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’

To qualify for the tax-credit, borrowers had to have an approval from a qualified lender and files submitted, effectively gone to contract, by April 30th 2010. This much has not changed.

It remains to be seen if the 90 day extension to the end of September is enough time to alleviate the back log considering the extreme labor contraction in the mortgage industry. The underwriting staff that’s pushing these loans toward the closing table are either overworked or lack sufficient experience causing the delays.

With approximately 180,000 potential home buyers who met the April 30th deadline, simply waiting for their files to clear the underwriting log jam, losing up to $8000 in tax-credits could’ve caused many to walk away from the transaction. This subsequently could have caused a significant negative ripple effect on the housing market with a sudden surge in supply and decreased sales, torching professionals and consumers alike.

Demand for mortgages are already at rock bottom despite historically low rates. New mortgage applications are at their lowest point since 1997, suppressed by increasingly stringent mortgage qualification guidelines. Throw those facts in the bag with the lingering bank owned shadow inventory that needs to be released into the marketplace, and you have a recipe for protracted depressed home values.  Extending the closing deadline to September 30th was the right thing to do and surely caused a collective sigh of relief for real estate professionals and mortgage professionals everywhere.

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Senate Extends Home-Buyer Tax Credit Closing Deadline

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

This entire post is based on The California Association of Realtors 2008 Home Seller Survey (released in July 2008, I just happened upon the PowerPoint presentation a few days ago) but the statistics are just as relevant today, if not more so…Granted this survey is but a snapshot of an industry, yet pictures are worth thousands of words…You can read the entire survey here.  (All statistical references in this post are derived from the aforementioned survey).

Public perception of the real estate professional and the greater industry is amongst the lowest of any on record.  Consumers are looking for an alternative to the ‘traditional’ Agent and they’re defining what this alternative is, yet relatively very few professional are heeding this demand and actually providing a tangible solution.  This Survey demonstrates to me that 90% of Agents are not providing what the consumer wants…and it is ALL ABOUT THE CONSUMER.

Personally I know alot of fantastic real estate professionals.  Genuinely great people, passionate, always striving to better themselves, their clients, the industry they serve and represent…they’re worth every penny they command…they dont suck…I’m just a sucker for a good title (no pun intended).  I could fill this page dropping names like Jay Thompson, Kris Berg, Missy Caulk, Bill Gasset and 30 others nobody has heard of as examples of who I consider to be the vanguard of where this industry should look to as ministers of positive change.  Unfortunately, they’re in the minority and a few good apples don’t ripen the bunch.

Agent Perception:  I can Has Consumer!

Talk to most any real estate professional and they will tout their expertise, knowledge and marketing prowess as the main reason you should retain their services.  Most will maintain that commission rates (should) mean very little to the consumer and they’re worth every penny.

Consumer Reality: You Suck!

According to the respondents:

Number One factor considered when choosing an Agent?  Lowest Commission.

Last reason?  Most knowledgeable. <– If this doesn’t snap you into reality, nothing will.

You’d best start putting your knowledge out there if you hope to attract a client…get a blogsite that rocks, start dropping neighborhood knowledge, get a killer IDX solution…substantiate your value!!  The days of being a prude with your listings and expertise until you had an executed contract are over.

I can find out more than you know.

~70% of respondents polled on ‘Information from The Internet vs Information from Agent’ indicated that the Net provided information that was as useful, ‘different’ or more useful than an Agent.  I can only surmise that ‘different’ means information an agent couldn’t or simply didn’t provide.  In the Age of Information, lack thereof is akin to being useless.
The ~31% that said The Net provided less useful information than an Agent are part of a 50% declining trend over the past 5 years.

You’re still (a) very necessary (evil?).

~95% of respondent sellers still used an agent, which makes perfect sense.  I often state that: While technology won’t replace a good real estate Agent, the Agent that properly utilizes technology will replace Agent that doesn’t.

Consider- 74% of 1st time respondent sellers considered not using an Agent, up 46% from 2007.

You can’t market your way out of a wet paper bag.

Of the reasons given for using an Agent only 7% said it was for ‘Better Marketing Exposure’.  Ummm, isn’t this what an Agent’s core value proposition is supposed to be, to market property?  Consumers clearly do not believe Agents can effectively market their property…yet online and offline marketing is the 1st and 3rd highest reason for choosing an Agent.  This is a huge disconnect and opportunity at the same time.

84% of respondent sellers are searching online and 96% Agents polled use print advertising. Helllllooo!?!  Can you say poor ROI, waste of money?  Newspapers and other print media are going out of business because less and less people read them.  Advertising in these dinosaurs is of almost no value going forward.

Only 57% of agents use multiple photos or a virtual tour as part of an online home listing.  This just blows my mind.  I’d guess that 50% of the 57% that actually use multiple photos look (kinda) like these:

Proper Feng Shui can do wonders for a small space.

Extra long chain for convenient access to light.

Sweet shower curtain stays with home!

Thanks to MLS Trash Can for the pictures.  Descriptions by me.

Seriously, an agent who can’t manage to market a property with quality photographs should have their license suspended on principle alone.

You’re being perpetually judged.

97% of respondents interviewed 3 or more Agents.  50% interviewed 6 or more Agents.  Consumers are getting more and more finicky about who they hire.  Agents better step up how they present themselves.  Better have an impressive resume and a killer suit = a slick engaging blogsite & robust IDX solution.

Here’s a scary thought (depending on who you are):

Consumers are lurking on your blog, stalking your FaceBook page, following your Twitter stream, viewing your Flickr account, reading your answers on Trulia, Zillow & ActiveRain, evaluating your IDX, the quality of your multi-media marketing, processing how you engage comment threads and otherwise perpetually judging you under the cloak of anonymity.

How are you representing yourself in public and when you don’t think anyone is looking?

The silver lining in this post could be that ‘The Bar’ is so low in a consumers eyes, those Agents willing to set aside their perceptions and confront reality are in a great position to capture some huge marketshare.  Take this information and use it to your advantage rather than deny its validity.

Many Agents are out there cleaning up despite this ‘depressing’ market…Find them, reach out to them, study their successes…I find the most successful people in life are more than willing to share their successes and help others get there too.  Reciprocity is still alive and well..

To hear more, check out this interview with Tim Harris…

Also See:

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Survey Says…Realtors Suck

Blood in the streets folks, watch your step…

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Yet Another ‘Black Monday’ on Wall Street

Bookmark this site in your RSS reader as it’s chock full of great business advice that any real estate or mortgage professional should consider.  Just because you’re a good agent doesn’t mean you’re a good business person, in todays volatile market of attrition every advantage needs to be explored.  What’s most refreshing is that the content is not your typical regurgitated vanilla flavor, it’s spicy real world advice given by people who are active in the trenches.

Enough with the intro, the floor is now Ryans…

This is the final post in a three post series on financing your real estate or mortgage business. Before I dive into the meat of this post, I’d like to briefly recap what I’ve discussed thus far.

In my first post, I discussed how important it is to form an S-corporation or LLC. I recommended S-Corporations for most circumstances, with LLCs being a preferred entity for working with partners.  In my second post, I demonstrated how forming a corporation or LLC can limit your tax liability.  In my last post, I turned my focus to accessing capital for your business.

The objective is to create separation between yourself and your business – for asset protection and to preserve your personal credit. Properly obtaining business credit and bank financing can help you access thousands of dollars for your business, without impacting your personal credit scores or ratios.

As the final post in this series, I want to share six concrete next steps for getting your business in position for financing.

1. Choose the right name. Believe it or not, what you name your business and how you define your business activities can have a huge impact on your ability to obtain financing. So whatever you do, please don’t: use the words “mortgage,” “real estate” or “investments” in your business name. All three of these words are akin to saying “bomb” on an airplane.  I recommend setting up a management or marketing company.
2. Set-up your business entity – now. The age of your business will either open or close doors for financing. The best time to incorporate was yesterday. Some of the most attractive lending products will require you to be in business for 2 or more years. If you’ve been operating as a contractor or sole proprietor you can sometimes sidestep this, but age is always an advantage.
3. Legitimize yourself. It’s important that your business look legit. That means you should have a website and email address at that domain; and that your kids don’t answer your business phone. Look and act professional/corporate and you’ll have a lot better chance of obtaining financing.
4. Get a couple business credit cards. If your personal credit is decent you should be able to easily secure a couple credit cards, even as a start-up. Your limits may start out small, but they can routinely be increased and most importantly – the balances won’t mess up your revolving debt ratios on your personal credit.
5. Unsecured lines of credit. This is the holy grail of small business financing – cash that can be readily accessed! You’ll need stellar credit, good ratios and typically 2 years in business. Most banks offer these products, but you’ll rarely get all that you want from one line. I recommend establishing lines with multiple banks. You’ll be able to increase each line and you’ll have access to enough capital to make all your dreams come true (well, at least your business ones!).
6. Build business or trade credit. Trade credit is the financing that business extend to other businesses. Like building your personal credit, you’ll need to proactively build your business credit by obtaining, using and paying off lines that will report to the business credit bureaus. If you properly do this, you’ll find that you can access thousands of dollars of credit, without the dreaded personal guarantee, with just about every business or supplier in the country. I’ve had a number of clients build their business credit so they could lease their business vehicle on the corporation without showing up on their personal credit. Others have leveraged credit accounts with the likes of Home Depot to finance the supplies needed to flip properties. There are endless possibilities – it just takes preparation and strategy to make it happen.

I hope this series has been useful. My partners and I will continually dive into these topics on our blog come pay us a visit sometime.

Thanks Ryan, you’re welcome back anytime…

Also See:

How Real Estate Professionals Should Properly Finance Their Business

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

How To Maximize Your Income and Minimize Your Liability as a Real Estate Professional

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6 Steps To Properly Position Your Real Estate or Mortgage Business For Financing

There has been much debate about Yield Spread Premiums (YSP’s), from overall required disclosure policies to their potential abolition.  All mortgage professionals have a personal opinion on the topic, some resort to denial when it comes to their relative importance in relation to the overall mortgage transaction, others will get down right hostile regarding the topic of proper YSP disclosure and use.

Regardless of status-quo industry opinion, YSP disclosure is a vital component to address amidst the mortgage mess we’re in. Many other industry pundits have writtten about YSP’s, opinions vary as widely as the colors of the rainbow, most of the articles I’ve read were written after this article was posted on the Active Rain real estate social network.  The post pales in comparison to the comment thread, which is most entertaining.  The same article is linked internally (below) as well…

I started writing about YSP’s in early 2006, even before this site became a ‘blog’.   They’re an interesting and important topic because Yield Spread Premiums drive business transactions in the mortgage industry, this is a hard fact.  As a former mortgage broker (owner/operator), YSP’s were a focal point of who we did business with as a matter of practical business economics.

The wholesale lender who offered the ‘best pricing’ (paid the most in YSP’s for a given set of products) often got a bulk of our business, unless their processing was so terrible it caused closing dates to be missed or something of that magnitude.  Any broker or banker who tries to represent otherwise is either lying or talking out of both sides of their mouth.

Improper disclosure of YSP’s have had a staggering detrimental effect on this industry.  Very viable, valuable programs like Option ARM’s were destroyed because of improper YSP disclosure.  Brokers sold these programs based on the low monthly payment option they offer and then juiced them with margin that caused consumers to defer inordinate amounts of interest to the loans principle balance and caused future rate adjustments to blow people right out of their homes.  Similar dynamics exist within other mortgage programs as well.

I’m willing to step out there and say that improper YSP disclosure and use are the cause for many foreclosures in todays market.  YSP’s foster higher interest rates via higher margins.  Higher margins are especially apparent when an ARM adjusts, (can) cause substantially higher payments.  Higher payments, or payment shock, cause defaults and subsequently foreclosures.  It’s not a stretch to ascertain that proper YSP disclosure, implementation and greater consumer understanding could have prevented a number of foreclosures.

Its worth mentioning that I’m not here to lobby for the elimination of YSP’s…eliminating Yield Spread Premiums would be a catastrophic mistake, they are a vital tool for many consumers in the market for a mortgage.  The average mortgage broker(age) would close as soon as their current pipeline of grandfathered business dried up if YSP’s were outlawed, it would crush the small business owner brokerages, although this may appeal to big business and the retail banks.

Properly enforcing how YSP’s are disclosed and used is vital to a fledgling mortgage broker (and banker) industry. Many in the industry will argue that Wal-Mart or some other retail outfit doesn’t disclose how much they make on a given product so why should they?…Such analogies are akin to comparing apples to arsenic. It’s worth mentioning the ridiculous laws that allow for mortgage bankers (and retail banks) the leeway to NOT have to disclose YSP’s while mortgage broker must disclose them.  Hypocrisy isn’t a strong enough word here to describe the two-faced mug of the greater mortgage industry.

If their definition is as the first line of this post dictates, then every last penny of YSP on any given loan must be disclosed and credited to the consumer.  If a wholesale lender is offering ‘50 bps (.5%) in YSP for closing a 5 Year ARM Purchase’ as this months ’special’, that ’special’ must be credited to the borrower. 

Mortgage professionals must recognize that they are not entitled to YSP’s, they’re not a tool of personal enrichment, not a profit center, and are the business of the consumer. They need to drop the elitest attitude, compete on service and experience, and most importantly of all disclose interest rate pricing with 100% transparency, not 90% or 99%…100%.

For the mortgage professionals who say ‘I already disclose/do business this way!!’  Even if you are telling the truth in fact, nobody believes you.  Consumers should ‘trust but verify’, alas there is no way to verify using todays web-based tools; blind trust is something a consumer is less and less willing to afford a perceived perpetrator of deceptive practices.  A mortgage professionals value is in their service, fulfillment, and expertise levels, not interest rates.  Interest rates are a commodity, a good mortgage professional is not.

Running a mortgage business under the Transparent monkier isn’t easy, you just don’t flip a switch…I was engaging David Podgursky via a Facebook convo, he was telling me that while he wanted to run with the Transparency movement, he was having a difficult time with how to ‘work’ this paradigm shift:

David:

I don’t know… I want to like transparency but I think that sometimes haziness is better … and it isn’t like I hide things but transparency in broad strokes seems to me would have implications that clients would shop based on the professional fees and that alone…
I work in Florida… we HAVE to disclose front and back end… so it is transparent! that BS HUD change makes it even more so!!

TXB:

Transparency in any marketplace causes that marketplace to have to figure out how to run more efficiently, so they can cut costs to accomodate the ever enlightened and discerning consumer. Its a nebulous, tricky proposition but an eventuality none the less…
The way traditional mortgage shops run, split % based commissions and all, are counter to participating in a transparent marketplace. This is where change needs to happen, at the core of the business model.

It’s professionals like David that inspire and motivate me.  He does business the right way and wants to be as transparent as possible but the fu*#ed up system gets in the way.

Consumer demand is what can and will change how this industry operates.  Consumers are demanding greater transparency and lower costs…and RESPA law happens to back them up.  There are plenty of professionals who currently and/or willingly do business this way and I want to help.  My intent is genuine, purposely designed to enlighten the consumer and empower the maligned quality mortgage professional.

While this article is sure to be deemed as self-serving, since I’m about to launch an anonymous mortgage application that discloses a participating mortgage professionals wholesale rate pricing feeds, every penny of YSP unveiled, what shouldn’t be lost in translation is the importance of higher education and transparency for the mortgage industry.  No amount of legislation will fix whats wrong here, big biz lobbyists will make sure of that.

The mortgage industry still needs an enema and I believe I’ve got a potent one

Next:  How to Run a Successfull Transparent Mortgage Business

Also See:

Yield Spread Premiums, a Quick Study

Yield Spread Premiums, Capital Hill Testimony

RateSpeed, The Mortgage Rate Search Engine

Indecent Disclosure, Yield Spread Premium Class Action Lawsuits on the Rise

RateSpeed, The Automated Transparent Anonymous Mortgage Rate Pricing Widget

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Mortgage Yield Spread Premiums and The Transparency Thing

REALonomics is a bit edgy…we ride the rim of the business model discussion orb, hoping to pull owners out of the spinning vortex of financial destruction to the edge of new thinking that tells them, you can make a lot of money in this business but not the old way. We deliberately drag owners into a new universe of thinking, hoping they will jettison the old in favor of the new.

Also See:

The Traditional Real Estate Commission Model.  A Critical Assessment

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

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REALonomics Nails Traditional Real Estate Economics