When real estate and Wall Street have a fling, things often go haywire. And sometimes, it can end up impacting the entire industry.
To understand the current escapades with Wall Street and real estate, look for lessons from history.
They are like two old high school classmates who have a raucous affair at their class reunion every few years. The comparison ends there, intimate classmates rarely face dire economic consequences.
When real estate and Wall Street have a fling, things often go haywire. And sometimes it can end up really bad, like the subprime crisis when mortgages were securitized in a sloppy scramble to feed the demand for risky home loans. This partnership was the first thread to unravel in the impending global economic meltdown, precipitated by runaway debt.
Money, money, debt
You don’t have to look too far to find other cases of recklessness in this relationship. Take when private equity firm Apollo Global Management bought Realogy in 2007 for $7 billion with about $6 billion in debt. The deal was led by iconic Wall St. deal pro Leon Black who hobnobbed with Realogy founder Henry Silverman. Perfect timing for Silverman, but a mess for future Realogy executives.
Arguably, Apollo saved Realogy from the worst housing recession in decades, but the company also got saddled with the debt. Then, the private equity giant got out of the deal whole when Realogy went public in 2012. But the debt did not go away and management has struggled with the burden ever since. Today, it has $3.6 billion in loans on its books, not money it can use to grow, but instead a liability from these earlier financial dealings.
Imagine if a stranger went on a buying spree with your American Express card, but you got stuck with the bill that took you ten years to pay off.
Realogy’s competitors took advantage of its troubles. Zillow leapfrogged any consumer advantage that the Realogy brands enjoyed and Keller Williams grew like crazy, becoming Realogy’s biggest threat. Then came the Compass juggernaut, egads.
The New Jersey franchisor could not afford to experiment, invent or innovate.
Eighteen months ago, smart and determined CEO Ryan Schneider came in to save the day, but the debt straight jacket has not been lifted.
Free to Grow
Gary Keller controls his own fate with no debt, no investors and no financial partners. He answers to no one on Wall Street or in the Silicon Valley and can do whatever he pleases. His loud pivot to become a technology company shows that he has not lost his chops for risk or controversy.
Agility can be a powerful competitive advantage.
Compass is on a no-holds barred growth run, impossible if the eyes of Wall Street analysts were on it, second guessing every move it made. The blazing sunshine on WeWorks messy IPO is what Compass CEO Robert Reffkin will sign up for if he goes public. Not fun.
Zillow co-founder Rich Barton came back as CEO earlier this year. Initially, the Zillow stock got a boost but then quickly lost its luster when Barton released his Q2 earnings. The numbers were impressive, but Zillow’s big plans to pivot its business made Wall Street nervous.
It is ironic, on the one hand Wall Street investors shun Realogy because it is stuck in an old-school business model, threatened by innovation. And yet, the Street is dinging Zillow for being too daring and too innovative.
The aviator, the race car driver, the “maximum”
RE/MAX founder Dave Liniger, like Keller, behaved like a cowboy his entire career, growing the largest real estate company in the world. He owned his enterprise outright with no investors and no Wall Street oversight. The word RE/MAX comes from the term “real estate maximums.” That is what he offered his agents, one of the early 100-commission models, and that is how he lived his life and ran his company.
In 1998, he attempted the first manned balloon flight around the world in a stratospheric gas balloon. The company owned 88 hot-air balloons. Driving a NASCAR vehicle for the RE/MAX sponsored race team in Las Vegas, Liniger hit a wall driving 160 miles an hour and was left with two broken ribs. He flew his own jets with a 40,000-square-foot hangar for his company-owned fleet of planes.
Wall Street would not tolerate such antics today.
Today, RE/MAX is publicly traded and Liniger has retired from his beloved company. Most of the planes, balloons and race cars are gone, including some of the firm’s cavalier spirit.
Real estate has always been an industry of colorful individual achievement, whether it be top producing agents or captivating company founders like Keller and Liniger or Barton and Reffkin today. From top to bottom, these are the characters who lead change in the industry.
Wall Street did not invent the MLS, the 30-year mortgage, FHA or any other piece of the nifty system that helps lots of people become homeowners. But it shows up, when money is to be made.
Once again, Wall Street is fully invested in real estate, providing bonanza-like funding for the audacious iBuying experiment. Billions of dollars are flooding Main Street.
Watch this tryst closely, consequences are inevitable.