigm Shifting in The Real Estate and Mortgage Industries

The goal is to create separation between your business and personal activities. This separation provides for asset protection and the ability to obtain capital for your business.

The scoring of personal credit is inherently biased against business owners and investors, because they don’t fit the typical consumer norms. What most entrepreneurs discover, usually when it is too late, is that their business activities drag down their personal credit – making everything else they do more expensive. In order to preserve your personal credit, you need to have access to non-reporting business financing.

Business financing comes in many forms, such as retail or trade credit, credit cards, vehicle and equipment leases, business loans and lines of credit. The key attribute is that they don’t report on your personal credit report. Some will require no personal guarantee at all! Most bank lines and credit cards will have what I call a “ghost guarantee” – which means that you are approved based on your personal credit, with you personally on the hook, but as long as the account is in good standing nothing will be reported. This helps preserve your personal credit by reducing your revolving debt ratios and personal debt-to-income.

Most business owners get the most excited about business lines of credit. The appeal of $50,000 to $250,000 of available cash credit is a no-brainer. The flexibility to use that credit for investments, payroll, or even a latte, makes it the most sought after lending product. I like to see breadth to a business’s financial and credit resources, so I prefer to compliment the lines with credit cards, trade credit and vehicle and equipment leases (and yes, you can get just about any car on a business only lease).

I know investors that will leverage lines of credit to secure a property and use trade credit with Home Depot for materials – enabling them to flip properties without ever walking into a bank. I’ve also seen the other side of this. I spent time trying to help a successful agent get financing so they could take on a huge opportunity with a builder. Unfortunately, I was too late to the scene. By the time I arrived, years of running their business and investments on their personal credit had taken its toll. Despite $800,000/yr in commissions they couldn’t get $10,000 in credit. Don’t postpone taking action, because when it is too late – it’s too late!

In my next post, I’ll focus on the actions you ned to take to best position your business for obtaining financing.

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How Real Estate Professionals Can Properly Finance Their Business

In spirit of my experiences, any time a chance arises to take a swipe at NAR’s antiquated ways and membership, I’ll oblige.

Part 1 Freakonomics

A New York Times best seller (and blog) written by Steven Levitt and Stephen Dunbar pointed out that a real estate professionals traditional compensation methodology is (way) out of sync with buyers and sellers economic interests and incentives.

Levitt writes that incentives are tricky when it comes to real estate commissions. The traditional 6% is typically split between sellers and buyers agents and split again between the agent and their agency, so the agent may only end up with 1.5% of the sales price, not 6%. At a $300,000 sales price, this would yield $4500 to the (buyers and/or sellers) agent. Drilling down quickly here, the basis of the argument is:

What is the agents incentive to sell the house for more than $300,000? What if they were a little more patient, put in a little more effort and could have secured a $310,000 sales price?

That would put $9400 net more in the sellers pocket, a good chunk of change. How much more would the agent receive?

$150.00

The same happens in reverse. You list the home at $300,000 but a buyers agent brings an offer of $290,000. You stand to eat ~$10,000 while the agent only stands to lose $150.00, but puts money in their pocket much quicker.

Long and short of it: The home seller and listing agents incentives are no where close to aligned.

*Pow* A black eye to the real estate commission model from a highly respected economist.

Part 2 Mark Nadel

Mark penned the following blistering expose for the FTC:

A Critical Assessment of the Traditional Residential Real Estate Broker Commission Rate Structure

To which I compartmentalized a bit here:

The Traditional Real Estate Commission Model. A Critical Assessment

Critical Assessment of The Traditional Real Estate Commission Model II

*Ugh* Gut punch from the Ivory Tower

Part 3

B. Douglas Bernheim and Jonathan Meer from the Department of Economics at Stanford University released the following case study last month:

HOW MUCH VALUE DO REAL ESTATE BROKERS ADD? A CASE STUDY

From the Introduction section of their study:

Historically, sales commissions for residential real estate brokers have averaged between five and six percent of sales prices. In 2004, commissions paid to brokers in the U.S. totaled roughly $61 billion (Hagerty, 2005). Do brokers provide commensurate value?

Sellers potentially benefit from brokers’ services in a variety of ways:

First, brokers provide promotional services. They help prepare a house for sales, circulate flyer’s, place advertisements, hold open houses, and recommend the house to individual buyers.

Second, they often assist with negotiations.¹

Third, they screen prospective buyers, facilitating and potentially accelerating the process of matching buyers and sellers (Salant, 1991).

Fourth, they provide access to the Multiple Listing Service (MLS), which lists all homes available for sale.

Fifth, they provide market information and recommendations pertaining to the appropriate asking price.²

Sixth, they of-ten assist with paperwork and legal documentation.

How much is this bundle of services worth? Because the component services are some-times unbundled, we can judge their value by examining market prices.

Discount brokers provide access to the MLS for as little as $300 (Darlin, 2003).

Market information and forecasts of selling prices are available through professional appraisals, which cost a few hundred dollars. ³

In Illinois, where sellers are required to retain real estate attorneys to prepare and review sales contracts, legal fees average roughly $700.⁴

Thus, the total market value of the fourth, fifth, and sixth benefits listed in the previous paragraph is roughly $1400 – enough to justify a 6% commission on only the first $23,000 of proceeds from the sale of a home.

To justify brokers’ commissions, the value of the first three benefits must be substantial.

Berheim and Meer test pool consists of homes sold on Stanford Universities campus over a 26 year period. It’s an interesting microcosm to study since it allows the authors to hone in the first three perceived benefits of a real estate agent:

Several features of this data make it particularly useful for our purposes. First, since the eligible buyer population is limited, the MLS plays no role in the campus housing market. Instead, the Faculty Staff Housing (FSH) Office maintains a free listing service for eligible buyers and sellers. Consequently, there is no risk of confounding the value of broker services with the value of access to multiple listing services. In addition, access to free listings has historically enhanced the willingness of homeowners to sell their homes without brokers. Indeed, during the 1980s, brokered transactions were rare. Second, our data sample spans a major regime shift. Brokered transactions became increasingly common during the 1990s, and have accounted for roughly half of all sales in recent years.

The value of real estate brokers for Stanford campus transactions is likely confined to promotional services, negotiations (the first and second roles listed above), and the interpretation of market data (an aspect of the fifth role). Given the small numbers of available houses and active eligible buyers as well as the physical proximity of all the homes, the costs of comprehensive search, and hence the value of pre-screening by brokers (the third role) is small for both buyers and sellers.

As we have mentioned, the value of MLS listings (the fourth role) is zero. The FSH Office also makes comprehensive market information (home characteristics, listing prices, listing dates, selling prices, and closing dates) for all transactions available to all buyers and sellers. Because market participants are generally familiar with the campus neighborhoods, and because the number of comparable transactions is limited, sellers can acquire and review virtually all pertinent market information at low cost. Thus, the value of brokers as providers (rather than interpreters) of market information (another aspect of the fifth role) is likely negligible. Finally, the FSH Office assists with paperwork, largely eliminating the value of the sixth role. Therefore, an analysis of the Stanford campus housing transactions permits us to hone in on the value of brokers as promoters, negotiators, and interpreters of market data.

Berheim and Meer use a series of coefficients and variables to create complex but proven statistical models, as well as reference Levitts (and others) data to substantiate their work. It’s not an easy read but the results are predictable, even though they don’t come right out and say it. The 6% Realtor commission model is economically and practically retarded.

The study draws two primary conclusions:

First, using a real estate broker does not significantly affect either the average initial asking price or the average selling price of a home. This dispels the theory that brokers have negotiation power, thus diminishing their second perceived value above.

Second, using a broker does lead to a quicker sale. An added value, unless you consider Levitt’s work stating that agents are incentiveized to move a home quicker simply to turn inventory over. Holding out for a higher price, even $10,000 higher, is economically insignificant for an agent. We’re all driven by motive, ‘altruistic business practice’ is an oxymoron.

Even more interesting, an agents ability to sell a home quicker apparently is only prevalent during the first 60 days on market, after which homes represented by agents sell slower in months three and four, slightly higher in month 5, with no difference in month six. It would seem to make sense to fire your Realtor if they haven’t sold your home in 60 days…or at least not sign an agency agreement that binds you for longer than that.

Dialing back to a paragraph from the study’s Introduction:

Thus, the total market value of the fourth, fifth, and sixth benefits listed in the previous paragraph is roughly $1400 – enough to justify a 6% commission on only the first $23,000 of proceeds from the sale of a home.

To justify brokers’ commissions, the value of the first three benefits must be substantial.

Refresher:

First, brokers provide promotional services. They help prepare a house for sales, circulate flyer’s, place advertisements, hold open houses, and recommend the house to individual buyers.

Second, they often assist with negotiations.¹

Third, they screen prospective buyers, facilitating and potentially accelerating the process of matching buyers and sellers (Salant, 1991).

The second benefit appears to be negligible according to this case study. The third is effectively the job of a mortgage professional or disintermediated by the advent of better information online which allows prospective buyers and sellers to quickly disseminate through and find each other, sans agent.

All of ‘this’ would lead someone like me (and many many more people) to summarize that a Realtor will sell your home fast and cheap for 6% of the sales price.

Granted, Berheim and Meer ’s case study isn’t the final word and may be off on more than one account, there are many debatable points and the same holds for Levitt and Nadel’s work. But when you start to add up the cumulative work from hundreds of hours of comprehensive study and research by highly intelligent people and institutions, you don’t have to posses a masters degree in Business Economics from an Ivy League school to understand that the traditional real estate commission model is (has been) broken.

Maybe one day the NAR will use it’s collective wisdom (and money from it’s million person army) to offer their membership some worthy advice and strategy instead of trying to protect some antiquated legacy.

Disclaimer: I believe real estate professionals provide a valuable service and aren’t the scourge of the earth. I also happen to like attorneys and claim members of both groups as friends.

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Real Estate Professionals Need a Better Compensation Model, One as Local as They Are

This is the second post in a four part series focusing on business and incorporation strategies for Real Estate Professionals.

If an employer offered you a 5% raise tomorrow, I imagine that you’d be pretty tickled. If that’s the case, the advice I’m going to give in this post will be the equivalent of a feather in your ear or a finger in your side… Sometimes the fastest route to increasing your income is to decrease your tax liability. Since I can’t recall ever encountering a taxpayer who thought they were under-taxed, I imagine this topic will have universal appeal.

There has been a lot of Washingtonian hoopla regarding the tax cuts over the last several years. However, there has been a silent tax increase that has far-reaching impact and has gone relatively unnoticed (my partner, Garrett Sutton, posted on this very topic last week).

The silent tax increase is the payroll tax, which is the tax collected to fund the bankrupt Social Security program and Medicare. If you are under 40, you probably already realize that this ponzi scheme has very little chance of yielding a return on your contributions when you retire. Many of you may discover that you pay more of this tax than any other.

If you receive a W-2 as an employee, you’ll notice that your total contribution amounts to 7.65% of your gross income (you don’t get to see that your employer is paying a matching contribution – if only your employer was as generous with your 401(k) you’d be retired already!). If you are an independent contractor – operating as a sole proprietor, you have the privilege of paying 15.3% of your income. Hefty indeed. So let’s talk about how you can take advantage of a legal remedy to this income sucker.

In my last post, I discussed the importance of setting up a corporation. I recommended an S-Corporation, which is a pass-through entity, meaning that at the end of the year all profits from the business pass through to your individual tax return as a distribution – where you will pay income taxes only. You only pay the welfare tax on your wages.

So assume you earn $100,000 this year. Operating as a sole proprietor you will pay $15,300 in payroll taxes. Now let’s assume you have set-up an S-Corp set-up and you feel a salary of $30,000/yr is reasonable.[The operative word here is "reasonable" - you don't need to pay yourself at the top of the pay scale, but the IRS requires the salary to be reasonable. PayScale.com will give you and your tax planner an idea of what is a reasonable amount for you.]

The $30,000 is subject to the 15.3% tax, meaning that you will pay $4,590 in payroll taxes. The $70,000 that remains in the business will flow through to you as a distribution – taxed at your income tax rate.

This simple strategy would save you $10,710 ($15,300 – $4,590) and leave you more money to grow your business or to reward yourself for your efforts.

Now that we’ve covered off on the tax benefits of incorporating, in my next post I’ll turn the attention to accessing capital for your business.

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How To Use The Proper Corporation To Minimize Your Tax Liability As a Real Estate Professional