No More Twinkies: Five Lessons for Real Estate Investors From the Hostess Bankruptcy

16

Heaven help us… The rumors are true.

Hostess, the corporation behind infamous (and often delicious) products like Twinkies, Ding Dongs, and Wonder Bread has filed for bankruptcy. The iconic Twinkie is in danger of disappearing forever from the shelves and it’s strange to think my future children may grow up without the sweet enjoyment of plastic-tasting chemical cake.

On second thought, maybe that’s not so bad.

Whatever your opinion is on the value the Twinkie (and other products) brought to the world – I want to look at this situation from a different direction.  Grab yourself a Ding Dong or a toasted slice of Wonder Bread and let’s look at five lessons that we, as real estate investors, can learn from the demise of Hostess.

1.) Hostess’ Products Were Becoming Outdated; Are Yours?

Sure, the Twinkie holds a special place in every American’s heart. However, as the national appetite is pushing further and further into healthier eating habits (following the examples set by much of the rest of the world) Hostess failed to introduce new products that would re-vamp their business. In fact, Hostess filed for bankruptcy in 2004 as well but, unlike the auto industry, failed to re-define themselves and emerge stronger. As the old adage goes, attempting the same thing over and over but expecting different results is the definition of insanity.  Hostess inability to change the company direction to accommodate a shifting cultural shift was a large part of their collapse.

As a real estate investor, you also operate within a changing system (we call it “the market”). If your business model is failing and you continue to do the same thing, time and time again, you will find yourself in the same shoes as Hostess: bankrupt.  A prime example are those “fix and flippers” who were caught with their pants down during the housing crash at the end of the last decade. Failing to recognize a changing market caused many investors to lose everything they had – including their life savings. I’m not suggesting simply changing your investment strategies to whatever is popular – but learning to recognize a changing tide is fundamental in staying in the investing game for the long haul.

2.) Like the Twinkie, Too Much Debt Is Unhealthy

The problems at Hostess were more than just the failing popularity of it’s products. Hostess also racked up immense amounts of unsustainable debt as a business that helped contribute to the inevitable collapse.  I don’t think I need to belabor this point. Too much debt is bad. Some, like popular financial radio host Dave Ramsey, say all debt it bad. As an investor, it’s up to you to decide at what level of debt you feel comfortable with but recognize that too much debt, like too many Twinkies, is going to kill you.

3.) Losing is Only Good When Talking About Your Weight

The third nail in the coffin for Hostess came from the failed labor negotiations between the Hostess employees and the company. It’s easy to blame the labor unions for being unwilling to compromise or the corporation for being too greedy but regardless of who was at fault the inability to reach a goal was a result of a failed relationship between the employees and the employers.  Simply put – the two parties could not find a “win-win” situation and the scenario became decisively “lose-lose.”  The corporation officially closed it’s doors and nearly 18,500 employees found themselves without a job.

As in investor – being creative and finding “win-win” scenarios are key to growing a successful investing business. Whether you are a wholesaler looking to find motivated sellers or a buy-n-hold investor negotiating lease terms with a tenant – a “win-win” scenario is the ultimate goal. Both sides of a transaction must feel they were treated with respect, dignity, and fairness. Relationships are the lifeblood of an investor’s success and creating “win-lose” transactions will tarnish your reputation faster than you can say “ding dong.”

4.) Your Job Is Risky

This week 18,500 employees of the Hostess corporation no longer have jobs. It doesn’t matter if an employee was part of a labor union, never missed a day of work in their life, or had a sick child at home to care for. Those individuals are out of work and forced to scrape by on unemployment until a new job can be found. The employees of Hostess are not alone in this, as every day thousands of individuals lose their job due to no fault of their own.

This important lesson is clear: your job is not secure. Real estate and other forms of entrepreneurship is often seen as being a “risky venture,” but if you are relying solely on the paycheck coming in from your day-job you are in a much riskier position than you think. Investing in real estate offers you freedom from the fear of losing your only source of income if your job suddenly disappears. Whether you are an investor yet or not – being financially savvy and having an emergency fund set up is not only a good idea – it’s a requirement if you want to succeed in life. Don’t wait until your company goes belly-up before you start taking control of your financial future. Start now.

5.) Clean Up in Aisle Four

I’ve got some good news for you: it may not actually be the end of the Twinkie. In the process of the Hostess bankruptcy, the company will sell off most of it’s products to the highest bidder to pay off it’s debts. Most likely you will see Twinkies, Wonder Bread, and other popular products back on the shelf under the umbrella of another corporation, probably with a new and improved marketing plan and packaging.  This “clean up” is a normal part of free market economics and will ultimately probably be good for the Twinkie name.

No doubt you see the connection this has to your real estate investments. Some of the best deals can be found by “cleaning up the mess” left by others. I buy the majority of my investments from banks who were forced to repossess the homes due to non-payment. I’m not taking advantage of the situation, but like the yet-unknown company that buys the Twinkie name, I am cleaning up a neglected and dilapidated product, adding value, and making that product a successful function of society once again.

What are your thoughts on the Hostess bankruptcy? Can you find any other lessons in the story? Share with me below in the comments!

Image Credit: Christian Cable

Subscribe to our mailing list

* indicates required Email Address * First Name Last Name

About Author

Brandon Turner (G+) is the BiggerPockets.com Senior Editor and Community Director. He is also an Active Real Estate Investor (Flips, Apartments, and Buy-and-Hold), Entrepreneur, World Traveler, Third-Person Speaker, and Husband. Come hang out with him on Twitter!

16 Comments

  1. Hi Brandon,

    Great article once again. Regarding the third point, I find it funny how the press and/or people blame the unions for this epic fail. I personally think it is a management cop-out and has more to do with all the other points you mentioned. The reason I believe this, is because look how President Reagan broke the Union for Air Traffic Controllers back in the 80s, for what I would consider a very technical job. While Hostess could have easily replaced some “Chefs” & factory workers, and could have replaced these workers with the many unemployed we currently have.

  2. Leave it to you to draw reference from the Twinkie and relate it to real estate investing! Hysterical, but right on point. Especially the part about reinventing. If you’re not constantly improving and reinventing – but staying true to the core – you’ll soon go the way of Hostess, the Ding Dong, The Ho-Ho and the almighty Twinkie. Great post as always Brandon! Mike

    • Brandon Turner

      Haha Thanks Mike :) It’s a delicate balance – continually improving without changing the fundamentals – but it’s so key! I think I want to go eat an almighty twinkie now. I’m not sure my P90X diet would agree…

  3. Really great post that turns our news-of-the-day conversation right back onto what we do for a living.

    Another point I think about when the big guys fail is, apparently they weren’t paying attention to the details. When you have cash coming in, it’s easy to throw money at problems to cover them up rather than fixing them. Or, if you have enough cash, you may not even notice the places your business is hemorrhaging.

    We find the best way to run our business is “lean and mean”. We have a cash reserve we never spend. When finances are tight is when the company is the most efficient because we’re all looking at ways to cut costs and save a dollar.

    Pay attention to the details. It’s the small leaks that can bring down the ship.

    Thanks, Brandon, for another great article.

    • Brandon Turner

      That’s a super excellent point, Karen. When there is so much money being moved, it’s easy to get lost and not really know how the business is doing. “Lean and Mean” … I love it! Thanks for the comment!

  4. Excellent post, Brandon! Regardless of the industry, I love looking at the successes and failures of larger businesses because there’s always something that I can apply to mine, and I think you were right on point with all of your observations. Periodic review of each of those areas is crucial to the success of any business. So, if nothing else, the tale of Hostess is a great reminder for all of us.

    Thanks for the article

    • Brandon Turner

      Thanks Pablo – I love to do the same! It’s one of the reasons I enjoy reading business books so much, even if they are completely unrelated to real estate. I always feel I can pick up a good nugget or two of helpful information in any story and apply it in ways to improve my investing skills. Thanks for taking the time to read and comment, Pablo! I appreciate the insight!

  5. BT,
    Nice job. I’m glad you led off by talking about them not anticipating change.

    Many in the RE industry failed to see the bubble collapse. Hostess should have drawn up lessons learned from our industry.

    • Brandon Turner

      Oh so true Al! I have to admit I didn’t see the colapse coming either – but I was just 21 and barely knew the difference between a single family home and a multifamily. I’m glad I learned everything as the market fell – getting to experience the bad stuff without being too invested in it. Too bad Hostess didn’t do the same!

  6. Don’t gloss over being greedy in the third point (or don’t miss that point if you’re reading!) It’s so important – for corporations forced to work with unions, and for real estate investors. I’ve seen investors who think that they can squeeze every nickel out of a buyer/renter just because they have a great property. Guess what? It may be a great property, still not worth what you’re asking. Greed is the sole reason I see those properties sitting on the market, and losing value in the meantime, for months on end. It’s always amusing to me (maybe it shouldn’t be?) to see those same greed-mongers scratch their head after a couple of weeks wondering why their property hasn’t been scooped up. In the end, they’re forced to reduce and with a property that’s been on the market, they get much lesser than they would have if they had only asked for an appropriate price to begin with!

    Thanks so much for the post. I loved reading every point and thought the entire thing very clever!

    • Brandon Turner

      Hey Bryan, I’ve faced that problem multiple times. A flip is finished and looks so impressive that it’s so easy to overprice and then wonder why it’s not selling. I once had a house on the market for over a year and had to drop almost 25% of the value before getting an offer. Ick. And yes – I blame it on greed. I thought I’d make $50,000 but instead barely broke even. A tough lesson, but one that almost everyone needs to face!

      Thanks for the comment!

  7. Great article Brandon. And as a health conscious vegan I was very pleased that you started the article by addressing the health aspect of Hostess’ demise. Great job!

Leave A Reply

css.php