I have written this statement so many times in articles on this blog, but it always seems relevant: I love to read books and have found that may be a huge reason for my growth as a business person. That and stumbling and bumbling through mistakes, but both can teach us a TON of lessons about being better in our business lives.
Recently, our company started studying a classic business book from the early 2000‘s to help us stay on track and define our goals for the next few years. We got all of our employees a copy of Good To Great by Jim Collins. We take business books and study them as a company, going chapter by chapter and letting everyone spend a few minutes discussing what applies to our company.
Two weeks ago we read chapter 7 and I could not help but think about the Turnkey real estate industry while I was reading it. The story of drugstore.com that starts on page 144 had me hooked and I thought it offered a great parallel to the Turnkey real estate world. Let me tell one other story quickly though, and then I will tie the two together.
Practical Value Vs. Intrinsic Value
I was lucky enough to spend a few days of down time recently with my older brother Kent and he said something to me that helped me relate what I was reading in Good to Great with the statements I wanted to make about Turnkey real estate. He made a statement about the difference between practical value and intrinsic value. Companies have used their knowledge of consumers for years to differentiate their products and take advantage of these two values to sell their goods. But, only those who sell intrinsic value remain successful over long periods of time. Only those who sell intrinsic value can count on customer loyalty to build a brand that carries them through any economy, good or bad. There is a real difference between the two.
Practical value is the nuts and bolts of a product. In real estate, practical value boils down to the return on investment. No sense in beating around the bush and making it about something it is not. It is all about the return. Now, there are other elements depending on the deal such as the price of the property or the renovation costs, the rental rate, etc. Those are all very important numbers, but they are tied to practical value. In no way am I suggesting that they are not important, but realize that practical value has a limit and no matter what the scenario, a practical value is stuck in place. It is what it is.
Intrinsic value on the other hand is made up of intangibles. It is the value that comes from the feeling someone gets when they buy something, own something or do business with someone and they know it was the right decision. Intrinsic value is created and marketed outside of price. Intrinsic values from a company may be the amount of time someone has been in business, the number of employees they have, the programs they have in place or the little extras they provide when you do business with them. They are the values that hard to put a price tag on because they are often the values that provide comfort, security and good feelings about a decision.
So Practical Value is very different from Intrinsic value and as they relate to real estate investing, and especially Turnkey investing, they need to both exist for a company to be great and have a chance at staying in business. I know some out there are going to read that statement and think I am crazy, but let me explain by going back to Good to Great.
New Technology Will Change Everything
The statement was made multiple times in the book because it was the mantra of the dot-com world in the late 1990’s. Business was being revolutionized and the value people put on businesses was changing almost overnight.
Because everyone thought that technology accelerators would make business basics and fundamentals obsolete. Business were literally popping up with “theoretical sales papers” and going straight to IPO generating billions of dollars in stock value and yet the business did not even exist! The demand was there, the economy was right and investors wanted in! There was a feeding frenzy to buy stock in any dot-com IPO you could get your hands on.
In the real estate world, the mid and late 2000’s offer a great contrast. The housing bubble was bursting and the market was falling apart and seemed to be falling apart a little more every single day. The news was bad, the economy was bad and foreclosures were not only going through the roof, but as the properties were re-entering the market they were being sold at incredible discounts. In the middle of the country, real estate was being sold for dimes on the dollar. Suddenly, everything lined up perfectly and a new opportunity became a buzz word – Turnkey. Turnkey real estate will change everything.
The properties were “cheap”. The properties were plentiful and as the stock market plummeted, demand for a solid investment rose. Many companies began to pop up in markets all over the country offering the same thing…”cheap houses”. Marketing was geared toward investors who had the money to invest, but no where to put it.
This new opportunity was suddenly all the rage and investors from all over the world were buying Turnkey properties anywhere and everywhere. Did some buy properties sight unseen? Absolutely. Some bought properties by the fist full and many Turnkey companies took full advantage. Sell, sell, sell….”cheap properties”. Companies did not worry about adding staff, adding services or adding other value benefits. Many tried to sell properties right over the internet – just point and click and the house is yours. If it is cheaper than you can buy in your hometown then just “click here” and the property can be yours. We’ll adda link to Zillow, a link to a calculator and a little button so you can tell all your friends you just bought a property on-line! It was supposed to revolutionize real estate investing.
Just as the dot-com companies were built on practical value – a new technology that would revolutionize business and those on the ground floor of the IPO would make all the money, the Turnkey explosion was also built on practical value. It was built on the idea that “cheap properties” were a great value because investors needed to put their money somewhere and they could never find properties this “cheap” where they lived. It was built on the belief that people would buy anything on the internet and all you had to do was “ build a website and they will come.”
Why Intrinsic Value Always Wins In The End
Some Turnkey vendors learned lessons very quickly during the volatile years from 2009 – 2010. These companies looked at how they could change their models from offering only a practical value of price to intrinsic value of services. When I say companies, it may be plural, but that does not mean many! Most companies have held tight to the belief that real estate buyers make buying decisions based on “cheap properties”. That may be the case. But Real Estate Investors make buying decisions based on value.
Steve Cook recently wrote an article for Real Estate Economy Watch discussing the declining inventories and declining price discounts on foreclosed properties. We continue to read articles almost daily about housing markets improving, prices going up and inventories moving quicker. I cannot tell you the number of phone calls and emails I have received from other Turnkey companies’ owners and employees asking what we are going to do. It is as if the sky is falling and for some it is. If the business was built to sell cheap properties then you have two choices. Go out of business or start selling even cheaper junk than before. Most are simply looking for advice on what to do next as they have watched company after company slowly disappear.
When I look around the landscape of Turnkey vendors, I don’t see as many companies as there were even two years ago. Many have disappeared as the market has improved. Most, like the dot-coms of the past, built companies that were not built to last. They were not built on the Intrinsic values that some real estate investors are looking for. When the companies are built to sell “cheap properties” with the click of a mouse, their success will be limited by the economy and the market. When the company is built to provide long-term property management, high-touch customer service, no-hassle response and the highest level of experience possible for a passive investor, then that product exists in any economy and any market. Does the practical value have to be there? Of course it does!
No one should expect an investor to declare that their return does not matter as long as they “feel” happy. That is absurd. But many passive investors today, who are very experienced real estate investors, are looking for opportunities with companies that provide taylor-made services and investment properties where the risk and the reward are balanced. That is what the smart investors did during the dot-com bubble.
If you have not read chapter 7, I will help you out a little bit. It tells the story of drugstore.com and Walgreens. The practical value of buying things online and cheap and the intrinsic value of buying things from a drugstore you are comfortable with and know. It is a story about how one soared to a valuation of 398 times revenue and the other lost $15 billion in market value to 1.4 times revenue. It is a story of how trust and long-term relationships with companies were downgraded as relics of the past and the new, fast-paced business plans who sold cheap and convenient would win the day.
I would love to take a poll of all the readers and you can respond right in the comments. I would be willing to bet a box of donuts (i’m not a gambler) that out of 100 people, 100 will say they have shopped at a Walgreens in the last 30 days, while we would be lucky to find even one who has shopped at drugstore.com. Good to Great is a book that all entrepreneurs and real estate pros should read. And for Turnkey vendors…times are changing and the practical value of “cheap properties” are not going to keep you in business. Figure out how to offer intrinsic value and follow Walgreens example.
Photo: StefanContrasting Turnkey Real Estate Investments And The Dot-Com Craze! by Chris Clothier