Much more than a risk strategy…
It’s no secret that Benjamin Graham has been characterized as one of the greatest investment advisors of the 20th century with his philosophy of “value investing.”
While value investing has thrived as a strategy in the securities world since 1949, in the real estate industry value add seems to only recently have gained popularity.
From 1999 to 2000, the number of results for “value add real estate” that show up in a Google search total 139,000. However, a search from 2016 to 2017 yields 58,000,000 results.
Talk about compounding interest!
To most in the industry, a value-add investment strategy is an indication of the type of risks and (hopefully) subsequent rewards related to repositioning an existing asset or developing a new project from the ground up. To us, it is a way of thinking, a way of doing.
We think about how to add value to our teammates, our clients, and our partners every day.
Most investment firms in real estate are really good at their job. They continually deliver returns to their investors that are hard to find anywhere else in the global economy. But just like most professional athletes, talent at the highest level is abundant and wide ranging. So the question becomes, how do you add value in a competitive and talented marketplace?
While these thoughts are unique to our approach in the real estate investment industry, you honestly could swap “real estate” for just about any industry in the professional world.
In our case, we work tirelessly to help investors limit their losses of money and time during the planning, design, and construction across a wide spectrum of alternative investments and portfolios.
Here are challenges we try to overcome and how we add value everyday.
You Are Your Own Worst Enemy
Did you know that an NFL football team has an average coaching staff of 20? Some even believe that the more coaches you have the greater the chance of success of the team. On a 53-man roster that is 2.7 players per coach.
Why do world class athletes who are the best at what they do have so many coaches?
One word: psychology.
At the highest level in any sport or industry, you have mastered the fundamentals. But if you are interested in getting better and continually optimizing your performance, you need feedback– constantly.
When you are able to constantly evaluate progress, or lack thereof, you can find ways to improve. Almost like Maslow’s hierarchy of needs, we believe that any professional should be focused on the following:
Fundamentals → Psychology → Details
So what does this have to do with real estate?
We all need an objective observer to help us get out of our own way at times. Who on your team or outside your organization is evaluating your performance, helping you test your assumptions, and highlighting areas for improvement?
If recent history is any indication, the real estate world has room for plenty of improvement. Eliminating risk and forgetting about it are not the same thing.
By structuring after action reviews and analysis, you are able to measure your progress against your projected milestones. Think of these techniques as “performance audits” or “gap analysis” that help you cut out the fluff and do more of what works.
In our experience, too many times in the real estate world, people move fast in the wrong direction only to learn that they have quickly veered off course, sometimes to their own financial detriment.
Professional coaches or team leaders, whether internal or external to an organization, can help you see the bigger picture. Perspective can help you stay out of your own way or see blind spots.
What are some gaps that you missed recently in your work?
In today’s world, it is quick and easy to send a message via text, email, or any one of a number of social platforms. Most of the time we notice a quick, but poorly crafted response only creates more work for people.
The lack of body language and tone of voice in email or text reminds us of the importance of Dr. Albert Mehrabian’s research and the 7-38-55 “rule.”
His work in the 1970’s suggested that our feelings, attitudes, and beliefs about what someone says are influenced by the speaker’s body language and tone of voice, not by the actual words.
We have observed too many “misunderstandings” or unclear directions sent via email.
It is rare to see an organization of any size today with communication guidelines, but now more than ever, we would argue that these SOPs are critical to facilitating work among multiple parties from different companies.
If you have ever worked in an emergency response setting, where the stakes are a matter of life-or-death, you know that communication protocols and “radio discipline” are crucial.
How can real estate investors learn from these other industries and findings?
Here’s a simple technique:
- Have a quick call; follow up with an email or memo summarizing your understanding
- Send an email; follow up with a quick call summarizing your understanding
Email is a tool, not a crutch. Yet we still see people sending notes with “emergency” in the subject line. It may be just us, but we feel that phone calls or face-to-face meetings are better for any corporate “emergencies.”
Regardless of the medium for communicating, establishing some sort of “rules of the game” both internally and externally will help your team crush your goals and deadlines.
Ideas and techniques to help prevent communication breakdowns:
- Establish team communication guidelines –
- What channels are appropriate (phone, email, text, Slack, Asana, Basecamp, etc)?
- How is work received, assigned, and delegated?
- Weekly calls — with a defined agenda, end time, purpose, and next steps
- Monthly meetings — with a defined agenda, end time, purpose, and next steps
- Executive summaries — daily, weekly, or monthly with defined next steps
We encourage our teams to hop of quick calls to resolve any issues that could turn an email response into days of “chatting” via multiple messages with misleading context.
The hardest part about communication is finding a set of “rules” that everyone can agree on.
Try to be clear with your intent, deadlines, and actions.
Can you please review this construction contract for the ACME Industrial project?
We need to receive comments by 4p ET on Thursday to be able to execute the contract by Friday.
Please email your questions and we can set up a 15-minute call to discuss any concerns.
Before you hit send, maybe ask yourself, “Is this email even necessary? What if I do not send this?”
Herd Mentality & Conventional Wisdom
Social proof is more prevalent in today’s hyper-connected world. With the rate at which “news” can repeatedly spread, it can be extremely tough to detect fake news from fact.
In the real estate industry, information is power and opinions conveyed as fact are rampant.
- How much did that portfolio sell?
- What are the average asking rents?
- Did the landlord provide any concessions?
- What was the total construction cost?
Most of the time, these answers are self-reported and maybe even exaggerated.
We are professional skeptics. We know information is never perfect. But we have seen enough bad information spread that we know to question the source, consider contrary information, and better understand the motivations of those “reporting” such data.
We do the best to make intelligent decisions by asking hard questions.
Honestly, we are just curious and ask “why?” a lot.
The next time a tough decision comes your way, consider asking 5 Whys.
“If [more] information was the answer, then we’d all be billionaires with perfect abs.” – Derek Sivers
Failing to Plan
Knowing where you are going is a great tactic to make sure you end up at your destination. In the real estate investing world, pro formas, annual business plans, and quarterly asset reviews are typical methods of planning.
Whether you are following a road map at the latest start-up, a 12-week marathon training plan, or a 12-month business plan for your office asset in Minnesota, it pays to plan….a little.
At the other end of the spectrum, our tech-obsessed generation has resorted to planning every detail. “Death by powerpoint” is a common phrase that you may hear from the boardroom to the modern military outpost.
Whether it is Mike Tyson telling you everyone has a plan until you get punched in the face, or a military commander mentioning that the enemy has a vote, or you reacting to Benjamin Graham’s Mr. Market, we find ourselves in a delicate balance. While the old adage of failing to plan is planning to fail has merit, we try to focus more on the plan’s execution and overall intent.
Have a new acquisition on the horizon? Great, know your key dates and must-haves. Be flexible and take surprises as they come, because they will come. Let’s make it simple: Plan to be surprised and plan for things to go wrong.
An aggressive capex plan to improve a tired asset? Great, know your key dates and budgets. Be proactive and set mini-goals or checkpoints throughout the process. Design, permitting, mobilization, weather, labor shortages, long material lead times, horrible as-built conditions, poor oversight, and many more hurdles can knock your efforts off track.
We try to use 1-page executive summaries (ExSum) internally to provide the team with a high level focus, approach, and goals.
Doing Nothing has a Cost
Anyone that works in the real estate game is familiar with the time value of money. Deciding to do something is just as important as deciding to not do something.
Too often, we see properties where maintenance and repairs are neglected year after year. As a result, minor cost items turn into massive capital repairs.
Imagine waiting to treat subterranean termites (properly) at your multifamily asset. After your multimillion dollar interior improvement plan to the appliances and finishes, you are ready to sell. Only now you have to take a multimillion dollar discount on your asking price because entire wall sections and framing have been completely eaten away.
To add to the challenge, only three years ago your team had the option to spend $30,000 on a full treatment of the property with a bond and warranty against future damage. In this case, the cost of doing nothing is severe.
Other times, the cost of doing nothing can be significant. Let’s say you have two proposals for $75,000 worth of foundation repairs at your 40-year-old property. While some may say you need a third proposal to start repairs with a contractor, what if the best option is to do nothing? The property is 40-years old and looks great. The minor cost of re-hanging a few doors and patching/ painting walls is pennies compared to sinking $75,000 into a solution that has little chance of success.
Our team constantly analyzes the cost of doing something and doing nothing. Time, energy, resources are not infinite. We are most obsessed with how we allocate our time.
Sometimes doing nothing is just what we need in order to have the space and time to rack up accomplishments for our team and partners.
When was the last time you decided not to do something?
Separating the Signal from the Noise
As available data on the web continues to increase, finding the space and time to think and listen can be challenging.
Take a look at these stats from 2014.
How is it even possible to not become distracted in such a “noisy” online world?
While we, too, consume a ton of information each day, we work tirelessly to focus on what is important. The simplest tactic we find ourselves repeating over and over is that we say no a lot and we track where we spend our time.
“There is nothing so useless as doing efficiently that which should not be done at all.” -Peter Drucker
In real estate, it is easy to get swept up by the hype and excitement of “exclusive” opportunities, hearsay, and rumor. For us, staying focused is a matter of discipline. We worry more about the process than the outcome. Rent rates, inflation rates, and tax rates are all beyond our control. We do our best to avoid the plethora of predictions that turn out to be wrong.
When investing in properties, it is much easier to control what you spend, where you spend it, and how fast you spend it. We make sure that each dollar invested counts.
Arguably Benjamin Graham’s best student, Warren Buffett lives this philosophy with his “20 slot punch card” idea.
“We don’t do very many things, but when we get the chance to do something that’s right and big, we’ve got to do it. And even to do it in a small scale is just as big of a mistake almost as not doing it at all. I mean, you really got to grab them when they come. Because you’re not going to get 500 great opportunities.”
Practice saying no for 48 hours. It is tough. But we understand that in our effort to separate the signal from the noise, we are able to have the space to solve big challenges and have an even bigger impact.
Value add to us is much more than a real estate investing strategy. It is our way of working.
Here are a few ways we overcome these common challenges to add value day in and day out.
- You are your own worst enemy – Seek out objective perspectives from trusted partners and teammates. What are you missing?
- Communication Breakdowns – Use technology as a tool, establish “rules of the game” and always try to connect with people in person or over the phone. Who do you need to call today?
- Herd Mentality & Conventional Wisdom – Consider the source of the information and try out the 5 Whys. How else do you question your assumptions?
- Failing to Plan – Have a plan but be flexible to the changing realities in a fast-changing world. How does your ‘road map’ help you to stay on track yet learn from/ adapt to obstacles?
- Doing Nothing has a Cost – Be detailed in your analysis of all the costs related to your decisions, including the cost of doing nothing. How has doing nothing cost you more in the long run?
- Separating the Signal from the Noise – There are things that we can control, and others that we cannot. Our greatest asset that we can control is our focus. How do you focus on the right areas to invest your dollars and your time?
Last but not least, what is your value-add?
Leave a comment below and let us know.