Jason Hartman explores the tumbling rates of home ownership in the US and what they mean for real estate investors. He also explains why it is an ideal time for a cash flow-oriented linear market, and why the decline of home ownership is not necessarily a negative.
He also talks with the former CEO of Digg.com, and current founder and CEO of Pro.com, Matt Williams. Together they discuss the features of Pro.com and what they mean for home owners, investors, and real estate agents. They discuss the ways that Pro.com differs from other sites of its kind by putting control into the hands of the consumer, as well as ensuring that there is no exchange of fees until after a service is successfully executed.
Removing the 3rd Party
Hartman starts the episode by informing listeners that although he sounds giddy and excited about the upcoming interview, he is not motivated by money and is not being paid for the interview. He doesn’t take money from his guests due to the belief that this practice does not have journalistic integrity.
He states that the excitement comes from the idea that people are becoming more empowered, because of technology. Through the developments in technology, the idea of individual empowerment is spreading. Hartman is not affiliated with Pro.com, but he mentions that the concept of its inner workings could mean a lot for individuals in the real estate market. This is because of the services that Pro.com offers, slowly redirecting information into the hands of investors rather than third-party managers by taking the mystery out of home repairs, rehabs, and improvements.
It’s becoming easier for people to have access to information thanks to technology, and Hartman states that the only businesses cloaked in mystery rather than empowerment are government, banks, Wall Street, and both syndication and LLC investments. He reminds listeners of his third commandment, thou shalt remain in control. The purpose of this episode’s interview is to maintain this commandment and show listeners how to access information.
Net Operating Income Rather Than Cash Flow
Hartman brings up the subject of inflation, mentioning an article he read on Zerohedge. He mentions that he isn’t a fan of the site in some ways, especially because of their gold bug mentality. He’s said on other episodes that gold is not a real investment because it fails to produce income. To qualify as an investment, something has to generate income, and because gold doesn’t, it is more of a way to store wealth.
He reminds listeners that income is judged by the Net Operating Income (NOI) and not by the cash flow. This means that if you’ve got an investment that’s over-leveraged, it could have a negative cash flow and still qualify as a good investment.
The Zerohedge article, by Tyler Durden (pen-name based on the Fight Club film) entitled “The Mystery of the Missing Inflation Solved, and Why the US Housing Crisis is About to Get Much Worse,” states that,
“The reason for this is a simple, if dramatic, one: the U.S. transformation from a homeownership society, to one of renters.”
Hartman explains that the term “housing crisis” has many meanings and asks whether this is actually a crisis. He sees it as an opportunity, though he does state that the article deserves more attention, especially when it says that at this point, home ownership in the US has dropped to 63.4%, the lowest rate since 1967. Hartman reminds listeners that this was before Woodstock 1969, during the Lindon B. Johnson era.
Though this is a low rate, Hartman doesn’t see it as a problem. He states that he might be the only person in real estate thinking that the rate of home ownership in the US should decline to 55%, because there isn’t anything wrong with renting. It’s a silly idea to believe that every citizen should be a homeowner. He points out that the unemployment rates in areas with high home ownership rates is also high. This is because homeowners have a harder time leaving their area to move toward available jobs.
Median U.S. Asking Rent is $803
Due to rent inflation, the median asking rate for vacant properties soared to an annual rate of over 6%. There is a huge demand for rentals now, and these rates have never been higher. The Census Department reported that the median asking rent is set at $803 now. The Zerohedge article states that according to the Bureau of Labor Statistics, the rent inflation is only at 3%. It also says that,
“One wonders what seasonal adjustments American renters should use to make their monthly paycheck smaller, the way the BLS perceives it.”
Hartman says that this market still poses a great opportunity for investors, but he also mentions that the issue regarding inflation growth. It isn’t so much what the honest inflation growth rate is, it’s what the offsetting income growth is. The Bureau of Labor Statistics can adjust rent payments to be as low as they want, but the US household income isn’t keeping up with rent inflation. It’s far below the rent inflation. Real income is set back to the rate it was in 1989, which is of course terrible news.
Still, Hartman doesn’t believe that the US needs to be a home ownership society, but incomes need to increase. Americans have not had a pay raise in decades.
Hartman mentions that people have asked him, especially during the recession, when his message was gloomier, that if incomes are going down and inflation is high, if unemployment is going to be a problem. With those factors, investors are depending on people to rent out properties, and with these issues, how will they make payments?
Hartman has answered by drawing a diagram of two ladders, with one ladder showing people moving up and the other showing people moving down. Economics, he says, is a relative phenomenon. As such, it means that people will still be able to rent homes in almost any market, but it depends on which homes they’re looking to pay for.
With the serious issues regarding debt and income, and rent inflation being higher, investors could talk with a tenant who owned a home ten years ago. This tenant might have owned a home in a nice neighborhood at that time, and they’re renting a smaller home now, in a neighborhood that might be lower than the previous one. This means that the standard of living is under attack in this situation, not necessarily the access to homes.
Matt Williams and Digg.com
Matt Williams, the founder and CEO of Pro.com and former CEO of Digg.com joins the podcast out of Seattle, Washington.
He introduces the highlights of his career by stating that he was a child of entrepreneur parents, and started his first company at 23 years of age, before selling it to Amazon. He also worked with Amazon for several years and spent time in that business learning about building marketplaces and the early Amazon community.
He states that he had a secret passion for news and left Amazon after 11 years to pursue Digg.com. During his time with Digg, he turned the company around and resold it after two years.
Hartman asks about the controversy surrounding the V4 launch ad Digg, and Williams explains that the founder of Digg launched V4 as an attempt at a deeply personalized news source. This version of Digg disturbed the original mechanics of “digging” and though the website didn’t do this intentionally, the community did not receive the changes with warmth.
The complaint centered around the fact that gamification was changed dramatically. Previously, Digg was built on a community composed of users that would find the most interesting news of the day and vote on these pieces to show up on the front page. The V4 version made a big difference in the way that the news stories were voted in, and it was not the same experience the community loved.
Williams took the time to listen to the community and he made a good deal of changes to bring back the community’s impact on their news articles. He was able to bring the community back to a positive place, turn the issues around, and fix them.
Hartman recalls seeing negative, irate posts online about Digg’s V4 release. The posts came from fans of the original Digg and they were passionate about their community. Through some of these posts, Williams was able to gather ideas from the community members to rework the website, as well as reinstating profile metrics and other features.
Incubating Pro.com at Andreessen Horowitz
After reselling Digg.com, Williams worked with Andreessen Horowitz for some time, and it was during this period that he incubated the idea for Pro.com. He had the desire to find people that were willing to make national investments, including foreign companies that invested in US properties. Some of these investors have properties they’ve never seen and tenants they’ve never met, but it works for them thanks to developments in technology.
One downside of distance management is the fact that investors are not usually able to perform a lot of work on their own properties. Pro.com has solved some of these issues.
Williams explains that Pro.com was developed for customers that have rental homes or properties, or people who are helping other property owners make repairs to their home. His website has made it easier to estimate the cost of repairs, rehabilitations, or improvements on properties, as well as scheduling services to be performed. Pro.com is also very prompt, with booked services usually taking only days to initiate.
In the past year and a half, Pro.com has considered real estate and has started developing pricing technology for homeowners to look at. The website is ideal for people and real estate agents who are getting their homes ready to sell, as well as buyers who would like to make renovations to a new or established home.
Until recently, estimates for any sort of repair could be a headache. Pro.com is designed to help agents and owners find reliable estimates in their area, as well as connecting them with trusted professionals.
Features of Pro.com
Williams mentions his features that set Pro.com apart from other websites of its kind. It has a comprehensive pricing engine, different from those that connect customers to a professional and then back out. Pro.com does not have lead generation fees. The website only makes money if their services can connect customers with a professional who does an excellent job on the project in question. The website makes sure that the consumer has a successful transaction with a professional. The professional is paid, and then the Pro.com website is paid a commission for the service.
Hartman asks about price comparison by giving an example of three different painters with three different estimates and questions how the estimates are usually so different. He states that it’s possible one is greedier, one has a less-efficient business, or one is absolutely excellent at his work to justify the price difference.
Williams answers by explaining that contractors often have a lack of transparency in their pricing quotes, and painting a room is a great example of price explanation. Prices can be adjusted for painting a single room based on color choices, paint brands, how many coats are desired, and whether baseboards are included in the painting process.
Because Pro.com gives an estimate of what a project should cost, this empowers the customer by putting control in their hands. The customer now has the opportunity to discuss the price quote with the professional to understand why there might be a difference in their quote versus what was generated on Pro.com. Cost can be broken down to where it is easy to understand for the consumer.
When it comes to landscaping jobs, even large projects, Pro.com has adjustable parameters that a consumer can change, add, and subtract for an accurate price quote. The choices can be narrowed down almost exactly depending on what the consumer desires. Even with landscaping projects, the pricing estimates are very accurate.
Pro.com and Location
Labor rates, according to Williams, are set by location. Most contractors have different rates depending on what needs to be done, and most of the jobs are priced on some sort of hourly rate. Estimates are calculated this way as well, and these estimates factor in the total cost of the job being performed.
It’s a sophisticated price estimator. Contractors don’t pay for leads, only commissions for completed work performed.
Hartman recalls a recent visit he took to a walk-in clinic, and referred to the thousands of treatment codes that the medical profession uses, for any sort of treatment one could imagine. Compared to this, he asks Williams how many different codes are involved in Pro.com’s home improvement estimates.
Williams answers that there are several thousand common projects, and can be tens of thousands of combinations because of the variations available in the initial thousands of choices. He has done quite a bit of research to develop the website’s estimate tool, and the feedback has been positive. In the initial stages of Pro.com, when it was developing under another name, testers stated that the website helped them receive an accurate price estimate on their project.
He also mentions that one of the issues that stand in the way of people starting a project is the mystery involving the cost. They don’t know where to begin and they don’t want to be manipulated by contractors. With Pro.com, customers are able to call, text, or reach out to the website to have access to the estimates.
Pro.com Rating System
Pro.com has a rating system for the professionals that perform work through the website. After each job is completed, Pro.com surveys the customer for a review regarding how the work was completed. Ratings are only posted by customers who have had work performed by the professional in question, and the ratings are all verified. This rating system is much more reliable than leaving the rating floor open for any random person to post, and it represents the value that the professional brought to the customer.
Williams also has an aspect of Pro.com, Premier Home Services, that is designed for real estate agents. It provides agents with a dashboard that catalogs the projects that past clients may be interested in. There is also a maintenance calculator, a way to connect with professionals to have the work completed, like with standard Pro.com, as well as advice on the top ten things to do in order to prepare a home, along with cost estimation.
Also, unlike sites like Angie’s List, customers don’t have to continue joining each different zip code’s site area. Pro.com only requires joining one time for any zip code in the country. It’s a free service that empowers investors.