Encyclopaedia Britannica announced yesterday that they would no longer print their reference library, opting instead to have it be available in online digital form only. Just a week or so ago, I wrote a post on my past life in the educational publishing industry, albeit nothing about the books and selling them. But I feel that my 7 years working for a company that was a Grolier distributor and a competitor in many levels with Britannica gives me some insight into the end of that line of books in print.
It should go without saying that this is a trend that affects more than encyclopedias; thanks to e-readers and computers, my grandchildren may never know what it is like to turn the pages of a book. Britannica was also not the first reference set to go out of print. As a matter of fact, they were the last of the Big A-B-C sets to stop killing trees. Colliers ended in 1998, and Encyclopedia Americana was last printed in around 2007. Only World Book, the set I devoured as a child, remains in print.
Having said all that, I do believe that the end of high end encyclopedias in book form was largely self inflicted and under discussed. I believe that, had they changed their model of distribution, Americana, Britannica and Colliers would still be in print in a sustainable way.
Virtually all high end educational references were sold the same way: a salesman would come to your house and sit at your kitchen table. After about a 90 minute pitch, you’d be informed that the whole thing would cost over $1,000, often far more. And if you didn’t buy today, the price would jump and the offer would expire when the representative walked out the door without a purchase offer. With each “no,” they’d throw in more books: children’s books, great classics, you name it, soon people would have a wall of books they’d never finish in a regular life span. It is called a one-call close, and the sales force was a transient, not terribly educated group that was on straight commission.
I know. I hired and trained hundreds. And I was one of them, initially as a trainee and all the way up to a regional manager overseeing the sales in 4 cities. I thrived selling our system, with Grolier’s New Book of Knowledge as the centerpiece of a $1,400 or so set. I was a cowlicked kid right out of college, I believed I was spreading the gospel of literacy, and I knew how to get people to say yes and sign their name on a contract and a check. I closed about one in three people I met with.
However, even I saw the writing on the wall, and in the post I link to above, I explain why I left the company and the industry. The firm closed its doors in 2000; one of the partners now originates mortgages and I have run into him at industry events. He went down with his ship, believing that a 1950’s model for sales would work in the new millennium.
I’ll cut to the chase. In the information era, you can’t generate sustainable revenue having a sales force of clip on tie wearing transients with high pressure schlocky pitches telling people that if they don’t spend $1400 right now, tonight, that they can’t have it. Not when they can Google anything for free or look it up on Wikipedia. Are there some people out there that would happily spend money on a printed encyclopedia? Hell yes, and far more than the 8,000 that Britannica sold of the 2010 edition. People may not buy a Stephen King or Harry Potter in print, but a reference library is still special to many.
The encyclopedia industry never adapted. That print is going away in all books is not the prime reason. People just don’t buy in the 21st century the way they did when I got started in the 1980s. Publishers should have realized that they could sell far more books far more profitably for far less money in perpetuity had they stopped the kitchen table sales and gone with Amazon, Barnes and Noble, and other distributors. Without paying those $250 commissions, rent on offices and phones, and all the other brick and mortar overhead, they could have priced the sets at a fraction of the cost and sold more-far more- for less money. And they could have thrown in an online password for updates to keep current for literally nothing and never worry about anything going out of date.
It is a lesson in failing to adapt that other industries should see as a cautionary tale. There are still enough people who appreciate print. But nobody appreciate a high pressure sales pitch from an individual who isn’t credible, and that was always a problem the industry never addressed.
Now there is no industry. A cautionary tale for the rest of us, whether we are in real estate or not. Change or go extinct.
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What is a Silent Second Mortgage?
In all real estate transactions involving a mortgage-which is most of them-all details of the transaction are recorded on a government form known as a HUD-1. A purchase can have more than one mortgage- the bank can loan a second (subordinate) mortgage, or in some cases, the seller can hold a second mortgage as well. In Westchester and metro New York, there are three lawyers at the closing table (buyer, seller lender) along with a title company. And if a second mortgage is permissible by the primary lender and all parties, it is recorded on the HUD-1 and everything is A-OK.
A silent second mortgage is mortgage that is not recorded on the HUD-1. It is considered a “side deal” and is typically a violation of RESPA (Real Estate Settlement Procedures Act). In other words, a silent second mortgage, or any other side deal that is not recorded on the HUD-1 for that matter, is often mortgage fraud.
The temptation to do a silent second mortgage occurs when there is a roadblock in closing a transaction and the parties are trying to avoid the pain of adapting to the circumstances. For example, suppose a house is priced at $400,000 and the seller agrees to a $385,000 sale price with a $10,000 seller concession back to the buyer to help defray closing costs. That would be a $395,000 contract price and the HUD-1 would reflect $10,000 back to the buyer and $385,000 net to the seller.
However, the house does not appraise for the $395,000, but instead only appraises for $387,000. The buyer still needs the $10,000 concession to pay their closing costs, and does not have the extra cash to make up the difference. The deal will therefore either die or the seller will have to absorb the $8,000 shortfall and net only $377,000. The seller is unhappy about this, and proposes to the buyer that instead of the $10,000 being a concession, that the buyer agree to pay back $8,000 to the seller as a second mortgage that is recorded after closing. They cannot put it on the HUD-1 because the mortgage does not allow for subordinate financing. The buyer might agree because they don’t want to lose the house. The seller is trying to avoid netting less money.
This is “fraud.”
While it may be tempting to grease a difficult transaction with a silent second or similar side deal, it can get all parties, including the lawyers and agents, into hot water. And no sale is worth jeopardizing one’s career for. To do the right thing, the buyer either has to get more money elsewhere or lose the deal, or the seller has to take less money. And as much as that stinks for either party, it sure beats losing your license. If something cannot be documented on the HUD-1, it should not be practiced.