The National Community Reinvestment Coalition (NCRC) has issued a complaint to the Federal Trade Commission (FTC) against Zillow.com.   NCRC alleges that zillow’s valuation methodology is flawed and places consumers at risk, particularly in low-income minority communities.

The NCRC complaint sites statistics on the accuracy of the valuation tool, quoting an MSN Money study that reported that zillow is accurate to ten percent only 29% of the time.  A more damaging accusation is that inaccuracies specifically target African American and Latino consumers – but notably no evidence is included to support this claim.    

A company like Zillow that is seeking innovative ways to provide data and information to the consumer is always going to be at risk for these types of claims.  Information is like any tool and it can be used or misused (a fact that we’re aware of here at equityscout.com.)  On their corporate blog Zillow.com’s president Lloyd Frink expresses disappointment that the NCRC sent their letter directly to the FTC without first opening a dialogue with Zillow.com. That, combined with the fact that the compalint does not offer any evidence for the damaging discrimination accusations, makes the whole issue feel a bit like opportunism. 

The Zestimate tool (Zillow.com’s evaluation model) is not an appraisal, and therefore is not accurate enough to be the sole factor in making any financial decision.  By their own estimate, the median margin of error is 7.2 percent, and 38 percent of estimates fall outside of 10% of the actual sale price.  But having access to a national database of price comparisons, tax records, and other sales data is unambiguously useful for consumers wishing to inform themselves before making a purchase.

Zillow.com got around 3.5 million hits last month according to the New York Times – and being popular makes you a target.  It will be interesting to see how the company handles this issue. 

More and more young people are getting into real estate investing.  Real estate is an investment with two key benefits for younger investments:  a) time is on your side and b) it’s the safest way to use the power of leverage.  You can read more on these thoughts in an article on young real estate investors posted recently in our Media Page. 

I’m an occasional contributor to the Houston Business Journal and recently wrote a short feature on the power of leverage and compound growth.  An additional article on ethics and investing was published this week - currently only available to subscribers to the Journal.  It will be accessible to all viewers in about a month and I’ll post a link here.   

As property values have skyrocketed in overheated markets the rental market has tended to lag considerably.  Rent-to-value ratios throughout much of California and Florida, for example, are so low that it’s almost impossible in some areas to find investment opportunities where rental income would cover operating expenses (debt service plus expenses and taxes) on a new investment.  Rents, it seems, are “stickier” than prices.  A big run up in property values impacts renters, but not in proportion to the size of the price move.  Meaning: if property prices double in a region over a short period of time rents may increase, but they won’t double. 

But this conventional wisdom is being challenged in some markets.  And some unlikely ones at that.  The New York Times ran an article on the challenges which renters are facing in Olathe, Kansas (pronounced oh-LAY-thuh)  20 miles SW of Kansas City.  New census data shows that Olathe renters showed the biggest jump in the percentage of people paying at least 30 percent of their income on rent, as well as those paying at least 50 percent. 

From the "yes, there's a difference between investing and speculating" file...

This story aired recently on National Public Radio.  Meet Casey Serin.  He's a twenty four year old former computer programmer from Sacramento California who went to some zero-money-down seminars, then quit his job and went out and bought a bunch of houses at the top of the market.  Now he's facing foreclosure on five of them and is headed towards bankruptcy. 

So he's decided that he might as well get his five minutes of fame out of the odeal - check out http://iamfacingforeclosure.com.

Listen to the radio story here. 

This public self-flagellation seems a little bit...odd.  But let's assume it's not a hoax - could be a sign of things to come as the easy money that the banks were offering during the market run-up finally hits stagnating prices.  Markets like the current one create opportunities for savvy value investors, but undoubtably there are a lot of get-rick-quick characters who will find themselves in the same boat as Mr. Serin. 

...but at least he's probably making a couple of dollars from the Google ads on his webpage now that the press has found him... 

I find it interesting that one finds so many references in the popular press about the horrors of being a landlord. 

Consider this blurb that appeared recently on Money.com:  

• “…if you can't imagine yourself answering late-night calls about clogged toilets, your choices come down to holding your property vacant or selling.”

Or this gem from the MSN finance page: 

• “…Just when you thought being a property magnate was going to be glamorous, that late night phone call from your tenant saying they have left the bath running and flooded the place is just what you didn't need.”

Note that these comments were written by journalists, not by real estate investors.  Experienced investors will know that if you’re judicious about selecting your tenants and if you maintain your properties responsibly then your landlord duties won’t overwhelm you.  I’ve yet to receive a call in the middle of the night. 

Sure there are challenges to landlording, and yes things will break – but establishing a good relationship with your tenants and finding a handyman that you trust go a long way towards helping you maintain your work life balance. 

A new article is posted in the Media Room that compares various mortgage options: fixed rate, interest only, balloons, and more. This is a handy reference for investors weighing the pros and cons of the various options being offered by banks and brokers. 

Check the Media Page regularly to see what's new. 

BusinessWeek recently ran an interesting article on Option ARM mortgages (also known as pick-a-payment, negative amortization mortgages, NegAms, deferred interest mortgages, and various other aliases).  There are variations on the theme, but these loans all offer flexibility, ultra-low initial payments, and lots of risk to go along with it.  Each month the borrower can select from a variety of payment options, but the lowest payment amounts are not enough to cover the interest on the loan – meaning – the outstanding principal actually goes up. 

Now with rates rising and property prices flattening in many parts of the country many homeowners are waking up to the fact that perhaps that deal that  was too good to be true wasn’t so good after all. 

Stay tuned – soon EquityScout will be posting an article to the features page that gives a rundown of all of the popular mortgage options out there, with the pros and cons of each. 

Ok - I know that rule #1 of blogging is to keep it short - 250 words max.  But rules are made to be broken.  Here's some thoughts on a whitepaper we're working on here at EquityScout.com.  Skip this one if you're looking for a short read...

For years Real Estate professionals are heard cries that the sky is falling – that the impending bursting of the real estate bubble along with advances in technology would soon make the profession obsolete.  But it’s been easy enough to disregard these predictions as alarmist exaggeration while the market zoomed along in the longest bull market in recent history. 

Now as we enter the fourth quarter of 2004 the picture is looking a bit less rosy.  According to recent market statistics prices are starting to stagnate in some areas, falling in other.  Houses are staying on the market longer as inventory levels hit record highs.  There are a variety of factors that lead me to believe that some changes might be on the horizon…

The real estate industry is poised to enter a period of instability.

The real estate industry, particular the customer-facing segment, exhibits a number of features that indicate that it is entering a period of transition:

• Large number of participants (estimated 1,275,000 registered Realtors® nationwide with around 10,000 joining the ranks every year.)
• Increasingly savvy customer base as consumers increase their understanding of the real estate markets and expect more from service providers.
• New market entrants on the technology front.

The three factors above are shifting influence towards the consumer and away from Realtors® and other real estate professionals.  This is a technology driven shift, and in the short term this will present a major challenge to the status quo 6% commission that agents earn on sales. 

 How does technology impact industries?

Technological innovation is nothing new, but the rapid rate at which new technological products and ideas appeared in the 1990’s prompted new efforts to understand the phenomenon.  Perhaps the most quoted reference is Clayton M. Christensen’s The Innovator’s Dilemma, which coined the term “disruptive technology.”

A “disruptive technology” is one that causes a major structural reordering of an industry.  Most major technological innovations are not truly “disruptive”.  Online retail is an illustrative example.  Destinations like Amazon.com have rocketed in popularity, but it’s now clear that traditional retailers are not headed for extinction.   In fact, online marketing has been embraced by the traditional segment as an enhancing strategy (example: barnesandnoble.com)

One the other hand, one doesn’t have to look far to find some technological innovations that truly have been disruptive.  Examples:

• The introduction and continual improvement of desktop computers revolutionized a variety of industries, from mainframe workstations to software design.
• The introduction and continual improvement of digital cameras impacted the entire photography industry.  Technology companies like Sony and Panasonic are capturing a major share of a market that was previously dominated by Cannon and Nikon.  Kodak has begun to discontinue some previously popular film-based product lines. 

In the two examples above, the structure of entire industries was permanently altered, long term strategies transformed, and the relative strength of market participants reordered. 

A number of industries are currently in a period of uncertainty as they go through technological shifts that may or may not be disruptive.  Examples:

• Online news outlets are threatening the structure of the newspaper industry.  The Economist magazine recently ran a feature “Who killed the newspaper?”  It remains to be seen what kind of impact this will have on the future of journalism. 
• Voice over Internet Protocol (VOIP) is challenging the telecommunications industry, and may permanently alter long-distance voice communication. 

…and most interestingly,

• The real estate industry is being challenged by a number of technologically-based innovations from companies as diverse as Craigslist, Zillow.com, Google, and a variety of for-sale-by-owner online solutions. 

 So what does this mean for the Real Estate industry?

Entrenched industries, by their very nature, tend to be slow to recognize and react to disruptive innovations when they arise.  Some factors to consider in the case of the real estate industry:

• The industry is made up of thousands of highly autonomous participants, with the National Association of Realtors (NAR) acting as a centralized but weak governing authority. 
• The information hierarchy is described as the progress from data (raw data), to information (processed data that answers a question), to knowledge (ability to apply information). 

• Within the traditional real estate industry, efforts to modernize, where they can be found, tend to focus on the data end of the information hierarchy (collecting leads, updating websites, digitizing contracts, etc.) 

These are the easiest challenges to undertake, however they will be the first to be assailed by new competitors, and they’re the services that Realtors® offer that consumers value least. 

NAR acknowledges that there is a gap to be bridged and challenges on the horizon, as evidenced by their commissioning of the 2006 Realtor® Technology Survey.  However, the same survey indicates a high level of complacency among Realtors® overall (although 86% of agents want MLS to expand technology tools, less than 40% were familiar with Zillow.com, a major emerging industry threat. 

If a major shift is eminent there is little that the industry as a whole can do to advert it.  However, individual participants can take steps to attempt to remain relevant.  (An example:  the emergence of digital photography pushed Polaroid into bankruptcy, but Kodak has thrived by using their position to move aggressively and early into designing and marketing digital cameras.  Witness also the major oil companies who are taking a position in renewable energy and biofuels refining.)

Market participants - companies, groups, partnerships, regional associations - need to recognize the threat that technology brings to their business model, move early and aggressively to preempt the threat by adopting technologies as necessary, and focus on shifting their value proposition away from the data end of the information hierarchy and towards the information/knowledge end. 

For those of you following the posts on avoiding real estate burnout, I've combined the posts into a single article called "Living with your Real Estate Investments" and posted it to our Media Room.  Like our other articles, you can either read it on the web or download as a .pdf file. 

Also, we recently ran an article in the Houston Business Journal on Young Investors - look for a link as soon as the web version comes out - soon. 

At a speech at the Economic Club of Washington, Federal Reserve Chairman Ben S. Bernanke commented that the “substantial” slump in the housing market will likely hit U.S. economic growth in the second half of this year and the first part of next year.

See the Washington Post article here. 

Bernanke’s comments were stronger than statements that he’d previously made about the housing market.  As Fed Chariman Bernanke is aware that any statement has the potential to be a self fulfilling prophecy since market participants often will act up on his predictions, but he appeared less guarded in his comments on Wednesday. 

Generally speaking, there is widespread concern that a decrease in housing prices will hit the economy as homeowners feel less financially secure and therefore forgo on discretionary spending.  The direct impact of cooling prices will hit some housing markets harder than others, but across the board a broader economic slowdown would have the potential to impact all markets. 

I don't recommend these:

Remodeling shortcuts

The last in my series on avoiding investor burnout...

Principle 4:  Don’t take shortcuts with repairs

Trying to save a few dollars on every repair is a short-sighted strategy.  Your tenants will take note of how you treat the property and they’ll act accordingly; why should they respect your house when you don’t?  A well cared for property is more likely to appreciate and in the end will cost you less to maintain and cause less trouble.   There’s not economic value in delaying a repair – you’re going to have to do it eventually, and if you wait not only will the problem have gotten worse (and, possibly, more expensive) but  you will also have alienated your client: the tenant. 

Principle 5:  Know when to say “when”

Sure you’re trying to build your empire, but don’t overextend yourself with too many properties or projects.  Most real estate investors have jobs to support their day-to-day lifestyle and invest in real-estate on the side as a long-term wealth building strategy.  Assuming that you fit into this category (that you’re not a full time investor) it’s wise to make a deliberate decision as to how much you can take on in terms of workload and financial risk.  Don’t cross that line.   

You can do it

A well maintained property w/ a good tenant should not be a burden on your life.  On an average month the only effort that is required of me is to take the rental checks out of my mailbox and deposit them into my bank account.  But the key to maintaining this balance is being diligent in all of the steps along the way.