Notorious R.O.B.

(Disclaimer: Move, Inc. is a client of Onboard Informatics, my employer.  But I have spoken to no one there, nor anyone here who deals with Move, for this post.  Everything here is my opinion, based on my own research into publicly available information.)

In what is an unusually long post for him, Dustin Luther laments the current state of Move’s stock:

When I started at Move in May ‘06, the stock (and my options) was priced at slightly above $6.  Today, I see the stock end today at $0.89, making for a very sad looking chart and definitive proof that I know nothing about timing my employment options.  I’m also not particularly good at reading financials, but I do know enough to know that having a market cap of $136M when you have $140M in total assets (down from over $200M in total assets from last year) is not a good thing.  I’d think they’d be an obvious take-over target except my guess is that many suitors would view the contract with NAR as more of an impediment to growth than an asset.

Yes, MOVE is an excellent takeover target.  And that contract with NAR is an asset (valued by MOVE itself at about $1.5m it seems, based on their Q3 2008 10-Q.)  And I think that contact could end up being pure gold if it means exemption for Realtor.com from the various IDX and VOW rules.

But really, that would mean that Move’s shareholders have lost their nerve completely.  And there’s no reason to panic, from what I can tell.  In fact, I think this is an amazing opportunity to build up long positions on MOVE.  (I am not a financial advisor, nor anyone competent to advise you on stocks, so uh… think of this post as being like a stock tip from your cabbie or something.)

Let me list my reasons.

1.  As Dustin points out, when your market cap is $136m, and your cash is $114m… um, yeah, you’re undervalued by alot.  In fact, the cash position is likely significantly better than $114m, as explained in the 10-Q, and is likely to be closer to $235m.  (The reason has to do with auction-rate securities, failures in that market, etc. which I noted earlier this year.)  But if you’re a shareholder of Move, you’d be an absolute moron to sell $235m for $136m, wouldn’t you?  Even discounting the ARS by some amount because of the risk, with the entire might of the U.S. government focused on bailing out the finance industry, I can’t see $121m worth of ARS being valued at only $22m (which is what $136m – $114m represents).

2.  The core business over at Move doesn’t seem that bad to me.  I’m no CFA, but looking at their Q3 results… yeah… there have been declines, but I see nothing to warrant a doom & gloom scenario.

Revenues went from $63.3m in Q3 of 2007 to $61.2m in Q3 of 2008.  it’s a loss, sure, but… not enough to warrant a drop from $2.50 a share range in Nov of 2007 to $0.94 today (when I just checked it).  The market must be pricing in some sort of future risk, but I’m just not sure I see it.

The management’s report contains this gem:

These changing conditions resulted in fewer home purchases and forced many real estate professionals to reconsider their marketing spend. In 2006, we saw many customers begin to shift their dollars from conventional offline channels, such as newspapers and real estate guides, to the Internet. We saw many brokers move their spending online and many home builders increased their marketing spend to move existing inventory, even as they slowed their production and our business grew as a result. However, as the slow market continued into 2008, it has caused our rate of growth to decline. While the advertising spend by many of the large agents and brokers appears steady, some of the medium and smaller businesses and agents have reduced expenses to remain in business and this has caused our growth rate to continue to decline and we may continue to experience a decline in revenue as we move into 2009.

So the big players are holding steady on their ad spends on Realtor.com, while the small guys are struggling to stay afloat.  This isn’t… shocking… but if it means losing about $2m per quarter for the next eight quarters… um… Move can deal with a $16m loss with their balance sheet.  But when you get even deeper in the weeds you get this:

Real Estate Services revenue decreased $1.4 million, or 3%, to $54.5 million for the three months ended September 30, 2008, compared to $55.9 million for the three months ended September 30, 2007. The decrease in revenue was primarily generated by a decrease in our HomeBuilder.com ^® business due to decreased Showcase Listings revenue and a decrease in our REALTOR.com ^® business due to decreased Featured Products revenue primarily due to reduced purchasing by one large broker customer. These decreases were partially offset by an increase in our Top Producer ^® product offerings. Real Estate Services revenue represented approximately 89% of total revenue for the three months ended September 30, 2008 compared to 88% of total revenue for the three months ended September 30, 2007.

So… the 3% decrease for Real Estate Services (which is where Realtor.com goes) is because of ONE customer?  I wonder who that is.  But that doesn’t strike me as a fatal flaw.  And then Move goes and sees increases from Top Producer?  In this economy?

Color me distinctly unimpressed with doomsayers.

3.  Move continues to invest in their core business.  The latest 10-Q is showing that they’ve spent $6.8m in product and web site development.  For the year, they’ve spent $20.5m on product and web site development.  I have to ask… who else is investing this kind of money into product and web development?

I seriously doubt that the RE 2.0 upstarts like Trulia and Zillow are spending $20m YTD on web development.  And if they are, I’m willing to bet neither of those companies have $235m in cash in the bank.

The thing that would concern me is if because of the economy, Move decided to slash and burn investment into its platform.  That would have serious reverberations down the line, at a time when the future of online real estate is still very much up in the air.  But $20m is not slash and burn by any stretch of the imagination.

4.  Their margins aren’t substantially affected.  Check out this beauty:

Gross margin percentage decreased to 81% for the three months ended September 30, 2008 compared to 83% for the three months ended September 30, 2007. The decrease is due to a decrease in margins in both the Real Estate Services and Consumer Media segments resulting from decreased revenues and increased costs in the segments.

Yeah, you read that right: 81% gross margins.  Those are some freakin’ sweet numbers.

Move could probably do more to cut some expenses, especially in Sales & Marketing, and in G&A (particularly the corporate overhead, which is unallocated to a business line).  They represent respectively $19.6m and $11.7m.

5.  Move still has the biggest war chest in the RE tech space:

We have generated positive operating cash flows in each of the last two years. We have stated our intention to invest in our products, our infrastructure, and in branding Move.com ^TM although we have not determined the actual amount of those future expenditures. We have no material financial commitments other than those under capital and operating lease agreements and distribution and marketing agreements and our operating agreement with the NAR. We believe that existing funds, cash generated from operations, and existing sources of debt financing are adequate to satisfy our working capital and capital expenditure requirements for the foreseeable future.

That seems right to me.  As the 10-Q indicates, even while reporting significant losses, Move was generating positive cashflow from operations — to the tune of $12.3m YTD.  Combine that with their $114 in short-term cash, $121 in auction-rate securities, and you’re looking at a formidable player somehow flying under the radar.

I figure the market has to get over its nerves re: housing market.  But until it does, fact is, Move and its properties are performing pretty darn well, and getting punished simply because they are connected to real estate.  And anything real estate is toxic right now to investors.

So I think I’m calling my broker and loading up on Move at $0.94 a share.  A drop of $2m in YOY quarterly results should not drop a stock from around $2.50 a share to less than half that.

Relax, Dustin.   And call your financial advisor.

So my post about Twitter is generating a fair amount of commentary from readers.  The general tone appears to be that while one shouldn’t Twitter just to generate additional business, it’s still worth doing for a variety of reasons, such as being Web 2.0 savvy, being in-touch with non-client business associates, and personal pleasure.

Here’s a followup question:

Is it better for your business as a realtor to spend 10 hours a week at your local Starbucks, or 10 hours a week Twittering?

On a percentage of the population basis, it seems that Starbucks can safely claim 8% of Americans as at least a once-weekly customer, and as high as 22% of Americans if you include the “occasional” visitor.  That’s compared to the maximum of 6% of Americans that Forrester Research claimed use Twitter (and which people dispute).

Of course, you can Twitter at Starbucks, killing two birds with one stone.

But the following would be a great experiment for someone to conduct.

Spend a month Twittering 10 hours a week (2 hours a day).  Count # of leads, transactions, and $$ earned as a result from that month of Twittering.

Then spend a month hanging out at the local Starbucks 10 hours a week (2 hours a day), with a sign that says, “Local Expert” or “Realtor” or whatever on your laptop, your bag, your jacket, whatever.  Get into conversations.  Count # of leads, transactions, and $$ earned as a result from hanging out at Starbucks.

Let us know the result?

-rsh

Matthew Rathburn puts the NAR Profile of Home Buyers and Sellers 2008 into context. I think it’s worth reading the whole thing, including the cool graphs he’s put together.

Matthew’s got some useful insights from the realtor’s perspective:

Whereas some agents are dwelling on the issue that the Buyer is finding their home on the internet 32% of the time and only 33% of the time by the agent; I prefer to look at the fact that consumers are only find the home they buy in the newspaper less than 3% of the time. Knowing this should help agents save some money. To me, fear of the “future” is less productive than knowledge of the present.

If the seller is demanding expensive newspaper marketing, I can show them this report and then show them all the marketing I can do, just by using Postlets.com. You can show that you’re covering 80% of the most useful marketing venues, just by being an agent, putting a sign in the yard and using MLS with IDX, Postlets, Realtor.com, Zillow, Trulia, Craigslist, etc…

This sounds right to me. But there’s an angle here that Matthew isn’t thinking about.

If the Buyer is finding the home on the Internet 32% of the time, then the price charged by the Agent has to go lower. By how much? Who knows. Even if the total price charged to the Buyer/Seller remains the same, the percentage of that price that goes to the Agent for his labor has to go down, to reflect the investment made in the capital asset of the website by the Agent, or the Broker, or whomever.

The 33% of the buyers found by the Agent directly –> the Agent in that case is bringing more value to the Seller, as compared to the 32% who found the property on the Web.

If the seller is demanding expensive newspaper marketing, but you can show them that just by using Postlets.com, you can cover 80% of the most useful marketing venues, then you also have to be prepared for the seller demanding that you cut your commissions. After all, if you have to do less work, then you should be able to charge less and still make the same profit.

The assumption that technology simply lets an agent make more money is wishful thinking. Consumers also recognize that technology makes your productivity higher, and accordingly, can expect that your price will go down. This is one of the big disconnects in the market today: brokers and agents seem to expect that all of the economic value created by technology will be captured entirely by them, while consumers expect that they will get that value. (Might be useful here to look at Redfin and any of the other rebaters.)

The real outcome is likely in between Agents capture it all, and Consumers capture it all. But rest assured that at least some part of the savings will be passed on to the consumers, like it or not.

-rsh

According to Forrester Research, 6% of Americans use Twitter.

Robert Scoble calls bullshit:

There is ABSOLUTELY NO WAY that many people are using Twitter.

My data shows that the regular users are between 50,000 and 300,000. A high percentage of which are outside the United States. That doesn’t come anywhere close to the numbers required for 6%.

And much debate ensues in the comments sections of geekblogs everywhere.

Here’s the thing, though: whether the number is 1% of 6%… for realtors who are getting into the Twitter action, and espousing “microblogging” as a strategy for business development…

How you liking that 6% number?

Take your relevant market.  My local area is probably 3-6 towns (Millburn, Short Hills, Maplewood, South Orange, maybe Livingston, maybe Springfield).  Say the total population is about 100K people.  6% amounts to 6,000 Twitterers.

How much time should you spend to form connections with that 6,000 people?  Not all of whom are in the market for real estate services, and may not be for six years.

-rsh

According to this post on the Trulia Blog, Trulia is the #1 lead generator in the RE.net:

Threewide’s ListHub, the most widely adopted network for listing distribution, works in concert with MLSs, various franchises and brokerages, and core real estate technologies to bring real estate companies a single dashboard for controlling their online marketing strategy.  Analyzing the traffic that’s sent to clients from their syndication feeds, Threewide found some interesting results.  Here are some highlights:

• Study analyzed about 600k listings sent from MLSs and brokers to 16 of the largest real estate sites for the month of October 2008

• Trulia generated the most leads* in this period with almost 12,500 – over 30% of all client leads!

• The second closest competitor had just over 15% of all leads and the 3rd just over 12%, with the top 5 making up almost 80% of all leads sent

• Trulia had the highest percentage of redirected traffic** with over 35% of all traffic sent to ListHub clients

• Finally,  over 8,000 listings received at least 1 lead from a consumer coming directly from Trulia, with our nearest competitor sending traffic resulting in leads for  a little over 3,600 listings

These statistics show that Trulia delivers the most leads, and in these challenging times we all know how important that is!  AND, considering that some of the 600K listings sent to Trulia were already being displayed from other broker listing sources and thus not actively displayed on the site to prevent showing duplicate listings, the actual percentage of leads sent from Trulia to Threewide’s clients is even better than the original report shows.

This is, of course, great news for Trulia.  The data supports Trulia’s business model and its claims overall.  So first off, kudos and congratulations to the Trulia crew!

However, as much as I like the boys and girls and Trulia, I have been saying since the beginning of this blog that Trulia poses a threat to franchisors and large brokerages.  Trulia has steadily denied such a thing, pointing out that they work with and for brokers and agents.

The thing is this: I look at consequences, not intent.  I have little doubt that Trulia intends to be a helpful partner to brokers and franchisors.  But the consequences of that may be entirely different from what was expected.

Consider the above news from the perspective of the average agent.

What services do you get from your broker that keeps you paying him a share of your commissions?  Whatever they are, they comprise the broker’s capital; that together with your labor as the agent creates the economic value.  Elsewhere, I wrote about the relationship between capital and labor in real estate.  The basic equation is capital + labor = production.  So when capital costs go up, labor costs have to go down if production remains the same.  And vice versa.

When Trulia replaces the broker as the #1 source of leads, then the rational agent quite rightly asks, “If I’m getting more leads to my website from Trulia than from my broker’s website, shouldn’t I get a higher split of the commission?”

The same logic goes for franchisors, such as Coldwell Banker or Remax.  If the national Remax site generates fewer leads than Trulia.com, a broker’s incentive to keep paying for use of Remax’s capital (i.e., its website, its platform, etc.) decreases, barring a sufficient increase in production to smooth over such things.

Even if Trulia funnels those leads to Remax National, who in turn funnels it to the franchisee, the rational broker can conclude that they can simply cut out the middleman of Remax and go direct to Trulia.  For that matter, as Trulia continues to do deals with MLSes and REALTOR associations, the rational broker (and agent) can get around all those people taking cuts of their commission checks.

Is there a happy win-win solution here?  I’m not sure.  At the end of the day, the market will flock around the most efficient producer.  If that’s Trulia, then it’s Trulia.  The study results above suggests that it might be.  But then, none of us have any idea of Trulia’s financials… so all this wonderful lead-generation for Trulia might be coming at a loss, which would suggest that it won’t be around long enough to displace any existing players.

One thing that does come to mind for me, however, is that if I were managing a franchisor today, or a large brokerage company today, I might take a look-see at my own lead generation efforts to my members/agents, and compare it with what they’re getting from these various third parties.  Then either prepare to provide value in some other way to continue to justify the cut I am taking, or prepare to invest heavily into capital (i.e., website, lead generation tools, etc.) to compete.  Anything else is shortsighted in the extreme.

-rsh

I think I might have fallen in love with Larson/Sobotka.  I haven’t the faintest idea who they are, but it looks like they combine some business consulting with legal work with something else involving MLSes and such.  Bears looking into more.

But they have done a great service for the RE.net by compiling a guide to the new VOW policy.  In fact, they call it a clearinghouse for the new NAR VOW rules, and I think it fits.  There’s a lot of depth here, and a lot of breadth.  Check it out in full.

For myself, I immediately zeroed in on this:

What a VOW is

For purposes of the DOJ/NAR settlement, a VOW is:

A web site, or feature of a web site, operated by a Broker or for a Broker by another Person through which the Broker is capable of providing real estate brokerage services to consumer with whom the Broker has first established a Broker-consumer relationship (as defined by state law) where the consumer has the opportunity to search MLS data, subject to the Broker’s oversight, supervision, and accountability. (See Policy Section I.1.) [Emphasis mine.]

Interesting.  The law-school training kicks in and I see at least three questions to be resolved, probably through litigation:

1.  What does “providing” mean?

2.  What sorts of activities constitute “real estate brokerage services”?  Is this governed by state regulations?  Or is this to be under some common law agency theories?

3.  If state law defines “Broker-consumer relationship”, then what to make of provisions like this one from Delaware?:

Entering a name and email address on an Internet or World Wide Web site is sufficient to establish a broker-consumer relationship for the use of that system, but does not in of itself create a broker-customer or client relationship for any other purpose.

Especially in light of the clause that reads, “capable of providing real estate services” in the NAR DOJ settlement, under Delaware law, there may be enough of a relationship created by entering a name and email address to use a VOW but not to take advantage of any of the real estate services provided.  Does that even make any sense?  Isn’t the display of property information itself a “provision of real estate services”?

Or does the NAR-DOJ settlement override Delaware law by operation of the Supremacy Clause?  Even when it specifically says state law controls definition of “Broker-consumer relationship”?

Heh.  I love regulations written by lawyers, don’t you?

But Larson/Sobotka has more riches in store for us:

• An IDX site is not a VOW. IDX is an MLS policy under which a brokerage firm participating in MLS grants permission to other brokers participating in MLS to advertise its listings on their web sites, in return for their permission to advertise their listings on its web site. IDX sites are governed by MLS IDX rules, which are entirely unaffected by the settlement. Note that a brokerage firm can operate both an IDX site and a VOW at the same location on the web. (For example, the brokerage can show the consumer some information on its IDX site but then require her to register to see the information available only through its VOW.)
• Zillow, Trulia, and other national aggregators and commercial distributors of listings are generally not VOWs. (Note that these sites are not IDX sites either, and the data feeds that some MLSs provide to them are not “IDX feeds,” as they are sometimes erroneously labeled.) These companies may receive listing data from brokers or MLSs, but display of those listings is subject to the agreements between the brokers or the MLSs and the aggregators. Neither the settlement, nor any of the policies imposed under it, applies to any of these types of sites. Note that if Zillow or one of these other sites were to become licensed as a brokerage firm, become a participant in an MLS, and actively assist consumers in buying or selling real estate (or both), it would be eligible to operate a VOW.
• MLS public consumer-accessible web sites are not VOWs. (Note that these sites are not IDX sites either, as they are sometimes erroneously labeled.) A VOW is by definition the web site of a real estate broker. An MLS could operate a VOW only if it were acting as a real estate broker – we are aware of no MLS that claims the right to do so.

If for nothing else, Larson/Sobotka deserves some sort of award for spelling these things out so clearly.  Now, to be sure, these should be construed as opinions of one law firm until litigation gives us definitive court rulings, but they strike me as being largely correct.

Assuming that Larson/Sobotka’s interpretations are correct, there are many implications that flow from the above three observations.

One, if IDX is entirely ungoverned by the settlement, then as Brian Larson points out, one can expect that the industry will begin to move towards VOW websites and away from IDX sites.  That could, in theory, be a Very Bad Thing for brokers and agents, however, as the plain fact is that imposing a “signup requirement” to consumers (especially if defined under state law, and that state law is onerous) will drive consumers away from such websites to those that are far more user-friendly.  How that will play out is wholly unknown.  Perhaps MLSes start relaxing IDX rules in response; perhaps brokers start working through their Real Estate Boards to change state regulations; perhaps something else altogether.  But this could be huge.

Two, if Zillow, et. al. are not VOW sites, then they do not fall under the protections (if that’s what they are) of the NAR-DOJ settlement.  So brokers or MLSes can explicitly prohibit its agents or members from giving data to these national aggregators without running afoul of the Settlement. Now, before you shrug, I happen to think there’s a fairly high likelihood of this happening.  Why?  Because of #3 –>

Three, if public-facing MLS websites (such as www.har.com) are not covered under the Settlement in any way, then they also don’t have to follow the “Broker-consumer relationship” rule either.  Which means that of all of the possible websites out there, only the MLS or Realtor Association websites can have all of the property info on every single listing without being subject to IDX rules, and without having to share any of those privileges with anyone else.

In other words, unless I’m totally misreading this, it seems to me that we now have a situation in which HAR (just to use an example; not that they would do this) could

1. display all of the listings info on HAR.com without limitation, and without the “signup” requirement;
2. prohibit all members of HAR from sending any data to Trulia, Zillow, or any national aggregator; and
3. force brokerages to use either shut-from-the-public VOW requirements, or ass-backwards IDX rules filled with purposely inane requirements to discourage the use of IDX.

Wow.  Just wow.

If this is a correct reading, then I differ with Brian Larson only in that even if there are 10,000 VOW’s by 2010, there will only be 50 websites by 2010 that any consumer goes to.

And how does this impact Realtor.com?  As Brian points out, nothing in the Settlement even mentions Realtor.com at all:

The settlement between DOJ and NAR makes no reference whatsoever to Realtor.com, either in the settlement agreement, in the attached VOW policy, or in the attached policy regarding the definition of “participant” in MLS. (In fact, the DOJ press release makes no mention of Realtor.com, either.) The DOJ lawsuit, and its settlement, deal almost exclusively with “virtual office web sites” which are by definition web sites of brokers participating in MLS offering brokerage services to their customers/clients. Realtor.com is not a VOW.

So Realtor.com is not a VOW.  Does its special relationship with NAR give it the same access that all of the local associations and MLSes now have? Will it be the sole national real estate website that can offer all of the information on a listing without requiring a consumer-broker relationship?

I’m thinking the answer might be Yes.

Talk about a seismic shift in the online real estate world.

Am I missing something crucial here?  Am I misinterpreting things?

-rsh

PS: I’m definitely adding the MLSTesseract to the blogroll.  A great site if you’re into some of the details of this stuff.

Noah Rosenblatt over at Urbandigs notes potential huge problems over at Realogy (H/T: 4Realz):

According to Crain’s “Seven area firms make endangered list“:

“The most vulnerable, according to S&P, include Realogy, the Parsippany, N.J.-based owner of such brands as Century 21 and Corcoran Group. The firm, which was taken private last year by Apollo Management in an $8.8 billion leveraged-buyout, has struggled mightily amid the housing crisis. Last week, the firm warned that it’s at risk of violating the terms of its bank loans and is trying to swap $1.1 billion of bonds for new debt at a discount.A default does not necessarily mean the end of a company. Traditionally, many companies in default have been able to negotiate new debt terms with their creditors. But with so many defaults looming, experts warn that fewer companies will be able to restructure their debt. As a result more of troubled firms could wind up in bankruptcy court and being liquidated.”

I think Noah is right to point out that this was likely a foreseeable event given the state of the financial markets back in mid-2007:

I discussed the LBO Buyout Boom as a Reason To Worry way back in June of 2007, as cov-lite (great for borrower, bad/riskier for the lender) deals were being done as LBO deals started to dry up after an unsustainable buyout boom:

“My Point – Forward thinking. I am by no means an expert of leveraged buyouts, credit risk, derivative products, cdo/abx markets, etc.. However, it doesn’t take an expert to see how the industry adapts to continue to be able to lend to support such massive buyouts in the private equity sector. I’ll repeat this again –> Right now you are seeing an environment that is a result of years of ultra cheap money and tons of liquidity. What is yet to be seen is the effect of globally rising interest rates to levels we see today; that will take 1-2 years. For the near future, I don’t think the end result will be that bad, in fact I think the environment will remain bullish for some time. However, red flags are waving for the years to come when we will be able to look back at how many of these massive buyouts were successful, and how many caused major problems to banks and other lenders”

However, I think in this case, Crains (and others) are hyperventilating just a wee bit at least as far as Realogy is concerned.

The reason isn’t that I know something others don’t about the strength of Realogy or any such thing.  The reason mostly has to do with incentives for bankers and bondholders to allow a default and the consequences of such.  There is next to zero incentive for any creditor of Realogy to force the company into bankruptcy.

Realogy has next to no assets.  Really.  If you think about their business model, as a franchisor of service businesses, their main assets are the brand names and the people who work at their various company-owned stores or franchisees.

In the case of some of the other firms named by Crains, such as JetBlue or Hovnanian Enterprises, they own real assets that can be auctioned off or sold off to raise a fair amount of money.  Airplanes and real estate are both real assets.  In those cases, it might make a lot of sense for creditors to push those companies into Chapter 7 liquidation proceedings and recover their losses that way.

But Realogy’s real assets are negligible, to say the least.  It owns no buildings that I know of (unlike other franchise models where the franchisor owns the franchise location and receives rent from the franchisee).  All of its company owned stores are lessees of other landlords.  Whether its servers, technology equipment, office equipment, and such are worth a lot is unknown, but one suspects that Realogy probably doesn’t own the equipment in its datacenters (it probably leases them from the hosting facility), and used furniture isn’t exactly going to make a huge dent in the billions owed.

In a Chapter 7 liquidation, you can’t hold on to any of the talent that makes Realogy the company it is.  People will get laid off, or walk out, but they’re not going to be sold at auction to repay creditors.

The best chance of getting repaid for a creditor is to let Realogy continue to operate, until things turn around.  That Realogy lost $200m or so in the past three years is relevant only to the shareholders of Realogy, namely Apollo Management, the private equity fund that bought Realogy in 2007 for $6.6B.  I’m sure their equity is hovering near zero at the moment.  But I’m equally sure that Realogy has been making all of its loan payments, including interest, for the past year and a half or so.

Realogy still owns NRT, which is still the #1 brokerage in the country by quite a margin, and did 323,000 sides in 2007.  Even if we assume that the NRT’s sides are down significantly, it will still be doing a couple of hundred thousand deals.  And that’s just NRT; all of the CB, C21, ERA, and Sotheby’s franchises (not to mention Coldwell Banker Commercial) will do deals.  They are perenially among the top brokerages in the country, some with billions in transaction volume.

The cashflow from all those operations are still quite significant.  Creditors want to keep that going for as long as possible.  Forcing Realogy into bankruptcy will likely cause significant disruptions of that continuing cashflow.  Certainly, forcing Realogy into liquidation will.

What could happen, of course, is that significant creditors end up replacing Apollo Management as the beneficial equity holders.  When Realogy debt is trading for pennies on the dollar, it’s impossible to think that Apollo’s equity is worth very much.  It may be that the banks and bondholders simply restructure the loan, extend the timeline, etc. but take over Apollo’s equity in Realogy in exchange.  That way, when the market turns around, those creditors will realize a fairly significant gain.  Chapter 11 bankruptcy is a popular way to make those kinds of deals happen, especially if Apollo ends up trying to resist the takeover by bondholders.

But however such boardroom intrigues play out, the real point is that a company that is generating very significant cashflow — even at a loss after all the expenses and such are taken care of — but has no real assets is not one that creditors want to exterminate.  To say Realogy is on the Endangered List is hyperventilating by a bit.  It is in financial difficulties, sure, and in the short-term there will be (and has been) layoffs, cost cutting, and so on.  It will, however, survive on the strength of its ability to generate revenues and operating cashflow.

-rsh

PS: While I worked at Realogy for years, I own no Realogy stock (unless one of my mutual funds bought it), have no inside relationships, etc.  This is just my opinion as an observer of the industry.

Looking through my junk email folder today, in pursuit of Inbox Zero, I ran across a long spam email from Paul Chaney, the President of the International Blogging and New Media Association (IBNMA). Normally, I auto-delete all spam, but this one, I read for some reason.

And immediately thought I need to post about this.

It appears that Paul is active in the real estate side of things, as he is the author of Realty Blogging with Richard Nacht. (I know Richard from my days at Realogy, but haven’t met Paul). I even own that book, and have actually read a couple of pages in it, before deciding that it wasn’t written with people like me in mind.

So it is with particular interest that I read this email:

First, the email (excerpts anyhow):

Leadership

One thing I learned from reading the book [Seth Godin's Tribes]was that there is a great deal of difference between leading an organization and managing it. For example:

*    Leaders inspire while managers control
*    Leaders break the rules by which managers play
*    Leaders are what Seth calls “heretics” – mangers merely tout company policy
*    Leaders ask forgiveness while managers ask permission

I came to realize I was attempting to “manage” IBNMA, when what the organization needs is leadership. In other words, I need to become a heretic.

Okay… let’s get real for a moment here.

One of the things I dislike most about the “social web” or “new media” people is just how hyperbolic they get.  (I do include myself in this indictment, incidentally.)  Seth Godin is the leader (or manager?) of the Hyperbole Masquerading As Insight Movement (HypeMAIM), but this pernicious bug needs to be crushed immediately.

The above distinction between “leaders” and “managers” is unhelpful in so many ways.

Leaders inspire while managers control?  I have to ask… after inspiring people, what exactly do leaders do to execute on all this inspiration?  Isn’t an enormous part of the problem of the social media space that there are all sorts of inspiring talkers and so few execution-oriented managers?  So many ideas, so few dollars to show for them.

Leaders break the rules by which managers play?  Rules like… what exactly?  ‘Revenues – Expenses = Profit’ seems to be one that gets broken quite a bit.  ‘Talk is cheap’ is another one that gets broken all the time.  Which “leaders” might Paul be thinking of when he talks about breaking rules?  Let’s look at our industry for a moment.  Who is Paul pointing to?  I want names.

Because the guys who were touted as leaders breaking rules by which managers play a couple of years ago, like Rick Barton and Lloyd Frink of Zillow, are having to layoff 25% of their staff and face uncertain futures.  Glenn Kelman is a brilliant guy, and a years ago, I’m sure his name would have been mentioned as a “leader” not a “manager” — but 20% layoffs make for question marks and rethinking.

For starters, Glenn might want to rethink this:

In a year away from high-tech, I volunteered at inner-city schools and felt the same way: my time was lightly valued because I was giving it away, and many of the tutors seemed unmotivated compared to my old colleagues.

So now I’m back in Internet software, mostly because I missed the sense of purpose and importance that being around other driven people gave me. I believe in what we’re doing. But since we’re also out to turn a profit, some have ventured to call this belief disingenuous.

And it may seem so, but not to anyone in high technology, which has so thoroughly mixed virtue with commerce that you can hardly tell the two apart. Apple launched the Mac with an ad showing a woman heaving a hammer at a televised image of Big Brother. Google is famous for its promise to not be evil, and eBay’s latest slogan is “people are good.”

And the high technology companies that have confused virtue with commerce are the ones going down.  The ones who have withstood the test of time are 100% focused on making profits, and do not confuse business with pleasure.  Microsoft, Oracle, Adobe Systems, Hewlett Packard, Cisco Systems… and the list goes on.  Do you really think Steve Ballmer sits around thinking about how virtuous they ought to be?

Examples like Apple and Google are anomalies.  Apple presents one face to the public, and another altogether to its employees.  I had a meeting with an Apple employee, asked him a question, and he said with absolute certainty of fear in his eyes that he couldn’t answer my question, or he would get fired right there and then.  You think that’s because Apple is about being visionaries?  Google has incredibly fat profit margins due to their monopoly power over search that allows them to engage in all kinds of non-commercial activities.

But the laws of business, those rules that managers live by and leaders break, are that fat profit attract competition, and competition drives down prices, and that in turn suddenly makes all those old, outdated rules seem valuable again.  It will happen even to Google.

When Paul goes about praising heretics, he throws around a word that is freighted with meaning.  I’m not even sure that he understands all of the connotations of the word ‘heretic’.

You know what’s the distinguishing feature of a “heretic”?

They get punished.

I mentioned at the outset that Seth Godin, in his book Tribes, referred to leaders as heretics who connect similarly minded individuals around a given idea or philosophy. In other words, heretics help create tribes.

I want to be such a heretic and my desire is to see IBNMA become a tribe. In fact, my hope is that the organization will become an inner-connected maze of many tribes led by members who rise through the ranks to take leadership roles themselves.

In other words, we are looking for heretics – people who believe so passionately about an idea they are willing step up, focus the attention of others and gather their own “tribe” around it.

No, Paul — heretics get punished, driven out of community, isolated, and alienated.  In most societies, they get killed.  Being a heretic is nothing to strive for.  Martin Luther did not set out to be a heretic; he set out to rediscover the ancient truth and reform the Roman Catholic Church.

For every heretic who turned out to be right, there are literally hundreds, thousands, who turned out to be just crazy.

In my view, it is far more important to be right than it is to be different.  I have no desire whatsoever to be a heretic.  I’d rather my ideas and insights be received to wide acclaim and immediate acceptance.  But most of all, I’d rather my ideas be right, and my insights be true.  (Because I believe in such things as objective truth.)

If it so happens that by being right, my ideas are seen as heresy… well, that’s the price you pay sometimes for being right.  And if I’m right, and I can execute on those ideas, then they will succeed.  If I’m wrong, or I can’t execute, then they will fail.  At the end of the day, reality provides firm rules and laws that neither leaders nor managers, neither visionaries nor earthbound bureaucrats, can ignore: success is the test of reality.

Are you a heretic? Do you believe in the power of social media to be a force for change? Are you passionate enough about an issue to become heretical (i.e. a leader)? If so, then I invite you to start a tribe and do so with us.

In hindsight, my friend was right. There is a “one thing” that the IBNMA can do and that’s become a spawning ground for tribes where we provide information, advocacy, education, research and support. I invite you to become a member of our tribe.

Am I a heretic?  Emphatically not.  I’m just a guy who wants to find the truth, and in finding it, make a bundle of money for myself and my investors by providing something of real value to customers.  If that makes me a heretic in certain circles, so be it.  But I’m definitely not setting out to become one.

Do I believe in the power of social media to be a force for change?  Sure, I guess.  But I also believe in the power of the toilet to be a force for change (and in fact, a greater force for positive change than social media thus far in the human experience), so what does that mean?

Start a tribe?  Whatever for?

If you’re right, and you can show it, then people will come around to see the truth.  If you’re wrong, then all the convincing in the world just makes you a charlatan snake-oil salesman.

Applied to real estate industry, there are problems and issues all over the place.  But they’re not problems simply because they are the “old ways of doing things”.  They are problems because they serve customers poorly, prevent good agents from doing deals, and make brokers lose money.

The web and social media may or may not be a solution to one or more of those problems.  If we can stay away from HypeMAIM, and focus on the real value to real businesspeople doing real things, then we have a chance of uncovering some truth about consumer behavior, about efficient operations, or new ways of cost-effective marketing.

But let’s not get caught up in the hoopla about the “power of the Internet to change the world” and all that jazz.  Let’s not inspire each other out of touch with reality.  Let’s not pursue heresy for the sake of being “different” and “new”.

-rsh

As some of you know, I am a fairly conservative Republican in the mold of Reagan.  My intellectual influences are the likes of Friedrich Hayek, Milton Friedman, and Thomas Sowell.  I did everything I could given a fulltime job, a young family, and a blogging habit to see a Republican elected in 2008.

I believe Barack Obama to be a dishonest politician, a shell of a man with little character, who is now in way over his head and will likely plunge this nation into some of the worst crises we have faced.  I disagree with him fundamentally on philosophy, and on many of his policies, and do not trust him.

Having said that… as an immigrant, and an ethnic minority myself, I simply cannot help but marvel at the United States of America.  A significant majority of my fellow citizens have chosen to elect to the highest office in the land a man who a generation ago couldn’t have gotten served at a restaurant, or stayed in some hotels.  Those ancient prejudices have been wiped out in a matter of forty-some years.  Somewhere, there is no doubt that Dr. Martin Luther King, Jr. is smiling at this turn of events.  They chose a man whose father is a foreign national, who is in our immigrant parlance, a second-generation American.  They chose a man who did not come from privilege, from the ancient political families, with all the money and advantages of ancient and modern nobility.

In what other nation on Earth is this possible?  None.  Not one.

So even as I dread the next four years politically and economically, even as I gear up to fight the Social Democrats as much as I can in my small way, and even acknowledging that I believe all of you in the 63 million who voted for Obama made a tremendous mistake… I congratulate you all.  I congratulate us all.  Even those of us who voted against him, and will fight against his policies, are part of what is simply the greatest country ever.

Mr. Obama is not Hope and Change.  But you are.  We all are.  America itself is.

May God keep and bless Her always.

-rsh