Tag Archives: Center for Urban Business Entrepreneurship

Craziest Real Estate Windfalls

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"Le Voyage dans la lune" by Georges Méliès - Roger-Viollet

Realtor.com quoted me in A Brief History of Crazy Real Estate Windfalls. It opens,

Real estate is one of those things where it’s hard to differentiate between a once-in-a-lifetime deal or an epic bomb without the benefit of hindsight. Want proof? Let’s take an invigorating jog down memory lane and view a few of the land swaps that are considered the most lopsided in history—windfalls for one side, colossal blunders on the other. Let’s crack open the history books!

Proof that Portugal needs better maps

The historical highlights: In the 15th century for the Treaty of Tordesillas, global superpowers Portugal and Spain sat down with a map of the world (as they knew it in the 1400s) and drew a line down the middle. Portugal got everything on the left, Spain on the right. Even Steven, right? Not quite. Once they decided to actually look at their new “empire,” Portugal found it basically had nothing (well, besides Brazil), while Spain had pretty much the entire world (you know, Europe, Asia, Russia…).

It taught Portugal a harsh lesson: Approaching land deals the way the kids in “Family Circus” deal with sharing toys is not a viable global expansion strategy.

Real estate update: Granted, Portugal botched this deal at the table, but it’s not quite as bad as it sounds. According to David Reiss, a professor at Brooklyn Law School and research director for the Center for Urban Business Entrepreneurship, the treaty was “heavily modified afterward” to give Portugal more land to the west, including control over most of the Indian Ocean.

Still, in the end, no one won: Both empires eventually shrank back to the size you see today. If Spain won anything, it’s the language war: Most of Central America speaks Spanish, while only Brazil parlays in Portuguese.

America goes through a major growth spurt

The historical highlights: In 1803, America made its historic Louisiana purchase, buying 828,000 square miles of land from France for $15 million—roughly the catering budget of an “Avengers” flick today. That territory gave the fledgling nation a hell of a growth spurt, adding land that would become 15 Midwestern states from Arkansas to, of course, Louisiana.

Real estate update: It was a lot of land, and it cost a lot at the time. But it was totally worth it. “You got New Orleans, so right there it was a good deal,” says Reiss. “If you look at the home sales in New Orleans today, $15 million is the price of just the top four most expensive houses combined.”

The Alaskan ‘oil rush’

The historical highlights: In 1856, Russia negotiated with U.S. Secretary of State William Seward to sell Alaska for about 2 cents per acre, or $7.2 million. The purchase was derided, and the American people quickly dubbed Alaska “Seward’s Folly.”

Real estate update: Most people think that the measly $7 mill we spent on Alaska is pocket change compared to the gushing vats of cash funneling into the U.S. through the Alaska oil pipeline, right? Not exactly.

“We think of Alaska and its pipeline, and we think it’s a great deal,” says Reiss. “But economists have deduced that the pipeline earns the government less than it costs to govern Alaska, so it’s a net loss. Calling it ‘Seward’s Folly’ makes sense.”

$24 for … Manhattan?

The historical highlights: It’s one of the oldest stories in our history—Savvy Dutch settlers, preying on the naiveté of the Canarsie Indians, bought all of what would become Manhattan for $24, less than the price of a sweater from a Times Square Forever 21.

Real estate update: True, New York City is estimated to be worth $802.4 billion today, and Manhattan is its busiest hub. However, before you express outrage about those poor Indians, consider this: It was the Dutch who got conned. You see, the Canarsie Indians who brokered the deal didn’t live in Manhattan. Sure, they’d hop over there to party with the Manhattoes tribe, but it wasn’t their home and they certainly had no right to sell.

“The common story is that the Europeans swindled the natives,” says Reiss. “But it does look like the other way around.” (The Manhattoes, however, are another story.)

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Man sells the moon

The historical highlights: In 1967, the United Nation Outer Space Treaty stated in regard to our moon: “No nation by appropriation shall have sovereignty or control over any of the satellite bodies.” In 1980, a Nevada resident named Dennis Hope came to the conclusion that the treaty forbade nations from owning the moon but not individuals. So he wrote a letter to the U.N. saying he was taking ownership and that it should contact him if it had any issue with that. The U.N. did not respond, and he’s been selling moon acreage ever since. Hope claims to have sold over 600 million acres, with the largest going for over $13 million.

Real estate update: If he really has those checks in hand, then Hope is a genius and this is indeed a very lopsided deal—he’s selling uninhabited land that will be completely inaccessible in the lifetimes of the buyers. Not that we should necessarily applaud him for it.

At worst, “I’d classify him as a huckster,” says Reiss. “And it appears his interpretation of the law is incorrect. The fact that the government hasn’t responded to his letter doesn’t give him rights to the land.” So, even if he does have all that money, it could get him in a whole lot of trouble.

What Makes NYC Crowded

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"Manhattan from Weehawken, NJ" by Dmitry Avdeev

NewsDocVoices quoted me in What Makes NYC Become More and More Crowded. It reads, in part,

Yuqiao Cen, a graduate engineering student at NYU, makes sure to shower before 10pm every night, otherwise she is criticized for making too much noise in her apartment. She lives with her landlord and his family of five in a 3-bedroom apartment on 11th Avenue in Brooklyn.

Similar to Cen, Yanjun Wu, a newly admitted graduate student at Fordham University, barely stays in his living room because she feels uneasy wearing pajamas while her male roommates are around. She lives with 4 roommates in a 4-bedroom apartment on the Upper West Side.

Cen and Wu are not the only ones forced to share an apartment. Many of their classmates and friends living in New York are also doing the same thing. In fact, a recent study conducted by the New York City Comptroller Office suggested that NYC has become much more crowded in the past 10 years with the crowding rate being more than two and a half times the national average.

The study “Hidden Households” was conducted by Scott Stringer, New York City Comptroller, highlighting the growing crowding rate in housing in NYC. According to the study, New York City’s crowding rate has rose from 7.6 percent in 2005 to 8.8 percent in 2013. The number of crowded housing units grew from 228,925 in 2005 to 272,533 in 2013, representing an increase of 19 percent.

The increase in the crowding rate is city-wide. The Comptroller’s study indicates that the proportion of crowded dwelling units increased in all of the five boroughs except Staten Island during this time period. Brooklyn has the largest increase with 28.1 percent, Queens has 12.5 percent and 12.3 percent in the Bronx.

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“Fundamentally, this is a story about supply and demand,” said David Reiss, professor of Law in Brooklyn Law School, and research director of Center for Urban Business Entrepreneurship. “The increase of the housing supply has been very slow, while the increase of the population was very fast, and that is the recipe for crowding. Because people can’t afford to live where they want to live, their choices would be continuing to live where they want to live and be crowded, or to switch to location with more space for your dollar.”

The data confirm Reiss’s observation. According to the U.S. Census Bureau, NYC’s population in 2013 was 8.43 million, increasing from t8.2 million in 2005. However, the 2014 Housing Supply Report, conducted by New York City Rent Guidelines Board, also indicates that the number of permits issued for new construction of residential units had reached its peak – 34,000 in 2008, but the number decreased greatly to 6,000 in 2009. Although the number kept gradually going up, and reached to 18,000 in 2013, the market is no longer as hot as before the financial crisis of 2008.

Contrary to common belief, income does not in itself drive crowding. Although “Hidden Households” shows that 23.6 percent of crowded households reported household incomes in the City’s bottom quartile, it also revealed that 18.5 percent of crowded households have incomes in the City’s top quartile and 5.2 percent of crowded households have incomes in the 90th percentile or higher.

In the beginning of apartment hunting, Wu and her roommates wanted to rent a five-bedroom apartment so that everyone could have their own private space. “The market is too busy in New York,” said Wu. “Once we were going to pay the [lease] for an apartment on Roosevelt Island, but someone was ahead of us by just a few minutes.”

After weeks of apartment hunting, Wu and her roommates decided to make a compromise – two of them would have to share a bedroom, in order to get a decent apartment at an acceptable price – $4,900 per month, with neither an elevator nor a laundry room.

“Land is very expensive, and there is not much left for residential development but a tremendous number of people want to live in New York,” said Albert Goldson, Executive Director of Indo-Brazilian Associates LLC, A NYC-based global advisory firm. “Real estate prices started to go up, so you have people who are middle class or who have modest salaries who can no longer afford [to pay a] mortgage. And what many of them would have done, either single people or a family, was ‘double up’. Like single people who bring in a roommate, now have several roommates in a unit.”

Most experts in the urban planning industry believe that the underlying cause of the growing crowding rate is the affordability of housing. Goldson argues that the city needs to be more available for middle-class people who are actually working here and potentially leaving the city if it is too small or uncomfortable to live here anymore.

From Reiss’ perspective, the way to solve affordability of housing is to amend its zoning code to encourage the construction of housing. Vertical construction is a trend and a solution to the crowding situation. But in the meantime, with more people living in taller buildings, the density would definitely increase. “If the city is really committed to increasing the affordability of housing, you have to be committed to increase the housing density as well,” said Reiss.

Won’t You Be My Neighbor?

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David Wilson

Realtor.com quoted me in Are Neighborhood Watch Signs Killing Home Sales? I reads, in part,

Neighborhood watch programs proclaim that a community’s members have one another’s backs, a collective way of saying, “Hey, we got you covered.” So home shoppers who see neighborhood watch signs plastered on telephone poles and in parks should feel confident about settling down in that community, right?

Not necessarily.

A debate is brewing, most recently in Longboat Key, FL, over whether neighborhood watch signs are good or bad for property values. While some think these safety-first signs raise home prices, former Mayor George Spoll is arguing the opposite: that they make an area look crime-ridden, sinking home prices and scaring off potential buyers in the process.

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“It would be hard to say that a watch sign on its own is a good or bad thing, but in particular contexts it could make a difference,” says David Reiss, research director at the Center for Urban Business Entrepreneurship at Brooklyn Law School. After all, he points out, “If home buyers have heard that crime is an issue there, neighborhood watch signs may give comfort that the neighborhood is doing something about it. On the other hand, if it’s a neighborhood that is not facing major crime issues, signs may be a confusing signal.” 

Bottom line: If you’re a home buyer and see these signs, do your homework and research crime in the area. Go ahead and ask your seller and Realtor about crime in the area; call local law enforcement or search online on sites such as Crimemapping.com or Neighborhoodscout.com.

Paid off Mortgage in Three Years

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Sean Cooper

Sean Cooper

Realtor.com quoted me in Why the Guy Who Paid Off His Mortgage in 3 Years Isn’t as Smart as You Think.  You’ll want to read about this guy:

You’ve gotta hand it to Sean Cooper: In a mere three years, this Toronto homeowner made epic sacrifices to pay off a $255,000 mortgage on his $425,000 house. His reason: “For a lot of people, their mortgage is like a life sentence,” the 30-year-old explained to the press. “I just wanted to not have a mortgage hanging over my head.”

After his story broke in publications such as the Toronto Star and The Hamilton Spectator, thousands applauded this as a feat of frugality.

But some experts say the opposite—that Cooper made a colossal mistake.

Forget the fact that to pay off his mortgage this pension analyst took on two extra jobs (including in the meat section of a supermarket even though he’s a vegetarian) and worked over 100 hours per week. Let’s also set aside the fact that he stopped using his car and claims Kraft dinners were his “best friend” (because clearly his real friends stopped hanging out with him). No, experts argue that Cooper’s extreme mortgage-paying regimen may have actually damaged his financial health.

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“Having a mortgage is not really such a bad thing,” says David Reiss, research director at the Center for Urban Business Entrepreneurship at Brooklyn Law School. “When you think about what a mortgage is, it makes sense to pay it off over a long period of time. You use a mortgage to buy something that will last a long time—a home—so you would probably want to spread the payments for that expensive thing over the whole period you’re using it, just as you would with a car. [Cooper’s paying off his mortgage quickly] may work for him, but not for the typical person.”

So if you’re inspired to follow in Cooper’s footsteps, think twice and consider less drastic measures.

“There are less extreme ways of doing this,” Reiss says. “Some people make payments every four weeks instead of every month. This results in one extra payment every year and does not seem so painful. Others will put extra payments into their mortgage—a tax refund, a bonus, money from a consulting gig. This is also less painful because you were probably paying your regular expenses without that money already.”

Bottom line: Don’t beat yourself up for having a mortgage. Embrace the benefits, relax, and live a little. Cooper, for one, is now playing catch-up. Now that he’s debt-free, he’s moved on to his next goal: He’s looking for love. Because let’s face it, most bachelorettes aren’t into eating mac ‘n’ cheese on a date.

Reviewing the Big Short

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Jared

Wax Statue of Ryan Gosling at Madame Tussauds

Realtor.com quoted me in Explaining the Housing Crash With Jenga—Did ‘The Big Short’ Get It Right? The story reads in part,

One of the more hyped movie releases this Oscar season stars the housing crisis itself: “The Big Short,” in which four financial wheelers and dealers (Christian Bale, Steve Carell, Ryan Gosling and Brad Pitt) join forces to figure out what caused the housing bubble of 2003-2005 to burst (and how they could profit from it, of course). It’s based on the best-selling, intensively reported book by journalist Michael Lewis.

Granted, the subprime mortgage meltdown is a complicated subject… but this movie purports to illuminate all with a simple visual aid: a tower of Jenga blocks. As Gosling explains in [this video clip], mortgage bonds at that time were made up of layers called tranches, with the highest-rated and most secure loans stacked on top of the lower-rated “subprime” ones. And once holders of those subprime mortgages defaulted in droves, as they did starting in 2006, the whole structure collapsed. Jenga!

Which seems simple enough. Only is this depiction accurate, or just a Hollywood set piece?

Well, according to David Reiss, Research Director at the Center for Urban Business Entrepreneurship at Brooklyn Law School, this movie’s high-concept depiction of the mortgage crisis is largely on the money.

“There is a lot that is accurate in the clip: the history of mortgage-backed securities, the degradation of mortgage quality during the subprime boom, the loss of value of lower grade tranches,” he says.

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Yet there is one thing that the movie did fudge, according to Reiss.

“I would argue that there is one big inaccuracy that exists, I am sure, for dramatic effect,” he says. “I would have put the AAA [tranches] at the bottom of the Jenga stack. In fact, the failure of the Bs and BBs did not cause the failure of AAAs, and many AAAs survived just fine or with modest losses.”

In other words, only the top half of the Jenga tower should have crumbled … but that wouldn’t have looked quite as flashy, would it?

“It would not sound as cool if only the top part of the stack crashed,” Reiss concedes. “But the bigger point, that the failures of the secondary mortgage market led to the crash of the housing market, is spot on.”

And hopefully one that won’t play out again in real life.

5 Signs You Probably Need an Accountant

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Alan Cleaver

WiseBread quoted me in 5 Signs You Probably Need an Accountant. It reads, in part,

Do you dread filing your income taxes each year? Does preparing your taxes take weeks of your time? And once you’ve sent your papers to the IRS, do you have the sneaking suspicion that you might not have taken all the deductions to which you are entitled?

You might need to hire an accountant.

“Hiring an accountant depends on whether your knowledge, time, and money are best spent on bookkeeping, loan application, and tax preparation, or whether you have higher priorities,” says Valrie Chambers, associate professor of taxation and accounting at Stetson University in Celebration, Florida. “A business owner who excels at sales should probably use her time increasing sales rather than learning and doing accounting. That strategy is just more profitable for the business.”

Here are five signs that you need to hire an accountant.

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4. You Own Rental Real Estate

Renting an apartment or two is a great way to earn passive income. But doing so can also complicate your finances. That’s why it makes sense to hire an accountant to make sure that you don’t miss any important tax deductions related to rental income, and that you file all the paperwork necessary when working as a landlord.

“There comes a point when personal tax software is not sophisticated enough to take into account the complexities of real estate investments,” says David Reiss, professor of law and research director for the Center for Urban Business Entrepreneurship at Brooklyn Law School in New York City. “If a taxpayer has multiple properties that have both a personal and investment component, tax software may not be able to accept all of the relevant inputs and generate the correct output.”

Saving on Home Insurance (en Español y Ingles)

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Woman with alarm system

Univision quoted me in 5 Ways to Save on Your Home Insurance (the article is in Spanish). It opens,

The cost of homeowners insurance can vary by hundreds of dollars depending on various factors. If you are looking to obtain a discount keep in mind these five tips when you purchase a policy.

1. Increase your deductible. Even though it is common for homeowners to have a deductible of $500 in their insurance policy, raising it to $1,000 could represent a significant reduction in the premium, says David Reiss, Professor of Law at the Center for Urban Business Entrepreneurship at Brooklyn Law School.

Extra tip:  You should have an emergency fund to cover any additional expenses which may be incurred. Use this fund instead of putting in a claim to your insurance, since this can increase your rate.