Friday, Jan. 16, 2009 | 2 a.m.
No one knows how challenging the downturn in the Las Vegas housing market has been more than Mark Stark.
The chief executive of Prudential Americana Group, one of the largest real estate brokerages in Las Vegas, had to file for Chapter 11 bankruptcy protection in November 2007 to save his company.
A Chicago-area native, Stark, 45, who came to Las Vegas at the age of 17 to pursue a career in hotel management, can breathe easier because the bankruptcy reduced his debt from more than $20 million to less than $7 million.
Now, Stark says, no matter what the market does, his company will be around for the long haul.
How did your career in real estate come about?
It was on a fluke. My buddy, who was my roommate in college, said, “You love Las Vegas. Let’s get a real estate license.” I was like “Cool. Let’s get our real estate license.” That is pretty much how it happened. And I went, and he didn’t. I got my license and went to career nights where you go to different real estate companies and check them out. I said, “Wow, the harder you work, the more money you make.” And if you don’t work hard, they were really clear that you are not going to make it. I said I was always a hard worker and didn’t mind. I took to it like a fish to water. I really enjoyed it. I enjoyed the whole house aspect of it. I enjoyed helping people move into their homes. I loved sales.
What were you doing at the time?
I was in college and working full time at the Las Vegas Hilton. I went in and they had not seen me at the real estate (brokerage). I sat down with the manager, at that time, of Americana Better Homes & Garden. I said, “Here is my plan: I am going to go through all the training and going to get my feet on the ground and get a couple in escrow so I can quit the Las Vegas Hilton because I have no other income.” He said, “How about this. If I don’t see you, you’re fired.” I said “OK, there’s a plan, too.” I thought about that night, and I said I am just going to go for it. It’s just me and so I quit the Las Vegas Hilton and went into real estate full time.
You did that without any backup income?
I had a credit card with a $2,500 limit and I had used about 400 bucks of it, so I had $2,100 (laughing). That is the way I looked at it. I was living with a girl at the time. We broke up. I couldn’t keep the apartment and I went to sleep on the floor of a buddy’s house and I worked all the time.
How long did it take before you started making money?
My first full year (at age 21), I made about 100 grand. That was huge. I was selling 50 to 70 houses. I was a grunt. I was a door-knocker. I was very aggressive.
How did it go after that?
At that time, I always did better than that. But I didn’t do hugely better than that — maybe $120,000 or so. It was steady.
What did you do with your new wealth?
I bought real estate. The first place that I bought was a fourplex, and I moved into the fourplex. I was in one unit and rented out the other three units. That was Nellis (Boulevard) and Owens (Avenue). I had a bed. I did not have a TV. I had a refrigerator that I never used. That was it. I slept there, showered and left. I don’t think I was ever there for more.
What other real estate did you buy?
I started buying residential homes, and then I moved out of the fourplex. I ended up selling the fourplex. I bought some land, but mostly single-family residences.
How did your career progress?
I sold for approximately six years, and the president of the company at the time asked if I had ever thought about management. I said, “not really.” He goes, “Well, why don’t you help us out. We are opening up a new office on the west side of town. Why don’t you become the assistant manager and you can still sell. You can train and do that kind of stuff.” I said, “cool.” I was making $433 a month clear for being a manager in addition to what I made selling.
What happened then?
Six months after that, an office opened up. They had let a manager go, and I took over the Green Valley office. At that time, I was 26 or 27. I got a salary and bonus based on the success of the office. We took it from the lowest-producing office to the highest-producing office. I was making about the same, but I was happy with that. I can get more of a stable schedule.
And where did you go from there?
When I was 32 in 1995, I went to one of the partners on why we needed a general manager and why I could do the job. He had me go back and structure my pay and everything. I would make less than I was as a manager if I didn’t succeed. If I did well, I could make more. I structured that and became general manager and things went very well. From there, Steve (a partner) wanted to be bought out a couple of years later. I sat down with the other two partners and then they brought me in as a third owner on sweat equity. My job was to run the organization, and I could take over for Steve and that additional debt went on the company, but the company paid the debt.
And from there?
Then in 1999, our franchise was up with Better Homes & Gardens and they sold to GMAC. We were not on the same page as GMAC. We went looking, and that’s when we found Prudential in 1999. I did that from 1999 to 2004 until Home Services, a Warren Buffett company, came in to buy our organization. I put an offer in to match that offer to buy the other 75 percent.
How much did you pay for it in 2004?
The purchase price was $26.5 million. The senior was Zion’s Bank for $10 million and the mezzanine lender was Peninsula for $12.5 million.
Why did you want to buy it?
I was running it. I enjoyed it. I had a very unique model that I wanted to move forward with. I wanted to go to the public market with it, and it was being very effective for us already. They asked if I was sure I wanted to do this because I was going to have a lot of debt on the company. I said, “I think we can do this.”
What is your model?
We are a business service company. We don’t structure our company like a real estate brokerage. We help brokers build brokerages under the auspices of Prudential Americana.
Our direct client is the agent. We attract high-quality sales executives to our organization because we help them build a business without all the stuff that doesn’t make them money. They don’t have to sign long-term leases. They don’t have to handle their own general liability insurance. We help them with institutional marketing. We help them with a lot of stuff that if they tried to do on their own, it would be a lot more expensive for them.
Why is that the way to go?
Thank God I did. It is one of the things that stabilized us in a very tough market. One, it works in a great environment, but it also protects you of the downside in a down market. If we were a traditional brokerage, we probably wouldn’t be here today. What helped us is when the days were really hot and things were rocking, our profitability did not skyrocket in any way shape or form. Our agents did. When all my buddies were calling from other markets, they were saying, “We’re killing it, man. This is unbelievable. We are printing money.” We weren’t. Our model is much more stable. And when it (the market slowed), all that profitability didn’t go away as quickly. It gave us time and our model protected us through the downturn. We made very aggressive changes in late 2006 and early 2007 that kept us ahead of the downturn.
How did the model protect you?
It gave us stabilized income. For example, because we attracted top agents, they had, in many cases, a flat fee with us. It wasn’t a cheapie thing, but a flat fee. When the market was starting to adjust, I was still getting their flat fee. You were still so successful that you were OK. Yeah, you made $5 million one year but if you dropped and only made $2 million, you lost 60 percent of their business. They still made $2 million, and they were still paying us a fair wage for that. It didn’t affect us as dramatically.
How much is the flat fee?
It ranges from $1,750 to about $3,000 a month.
How many agents do you have?
Right now we have 1,100 agents. Figure 500 of those agents are leads and the other 600 agents work for them.
How does that compare to where it was?
We had about 800 brokerages, and it has come down from there. A lot of people left the business or they became a team associate because they shouldn’t have really done it on their own.
When you bought this, what was your anticipation of where the market was heading?
We were so ahead of the game. I had a plan. A 20 percent hit to the market is big. We had a plan in place that if the market ever got hit 20 percent, we would adjust these areas. The market got hit in 2006 by 25 percent. We immediately put our plan in place, and it was like invisible to us. Then 2007 got hit another 42 percent. Then we started feeling it. The beautiful thing for us was because we were so operationally strong, we still ended up breaking even for 2007. That is all well and good, but it’s not OK if you have $20 million worth of debt on you. From a straight operational aspect, we were OK. That’s in March 2007 when my senior lender blocked my mezzanine lender and that’s when everything started.
So what happened?
I got a call from my senior lender (Zion’s) who said, “Mark, I don’t want you to think we are being a blank, we have an agreement with Peninsula and we have the right that if the market has adjusted by X amount, we have the right to block them,” And they did. I was no longer allowed — no matter if the money was there, I couldn’t make another payment.
How much was Peninsula getting?
At that time, they were being paid interest only and it was about $150,000 a month. I believe we were paying, at that time, 12 percent interest. I was allowed to continue paying the senior, which we did all the way through the reorganization and never missed a payment.
What happened after that?
After they got blocked, I contacted my mezzanine lender and they said, “We are raising our interest rate to 19 percent because it said in our documents that if we are blocked, we are allowed to do that.” I said, “Look, I am not allowed to make you payments. You are raising it to 19 percent, and it is going to escalate to some silly stupid rate. You will own the company.” They said, “That’s how it works, Mark.”
What was your reaction?
I said, “That’s not how it’s going to work.” I said I was not a happy camper at that time. I got on the phone and said we were going to work something to get them out. And so we negotiated for six or seven months. The last conversation I had with them I said, “I don’t get it.” I got deals here that, ultimately over time, will pay you more than you had. A Peninsula executive said, “Mark, anything we give you is a favor. We already own your company. The market got hit, your company is worth X, you owe us Y, we own your company.” I said, “I don’t understand this thought process.” I said, “OK, I need to hear this because I am the only idiot who thinks I am going to work this out, but I am not going to work this out.” I hung up the phone and called Prudential and said, “You are right. I was wrong.” I called my attorney and said, “Let’s go after these guys. They want the company.” I thought it was just a money issue. I guess they wanted a windfall.
We went after them and filed (for bankruptcy) a month after that (in November 2007).
That had to be a hard decision.
That’s where all the pressure was. Once I made the decision, there really was no pressure at all. The gloves were off. I told my attorney. He didn’t want me to go to my people and tell them first before I filed. I said that was unacceptable. We are going to have a meeting with everybody. We brought everyone in and told them everything. We took them through the whole timeline.
What happened in the proceedings and Prudential giving you a loan?
It was amazing that we got ours done in six months. We went through the process. I had dramatic support from Prudential. They said a break-even operation does not warrant a $6.8 million loan, so you know why we are doing this. I came in with $2 million, and they came in with $6.8 (million). They believed in Americana, in me, our leadership, our model and in our company. They put their money where their mouth was. We paid Zion’s off 100 cents on the dollar. They got every interest dollar and every principal. We paid Peninsula, per the court, 6.2 cents on the dollar.
How much was Peninsula paid?
They had gotten $5 million in interest prior to all this. They got another $900,000. They got just under $6 million, and so they got about 50 percent of all their money. They would have had it all if they would have just been reasonable.
What was their reaction afterward?
Once we got into the case, they were trying to put us out of business. They wanted to make a point. It had nothing to do with the money anymore. The first day they fought me paying my agents. It wasn’t a money issue. We had the dollars there. What would have happened to my company if I couldn’t pay my agents? I would have been out of business in a day. I knew we were in good shape when the judge asked the question: “Have you ever seen a market get hit as hard as Las Vegas?”
How big a blow was this to your ego to go through that?
Before you make the decision, you’ve got to get OK with yourself. My faith always helps and truly knowing what’s important and what you are really blessed about — your family and friends and your children and wife. You look at that stuff and say that’s all that matters. Here is a powerful tool. Once you get OK with worst case, they can’t touch you. It has helped me because I am so much more relaxed than prior to all this because I have created a habit, so I don’t bring it home at all.
So how has all of this affected the bottom line?
Now I am going to come out of this so much more ahead of the game than I ever thought I would come out of it. I went from having $21.5 million worth of debt to down to $6.8 million. I am very thankful I did it when I did it and it happened the way it happened. Hindsight, it was perfect. Looking back, I think there has to be some divine intervention there because I ain’t that smart.
Do you see more bankruptcies on the horizon in your industry?
Without a doubt. Most of them will not be business bankruptcies. They may end being personal bankruptcies. The big challenge now is individuals have signed personally for these leases. Their business may close down, but they are still on the hook for three-, four- or five-year leases, individually. The business — there is nothing to get — there is no reason to file bankruptcy. It is worth zero.
What do you anticipate for the market?
We won’t have our final numbers until the end of January. But it will basically be a break-even year on the brokerage side. Nothing to write about. If you talk to most brokerages, they would be thrilled with break even. I am not.
You are able to pay your Prudential loan?
I have not had any issue with that. We are in great shape to grow market share and that is what we are going to be focused on in 2009, basically building our market share. We are not cutting back. We have new lead-generation programs starting this year.
Are you going to break even in 2009?
We are going to do a lot better in 2009. We are going to take advantage of the downturn.
How can you make money considering how bad the market is?
We are still closing anywhere from 650 to 750 transactions a month. The challenge for us is average sales price. We ended last year (2007) at $405,000 and this year (2008) will end somewhere around $260,000, but that’s because of the first half of the year. It is really tracking at about $225,000. We are going to budget $225,000 for 2009.
How are you in 2008 sales?
We are about 50 percent up, the number of sales. Volume, probably, this year over last year will be down about 20 percent.
Where do you see the housing market heading?
We are going to have a lot of the same in 2009 that we saw in 2008. I don’t understand why the FHA loan limit is being decreased from the $400,000 where it stands now, and I think it is going to $287,000 and change. That is a disappointment and doesn’t make any sense to me. I think you are going to see more accepted short sales in 2009. You are seeing a lot of the big players beefing up their short sales division. You will see a hellacious amount of bank-owned properties hit the market and then we are going to see what the government is going to do ease some of the stress on businesses around the world. If nothing changes, we will do very well in 2009. We created our organization to succeed in this environment.
What about prices in 2009? Will they keep falling?
In certain segments they will. Overall average, I don’t think they will fall much more than they are at now. In some segments they are rising and other segments they are coming down and others haven’t even started to come down. They are going to be much lower.
Where are they rising?
In the lower prices. Many of the banks are pricing properties at the liquidated appraised value. You are getting 20 offers on one property, and so instead of selling for $180,000, it is selling for $205,000.
Which are coming down and have yet to come down?
You are looking at high-end tract properties that appreciated. You bought it for $350,000, and it was worth $825,000. Those are coming down hard, and a lot of those have not come down as of yet. But a lot of them will. The problem will be getting financing on anything over that FHA limit because conventional is tough right now, and they have a larger down payment.
How is the mortgage market going?
The loans, they are turning down now — if the only thing we did was lend on these types of loans, none of us would be having an issue. They were OK lending to someone who stated their income with no verification. Now you are coming down with 25 percent, you have a good FICO (score) and you are a dirt bag and you can’t get a loan. It makes no sense to me. The pendulum has swung.
Are you worried about people walking away from homes in 2009?
The one thing that saved this company is that we never lied to ourselves. We were always honest with what was going on ... Moving into a home and doing it for an investment, I don’t know any investment adviser that would advise you to continue to stay with an investment that continues to bury you. We have to be realistic. There are people who are underwater in their house who know they are going to be underwater for a very long time and have no intention of moving. They like their neighborhood and their home. They have the means to pay it. You have that group. Then you have the group that says, “My house is OK but I would like to find a different house and I have a good income. I could certainly afford to stay in my house but I don’t want to.” Of course, you are going to have people walk away who have the ability to pay.
Why didn’t people see this coming?
I ask myself the same question. I think a lot of it had to do with greed. People were making a lot of money. People had an opportunity to buy homes that normally they would not have an opportunity to buy. I got asked a question one time: Isn’t it you real estate people, you let them buy. Think about someone having a loan and Mr. Stark goes to them and says you are not allowed to buy. You can’t do that. People will go where they see the opportunities. That’s why rules and regulations are important. Did people see it coming? My heart of hearts says absolutely. I don’t think anyone saw it coming to this magnitude. I think they thought they might have a bad batch, but we will work through it. They believed in the economy. It is like the 1999 stock market and everything started getting superhot and Warren Buffet said this just doesn’t make sense. And everyone said the days of Buffet are over. He is the old economy. He doesn’t get the Internet economy. I remember reading a year later: Buffet’s back. You stay with the base rules. I sold pretty much all of my real estate in 2004 and 2005 — not because I am brilliant or saw this coming. It’s because I do the opposite of what the masses are doing. That’s why it is a great time to buy right now because everyone is looking to sell. Everyone is looking to get out.
We are never going to have a boom like that again?
No. The metrics won’t exist to give us a boom like that. You can’t create that. Will we have a solid, stable market? Yes, I believe in that wholeheartedly. This will all heal. When that exact time frame is, I don’t know. And you start building from that point. There will be a lot of positives that come out of this. People will have an opportunity to buy a home who never had the opportunity to purchase before. You will have affordability. Houses will cash flow again whereas you only bought it for equity. You couldn’t buy it for cash flowing. It will be a grand opportunity for some people, and some people will take their hard knocks and start again.
So what is your overview?
I don’t see things changing much in 2009. I do feel confident that by 2010 we should start seeing some normalcy to the market. I think we will have a vibrant 2009 in units, but what those prices will be, I don’t know.