The Missing Link in Real Estate
A common thread runs through everything spoken and written about the real estate industry, from conversations to specialized seminars, and it addresses these questions.
1 -- Who is lending and what is the cost?
2 -- Who is buying or selling, and what are the price, the capitalization rate, cost per foot, etc.?
3 -- What legal entities, tax laws, etc. apply?
Consequently, most of the materials produced by the real estate industry focus on these three areas. Conspicuously absent from most of the conversations and presentations are analyses of management skills, approaches, and techniques.
As a result of this environment, real estate owners and asset managers have a transactional mentality and a desire for maximum leverage.
This type of thinking has led real estate executives to focus on promotion, not management.
Real estate executives who focus on promotion (a mentality shared with many politicians) move the efforts of their company away from identifying issues and planning and controlling products. Because they have lost an important aspect of management in the ability to develop options or alternatives, their companies cannot improve the quality of their products or maximize their results.
A company that doesn’t have options or alternatives is a company on a collision course with a crisis. Without options, a problem becomes a crisis. With options, a problem remains a problem, but a company can survive problems. A crisis reduces the likelihood of survival. Two recent examples follow.
1 -- Many real estate companies have found that their cash reserves are disappearing. The companies’ principals looked at their profit-and-loss statements and discovered that their property management operations were the only ones generating a steady income. Their conclusion: We want more of that. The fact that their companies couldn’t identify their markets, and didn’t have track records, plans, company profiles, and financial projections didn’t change their outlook. The executives still retained their focus on promotion. What did they do? Most of them created a sales force by transferring people from other positions within the company or by hiring new sales persons.
The result was a host of real estate companies with an army of sales people chasing more property management business than existed. The people who made the decisions about hiring property management companies were deluged by sales people from real estate companies, and the sales presentations and materials that were developed to sell property management business all began to look alike.
Some companies were large, some small. Some companies had been in business for a long time, some for a short time. But they all claimed to be the best and provided similar forms of compensation, management style and reports.
There was only one predictable outcome, and of course it occurred. The people responsible for hiring property management companies asked for and got lower and lower property management fees. Subsequently, the profit margins were squeezed, and what was probably a profitable business in the beginning was no longer as profitable.
A few owners and asset managers were open to suggestions. They asked themselves: Are new opportunities available for creating income for our type of business? I looked at one property management company and concluded that with minimal risk and very little capital, they could create 20 possible sources of income from their present business. Unfortunately, their emphasis on promotion, which resulted from the transactional thought process, precluded them from coming up with or even accepting these ideas.
2 -- Recently, I had an opportunity to meet with the new CEO of a local real estate company. This person has the two classic characteristics of the promoter mentality: He believes that people are motivated when they are happy and he carefully says all the right things. He believes that his two most significant accomplishments are getting people to speak to one another, and telling people the company has to make a profit. The facts that he doesn’t have a well thought out mission statement, philosophy, or business plan; that his technology is outdated; and that he has an inferior product and doesn’t understand his market don’t seem to bother him. Because he has developed a transaction mentality, he believes that all management has to do is make people feel good, pay a commission, step aside, and watch the money flow in. What he doesn’t realize is that the profit he so anxiously seeks is the by-product of sound business practices, and a transaction mentality is only one part.
Compared to real estate companies, non-real-estate companies usually have a better understanding of how to maximize their present income and create new sources of additional income. The real estate industry has recently been given an opportunity that places it on a par with non-real-estate companies: a marriage with Wall Street. This association has provided new sources of capital. The real estate industry now has access to long-term capital and exit capital. This means that real estate companies may now be required to use the management skills already used by non-real-estate companies.
What is the missing link? The missing link is a thought process that fosters a conceptual approach toward utilizing management skills. This conceptual approach strengthens the ability of a company to examine its position in the marketplace. This approach goes deeper and further than a transactional mentality. When the management of a company looks at its business, it has to know all facets of its business: the skills, desires, and energy level of its employees; its networking contacts and the contact’s contacts; etc.
Management skills combined with this knowledge will help the executives of real estate companies create the structure and energy to find ideas that can be converted into plans with checkpoints and budgets and sources of capital that will ultimately create products, revenue, and more profit. The successes achieved by the real estate companies that use sound management techniques will become evident to all real estate companies, including those that don’t have access to public capital.
The result will be either better managed real estate companies with better performances and better financial results for those companies that use sound management practices, or failures and a round of distress driven mergers for those that don’t. The net result will be an all around healthier real estate industry.
(Robert Mann and Allen Cymrot have well over a half century of combined experience in the real estate field. Some highlights of this experience include building a billion dollar portfolio, addressing both houses of Congress, college lectures, and design of industry related Internet portals. Their current project, NetGainRealEstate.com, is dedicated to a better understanding of and increasing the value of income producing real estate.)