How brokers and consumers manage finances with property

By Eugene L. Meyer

RISMEDIA, March 21, 2007-It's a bad time for flippers looking to make a quick buck, and their departure from a demand-driven market has certainly contributed to a drop in home prices. But for investors who view real estate as the keystone of a long-range financial plan, there may be no time like the present to buy-and hold.

A New Approach to Sales

For brokers confronting large, lingering inventories of unsold properties a buyer's market could actually be good for business. Just ask Greg Rand, a Hudson River Valley, New York broker who has found a niche that transcends the cyclical ups and downs in housing.

Rand's 725 agents in 21 offices service owner-occupants, both buyers and sellers. But they also seek out buyers who aren't looking for a primary residence but rather for a long-term investment. He calls it the "get rich slow" program. "It's a different sales campaign," he says. "You're contacting somebody who may not want to move but may want to make an investment. You are realizing a transaction out of thin air.

"This is a great differentiator," says Rand, managing partner of Prudential Rand Realty, whose business is mostly in the suburban home owner market. But as Rand sees it, the firm's investor services set it apart from others. "We happen to occupy a niche where we have real substance behind the claim."

The substance, Rand says, is "My Property Portfolio," an online way to track the value of a real estate portfolio, with access to all comparable sales in a neighborhood and to detailed local market statistics "customized to your real estate portfolio."

Rand developed the program, which includes training for agents and clients in the fundamentals, based on his own experience with a financial planner. "I bought a $200,000 condo five years ago when my daughter was born," he says/ He put $20,000 down for the property. The condo isn't producing rental income above expenses but Rand says he is breaking even and counting on rising equity from long-term appreciation and from paying down his loan.

"I'm not doing this for income but for the objective of easily financing college in 12 years," he explains. "I'm extremely confident I'll have the dollars I'll need, $500,000 when she goes away, based on my initial investment. It will be very, very largely paid down. I'll either sell or refinance it."

Rand has taken this philosophy to the bank, and for inspiration he credits financial planner James Giangrande, who worked with him to create a long-range plan. "My thing was: here's a condo for college and a share of a multi-family building for retirement and a piece of commercial property, also for retirement," Rand says. "It helped me to design our program."

Rand's initial thought had been to invest $20,000 in a Section 529 college savings plan, but Giangrande had another idea. He noted that after 15 years, Rand could wind up with $146,000 from a 529, all of which must go to education, leaving nothing left over.

Or Rand could buy a $200,000 property with $20,000 down and a 15-year mortgage. At the end of the day, assuming rent covers only expenses and no profit, the mortgage is paid off and Rand has at least $200,000 in equity. If the property has appreciated 5% a year, its worth rises to $415,000. The property could then be sold, or refinanced to use some of the equity for college.

"You're using other people's money to build your wealth," Giangrande explains. "It's not for everybody. There'll be times when you have no tenants or damages and you have to put money into the property, but it could be viable in the right situation for the right person with the right temperament and the right stomach for it."

Those who get hurt, he adds, are people who use equity lines for down payments or finance 100% of the sales price or don't have cash reserves, in case the house sits empty or requires repairs. And, Giangrade adds, it's important for investors to make a "holistic" financial plan that takes into account all their goals, not merely one.

Financial Planning is Key

Rand says his blended service, combining financial planning and real estate investment, are tailor-made to the current market. "The world was full of investors when the market was hot," Rand says. "As the market has changed, people who still wish to invest in real estate need advice. The follow the herd mentality got a lot of people stung, and the slowdown has caused people to become more conservative."

When rising interest rates restrict the pool of buyers, rental properties become more attractive, according to financial planner Jim Ludwick, of Odenton, Maryland. Many would-be buyers will remain renters, "which will give landlords the opportunity to raise rents more rapidly than in the last few years as some of their best tenants left to purchase a home. This would be a good time to be in the rental business."

Ludwick suggests another variation on the buying-for-college strategy: "Parents buy a small house or condo in a college community, have the child manage it in a tax-advantaged way so they pay him a salary, rent it out to other students with the child also staying in the house. Then, after college, sell it to another parent. I have heard whispers of parents trying to find other parents to buy their property."

A former commercial real estate broker, Ludwick says his clients "appreciate a financial advisor who has an interest and experience in real estate." The converse-Rand's business model-might also be true.

In attempting to make investor sales a core part of his business, Rand appears to be offering a product that is hard to find in the marketplace-though others have at least dabbled in it.

Nashville real estate agent Hal Wilson has a sub-specialty in real estate investment. On his own, he searches for derelict properties to buy, fix up, rent and eventually sell. He currently owns 70 units he manages himself. "When my kids were young, I started buying property way under market," he says.

While his daughter handles "the retail side" of the business, Wilson represents 40 or 50 "investor clients. I have a young man of 40 with two little children. I got him on my program about ten years ago. He has 15 properties, five paid off, bringing in $1,000 a month in rental income. His net worth is now more than $1 million."

Target the Right Clients

Jerry McMahan, principal broker for Coldwell Banker McMahan, in Lexington, Kentucky, has helped a few doctor friends buy and sell rental properties.

"One doctor took as little as $25,000 of his cash, and we were able to secure him five homes the first year," McMahan says. "It got to the point where he had $550,560 of equity built up from that original $25,000. He held them for 12 to 15 years and right now he's gone ahead and cashed all of them out. That's where his retirement income is coming from."

McMahan said he approached the doctor and helped him develop an investment plan. Eventually, a few other doctors decided to work with McMahan to build real estate portfolios. They wound up with 25 or 30 rental homes they kept for eight to ten years.

As part of the deal, McMahan's company managed the properties for free in return for the investors selling as well as buying the properties through him, thus assuring sales commissions at both ends. "That's the program we set up because we felt we were being well enough compensated" through the transactions, McMahan said.

"It's not our main business," he said, "but I think if we had somebody who worked directly with the medical profession, it's something to be capitalized on. They are so busy that they don't have time to keep up with their investment. I think it could work for other professions, too."

While McMahan hasn't expanded the program, he has encouraged his top agents to build up their own portfolios. "They're out in the market every day, seeing what's going on," he says. "Maybe they see a property's not selling" and buy it.

Property foreclosures, looming larger in some overheated parts of the country, can also be a window of opportunity, he said. Before a property goes to foreclosure, an investor could take over the note and pay some back taxes to get clear title. "Especially with the market we're in right now, a buyer's market, it's a good time for that type of investor to step forward.

"It's not something you'd want to flip right away but hold onto for a long-term investment, knock the principal down, and one day wake up with some good equity," said McMahan, who at one time had 12 to 15 rental homes in his own portfolio. Now that his firm has grown to 11 offices and 300 agents, he's been otherwise occupied and owns only two rental properties.

"I think there's a good market for it," he said. "It's a time management deal. I think too many of us get involved in day to day stuff and some aspects like this pass us by; and we're supposed to be experts in the industry."

Why haven't many other brokers jumped on the Rand-wagon? "In my experience, this is not an industry that is famous for innovation, breaking the mold," Greg Rand says. "My sense is that it's a whole different discipline than owner-occupant real estate and brokers just haven't developed the expertise."

Eugene L. Meyer is a former Washington Post reporter and editor who freelances from Silver Spring, Maryland.

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Lately I've spent a good deal of time talking to brokers across the country who are evaluating their current position and weighing the merits of becoming part of an organization that can deliver resources they do not currently have.

These are challenging times. Over the past five years, commission rates have fallen from 6% to 4.9% nationally, and productivity has declined 16% to an average of just 6.49 closed units per agent. While average agent income increased from 1999 to 2004, much of that increase came at the expense of the broker. Then, in 2005, the industry showed a decline in average agent income, and the projections for the year just ended, indicate an even steeper decline.

Of greater concern is that real estate professionals and the value of their services are clearly diminished in the eyes of consumers. The most recent Harris poll shows an embarrassing 5% of consumers holding real estate agents in "high esteem."

Since the Internet broke our monopoly on information and ushered in a host of new competitors, we have faced a new reality: consumers don't see the value in what our industry does. So we can choose between two courses of action-pursue a low-price, low-service model or add value to our customers' experiences by offering value-based, comprehensive services made stronger through the convenience of one-stop shopping.

Maximizing the value of a client's treasured asset through a complex transaction is a job for a trusted advisor, skilled negotiator and expert facilitator who is in command of every part of the transaction-and who merits a full professional commission. Creating the single-source service environment in which such people can thrive requires:

1Brand. A well-branded company has the presence to credibly position itself as a full-service company.

2 Resources. It takes money to create, acquire or establish relationships with proven providers of transaction-related services and to manage these providers in a way that ensures value delivery to agents and consumers.

3 Credibility. The greatest challenge to building the single-source company is transitioning from a business of independent agents to a profession of interdependent sales partners. Agents must believe in the company and that sort of faith is best based on experience.

4 Leadership. Agents want leadership at the branch and company levels. Transforming branch managers into branch leaders requires cultural change. GMAC Company-Owned Real Estate has executed an intensive leadership development program that has transformed our branch executives into business leaders who help their sales partners identify their income goals and create and execute written business plans that advance their careers.

Only the home-services model can satisfy the expectations of our three constituencies: customers who demand a more cost-efficient and organized transaction; agents who desire more productive and rewarding careers and relief from the administrative burdens of steering the transaction through unrelated vendors; and owners who have a right to a reasonable return earned through the value delivered to the customer and the agent. - Terry Morris

Terry Morris is president/CEO of GMAC Company-Owned Real Estate. Morris heads a team of 3,800 sales professionals and 546 employees who in 2005 recorded a volume of $16.7 billion. GMAC Home Services owns real estate companies coast-to-coast with 95 branch offices in San Francisco and the Bay Area, Chicago and suburbs, metro New York, and New England, including the greater Boston market, Cape Cod and southern New Hampshire.