The Pursuit of Passive Income

In many businesses brand awareness can make or break you. A strong brand name can get you in the door, but preconceived ideas about that company can limit your growth.  While a little known brand, new to the market might not have any history or exceptions associated with it. 

So I ask, whose brand are you promoting? And, how is it affecting your business? If you are an independent contractor, are you promoting “Your Brand” or the company’s brand? Do you have a choice?

A case in point: What email address do you use? I’m probably not the first person who will start my research on you and your product by adding www to the @xyz.com part of your email address to learn about the company you are promoting. 

Every time you send an email, you are pushing that company brand. Why aren’t you marketing yourself in place of that URL? 

I’m floored when I see folks use emails like bobscarpetandtile@gmail.com, Why wouldn’t Bob set up his own email URL domain like Bob@bobscarpetandtile.com? Better yet, why use your company email as the gateway to you? Why not have all your emails go through your own account then forward to the company email address? It certainly would make it easier for you to change companies, it would ad some continuity to your business and give you control of your brand. 

This works both ways. I’m equally floored to see the contact email address for the leasing person at a property as cindylovesbassetthounds@hotmail.com. Where’s the logic there? Your residents are totally confused (What does a bassett hound have to do with this property?) There’s probably a hundred legal/liability reasons why this is poor practice. Think about it like this: What happens when Cindy quits and get’s hired at the property across the street? Don’t be surprised if most of your residents get emails from Cindy soliciting them with move-in specials. 

Get your own branded emails. (Hint: Google Apps)

This leads to the associated issue of listing employee’s personal cell phones as contact numbers. It’s very easy to set up a system of automatic forwarding to employee’s cell phones. This makes for better tracking, easier break ups and continuity of the whole customer experience. 

Take time to understand whose brand you are pushing, what the public sees and start implementing good practices. 

As always, I’m open to your thoughts and comments. 

The new cry from constituents and customers alike is for transparency. No more backroom deals or preferred treatment. The White House is being held to a new standard of transparency, Wall Street is being dragged into an era of transparency (abet kicking and screaming) and in the age of Google and communication at the speed of light, why not?

Shouldn’t we all understand why something happened or why it didn’t. Haven’t we outgrown the ambiguous answer of “Just because?” The world is asking why and how and how does it work and why did that happen and what caused it? We are learning that there is usually a simple, obvious and truthful answer, even if insiders try to make it complicated, cloudy and ambiguous.

Why isn’t the sales model in Real Estate transparent?

There are so many new tools available to the consumer. In many cases, the research we can do ourselves is better than the research the professionals in their respective fields can assemble. What’s more, we have a direct/integral role in the validity and source of the data. Generally we are not looking for data to support our position, or to close a sale, we are educating ourselves.

It’s part of the evolution of business and business culture. Travel Agents are rare today, but the good ones are very helpful for complicated travel plans. But if I just want the best deal on a flight to Vegas and hotel room that I can chose from a list of options, I’ll book it myself on one of dozens of online sites. I can do my own research on the best locations, rooms, itinerary and prices. As much we take that for granted, just 10 years ago, you couldn’t gain access to the booking systems and therefore the available options without being a member of the travel industry (A Travel Industry Professional).

Interested in buying and trading stocks, bonds, options and equity positions? Before online services, you called your stock broker and placed the trade. Today true day-traders and those with the time and patience can research positions and companies while reacting to streaming news and moment by moment to changes in the markets all from the comfort of their kitchen table. Of course, there are still positions not open to the general public like IPO’s, some forms of shorts and propriety stock class offerings. But, that’s all probably going to change.

Why is it that one needs to hire a Real Estate Agent to find, view and offer on real estate? Our we really so short sighted to think by restricting access to a “Listing Service” we are protecting the consumer? Does a confidentiality agreement protect the seller?  No, we are protecting the business model.

I’m going to step on some toes here, but this is the question consumers (buyers) and the sellers (mostly bank asset managers) are asking.

There’s no surprise we’ve seen the growth of the Auction market in Real Estate. HUD has done it for years for residential sales… generally HUD listing agents simply act as a concierge to assist HUD. Any buyer can find, research and in many states bid on homes themselves. Other lenders are starting to catch on too. Why manage 100 sales through 100 platforms with 100 different brokers when they can market all of their inventory themselves, on-line, see every offer, question and feel confident they reached as many possible buyers as they could. (Achieving the highest possible price.)

Nearly every Asset Manager has said the same thing to me in different ways..”We trust and need the local expertise of the local broker, but we just don’t trust the execution..”

Why are lenders selling their assets on auction sites? They want to be sure everyone had access to make an offer who is qualified to make an offer and they got the highest and best price. That’s why HUD does it. Transparency and accountability. All offers are submitted and managed through their on-line bidding site. It’s a blind, best price take all approach we all hoped the traditional sales process was supposed to be. (Ever wonder why the house or building you offered more for was purchased by another buyer at a lower price? Consumers do..)

The world is shrinking. We are all asking for the accountability and transparency that a free market should produce. If we don’t like that our roles are changing, it’s too late. They’ve already changed. (Gone the way of the wheel-right, cooper, mule skinner, lamp-lighter). Auctions are here to stay.

As always, open to your comments and suggestions.

John Kobierowski

Tough times breed new levels of desperate behavior. Not that landlords need more to worry about, but I just heard about a new trend in theft called “Travelers.” If you haven’t heard about these folks, you might be quick to fall victim. 

Spawned by the rash of people loosing homes to foreclosure and gutting the home of everything that isn’t nailed down (which for some reason is condoned as getting back at the big bad banks) we are now finding renters feel it’s ok to strip your rental home or apartments. 

Here’s how it works: A nice couple fills out application, pays a small move in fee (prorated rent, meager deposit) and they show up with a moving truck and move in. You’re staff is smiling because they just leased another unit - one less vacancy. 

Next month, that tenant doesn’t pay rent and the eviction process starts. The night before they are supposed to be in court, a moving truck shows up and they are gone. When your staff gets access to the unit you get a frantic call… “They took everything…” Your manager is telling you that the tenants left in the night with the cabinets, appliances, a/c unit, circuit breakers, sinks, light fixtures, toilets, garbage disposal, window coverings, everything. They got away with paying a few dollars to live in the unit for 45 days or more and left with $5,000 of the units interior. The police are too busy to follow up, and the “Traveler” has already sold everything on Craig’s list and left town. They are already on to their next victim.  

The scenario is worse for homeowners who find the house gutted and the copper gone, pool equipment cut out and the aluminium garage door missing (presumably sold for scrap metal).

The tenant is nearly untraceable, even if law enforcement would get involved (most see this as a civil issue).

This new trend is compounded by the growing transient nature of our residents and the active resale markets for materials via Crag’s list, Backpage.com and other free listing sites. No one questions where the cabinets came from or why they were able to purchase a full hvac system for a few hundred dollars cash. Scrap metal prices are at all time highs too.

I’ve heard from some property managers who have been hit on all their properties. Neighbors and neighboring tenants didn’t see anything out of the ordinary and assume their neighbor was just moving. Bank asset managers report that it’s becoming so prevalent that they have become accustomed to it “…if it’s not the previous owner gutting the home when they leave, or the neighbors gutting it when the home sits vacant, then it will be a Traveler that rips them off. 

If you are wondering why they call them Travelers, its because these thieves will hit property after property, each in a different state as they criss-cross the country. 

Beware of who you rent to and more aware of who you are buying used appliances from…

As always, open to your comments.

John

Investors the world over were taught to exercise caution and use reasonable due diligence to discover  threats to investments. Since the fall of Enron, AIG and so many other companies we’ve learned about “Off-book” threats. Also called Off book debt, counter-party risk, derivatives, and the shadow market. It seems that in a the age of transparency, bolstered by instantaneous news and gigabytes of data to research on the net, things are less transparent than ever. 

We are in the housing business. Our competition for customers “renters” is more diverse than ever, and yet less trackable. We use the term “Shadow Market” to refer to all those homes, condominiums, hotel rooms, mobile homes, spare bedrooms, and units that we can’t track/qualify as competing rentals in our studies. 

What scares us the most is that we don’t know home much of it is out there, who controls it and when it can or will be released. Arizona ARMLS tracks how many listings are on their MLS system and the news out this week is that there are far fewer homes for sale in Arizona than we’ve seen in a long time. Where did they go? 

There’s a rumor that Bank of America has over 55,000 Maricopa County homes in their REO inventory. Some reports count as many as 100,000 additional homes in default or serious default in Maricopa County. These figures don’t account for the hundreds of thousands of homeowners under-water and considering strategic defaults. Is this a threat or are the lenders, banks, GSE’s and other entities committed to slowly controlling their release to the market?

Can we really assume that the numbers were are seeing are real? The first lesson in economics 101 was the relationship between supply/demand and pricing. Less supply in a market should lead to more demand and to higher pricing. But that’s in a natural market - one absent of manipulation.

I guess what gnaws at me the most is that the data suggests that there are less homes on the market than we’ve seen in years, there’s little more than a 2.5 month supply at current absorption and yet prices haven’t inched up a bit (actually reported to be down year over year by 4% when June 2010 is compared to June 2011). 

Clearly there has been a positive surge in rental activity. Lower vacancies and higher rents have been reported month over month in the Phoenix MSA. So there is some correlation with the data suggesting the limiting supply. 

I’ll throw one more observation out there. I was recently tempted to invest in the fix and flip market for single family homes. I found a few candidate homes and was set to make a run at the trustee sale auctions, until a friend showed me an insider report on that neighborhood. What appears to be a subdivision that’s has hit bottom and gaining some stability to the outsider, was clearly not. There were dozens of homes owned by lenders and others where lenders hadn’t started foreclosure despite owners not making payments in months. Driving through the streets on a Saturday I saw owners cutting the grass, washing their cars, kids playing ball in the street - not a hint that occupied, functioning homes were not even owned by the family anymore. Were they all in denial or did they all just accept the situation as normal? 

I’m absolutely encouraged that we are seeing higher rents and less vacancy. I’m happy to see that the lenders all appear to have formed some sort of a pact  to slow the release of homes to the ecosystem to keep things in balance. I’m just not sure how much of it is real.

As always, open to your thoughts and comments.

John P. Kobierowski

The “Buzz” among the politically charged today is centered around the Frank-Dodd Financial reform act. Over 2,000 pages in length, it contains only instructions to the regulatory agencies to create the policy - its a work in process and this seems to scare everyone.

What is clear is that we will see Fannie/Freddie and the other GSE’s scaled down and eliminated. The new rules put in place for loans to be securitized are going to be more stringent on private sector loans. 

-Real Down Payments of 20% (no secondary financing or carry-back)

-Higher credit scores

-Lower “Maximum” loan amounts. 

With just these changes, less than 36% of those who could have qualified for a loan today will qualify for a home loan after the new rules go into effect.

Pair this with the reality of a shrinking pool of first-time home buyers and lower consumer confidence in home ownership and we start to see a strong undercurrent of renters. 

Our markets in the southwest US (Phoenix, Tucson, Las Vegas, Reno, etc) have seen heavy adjustments in home values from the highs of 2005-2007, which should have lead to a buying frenzy. It didn’t because in these same markets, household income declined in-step with home values. Families buying power has declined which is creating a generation of renters.

Most surveys of the Phoenix apartment market report lower vacancy, increasing rents and lower concessions. Owners are experiencing a strong rental market.

Multifamily values have remained low mostly as a reflection of the distressed condition of the properties going to market. These buildings were cannibalization, and run on a shoestring while lenders pushed off foreclosures and owners struggled to run their failing assets. 

With the recent surge in acquisitions these buildings are bouncing back. We will soon see a new wave of properties hitting the market that are stabilized, clean, reset to today’s values and producing real (not Pro-forma) cashflow. 

We are returning to an investment market from the days of a trading market. 

I’m including a link to an interactive heat map from the Wall Street Journal on-line today, illustrating the states that will see the greatest changes to qualifying for a home loan. http://ow.ly/5qhAh 

It’s been a long dry-spell, but we are entering a market cycle where hard work will be rewarded with profit again.

As always, open to your comments and suggestions.

John Kobierowski

So many things to talk about. There is so much happening lately that I’m trying to separate my thoughts. Jobless claims are up, but the Mid-west is being shredded by killer tornadoes. The Dow has recovered nearly all it’s losses from 2008, but the US has exhausted it’s credit line and we need to raise the debt ceiling. It seems that as bad as the bad news seems to be, we are either numb to it or we recognize the worst is behind us. After all, can it really get worse?

I inserted a chart from Starbucks first Qtr 2011 to illustrate a point that may relate to our Real Estate market. Starbucks Net Income is up a staggering 42%, despite nearly everyone I know telling me they are cutting back on their spending - because they have less to spend. And yet, the world needs their $4.00 Latte to go with their $4.00 a gallon gas.

The apartment market is in a similar dichotomy. Our expenses are up, our debt costs most likely to increase, our values clearly down and yet out occupancy is up and our net rents rising. Despite all the belly aching, we are doing better today than we could have hoped just 12 months ago. 

I received my weekly Loopnet, Inc Market report via email today and glanced at the section where they report the 10 most active listings in the Metro-Phoenix market by “Click through’s”. The top listing is a parcel of Land in Scottsdale (with nearly 1,600 views in the past 30 days) the remaining 9 on the list were all multifamily listings (very encouraging). But here’s the surprising part… each of those listings had over 1,000 views each in the past 30 days. 

One more observation: Yesterday I met a friend for lunch and the parking lot was packed..middle of the week. The restaurant was packed. We both looked at each other and said the same thing. “Wow, three years ago you called to make a reservation or chance not getting a seat. Last year you called to make sure the place was still in business before you drove there, and today the place is packed again.” Leaving the restaurant I looked across the parking lot at two vacant “For Sale” free standing restaurant buildings and empty retail space in the main buildings of the retail center. How crazy is that. 

I’m encouraged. Cautious, but encouraged.

Hoping you see more signs of improvement through the haze of the collapse. 

John

I have been spending most of my spare time meeting with and talking to owners and developers. I’m happy to report that most of the market seems to feel the market is turning for the better. I’ll elaborate on this in my next blog post. 

On another front, I read an article this past week about how the rest of the world is trimming their federal budgets. One startling bit of news was the dramatic cuts in public housing funding in the UK. The 2011-12 budget has been slashed by 60%. 

This is putting a tremendous amount of pressure on families who are in the UK’s subsidized housing system. Public apartments are closing and there are very few alternatives in the densely populated cities.

I mention this because the UK is not the only government forced to make hard cuts. Almost every country in Europe has been struggling to determine where to cut. 

Here on the other side of the pond we are approaching it in a different way. Yes, we are seeing some services cut, but HUD and HUD properties have not been tagged for the chopping block. We are are however certain that Fannie/Freddie/FHA and associated GSE’s will be trimmed and phased out ultimately. Even the mighty US postal service is changing. They are eliminating thousands of post office locations by not renewing their leases. 

I can’t help but wonder when we will see some of the US housing programs revamped or slimmed down. It might be a logical conclusion given the fact that cuts to defense, Medicare and other US entitlement programs seem to be the last cuts our citizens want to see. 

With an abundance of apartment vacancies, vacant foreclosed homes and growing REO portfolios, cuts to providing and subsidizing housing may be an easy cut here as well.

As Always. Open to your thoughts and comments. 

John

I really do enjoy the conversations I have daily with owners, developers and managers in our business. The frustrations, challenges and successes they experience each day reminds me how far we have come in running our properties. 

Today we have software systems (cloud based) that combine accounting, management, tenant records (contact management), documents and even maintenance records. No longer do we need to keep cabinets of files or any written documents. Tenants pay rent, view units, schedule repairs, and renew leases completely on-line. Regional and national offices have the same access to records as the on-site staff - no need to mail or fax or triple copy each department. So in some ways our jobs are becoming easier and our properties easier to manage. 

But with every advance comes new challenges. Our staff now needs to be trained on fair housing, litigation support, privacy screening, HUD regulations, company policy and so many new areas of potential litigation.

Arizona is in the midst of passing new legislation that will require our on-site managers to determine if a rental applicant is in the US legally before they can rent to them. We are already required to determine if a job applicant/employee and now if a vendor/subcontractor has legal status to be in in the country. 

This morning I was speaking with a friend who was pointing out the way the world has changed. As he said, twenty-five years ago, I decided who I wanted to rent to and it was my decision. Twenty years ago I was told who I had to rent to. Now I’m being told what happens if I rent to the wrong person. Problem is, I’m not allowed to even use my own judgment anymore - I can be sued and/or jailed for doing so. 

We joked about the old TV sitcom “Three’s company”, in which Jack Tripper had to pretend he was gay to share an apartment with two single women. The landlord would never have allowed the three of them to live together, even in the very free thinking time of the 1970’s and in a the free spirited town of San Diego. (which made for hours of fun dialog and humor)

But, putting aside well understood the horrors of discrimination for discussions sake, it’s interesting to understand today, that the Three’s Company landlord would have been in more trouble from federal and civil agencies for refusing to rent the apartment then he would have been from the neighborhood for harboring socially unacceptable behavior (co-habitation of single coeds). 

Is is safe to say that social pressure, virtue and common sense are being trumped by political correctness? 

I’ll give you another example. A few years ago I was marketing a large student housing property. The property had developed a population of primarily Indian students. The seasoned staff knew enough to ask specific questions of the applicants to understand what class/sect they were from in India, then placed them in areas of the property (floors, or sections) where renters were of the same sect. From the outsider’s perspective, this may have seemed like a discriminatory practice. From a common sense perspective it was genius. There were rarely conflicts and because the residents recognized the staff understood their culture, the property was always fully leased before the school year. 

I understand the need for regulations and enforcement of restrictions, but I clearly see a need for more common sense approach to their implementation. I don’t want my staff to take on the role of a customs agent, bouncer, detective, or document specialist. I just want them to treat our residents fairly and excercise good judgment.

As always, open to your thoughts and comments.

A friend told me that you never see the progress when you are knee deep in the process. I use this little pearl of wisdom to explain why some investors and owners are having a tough time seeing positive changes in the housing markets. 

We look for signs of change and benchmarks that are measurable. I’ll share a few that have been shared with me:

- You know when the market has topped out when brokers start buying their own listings. (The drug dealers shouldn’t smoke what they are selling example)

- You know when you hit the market bottom when prices have retreated to the pre-bubble lows. 

- You know when the market has peaked when your mailman starts lecturing you on his investment property portfolio.

I can remember selling lender owned buildings on the I-17 corridor in the early 1990’s for $5,000 per unit. I underwrote buildings in Texas for $4,000 per unit. But…that was 20 years ago. That was when gasoline was under $1.25 a gallon and you could  buy a pack of gum for $0.25. Adjusted to the current market prices for consumer items, wouldn’t a west Phoenix building selling at $11,000 per unit today be equal to that building selling at $5,000 per unit during the last recession? Have we lost perspective? Maybe. I seem to meet many investors that are convinced values can go lower and are waiting for the illusive bottom of the market to jump in. Maybe we’re there?

Here’s another benchmark I’ve been watching for: second generation defaults vs. second generation sales.

Second generation defaults defined as a home or property recently sold as a distressed sale that is again in default by the new buyer. The new buyer is now losing the property. 

Second Generation sales are defined as the resale of a building that had been sold at a profit after the initial flip/fix up sale. 

Both definitions explore the two sides of equity. Assets gaining enough equity that a profit is realized in the second sale or, in the case of the default, the asset is loosing equity so quickly, that the new owner can’t maintain it..

The bad news is that we are seeing Second Generation defaults in the single family home market in Arizona, Florida and Nevada. The good news, I’ve seen some second generation sales in Arizona, Nevada and Florida multifamily sales. 

These phenomenons can be synergistic. A wave of second generation defaults can lead to a “double dip recession”, while a market budding with second generation sales can lead to the growth of value and reinvestment. 

It’s too early to see which effect is gaining and interesting to see them simultaneously in certain markets.  

As always, open to your thoughts and comments.

John