A Real Estate Career: Lessons Learned (2006)

After about a year at the brokerage, I moved across the courtyard of our office-industrial complex to a smaller shop where I became a monk at the temple of Excel.

In retrospect, before I left, I should have tried to become an agent and at least do a deal or two and actually deeply understand everything from the lead stage to closing.  I understood it better than most, but not as much as I could have.

But I didn’t do these things.

It’s hard to articulate my thinking at the time.  I was naive and arrogant/blind.  I mentioned before that because of the tremendous amount of money some were making, they either felt guilty or like it wasn’t theirs.

For me, looking at the tremendous amount of money others were making, sometimes working 5 hours a week, it gave me the impression that money was abundant, and that to earn it required little skill, and more like random optionality and knowing the right people.

I also should have tried to learn more from the actual hard-workers in the office, like my boss Greg.  But partly because he was never in, and partly because I was arrogant and blind, I didn’t.

So now officially, I became an analyst at Del Mar Equity Partners, a TIC sponsor.  This means nothing to anyone outside of real estate, but it suffices to say we were basically an investor looking for good deals, and syndicating them out to a range of other investors.  Like doing a group-buy of real estate.  And making some money in the process for being the originator.

In practical terms, this meant I moved from an office of a group of 15 young hooligans doing eating competitions, boxing matches, arm-wrestling and push-up tournaments everyday, to a sedate environment where I worked with only two other people – my boss, Martin, and an administrative assistant.

This provided much less pandemonium, and less time devoted to psychological analysis of extreme humans, but things were no less entertaining.

Since agents and brokers around the country knew we were a source of capital, we got bombarded with deals.

Some of these deals showed up unsolicited in the mailbox in the form of postcards and too-good-to-be-true brochures.  Others showed up in my inbox, with rent rolls attached and scarcely any explanation to them.  Some of these deals made sense.

Others did not, like deals where you were supposed to invest, and you got no money or any return for a few years, and then at the end you got an unspecified return on the appreciation of the property.  Like a zero-coupon bond.  Except even riskier, and again, no guarantees on what your principal was worth at the end.

And sometimes people called.  Sometimes I would get calls from guys who sounded like they were working in boiler rooms.  Some guy with a wiseguy accent would call and ask me if I wanted to hear about an opportunity.  Then if I said yes, he would ask me if I was ready, if I really wanted to hear about the opportunity, if I was really ready or not.  It sounded like these fluffers were trying to get me to stay on the line until they called the real closer over, but I never stayed on the line.

Anyway, for the next six months, I became a master technician of Excel.  Not a master real estate analyst, understand: a master technician.  More on this later.

My job was to model out the deals we were getting pitched.  This meant I had to model a few dozen a week.  Now looking back at it, I spent those months doing what I thought at the time was ‘analysis’: filtering dozens of deals a day, modeling them, and recommending the ones that ended up with good returns.

But what I was actually getting good at was not analysis, nor real estate evaluation.  It was Excel.  Partly because of the sheer volume of deals, and partly because of the sheer time I was spending with the program, I became obsessed with Excel itself.

I started slowly by implementing functions like dynamic rent bumps, and probabilistic Monte Carlo simulations on rents when the leases rolled over.  I implemented arrays and quintuple nested functions referring to INDIRECT and OFFSET cells.  I had macros that pulled in information from demographic sources to update assumptions.

It had become my goal to model the behavior and performance of a building, to recreate it in a small file sitting on my laptop.

This wasn’t analysis at all, and this Excel work itself didn’t actually help me become a better investor.  What I was doing was ascribing Excel with an intelligence it didn’t have, and hoping to imbue this construct with decision-making and analytical capabilities.  It was intellectual laziness, in a way.

If I could have this period back again, I would: conduct more interviews, do actual on-the-ground research, talk to owners, brokers, shopowners down the street from the building, in the name of articulating a thesis on different markets/types, and then test these theses continuously.

What I’ve realized ever since, is that in real estate, doing an initial filter on a deal is not some arcane exercise of testing 100 different assumptions.

It’s an exercise in evaluating maybe 5 core ones, like cap rate, rents, growth, supply, and expenses.  A good investor will probably only spend five minutes on the back of an envelope filtering a deal, and if it passes, then spending 95% of the time testing these core assumptions with research.

I didn’t know any of this yet.  I didn’t have a filter system so I was looking at every deal like it was some sort of abstruse puzzle that could only be unlocked with my magical tool, Excel.

What I was lacking was critical thinking, big picture thinking, and thinking from first principles.  Anyone can learn or be taught to become a technician.  Becoming an actual analyst requires you to think.

I didn’t know how to think yet.  I didn’t have a view of the analysis I should be doing, and because I thought that just “doing Excel” was the whole job, I was bored, frankly speaking.

And so I left this job too, six months after joining.  We did two deals when I was there, out of the hundreds I had scoured.  In retrospect, that’s a lot for six months.  But in my naivete, I thought it was too little.

Also, one of the deals was literally nothing more than an off-market property that we flipped within a few months, sight-unseen.  This deal just about sums up both my experience there and the spirit of the time.

I left because in a sense, I thought there was no more growth opportunity for me.  And I believed it for a while.  Only in recent years have I realized it couldn’t be further from the truth.

In any kind of job, there is a wide range of ‘winging it’.  Because I had only worked at small companies and everyone kind of did everything, I thought (at the time) that this prevented me from falling into a ‘winging it’ mentality.  After all, I did what was assigned to me and did it well.  But I was still in a lazy zone.

In any job, there is a level of performing the job that is beyond just doing the job.  This level is thinking like an owner, like you have something at stake.  Thinking like an owner will open your eyes to new opportunities, because you’ll understand the opportunities and constraints, and how decisions are made.

In the years since I’ve worked these first two jobs, I’ve come to believe that unless you start thinking like an owner, you have no real knowledge about your business or industry.

And the way you know whether you’ve grown as far as you can grow in a job is, can you do the owner’s job?  For me, the answer was no, for both jobs.  Therefore I hadn’t tapped out my growth potential.

But back then, I didn’t realize any of this yet.

I quit and for a time I was jobless.  And a little directionless.

I interviewed at a surf company.  I remember walking into their Orange County office in business casual and drawing stares, because everyone else was in t-shirts and shorts.  Talk about a game theoretic exercise: do you dress down for a job interview at a surf company, potentially disrespecting the interviewer, or do you dress up, and run the risk of looking clueless?

Anyway, I didn’t get the job, but the interviewer did give me a new wetsuit as a sort of compensatory prize.  It was a little small for me but thicker than my existing one, and better for winter surfing.

Now we were in the summer of 2006.  After a few months, I was going to be in for a real treat.

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