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Berkshire Hathaway Joins Crowded Field

The Housing Scene by by Lew Sichelman
by Lew Sichelman
The Housing Scene | September 20th, 2013

A new real estate franchise under the fabled Berkshire Hathaway brand marks its official launch this week.

The name Berkshire Hathaway adds some mustard to an otherwise bland real estate landscape. After all, the conglomerate is one of the world's most admired companies, according to Forbes, with Warren Buffet -- widely considered the most successful investor of the 20th century -- at its head.

But it may surprise you to know that the National Association of Realtors counts 32 national and regional franchise brands currently in operation across the land. And that does not include the handful of start-ups that seem to pop up every year and then fade away.

Another surprise, perhaps, is that only slightly more than half the nation's realty agents work under a franchise banner. The rest -- 41 percent, according to NAR's latest membership profile -- choose to remain independent.

At the same time, 84 percent of all real estate firms are independent, NAR reports. The rest are franchises or subsidiaries of national or regional firms. The reason: Most realty firms are one- or two-office shops with only a handful of agents, whereas the franchises are larger offices with bunches more agents.

There are good reasons to join a franchise, for both the brokers whose names are on the door as well as the agents who hang their shingles on the wall.

Banners like Century 21, RE/MAX and the others give a business instant recognition. Branding is a way to define who you are, according to the experts, and allows real estate brokers to say, "We are different from the rest of the pack."

That's why many newly minted brokers who are just starting their companies decide to affiliate with a franchise. Even though it may cost thousands of dollars to join, working under the Coldwell Banker or Realty Executives label gives them an immediate identification that they would otherwise have to spend years building.

A brand like ERA or Keller Williams also gives brokers a certain edge in recruiting. New agents and industry veterans alike often decide to work under a national trademark in order to receive the training, leads and other benefits the nationals have to offer. And in real estate, unlike, say, McDonald's and numerous other franchises, brokers are free to run their businesses as they like (within certain parameters).

But even independent brokers have a brand, and their agents do, too. They communicate their lineage, trust, expertise and other qualifications through their signs, business cards and marketing materials.

At the same time, the company an agent works for doesn't seem to hold much sway with clients. According to NAR's latest profile of buyers and sellers, just 3 percent picked an agent because he or she was associated with a particular shop or franchise.

More important factors include honesty (24 percent), reputation (21 percent), friend or family member (15 percent), knowledge of the neighborhood (12 percent) and a caring personality (9 percent). Of the other less material reasons, including timely responses and accessibility, only the agent's professional designations was less important than the agent's company.

So what does Berkshire Hathaway HomeServices (BHHS) bring to the already crowded realty landscape?

The name has "a huge reputation," says Earl Lee, the industry veteran who heads HSF Affiliates, which operates the BHHS, Prudential and Real Living networks. "It promises integrity, trust and competence."

As Lee sees it, "consumers today are looking for someone they can trust. They want to know they are working with an organization that stands behind its agents. And the strength of Berkshire Hathaway's reputation of integrity and financial stability is behind everything we do."

The company doesn't expect to be the largest, but it does expect to be the best, says Lee, attracting the most qualified companies and agents. Certainly, it will hit the ground running.

Already more than two dozen brokerages affiliated with the Prudential Real Estate brand have agreed to transition to Berkshire Hathaway, including the three that will "go live" next week: Prudential California Realty, Prudential Connecticut Realty and Prudential Florida Realty.

Other brokerages -- including Fox & Roach Realtors, a Philadelphia-based chain with some 4,000 agents that the BHHS brand purchased in August -- will make the official switch in the coming weeks. "It's happening, and it's happening fast," said HFS spokesman Kevin Ostler.

Here are some other facts and figures about real estate franchises from NAR:

-- The oldest is Real Estate One, which began franchising in 1971. The Southfield, Mich.-based company has 74 offices under its wing with 1,622 agents.

-- The newest is United Real Estate of Kansas City, which launched this year and has seven offices and 1,025 agents.

-- Keller William is the largest in terms of agents, with some 83,000 sales associates in 662 offices. Coldwell Banker is a close second with 82,000 agents, though it has more offices, with nearly 2,300.

-- Century 21 is the largest in terms of offices, with 2,500.

-- RE/MAX agents sell the most houses, according to marketing research specialists at the MMR Strategy Group, followed by Coldwell Banker, Keller Williams, Century 21 and Prudential Real Estate.

NAR doesn't keep count anymore, but in 2009 it listed NRT, the parent of Coldwell Banker, ERA and Southeby's International, the leader in "sides" with nearly 275,000. A listing is considered one side; a sale, another. Home Services of America had nearly 124,000 sides in '09, followed by Long and Foster Real Estate with almost 70,000.

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Nar Pilot Program Rates Agents' Service

The Housing Scene by by Lew Sichelman
by Lew Sichelman
The Housing Scene | September 13th, 2013

A system for rating real estate agents is being tested by the National Association of Realtors, the trade association for realty pros and, at more than a million members, the largest trade group in the country.

Under the pilot program, clients of participating agents are being asked by a third-party vendor to complete a survey about their experiences in the transaction. Brokerage firms sign on to the program, but their agents are not required to participate.

Even those who decide to take part have the authority to block the results from being posted online. At the same time, though, agents cannot pick and choose which results they want posted. It's all in, or all out.

To some, the NAR program smacks of the proverbial wolf watching the hen house. To others, it is seen as a thinly veiled attempt to get ahead of the private market, where there is no shortage of ratings websites. There's even a site that offended agents can use to remove complaints from popular consumer site RipoffReport.

But NAR officials say the rating service is just one aspect of a larger "Realtor Excellence Program" designed to help brokers identify agent shortcomings and provide whatever education is necessary to bring them up to industry standards.

"Everyone seems to be focusing on the rating service, but I'm focusing on getting good consumer feedback," says Laurie Janik, NAR's chief counsel. "The bigger picture is that this is a way to enhance professionalism and have more satisfied buyers and sellers. Using the surveys, brokers can spot problems and weaknesses early on and get the agent the help or training they need."

Under the pilot program, brokers are able to use the survey results solely as internal feedback. But agents are given the choice of whether to participate or not. And they also are given the choice of whether to allow the results to be made public on the website RatedAgent.

In and of themselves, those parameters seem to limit the rating system as a true and open measure of an agent's abilities. In addition, the surveys are being sent only to participants of closed transactions, meaning that buyers or sellers who are dissatisfied with their agents' performance and failed to close a deal for one reason or another are left out of the loop.

But Janik says that is an effort to make sure survey respondents are truly clients. "This program is set up so that it can't be gamed," she says. "It's real buyers and sellers rating the agent they worked with in a transaction that has closed. Therefore, the ratings have validity. We don't want agents' mothers and friends rating them."

While NAR's general counsel plays down the ratings aspect of the excellence program, Quality Service Certification -- the San Juan Capistrano, Calif. company that designed the survey and sends it to participants -- says "agent ratings are coming," whether agents like it or not.

Agents ratings "are an important element of the decision-making process," says Larry Romito of Quality Service Certification in a white paper. "Denial of consumer interest or an unwillingness to participate will not change what's happening or even slow it down."

Consequently, the white paper says, realty professionals can "take the ball or give it to someone else." Either way, it adds, "the game will go on."

In an interview, Romito says the purpose of the surveys is to make real estate transactions more about buyers and sellers and less about their deals. "Currently, there is no measure, no common standards for feedback," he says. "So this is a provider-centric business that is only incidently about consumers."

Unlike other ratings systems, NAR's is designed not only to shed light on bad practices but also reinforce good things, according to Romito. "When agents know their brokers are seeing real-time data, it dramatically changes human behavior. Then, it becomes not 'because I say' but 'because consumers are saying so through an independent source.'"

Romito defends the decision to survey only participants in completed transactions, saying that agents' behavior is "fairly consistent," whether the deal closes or not, because they "have no way of knowing" in advance whether a transaction will lead to a successful outcome.

To date, the nearly year-old experiment has had mixed results among the 20 or so participating state realtors' associations and multiple listing services.

The Mainstreet Organization of Realtors (MORe) was one of the first to sign on to the Realtors' Excellence Program. But only about 3,000 of MORe's 14,500 member-agents have agreed to participate in the ratings aspect, according to the group's chief executive officer, Pam Krieter.

Krieter says the hot real estate market has hindered development of the ratings system. "It's a great time to launch something like this," she says. "But it's also a tough time because the market is good and agents' main focus is there."

The MORe executive said educating agents on the program's benefits is an ongoing effort. "It's going to take time to get this in place," she says. "But as we get the word out, more companies will see that this is the way to go."

Don Faught, president of the California Association of Realtors, NAR's largest state affiliate, is also "a big proponent" of the program. But, he concedes, there "hasn't been a whole lot of acceptance" among CAR's 155,000 members, either.

"It's been a struggle for us," says Faught, who works for Alain Pinel Realtors in Pleasanton, Calif. "Some (agents) like it and some don't. But whether they like it or not, this is the way people find out about you."

Meanwhile, there are any number of sites that purport to rate and/or review realty professionals, including Zillow, Redfin, ZipRealty, Homethinking, AgentRank and Yelp, among others.

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Underwriting, Then and Now

The Housing Scene by by Lew Sichelman
by Lew Sichelman
The Housing Scene | September 6th, 2013

All the hand-wringing aside, underwriting guidelines for prime mortgages haven't changed much since the housing bust. But what has changed are lenders and their automated underwriting tools.

In 2006, the minimum credit score for loans sold by primary lenders on the secondary market to Fannie Mae was 620 -- exactly where that requirement stands today. Likewise, the maximum debt-to-income ratio (DTI) is the same now as it was during the boom years, 38 percent, with exceptions up to 45 percent with compensating factors.

Still, it's much more difficult to qualify for the best rates and terms. And the reason for that, according to Credit Sesame, a website that helps borrowers make smart credit decisions, is that lenders are no longer pushing loans through at the limits.

"While the underlying requirements loaded into automated underwriting (AU) engines are not publicly disclosed, it is clear they were much more aggressive during the boom years," says Tony Wahl, director of operations at Credit Sesame.

"In the boom years, for example, it wasn't uncommon for Fannie Mae's AU engine to approve borrowers with a good credit score and a reasonable loan-to-value ratio (LTV) of up to 65 percent debt-to-income. Today, it tops out at 45 percent, even for the most qualified borrowers."

Another contributing factor: Lenders today run a far greater risk of being stuck with a loan they cannot peddle on the secondary market. Consequently, they are adhering much more closely to the rules.

Back then, an AU approval almost guaranteed your loan would be gobbled up by an investor without much risk of it being audited or repurchased. Today, mortgages are scrutinized up and down, even post-closing, and lenders are being required to buy back those loans for relatively minor reasons.

So, to offset that risk, lenders add on various "overlays" over and above the AU engines' rules. Those overlays vary from lender to lender, but Wahl says it is not uncommon for lenders to require minimum credit scores of 640 or even 660, and maximum DTI ratios of no more than 42 percent.

Many of the other underwriting rules haven't changed significantly, either. But again, the regulations inside the AU engine black boxes are tighter, and the willingness of lenders to accept waivers is lower. And that makes obtaining financing more challenging than it has ever been.

According to Credit Sesame, which allows people to shop for mortgages based on pricing, underwriting rules and lender-specific requirements, here is what you can expect today versus what was acceptable in 2006:

-- Bonus/commission income: Seven years ago, AU engines would ordinarily approve borrowers with reduced income documentation, such as a one-year history of commissions and bonuses. Today, two years are required.

-- Investment property: The maximum loan-to-value ratio on investment property has slipped from 85 percent to 80 percent. The change isn't terribly significant. But on top of that, mortgage insurance is no longer available on rental houses, so borrowers are limited to making down payments of at least 20 percent.

-- Cash-out refinance: Similarly, the max LTV ratio for cash-out refis has dipped from 85 percent to 80 percent. And mortgage insurance is no longer available for loans in which the down payment is less than 20 percent.

-- Reserves: In 2006, borrowers were required to have anywhere from zero to six months' worth of PITI (principal, interest, tax and insurance) in cash in reserve. Now, it can be up to 12 months' worth.

-- Gift funds: Gifts from family members or friends were allowed in 2006, even if the LTV was over 80 percent. And the same is true today, except that lenders are much more diligent in making borrowers prove the source of the gift money and that it really was a gift, not a loan.

-- Pay stubs: It used to be that pay stubs were required within 30 days of applying for the loan. Now it is within 30 days of closing.

-- IRS Form 4506T: In 2006, this form, which gives the lender permission to pull your tax returns directly from the Internal Revenue Service, was usually signed at closing but rarely executed. Now, most lenders want the form signed at application, and they use it to confirm your income as stated.

-- W2s: Often, the need to provide W2s as proof of income was waived in '06 if you signed a 4506T. Now, you need to provide two years' worth of this basic income verification tool, as well as a signed 4506T.

-- Employment: Verbal verification of employment used to be necessary within 30 days of closing. Now, such proof is required just before settlement.

"Today, most lenders are much more cautious in making sure no changes to a borrower's employment status have taken place since the initial application," says Wahl. "Most lenders will call employers immediately prior to closing."

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