Mortgage Mania - Part 10, The Credit Crunch

August 14, 2007

As news of fallout from the growing subprime lending and resulting foreclosure crisis continues to spread, I’m seeing more evidence of it impacting even our hallowed ground here in Palo Alto. The growing question and concern is “How much will this affect our local housing market?”

 Palo Alto and the surrounding communities have shown an amazing resilience in maintaining property values in the face of economic changes that crush other housing markets, even those within a few miles.

I was recently interviewed for an article in the Palo Alto Weekly regarding how changes in lending are affecting home buyers in Palo Alto and the surrounding communities. You can read the article here.

At our Keller Williams office meeting on Monday, Eric Trailer of Absolute Mortgage Bank in Palo Alto discussed the latest news regarding changes in lending and made the following recommendations to the assembled group of Realtors.

1) Buyers: Make multiple loan applications. Lenders are changing their guidelines constantly, and more than one transaction in the last month has been at risk because the lender has changed their mind on the loan, or the investor that they were planning to sell the loan to has stopped buying new loans. With a second approved application, the Buyer has a backup, and the transaction can proceed smoothly.

2) Sellers: Ask for backup offers. If your home goes into contract and then falls out because the buyer’s lending falls through, you will lose a significant amount through having to put your home back on the market. It will almost always sell for less, plus the additional time and expense associated with having the home on the market for longer.

3) Buyers: If you are in a multiple offer situation and don’t get the house, ask if the sellers are taking backup offers. In this time of upheaval in the lending industry, the chances that the winning offer falls through are greater than in several years. It doesn’t cost you anything to be in a backup position, and your chances of getting the house are better than ever.

The good news is that the consensus among lenders is that it will take about 6 - 9 months for this problem to work its way through the system. Hopefully, Mr. Bernanke will see the light and the Fed will bring back interest rates a bit, which will take some pressure off those people struggling to keep up with rising adjustable rate mortgages.

In the meantime, stay tuned.

Thanks for reading.


Real Estate Carnivals Galore

August 13, 2007

The 54th Carnival of Real Estate is now live over at fellow white African Erik Hersman’s Realty Thoughts blog. Of the no-doubt numerous entries he received, he picked out 6 for special mention, including yours truly’s article on Redfin as an example of the Innovator’s Dilemma. I’m honored.

Prolific blogger, writer par excellence, controversy-stirrer, and maverick Greg Swann, disappointed with the judging and content of recent Carnivals, sets off on a course of his own with his weekly writing contest. I’m honored to be the recipient of his inaugural Odysseus Medal, with the same article as above.

Other winners in Greg’s contest were:

Back to Erik’s carnival, other finalists were:

Thanks Erik for your hard work.

* Full disclosure:  Pat Kapowich is a client of Domus Consulting, of which I am a Managing Principal.

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Technology and Real Estate - Part 3, The Evolving Realtor

August 7, 2007

In my last post on Realtors and technology, I discussed the idea of being client-centric, leveraging technology to provide better service for your clients, or equal quality service while being better to yourself (interesting concept, huh?). 

As I have been extolling these views recently, it has turned into a greater discussion of how the practice of real estate is changing as a result of new technologies, and how the role of the Realtor is evolving as a result. 

As I have mentioned before, Realtors used to control access to information about listings, neighborhoods, etc., so you had to go through one to find out what was for sale in a given area, etc. Then listings were put online, and pundits suggested that Realtors would be marginalized, since people could find listings online. The introduction of single-property websites, virtual and video tours and the entry of content giants like Yahoo and Google into the listing search world would seem to sound the death knell for the local real estate agent. 

Not so fast . . . Actually, what we are seeing is that non-core functions that a real estate agent performs are being leveraged using technology, so that the agent can focus more on the real value that he or she brings, namely risk mitigation and market knowledge. 

Any consumer has access to virtually the same MLS data that I do, whether she is looking at listings through the search tools on my website, Movoto, Google Real Estate or MLSlistings. The major differences are that I can see showing information, and the commission fee being paid by the listing brokerage.  

My clients who are looking for a house to buy are able to set up and edit their own searches, view virtual tours, calculate commute distances, research schools and many other things using tools on my website from the comfort of their own homes, while wearing their jammies. They find this actually very valuable, so that we only actually go look at a small number of houses, and tend to make an offer on one of those few. This is an efficient use of their time, and mine too. The value that I provide is not access to listings, but managing the discovery process, looking for potential problems, providing pricing recommendations, and risk mitigation. 

As my broker reminded me recently, Realtors are licensed by the California Department of Real Estate to practice law in a narrowly defined area, namely the transaction of real estate. With this comes a fiduciary responsibility to look after our clients’ interests, and mitigate risk for them. Being able to leverage technology to deliver services that aren’t complementary to this responsibility enables Realtors to provide better services to our clients. 

The sales contract used in Silicon Valley is constantly evolving, and it requires a great deal of study to keep up with changes, understand the nuances and ramifications of those changes, and then provide appropriate guidance, advice and counsel to our clients on what those changes mean to their particular situation. 

At the Keller Williams office in Palo Alto, we regularly have to counter offers made on listings in our office, because the contract that the offer was written on is an out-of-date version, and the language and meaning of the contract change with new revisions. Some agents buy a packet of paper contracts and then use that version until they run out, then order updated ones. Again, technology is our ally here because the online contracts are always the most current. 

So, the practice of real estate is evolving, and as prices increase, the number of lawsuits increase and the stakes become higher, look at the qualifications of the agent that you are talking to. Does he or she have a business or legal background? What does he do to stay current with new changes to real estate law and risk management issues? Does she do her continuing education classes on a bus trip to the wine country (a lot do!), or in classroom environments where she may actually learn something? 

In Palo Alto, where the median home price is over $2 million, we are talking about a lot of money, plus the emotions associated with someone’s home. In the most litigious state of the most litigious country in the world, do you want to risk your investment with someone who sends you a monthly recipe card, or someone who can provide you with good counsel and can act to limit your exposure in a business transaction? 

I know where I’ll put my money. 

Thanks for reading.


The Innovator’s Dilemma In Real Estate: Beware Of That Redfin Swimming Just Below You

August 1, 2007

Redfin is the company everybody in the traditional real estate industry loves to hate. “They’ll go bankrupt just like all discount firms do when the market turns bad.” “Can you believe how they force listing agents to do all the work?” “Their agents don’t have a clue about the market!”

Deride Redfin if you want, be skeptical of its business model, take potshots at Glenn Kelman all you want…but whatever you do, don’t dismiss Redfin out of hand, at least not before hearing what this man has to say.


Clayton Christensen is a professor at Harvard Business School who has become well-known for his research into how technology disrupts industries. His theory, put forth in his books The Innovator’s Dilemma and The Innovator’s Solution posits that new entrants into an industry often take advantage of a disruptive technology to enter the marketplace at the lower end, catering to the low-margin customers that the established players aren’t that interested in serving. He gives examples in many industries, including financial services (Charles Schwab came into the brokerage business catering for the budget stock investor), steel manufacturing (mini-mill technology), and hard drives.

While Redfin is by no means the first entrant in the discount brokerage space, it is arguably the one that has generated the most attention. Redfin’s technology — its slick real estate search site, its semi-automated offer-writing system — may not appear too disruptive, but its technology and associated business model have struck a chord with a growing market segment that is disenchanted with the traditional real estate industry, and, not coincidentally, the industry has returned the favor. That market segment — initially diehard do-it-yourself’ers who just don’t see the value of schlepping around town with a real estate agent — is one the traditional industry isn’t too fond of catering for, on the assumption that if we let clients out on their own, they might discover it’s not that difficult to plan an afternoon’s home-shopping around an open house schedule, and then they might question our overall value. For the most part, the traditionalists aren’t too sad to see this type of client defect to Redfin. “They think they know everything, they don’t see the value of a Realtor, and then they want part of my commission!”

What is common about the customers of these new lower-end entrants in any industry is that they’re not interested in a gold-plated product or service — they want something “good enough” and cheap.

If the new entrant succeeds, it starts to take market share from the incumbents, who finally wake up — often too late — and discover that the “cheap, undesirable” part of the market is both larger and more lucrative than they previously thought.

Even more interesting is that as the new entrant grows, its clients’ needs often change over time — to the point where the new entrant now also provides more of a “traditional” experience. Think back to Charles Schwab: its early customers were drawn in by the prospect of significantly less expensive stock brokerage services. The Charles Schwab of today still provides that, but also provides a higher-touch, higher-cost service, akin to that of the Merrill Lynches.

Might this happen to Redfin? Nobody knows…but if they are successful in what they’re doing, don’t be surprised if five years from now Redfin offers not only a discount real estate experience, but also a full-service one.

How can established companies lessen the risk of a low-cost competitor coming in at the lower end, then working its up the value chain? One of Christensen’s suggestions is as audacious as it is — for most companies — implausible: spin off a separate lower-cost business unit to learn about the lower end of the market.

So, how about a “Coldwell Banker Lite” offering? Want a full-service, full-fee experience? You can use the Coldwell Banker you’ve always known. Thinking of using a discount service, but unsure about Redfin’s brand? Then you can go to the Coldwell Banker Lite offering. Either way, Coldwell Banker can serve you. From the company’s point of view, they’ve retained a client; sure, it’s a low-margin client — for now. But five years down the road, the customer’s good experience may lead him back to the Coldwell Banker name, and perhaps this time using the full-service, high-margin option.

Skeptical of Redfin? That’s fine — but just don’t write them off until you look at the uncanny resemblances between our industry today and the industries Christensen describes in his books.

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Trulia’s Voices Hoarse From Answering Questions

August 1, 2007

2007-08-01_00-00-18-171.pngTrulia Voices, launched 10 weeks ago, is an online real estate Q&A forum, adding qualitative information (”Where are the good restaurants in this neighborhood? Why are prices higher on the other side of Main Street?) to Trulia’s robust quantitative offering (”What are median home prices in Akron? How many homes are for sale in Menlo Park?”)

Trulia just announced some fairly impressive numbers for the product. On average, each question gets answered in 20 minutes and receives 3.2 answers. As of 11:56pm on July 31st, there were just about 4000 (3897 to be exact) questions on the site.

While many of the agent participants on the site are, as you would expect, also active bloggers, there is a growing contingent of agents who seem to be using Voices as a platform to begin learning about online real estate interaction.


Full disclosure: Friend and colleague Pat Kitano of and I have established a consulting company, and one of our projects has been helping Trulia with its Voices product.

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