REAL Trending Episode 59: New Real Estate Startups and What’s Up with Business Valuations?

REAL Trending Episode 59

New Real Estate Startups and What’s Up with Business Valuations?

Steve Murray

From REAL Trends, the trusted source for real estate industry news, this is REAL Trending episode 59.

We’re breaking down trends and news of the week and showing how they impact brokers and agents. I’m Steve Murray, president of REAL Trends. Today we’re going to talk about changes coming for Fannie Mae and Freddie Mac, a whole slew of new startups, helping people get into home ownership and valuations of agent and team practices and brokerage companies. But first a message about an upcoming event.

Fannie Mae & Freddie Mac

The Trump administration over the last month has proposed some changes to Freddie and Fannie, and everyone shakes and quivers and wonders, what does it all mean? But it turns out that the Trump administration’s plans primarily return Fannie Mae and Freddie Mac to private ownership with accumulation of capital and a backstop by the federal government in terms of lines of credit in times of stress.

All in all, it won’t really mean a big change to the housing mortgage market. They will continue doing what they do now and buying mortgages and package them for sale to investors, but instead of returning all their profit to the federal government, they will be private companies with shareholders will be allowed to build capital cushions so that they can be stronger as the years go by. And in the event of another downturn they will have the capital just like other banks have to have capital to continue to perform their basic functions.

There are other changes at the margin being proposed by the Trump administration, but it turns out all the discussion of the last decade about getting rid of Fannie and Freddie and allowing the private market to become the secondary market for big financial companies to step in and replace Fannie and Freddie is not part of the Trump proposal. That’s all good news for the housing market. A lot of details to be worked out according to Steve Mnunchin, the Treasury Secretary. A lot of work left to be done, a lot of house and senate committees yet to hold hearings on what this might look like and what it might mean. In the meantime, Fannie and Freddie will continue serving the functions as they have in helping keep liquidity in the housing market.

New Startups

Secondly, new startups, there are all kinds of news about new startups. Companies like Divvy and ZeroDown and FlyHomes are now offering services to home buyers who on their own either can’t get in the housing market because they don’t have the cash to do so or B, because they don’t currently have the credit or C, they can’t bid enough to get in the market. These companies are offering a variety of services and approaches to helping people get into homes.

Among them are, we’ll buy the home and we’ll rent it to you for three to five years. You’ll be paying more in rent than you might normally for a similar place, but not substantially more and that extra will be credited towards a down payment so that three to five years down the road, the renter/future home buyer will be able to then get their own mortgage financing or alternatively they could sell it.

Each of these assistance companies in some way participate in the equity if in fact the home is ultimately sold while they’re still in the property itself as a provider of financing.

It’s a wonderful thing to watch all of the various financial tools; the offer pad, the open door and the Zillow type companies, and the NOC, which helps people buy their first home or helps move up buyers buy. And now we have these other companies. FlyHomes actually operates a brokerage alongside its service and calls itself a full service brokerage company with capital to help people get into homes.

Executives of these companies make the point that this is not a return to the days of 04, 05 or 06 where lenders were giving people no money down, Alt-A and subprime mortgages. It’s not that at all they say. It is real money that they’re putting into the property backed by careful valuations to make sure the buyer and them are not overpaying for the property, but it helps otherwise families that don’t have the financial capability to get into a home to get into home ownership.

The interesting part is more and more companies like them and others are seeking to partner with existing brokerage companies to market these services and these products to buyers and sellers. Certainly this benefits large, strong brokerage companies in major metropolitan areas who have the money, people and resources to effectively market this to a wide range of potential home buyers.

We don’t see any big problem with it. And we think it’s an opportunity for brokerage companies in a lot of markets to find ways to partner with these companies in providing these new financial tools. It helps first time home buyers get into a market where they’re having a tough time crashing that party. It also removes the friction potentially for move up buyers in that they can secure that home they want before having to sell their existing home or trying to bid competitively when they have a contingency on the sale of their home. We think this is on the positive side it’s a broadening of opportunities for home ownership. And rather than crazy lending of years past, it sounds like a lot of companies with a lot of capital feel safe to invest in residential real estate these days.

Homeownership

Now, we can talk about whether there’s too much money crowding into the housing sector right now, but the truth is the country is short millions of housing units and given the rapid increase in the number of households being created, particularly among younger generations and the lack of new home construction, both single-family and multifamily, these seem like safe bets at this time. There are those people who think a recession could turn the tables on these folks, but this editor thinks that with that dearth of supply, there’s still a lot more demand for housing, both rental and owned homes than there is supply, it’s not a crazy bet.

Valuations

Lastly, a lot of articles in the news these days about valuations. There’s stories about the valuations of Compass and Redfin and Zillow and Realogy and Re/Max and EXP, and then there’s other people talking about the valuations of teams and agents and how to boost your value.

We’ve written about our view of the valuation differentials between companies like Zillow, Redfin, and Compass on the one hand and Realogy and Re/Max on the other. We won’t belabor the point on this podcast except to note this, Wall Street and the private investment market are in love with anything that says technology, anybody who says they’re a disruptor and anybody who can show rapid growth in their business regardless of how they get that growth done. And we’ve written extensively. It’s almost like we need to discount for the day to day real estate agent team or brokerage company, you just need to discount what’s going on with those valuations because they have no meaning to the agent or the team or the brokerage company in the day to day business of helping people buy and sell homes.

We do note that among others, Bernice Ross recently commented on Inman in a number of articles she’s writing about how to establish the value of your business if you’re an agent or a team. As we have said for years in our valuation work on valuations for teams and individual agents, the less valuable the agent or the team leader is to their practice, the more likely it is that the practice will have value. To the extent the value is wrapped around in circles around the leader or the individual agent’s own relationships, then the value will not be so high. It doesn’t mean there won’t be value, just not as much value as people would like it to be in that area.

For brokerage companies we’ve written extensively. And in our practice of mergers, acquisitions and valuations, while the multiple of EBITDA that buyers are willing to pay in the price that they’ll pay and the terms, how much cash down, notes or earn out over time are down from the peaks of two and a half years ago, there is still a very active market for brokerage companies and still a lot of buyers and increasing number of sellers as well. There are great opportunities in mergers and acquisitions as a tool for growth.

As you’re thinking about your future, focus on is it income, is it equity, or is it personal satisfaction that drives you to own your own practice. Learn more about industry trends, marketing, and technology strategies as well as listen to past REAL Trending episodes on our website, www.realtrends.com/blog/. This has been Steve Murray, until next time.

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