Matthew Ferrara, Philosopher
 

Diversify to Grow Your Sales

Traditionally, many real estate agents turned their noses up at the rental customer. Had they diversified instead, they might have been better prepared to take advantage of the growing market today. And tomorrow. 

Name three segments of housing that are doing well. One: Luxury markets. Smart money buys low. Two: International markets like Miami. Smart foreign money buys when the dollar is weak, and the U.S. is the safest haven. But if you don’t work the upper-end or international, is there a third bright spot in the market?

Rentals.

Ewwwwww. I don’t do-ewww rentals! (Don’t forget the eyeroll and the hand-wave). 

Working with renters has suffered the eyeroll for decades. But snobbery has its costs, especially in an industry where overall margins have declined for decades. Whether it was dispensed in commission splits or lost in two-years-on-market listings, the margin has become a footnote to most real estate deals.

Whatever the reasons, most agents are still passing up a loud market signal to diversify. It’s Sales 101 to us: Most people who rent today eventually buy. Why not build relationships as early in the customer-for-life cycle as possible? Keeping in contact with past clients is the least expensive marketing strategy, when you can capture the up-sell work over and over.

You don’t need a whole lot of data – even over-counted sales data – to know that when a country falls from record high ownership levels back to its trend-line values, all those owners have to go somewhere.

And that somewhere’s called an apartment.

Oh, wait! Don’t the surveys show that most Americans still believe in homeownership. Yes, they do. But not a single survey has ever asked: when they would believe in it enough to buy one.

You build a business strategy on what people do; not sentiment.

And here’s what they are doing today:

  • If they are under 30, they are graduating with so much college debt, they are destined for mom’s cellar or an apartment for the next decade. Since 1975, college tuition has increased tenfold; wages minus inflation haven’t kept pace. So the financial picture of most twenty-somethings makes them the rental generation for quite some time.
  • Household formation, aka starting a family, is down significantly for Gen Y’ers. Marriage rates have dropped to the lowest in nearly fifty years. Raising kids in your 20s has given way to waiting until your mid thirties. That adds in the Gen X’ers. Job scarcity requires mobility. Single people, in the global village, move a lot.
  • Renting as a form of general consumerism is bigger than ever. Companies rent software. City dwellers rent Zipcars for an hour. Travelers rent rooms in someone’s house. Cable boxes, cars, even voice mail is rented. Pay-to-use is a way of life for everyone. Even the rich fractionally rent jet airplanes.
  • Renting has become a strategic tool for underwater sellers. Frustration-induced renting is increasingly frequent amongst upper-end homeowners who must wait out the market (rather than take a significant capital loss).
  • Renting as recovery is vital to completing the foreclosure process. A few million households will need somewhere to live while they repair credit, recoup losses and save cash over the next 2 to 10 years.
The market signals couldn’t be clearer or louder. Demographic, psychological and economic changes have been brewing social acceptance of renting for years. Homebuilders have long heard Gen Y’s household desires: Small, efficient, walk-to-work and connected. All of which are easier to sell, or rent to friends if necessary.
And builders are putting their money where the research is: According to the Wall Street Journal (Dec, 2011):

Much of November’s [new construction] increase came from the construction of apartments, town houses and other multifamily developments, evidence that rising demand for rental housing has encouraged developers to begin building again.

Starts of residential developments with two or more units saw a 25.3% increase, while starts of single-family homes, which make up about 65% of the housing market, rose 2.3%.

Finally, there’s the Federal reserve, which is artificially suppressing interest rates. As long as banks spreads remain small, credit will remain tight. Lenders will seek only the best-rated consumers for the lowest rate offers. Most others will be priced out of borrowing, at least while wages remain stagnant and food and energy inflation erode purchasing power. The Fed just might turn the “buy-instead-of-rent” formula on its head.

While leads us back to diversification. Financial planning and insurance seem complementary enough to create multiple lines of business for real estate agents. But rental services seem like the most obvious of starting points. True, not every company needs to diversify: If you work in markets with Apple-like consumer demand, you can ask any price, even in a recession (say, Manhattan). But aggregate demand has fallen for nearly six straight years in housing. Even stable markets have seen per-sale margins thin infinitesimally.

Any deal that requires lender involvement takes longer, harder, lower-return hours than ever before. The brightest spots in the real estate industry today are in cash. That means luxury buyers, international investors and, ironically, the first-and-last payment check of the renter.

Are you prepared to do more than make a single-family sale?

 

 

  • Leslie Ebersole

    Change? You want us to change? Hmmmph. 

    Great post. 

  • Developers in my area of North Jersey are building rental-only FAR more than condo or single-family. You’re dead-on with tight lending margins & the recently distressed crew adding to the rental consumer pool. This is causing a bit of a famine in quality rentals & pushing up prices. Smart investment dollars buy rentals!
    Great post, as always!

  • Thanks, Brian! I think we’re on the same wavelength!