I usually steer away from books and websites with the word “millionaire” in the title. In my opinion readers benefit from sources that teach them how to do something well, not from advice on getting rich.

There are exceptions, however, and a notable one is Stanley and Danko’s The Millionaire Next Door, an enlightening study on how most wealthy Americans earned (and keep) their net worth. They theorize, in a nutshell, that most wealthy Americans got that way though a combination of shrewd business sense and frugal living.

My two cents is that Stanley and Danko could stand to lighten up a little; if at some point along the road I decide to trade in my ’85 escort and splash out on a new sports car then it’s not going to be the end of the world. But generally speaking their message is excellent. Americans are great at consuming and terrible about saving – this is a message the people need to hear.

Pat Kitano over at Transparent Real Estate uses a format that I like when he compares two different ideas, services, or trends. Imitation is the sincerest form of flattery, so with apologies to Pat here’s how I compare Kiyosaki’s Rich Dad series with The Millionaire Next Door by Stanley and Danko.

Note:  those of you who read my recent post on Rich Dad Poor Dad already know I'm not a fan of Kiyosaki's philosophy.  But hey, this is a blog - I don't have to be objective.  You want Fair and Balanced then go to Fox News. 

Recently I was looking for a new tenant for a single family home that was going to be vacant in about a month’s time. The house is in the back of a quiet cul-de-sac, so I spoke to a neighbor a couple of houses over on a busy corner and paid her $20 bucks to put a “For Rent” sign with my phone number in her front yard.

It’s a popular area so I got lots of calls. Some of them, of course, were from Realtors who wanted to help me lease the house. I like developing relationships with Realtors (as I’ll explain below) so I agreed to meet one. She rolled up on Saturday afternoon in a massive shiny SUV with a magnetized sign featuring a large glossy portrait of her smiling face.

She took a look at the place, declared that she thought she could help me, and explained that the charge would be one month’s rent plus a $150 listing fee. And free of charge she offered me lots of advice, like check the applicant’s credit and make sure the property is clean before you show it and call the applicant’s references before signing a contract.

She called me the following Tuesday to see if I was ready to list the property with her, but by then I already had it leased out myself.  This particular unit rented for $1,250/month, so I saved myself a total of $1,400.  Well, $1,380, including the $20 bucks I gave the neighbor to allow me to put the sign up. 

Realtors can offer a lot of value to investors…

…it’s just that your needs are different than the needs of standard consumers.

Bottom line: your needs, as an investor, are different than Joe Homebuyer’s needs.

There are three ways that Realtors will tend to react to this:

• Offer the same package of “value” that they offer to the general consumer and insist that you pay what the general consumer pays. You’ll get the “my services are worth it” angle from these Realtors. But that’s like arguing that a circular saw is worth fifty bucks: it might be worth that and more, but if the job calls for a drill then you’re paying for the wrong tool. Verdict: wrong answer.
• Offer you the “investor services” that fit the value drivers on the right hand side of the table above, but insist that you pay the same rate that they charge for the suite of services on the left. This is an “entitlement” mentality; the agent feels that his fee isn’t for service rendered, it’s for having his expertise supporting your deal. If you’re an investor this isn’t reasoning that you should accept. You should pay for the time and effort that agent puts into the deal; if you’re doing much of the heavy lifting then you shouldn’t pay the same as the next guy who buys a property once every other decade and needs his hand held through the entire transaction. Verdict: wrong answer.

• Offer you the “investor services” that fit the value drivers on the right hand side of the table above, and charge you appropriately. This…by process of elimination…is the “right answer.”

So, what does “charge you appropriately” mean? You’re the negotiator and so is your Realtor – sit down and work it out!

Figures released last week indicated a contraction both in housing starts (lowest level since 1997) and in median sales prices.  Median prices fell in 73 metro areas in the final three months of 2006.  These results on the back of one of the strongest housing booms in U.S. history.  The sober view is that concern is not unwarranted.

Glance at today’s USA Today, however, and you’ll get the idea that everything is rosy; unless you dig into the article you might come to the conclusion that some positive numbers have been release.  The main headline on the front page of the Money section (three of our columns - use your imagination if you're looking at the online version): Realtors expect home price recovery.  The first quote is from David Lereah expressing optimism that a “discernable improvement in both sales and prices” is already upon us. 

Real estate professionals will know who David Lereah is, but some investors might not.  Lereah is the Chief Economist for the National Association of Realtors®.  The NAR is the industry group charged with keeping the real estate market moving, keeping prices on the rise – and most importantly ensuring that sales volume stays high, which means more commissions flow into Realtors® pockets. 

A statement from Lereah isn’t "news", it’s a sales pitch.  Lereah is just doing his job – trying to convince homebuyers (and investors) that everything is rosy.  The problem is that consumers will read an article like this one – prominently published by a high volume national news source like USA today, and mistakenly conclude that it’s news. 

So what does it mean to me?  Two things to consider as an investor.

• Consider the source.  It’s fine that the National Association of Realtors® has a voice in the press, but don’t give their forecasts and vies the same weight that you’d give to an impartial market expert.  The NAR has a point of view that they’re trying to sell. 

• Look at the underlying numbers.  Even a bad article like this can yield some information.  National median sales price for an existing single family home is down 2.7% nationwide from the same period last year – so instead of trending upwards with inflation (the natural path) the market has entered into a quantifiable correction.  Ask yourself “is this enough.”  What’s your view on your own area. 

• Be skeptical about some “information” you get from the popular press.  I note that on the same page of the USA Today they have a color photograph of the new Ford Edge HySeries prototype SUV, a fuel-cell plug-in hybrid that the paper refers to as “pollution free”.  This is simply wrong.  A car that you plug into your wall to recharge runs on electricity, and the vast majority of electricity in the United States is produced by power plants that burn hydrocarbons – primarily coal and natural gas.  Electricity isn’t free, and it can’t be produced unless you burn something, which creates pollution.  Fuel cells run off of hydrogen, which in itself is clean, but is produced as a by-product of natural gas – again, a hydrocarbon. All cars pollute – it just makes us feel a bit greener if the pollution is coming from the smokestacks of a remote power plant or hydrogen facility instead of the tailpipe of the car we’re driving.  A tangent from the topic of real estate?  Perhaps – but for me it’s a clear example of the fact that the press will simplify issues until they’re simply wrong – and that’s dangerous for an investor.  

The real estate industry slowly but surely continues it’s march towards a new, yet-to-be-defined future state – driven by technology, new players, new business models, and ever changing customer expectations.  Against this backdrop the National Association of REALTORS® continues it’s quest to block the freight train of progress, this time lauding H.R. 111, the deceptively titled Community Choice in Real Estate Act which was introduced Thursday by Congressmen Paul Kanjorski (D-PA) and Ken Calvert (R-CA).

In a statement released today, Pat Vredevoogd Combs, the NAR Presidents, states:

• Realtors® provide extensive personal attention to consumers during the lengthy process of buying a home.  It would be difficult for banks to provide that type of counsel because of conflicts with their other business objectives.

Wow, where to start?  First, banks already offer advice on a vast array of services, and they do this well because of the brutal competition between them.  Sure, it’s probable that some banks will do a shabby job of representing real estate customers – and these are the banks who won’t manage to make any money doing it.  The phrase “extensive personal attention” is buzzword filler.  The consumer will determine the standard, and whatever market player meets this standard will capture the business.  This is the very definition of competition.

More importantly, the banks will jump in if and when it's profitable to do so -  which means using synergies to pull cost out of the system and using this to compete with customers based on price (lower fees).  Beware an industry group who seeks legislation to keep a class of competitors out of the market in the name of… drum roll…competition. 

But perhaps I’m not being completely fair here.  It’s hard to knock the NAR for backing their friends Kanjorski and Calvert – after all this legislation is unambiguously a threat to Realtors®.  In corporate America “synergies” is a code word for “redundancies”.  This isn’t corporate America we’re talking about here, but the concept remains the same. 

The real problem, though, is that all of the arrows in the NAR’s quiver look kinda similar.  Storm clouds on the economic horizon?  Just send David Lereah out to tell everyone that everything looks rosy! .  Sales are down?  Proclaim that now is the perfect time to buy and sell a house!  .  New technology players offering new options?  Use your leverage to muscle ‘em out. 

Facing an evolving market with a brave face and a vision isn’t an easy thing, but 1.3 million Realtors® out there are waiting for some direction.  Bad idea.  Some regional associations are taking matters in their own hands, but there’s trouble on the horizon for the rest. 

So now that Zillow is officially in the listing business it’s the topic of the hour .  Some have compared Zillow.com with WebMD, a once promising startup with a now discredited business model.  In my opinion this isn't a good comparison - a doctor spends somewhere between 10 and 15 years in college, medical school, and residency before she can operate on you.  And the internet, no matter how good it gets, will never be able to remove your appendix. 

A much better comparison is with a stockbroker - a skilled profession that offers a more similar service.  The stockbroker profession hasn't been eliminated, but it has changed radically, and margins have plummeted.  I use a realtor, but I don't use a stockbroker.  I go online, log onto vanguard.com or etrade.com, check my stocks, read the research, buy, sell, and manage my own portfolio.  Ten years ago they told us this would be financial suicide - but now it's commonplace.

Remember E.F Hutton - the stock brokerage firm?  "My broker is E.F. Hutton...and E.F. Hutton says"...then everyone turns around and listens w/ rapt attention.  Hutton and their ilk sneered at the internet startups.  Financial suicide for foolish investors, they said.  Cheapskate clients...we don't want 'em.

Well, E.F. Hutton is gone.  Bankrupt.  People stopped listening, and they stopped paying those fat commissions.  Meanwhile, E*Trade, Ameritrade, Fidelity, Schwab, and the rest of the online guys survived the dot.com collapse and are churning and burning.  The point being that all competitive landscapes change...and market participants who don't go with the flow - those that stick to their guns with a religious fervor - are doomed to the dustbins of history. 

Has real estate gone that far?  No.  Not yet.  But it will if the response from the National Association of Realtors is simply to point out Zillow's flaws, insist that the public will always pay 6% commission to sell their house, and that technology isn't a threat. 

Six percent has been a rule of thumb that the National Association of Realtors has done everything in its power to protect (just as any industry - auto, energy, consumer products, whatever - will always try to protect its margins).   

Problem is: in the long run this strategy simply won’t work.  The New York Times  ran a great article on this. A quote from the article:  Traditional agents still firmly control the M.L.S., which allows all participating brokers, including Redfin, to view almost every home for sale in a particular area, even those being offered through competitors' agencies. But the typical 6 percent commission, paid out of the seller's proceeds and split between the seller's and buyer's agents, is under attack because, as economists note, it does not serve consumers well.

Disruptive technologies are notoriously hard to predict.  Zillow may be a flash in the pan.  But eventually – soon – something will come along that isn’t.  There are some stockbrokers and travel agents who survived the onslaught of e*trade, Ameritrade, Orbit and Travelocety, et al – but many didn’t.  The ones that made it adapted found a niche where they added a special kind of value.  But the bread-and-butter business will soon go away. 

There’s an interesting post on the National Association of Realtor website in response to a recent Harris Poll that ranked real estate agents as the least prestigious of professions.  The reason for the disappointing placing, reasons the NAR, is that "real estate agent" was offered as an option in the multiple choice survey instead of Realtor ® .  The NAR reasons that a Realtor® is to real estate agents as Mercedes is to car. 

Some of you will have read Steven Levitt’s excellent book Freakanomics, a thought provoking read on diverse topics relating to economics and market forces.  I look at Levitt’s blog every now and then.  He has an interesting comment on the NAR argument above:  “While I guess you’re supposed to assume that a Mercedes is more trustworthy and downright better than a plain old Car, you could just as easily assume that, in the eyes of most people, it’s simply more expensive.” 

Note:  I fear that two professions that would most accurately describe me -  real estate investor and dot.com entrepreneur - would have limped in even lower than real estate agent had they been included in the survey.  Oh well.  But I used to be a Military Officer and that ranked pretty high...I'll take that as some consolation. 

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.