Proforma merely a starting point in predicting a property’s potential

August 9, 2010

Have you heard the one about the real estate developer? He never met a proforma he didn’t like.

On the other hand, as an operator, I want to know, first and foremost, what something is going to cost me to operate. During my many years of developing and managing multi-family properties across the Midwest with Village Green Companies, I was known (affectionately?) as the “Budget Monster.” It was a title I relished borne of an approach that has served me (and my clients) well.

Every budget or proforma, first and foremost, has to be carefully developed and scrutinized. Dover Realty Advisors subscribes to a system of “sources and uses” which creates internal escrows; an inherent discipline for properly handling hard and soft project expenses – everything from legal to accounting to inspection work.

It is imperative that there is absolutely no guesswork where cash flow projections are concerned. If rents are too low and costs are off the return will not be there and what you thought would be a 10% return is suddenly 4%. You need to know where every dollar is coming from and where it is going.

Also key for analysis: What’s happening now in a particular area you are looking to develop. For example, are competing properties on the drawing board (a negative), or, are transportation/infrastructural improvements in the works (a positive).  How about with regard to the demographics of your potential customers? Are factors related to age and income lining up in your favor? Are these individuals there now? Will they stay? Are more coming? If you are going to have to wait 5 years for a particular neighborhood to transition in your favor, or, if it is poised for a downturn, more than likely that area is not ideal or even viable.

The proforma, then, should be a starting point for determining a property’s viability. From there, do your homework and then some.

Sometimes the best deal you ever did was the one you didn’t do.

Growing a service business

July 30, 2010

No matter your industry you are no doubt constantly focused on serving your existing clients with an eye toward new business. While some say that the day to day of maintaining and growing a business  is a balancing act of duties between the two, I would argue that one is much more important; yet, both are intrinsically linked.

Whether you focus on multi-family and turnaround or Receivership work like Dover Realty Advisors or any service business, I feel strongly that the key to long-term success is, first and foremost, doing an outstanding job for the client and customers that you already have.

It is a simple strategy, really: You worked hard to attract a particular client. You should work even harder to build and maintain a level of trust based on honesty, transparency and superior service. Do that enough times and with enough people and, suddenly, you’ve built not only a strong client and referral base but also a solid reputation.

In turn, that reputation and foundation of satisfied customers, referral sources and business partners builds referrals and new business.  Word always gets around when there is a “good thing” out there.

So, don’t get bogged down or distracted with worrying about where that next big client is going to come from. Fear is always unproductive.  Instead, stay focused on and dedicated to the customers that you have.  Treat them well and others will follow.

Credit where credit is due

July 23, 2010

As someone who has worked within and closely watched the real estate world for more than 30 years – both in Detroit and throughout the Midwest – I am often asked for my opinion on the current economy and where I think it might be going.  When looking at one key indicator, FICO, or, credit scores, the scene is far from pretty.

10 years ago, when the market was robust, just one or two out of every ten applications and scores we looked at had what we call “hair on them”; that is, some sort of “warning flag” that a particular person might be a risky tenant. Today, by contrast, six out of every 10 applications are suspect and risk from customer defaults is pronounced.

In turn, as managers and receivers for multi-family apartment and condominium properties, we have been forced to adjust accordingly. Where, in the freewheeling days of easy credit, we routinely offered security-deposit-free lease deals, now we must weigh fiscal responsibility with real and tangible risk; for example, a sliding scale menu of security deposit “breaks” (i.e. no deposit with a credit score of 750; reduced at 650 and full below 600).

It is an unfortunate ramification of risk mitigation today in an economy where a tenant is just as likely to walk away from their contract as honor it. If only these same individuals considered the long-term effects of thinking in the short term. Such irresponsible decision-making can come back to haunt in a major way down the road when trying to get a loan on a new home. Not to mention how a plummeting FICO score will adversely impact insurance costs – from health to auto. It is “pay me now or pay me later” via a slippery slope which can be hard if not impossible to recover from.

Can we recover? Yes. Will we recover? Absolutely. It will, though, take sacrifice and a new mindset to, in time, turn things around. How often have we seen it over the years? From crisis can come redemption.

Getting a fiscal house in order

May 12, 2010

Of vital importance in running a big city, as I mentioned last week, is getting finances under control and balance sheets resonating black. Unfortunately, the City of Detroit has operated far too long without a proper system of checks and balances and without city officials working in the best interests of their constituents. The City needs to run more like a business. Mayor Bing is trying to accomplish just that.

Take, for example, bus routes in the City. While there is no denying that public transportation is necessary and often lacking, there also exist many routes that travel where very few people live. Mayor Bing is now trying to make the tough, unpopular decisions that must be made to not “downsize” but rather, “right size.” There is simply no way around it.

If such moves are not enacted, the only alternative I see for the City is receivership. Bonds have helped Detroit Public Schools recently, and can help the City as well. But it’s only a temporary fix to a problem that has plagued the City for far too long. Because of Detroit’s tentative financial condition, its credit rating has been reduced, bordering on “junk” status. Hence, some past bond issues not sold out or future bond issues will cost the City much more due to having to pay bondholders a much higher interest rate. Investors see a much higher risk of bond defaults if the City does not get its fiscal house in order.

Mayor Bing recognized that increasing taxes is not an option. Detroit already has significantly higher property taxes than elsewhere in the state. Raising taxes will only exacerbate the problem of suburban flight.

Instead, the city’s return to profitability will be predicated on attracting a larger population of those living and working in the city; Rock Financial’s pending move to Detroit is a step in that right direction. Prudent cost cutting, including the “right sizing” of some services must also continue.

Bottom line: Detroit must operate more like a business; getting its fiscal house in order to increase its bond rating from “junk” to investment grade and create a climate which is an incubator for new business

The Era of the great Operator

April 12, 2010

As I mentioned previously, finding a great operator is essential to enjoying success, regardless of economic realities. Operating, managing and leading multi-family real estate investments for 30 years, I’ve come to know a few things about keeping a great operation going.

Other real estate professionals from around the country, also feeling the real estate pinch, ask me how I survive in the real estate business in Michigan; what my secret is. My response? Overcome the war by winning the daily battles. Put another way: sweat the small stuff.

We are in the era of the great operator. The person or persons who run your operation(s) is much more important to your business than ever. Tech upgrades no longer help you stand apart. High-speed Internet, unless it’s Google Fiber,, cable TV, flat-screens – they’re everywhere. The customer experience and interaction, set by the operator, is once again the rarest and most unique of commodities. You distinguish yourself today through service, service, service, not bells and whistles and smoke and mirrors.

Everything else is truly secondary. A great operator can make a mediocre asset perform in outstanding fashion. On the flip side, a mediocre operator can ruin a great asset. At the end of the day, the battle is no longer between properties and amenities, it’s about the whos, whats, whens and hows of the operator, and the best operator/operation always wins.

At Dover Realty Advisors, we survive by doing what great operators do – rolling up our sleeves every day, going to work wanting to be the best, never resting on yesterday’s successes, knowing how and when to react, and understanding that change is sometimes necessary. I also work hard to find the right people and instill these same values in them. More on that next time.

Are you a Driver or Passenger? A primer for effective real estate investment management

April 5, 2010

In the last several years, investment real estate in Michigan and the Midwest in general has suffered, which is not breaking news to anyone. But when I sit back and think about why, I feel it’s beyond the simple excuse of a “bad economy.” Rather, investment is suffering because of a lack of what I call “great operators.”

In economic downturns, great operators can produce significantly better investment returns then those of mediocre competitors.  Great operators are “drivers” of value while mediocre ones are “passengers;” they choose to sit idle and allow market conditions to be the determining factor for success or failure.

Ten years ago, it was easier to produce favorable investment returns as the strong market pulled everyone along including the “passenger” operator.   In today’s environment, the “passenger” attitude—where one accomplishes marginal results at best—won’t cut it, at least not for long. Those who are “drivers” continue to learn, improve and employ best practices, those practices built on a strategy of constantly maximizing investment value.

The current economic climate has emphasized the need for the great operator.  The key in an economic battle is to recognize great operators and provide them the platform to perform.

I’m reminded of Warren Buffett, the great investor and businessman, who stood by several tenets when entrusting companies with his money – invest in businesses you understand, never invest in the average company, and target the great operators, those who are on top. Because when the average drops, the great operator will fall slightly, but still be ahead of the curve.

Now how do you find a great operator? We’ll continue to discuss that in later posts. Meanwhile, thanks for reading, be sure to drop by again soon.