A Real Estate Career: Lessons Learned (2004-2005)

I graduated from Penn in 2004.  I had no job or any prospects to speak of, so I moved back home to LA after spending a summer in Philadelphia fruitlessly looking for a job.

Back home, I saw that the majority of my high school class had become loan brokers at names like New Century Financial, Countrywide, and Washington Mutual.

I grew up in the San Gabriel Valley, which among other things was famous for suburban pot farms, and I also noticed that a not-insignificant percentage of my high school class had gone in the marijuana business.

One guy I knew from high school told me point blank that he liked the mortgage business because it “was like drug-dealing: you give people a fix, and they keep coming back for more.  They can’t resist.”  I remember that he used to drug deal in high school, too.  I guess he had chosen the more lucrative route.

It’s hard to express the sentiment of that time.  Everyone was getting rich off real estate.

I remember the fact that some of my friends who hadn’t even gone to college, were giving no down payment loans to people and making $20,000 a month, did give me pause about how the world wasn’t the way I had learned it to be.

But I liked the idea of real estate because it was tangible.  My senior year at Penn, I had interned for the largest campus housing landlord, and they all seemed like a bunch of easy-going, Philly wiseguys.  I liked that.

When you graduate from Wharton, half the class goes into banking.  I heard stories about how you worked 120 hours a week in banking.  And I didn’t like that.

And with a lack of prospects, no interviews, and no jobs to speak of, I made the decision to go into real estate.

At first, I thought I might like going into the public sector.  I interned at Senator Feinstein’s office in San Diego and researched the economic impact of military bases.  The internship paid no money, so I worked as a picker in a t-shirt factory part-time.  In the other remaining time, I surfed.

But most importantly, I rented a room from a woman, who I’ll call Lucy, who had no discernible job.

My lasting memory of her was of her sitting on a couch, eating ice cream, and watching tv – both when I left for work, and also when I came home.  And it was during one of her ice cream-eating sessions that we struck up a conversation and she mentioned to me that she was in real estate.

When I asked what she did, she said she bought houses.  She had three already, she said.  It was so easy, she said.  She was planning to buy a few more.  Because all you had to do was take out loans and wait for the prices to go up.  In fact, her agent was one of her best friends and later moved in to my room when I moved out.

Midway through the internship, I decided that the public sector was not as fast or impactful as I had imagined.  I wanted to see some action.

So, I applied for a job at Marcus and Millichap, the real estate brokerage.  Almost immediately, I was invited to an info session where I was witness to a presentation that should be enshrined somewhere in the historical annals.

My lasting memory from that presentation was towards the end when the agent put up a slide.

The slide was a grid whose rows were Years 1-5, and whose 3 or 4 columns represented duds, high performers, and rockstars.  In the cells were numbers that represented the incomes that each of these categories of people in the world, stood to make at Marcus and Millichap.

I noticed that the duds started at $80,000 and climbed their way north of six figures in the second year.  The rockstars started in the mid-six figures and were making millions by year three.

These numbers all sounded great, and I decided to sign up.  But there was a catch.  Unfortunately, they said, the job was commission-only so they recommended that you have a savings fund of at least six months to live off of, while you “learned”.

This sounded a lot like school, so I passed on that opportunity and told myself the numbers were probably all fake, anyway.

I moved up from San Diego and stayed with a friend who was in his final year at UCLA.  There, while looking for jobs, I opened the newspaper and spotted a posting with Marcus and Millichap in the El Segundo office.  It was paid.

That paragraph makes me sound ancient, but trust me, there were online job posts and applications back in 2004 too.  Maybe it was dying out, but still.  That’s just how things happened.

I interviewed and got the job.  My salary, if you can call it that, was $12/hour with no benefits, and my job was to maintain the internal database.

At the end of 2004 and during 2005, money was falling from the sky.  And that’s what the theme of those years was: money.  Money, so much of it, that numbers became meaningless.  Hundreds of thousands, millions, and NBA superstar money, being earned by agents in their 20s and early 30s for essentially, making phone calls.

And before you get the wrong idea, the money wasn’t going into my pockets.  I was still at $12/hr.  I was poor enough and without benefits that sometimes in restaurants, if people at the tables next to me left food untouched, I would eat it.  Sometimes after they left, and other times I asked nicely.

My job at the Harris Group of Marcus and Millichap was to maintain and ensure the integrity of the database of leads.  This meant a lot of searching online through other databases to validate information.  It was boring, so I quickly asked for other things to do.

And so over the next year, while helping maintain that database, I also helped underwrite and package deals totaling maybe more than a billion dollars in nominal value.

For a long time afterwards, this entire experience working on the “sell-side”, so to speak, at a real estate brokerage, made me skeptical almost to the point of cynical, about actually investing in real estate.

In my naivete, I first thought that the prices we were going to sell buildings for, were what they were worth.  So I pored over rent rolls and looked up market averages for rates and prices.  What I learned instead, what that there is no such thing as anything actually being ‘worth’ anything.  The sales price is what a broker wants to sell it for, and all the numbers surrounding it are the supporting props that have been artfully arranged to convince you that this price is the right and true one.

And if you think the price is too high, based on the market comps, you are entitled to your opinion, and may be mathematically correct – but if someone else comes by, who is using a tax advantaged scheme to roll out of a previous property and is under a time crunch to park their funds in something else and so snatches up this expensive property, at or higher than listing price because of a false perception that they are competing, then…what was it actually worth?  Who’s right?  You or them?

On our packages, we sometimes photoshopped gangsters out of the roof of some of our building photos, and photoshopped luxury cars into the streets in front of them.  And sometimes I would discover mistakes I had made in the modeling, much later – and it didn’t matter, because the deals had already sold anyway with the buyers scarcely looking at the cash flow.

During a bubble, money becomes divorced from the effort required to earn it.  In our office, there were agents who worked an average of two hours a day, three days a week.  There was one who was making a million dollars a year from having landed a single big-time client on a lucky phone call.  And sometimes these agents would go into the offices of the harder-working agents and steal leads off their desks and make six figure commissions.

Even though my job was to maintain a database of leads, that last reason is why sometimes people sabotaged my work by trying to pay me on the side to not do my job, or to give them contact information for their own use.  In reality, not many people wanted me to share the hard-won contact information for potential leads across the whole office.  They wanted it for themselves.  This is when I learned about misalignment of incentives.

I don’t want to give the impression that no one in the office worked.  The Harris Group was named after Greg Harris, who was and probably still is, a legendary superagent.  Greg’s stare was of the laser beams shooting out of his eyeballs variety, and he was always on the phone, always in that rapid-fire staccato voice that hammered poor clients down out of their illusions of paying less for a building than it was ‘worth’.

One of my lasting impressions of Greg is a time I walked into the men’s room and saw, under the stall doors, someone sitting on the toilet with pants around his ankles, doing a real estate deal at full volume.  It was Greg.

His work ethic was legendary, and when he was first starting out, I heard he hired interns even younger than he was to drive him from his home to the office at 4 am – no one else was up at that time, except the elderly landlords and investors who he would be calling, and who would remember that he had been the first to call them that day.

And this is also when I learned about money.  They say money makes you more of what you already are.  That is true.

I also think money, in some deep way, also reveals your deepest held beliefs.

The agents in our office were split into two camps.  The ones who worked two hours a day, bought nice cars and homes, partied mid-week in Ibiza and Miami, and had no compunction or even deep thought about living through a bubble of historical proportions.

We had other agents who made just as much money but who were deeply terrified of the state of the world and felt that something was deeply, utterly wrong, and sought to serve penance for it, in a way, by working even harder.  These agents, I think, sometimes felt guilty.  Like when they did deals that caused market rents for an entire town to double.

But if I really think about it, the two camps weren’t so different, fundamentally.  The first camp spent their money as soon as it came in, like they were laundering it.  Perhaps from feeling like it wasn’t really theirs.

During this job, I also learned about the power of sales.  Selling is storytelling, and sales is an art form that needs to be taught in school, because the basis of our shared reality as humans exists as a series of beliefs and stories.

I learned that during a bubble, the best salesmen are the people who deliver their message with absolute conviction, no matter how outrageous it is.

Actually, the more outrageous, the better to catch your attention.  Because during times like that, peoples’ beliefs are being tested.  And during periods when peoples’ beliefs are being tested, they want to listen to people who sound like prophets.

At the time, real estate cap rates of 4-5%, even on trophy properties, were considered unbelievably low.  And sales prices of $200,000/unit on multifamily residential were considered high.  In any case, the actual figures don’t really matter.

What matters is that the best agents in our office were the ones who could talk about cap rates of 4% and prices of $250,000/door as if they were universal constants like e or pi – and often, I noticed, the less the agent actually knew about market conditions, the lower his doubt, so the higher his conviction, the higher his credibility, and the higher his closing rate.

Meanwhile, those who overanalyzed (like me), stood by in disbelief.  In times like those, the best storytellers don’t even need a firm grasp of English.  Just belief.

And my last point is that when you’ve worked around people in real estate for a long time, you’ll pick up a pattern of speaking.

This pattern of speaking is whereby crazy claims are stated boldly as to make others doubt, waver, to ultimately put them at a disadvantage.  This is a variation of the anchoring effect/bias.

This technique absolutely ravages weak souls, conciliatory/nice people, and those who are unsure of themselves.  Let’s say you’re trying to sell me a car and we meet, go through the pleasantries, and after I look at your car, the first thing I say at the top of my lungs is that I’m going to offer 20% of your list price for it because the bumpers of your car model cause cancer.

Now if you’re inured to this type of speaking then you’ll just shake your head no or tell me to GTFO.

But if you’re a nice person, or out of practice with this type of aggression, you’ll start doubting yourself.  Your initial reaction to the 20% was shock and disbelief, but you’ll start thinking…maybe I did price it too high.  Your initial reaction to the cancer claim was the same, but now you’re thinking about it – maybe the metal or the paint in it does cause cancer, but the incidence of cancers from bumpers is very, very low.  What you’ll do is start to explain this it depth and try to argue it logically.  Now you’ve lost because you’re playing my game.

You’ll try to bring reason into, and analyze/dissect a fundamentally illogical and absurd claim.  Congratulations, you’ve lost.  The discussion will go into the finer points of airborne carcinogens and colors – and you’re in a hole because you’re tacitly implying there may be some truth to the cancer claim instead of making ground in the other direction.  And with the doubt of the price lingering over your head, the price will slowly creep down to my target.

I mention all this because this was the prevailing way we all talked to each other in the office, whether discussing foods, sports, real estate, or even pets, the latter of which actually led some people to start believing that such a thing as a pig-dog (a cross between a pig and a dog), existed.  And this is the way of speaking that during a bubble, or times of distortion and change, lead people to believe insane things, like that prices will keep going up forever.

The only way to counter this technique is to: a) recognize it immediately, and either b) counter with an equally insane, but opposite claim so the discussion grounds still stay somewhere in the middle, or c) drop it and walk away.

I also note that our current president (who is a real estate guy, by the way) has taken this technique all the way to the top.  He says outlandish things and has the other side/media actually take it seriously and try to refute his claims by logic.  If you do that, you start playing the other person’s game so you’ve lost.

As I see it now, the Democrats seem to have stopped their full-fledged losing campaign, and moved from c) the outraged dismissal phase, to b) full communism.

Things I’ve Learned as a Consultant – Part II

  • As an extension of the last point of the last post, when you’re in professional services, whether banking, law, design, consulting, whatever, you’re trying to sell someone something that there are no physical results of. And sometimes, not even precedents. You’re saying ‘trust us’. So how do you build that trust? A brand goes a long way.
  • But having been on both sides of this — the salesman and the person doing the contracting/hiring, I believe the absolute best thing that will help you nail the pitch, without question, is a sample. Samples are the strongest test, for the simple fact that having something that addresses the requirements perfectly makes you impossible to ignore. This not only makes them know you are capable of doing the job, but that you’ve listened. It is a rare client that knows 100% exactly what he or she wants before the service has started, because as I’ve written in the previous post, clients engage you based on a dark nebula of capabilities they imagine you can do. In the beginning, it is important for them to know that you are responsive, that you can react to their feedback.
  • But I cannot stress this enough: “Let em test the product, give em a promo show/Just a breeze, not enough to catch a real vibe/Then we drop a maxi single and charge em two for five/Ain’t tryin to, kill em at first just, buildin clientele/So when the album drops the first weeks it’s gon’ sell” — Jay-Z (Rap Game/Crack Game)
  • The reason is that if you have a sample or a pitch that addresses their requirements, it will cause them anguish if they have to pick someone over you. It will cause them to justify their own metrics. You will be remembered.
  • If you are in a profession that does not allow you to provide a work sample, just be aware that a buyer of services, especially if they are purchasing a particular service for the first time, will latch onto other things (attribute substitution). For example, how polished of a speaker are you? Do you buckle under pressure? Do they like you? Do you have the proper gravitas? Are you older, do you have a few grey hairs? Many of them are unfair and irrelevant, but this is what happens, so it helps to be aware.
  • Related to that last point, there are people in the consulting business who dye their hair grey and wear glasses in order to appear older and more experienced. Just saying. When you’re a bright young person it’s easy to become disillusioned about this. But if you encounter this situation, it is better to step back. What is it really telling you? That as much as you think clients are paying for the actual insight, they’re paying for reassurance. They are buying the brand.
  • The higher your fee, and the longer you take, the higher the expectations of your client. They will grow. And grow. It is better to program in interim deliverables to anchor their expectations early and allow for feedback. This is as a result of differing perceptions of time between those in the flow of doing work, and those waiting for something.
  • But curiously, even if you are able to finish something ahead of schedule, having any extra time left leads to doubts. You’ll check and recheck your work. Due to Parkinson’s law, the project has a good chance of actually always ending up taking the amount of time allotted to it.
  • Everything is about good communication. It’s not just about having the facts or a superior product. You can have a superior product and still lose the pitch, you can have all the facts and insights but fail to engender understanding. And you can have titular authority in your firm, but fail in managing or marshaling the resources of the people under you. Good communication includes soft skills, connecting with people, speaking with enthusiasm, being authentic, etc.
  • Smaller clients are good because often you work directly with the person who is both the decision-maker and stakeholder in the service. But smaller clients have less to lose when they try to negotiate your fee — down — after you’ve already performed. They can also be demanding, and your interactions will be subject to the whims of the person buying your service, who is often the same person writing your check. Big clients will often have no problem paying you, but because the stakeholders, decision-makers, and people you are interacting with can be three different sets of people, the layers of hierarchy and management can lead to confusion, delays, conflicting directives, which ultimately means, more time spent on it and more work for you.
  • Since consulting is the business of selling brains, the necessary conclusion to this premise is that the better the brains perform within a given length of time, the more value you can capture, and the less costs you incur. Research has shown that cognitive thinking is a physiological process, meaning it’s another body function regulated by energy levels. Keep up your energy levels and you have the potential for longer periods of higher thought. Exercise, meditate, eat right. This cannot be stressed enough, and goes back to the athletic component of traveling for consulting.

Things I’ve Learned as a Consultant

  • As in any other job, being good at the job is a process, not an outcome. Pursuit of the frontiers of the field, a focus on incorporating new ideas, relentless introspection and feedback, hard work, and constant improvement of technical skills will help you stay ahead.
  • Identifying and improving the necessary technical skills was the easy part. Merely recognizing what the other necessary skills were, like salesmanship, self-discipline, introspection, hard work, was harder, and it was hard to miss that I didn’t even have them.
  • Consulting is a lifestyle choice. This is not only when it comes to travel, although that is a significant portion of it. The consulting lifestyle revolves around the project lifecycle. It starts with the pitch and sale, moves onto research and analysis, and concludes with presentation and feedback and iteration — with different required skills in each portion of the cycle.
  • When extensive travel is required across multiple time zones, being good contains a physical, athletic aspect to it as well. Maintaining clarity of thought, focus, and polished communication skills when I am physically in a meeting with a client while my biological clock is deep in an REM cycle, is as physically demanding as being in minute 32 of an intensive Muay Thai workout.
  • There is another, longer cycle, which is the lifecycle of a consultant himself or herself. As an entry-level person, you are primarily engaged in research, analysis, report preparation. As you progress out of the back office (figuratively speaking) and into more of a client-facing role, you are called on to do more meetings, pitches, presentations, face-to-face communications with the client. Before you know it, your job is no longer research and analysis; it turns into that of a representative, salesman, and manager of the younger versions of you. As with the project-cycle, different skills are required at different points in the cycle.
  • There are several things about the nature of the job itself. First, a consultant is a paid outsider, so that no matter how convincing you are, nor how much you know, you have no inherent power to actually implement your ideas. Clients can and will ignore your advice. This can be demoralizing.
  • Another important thing about the nature of the job itself is that that you’re in the business of selling time — your time, which is finite. Consulting is the business of selling your capabilities to achieve a recommendation, insight, or strategy, which in itself is the product of human minds working in real-time. If that sounds vague, that’s because it is. And because what you’re selling is so undefined, there is naturally a huge variability to it, regarding both the actual product and your client’s expectations. Managing both of these things becomes a huge drain on resources and time. Clients will, almost as a rule, demand that you do anything and everything for them that they’ve seen you do, read about you doing, heard about you doing, and imagine that you can do.
  • Because of this variability (also known as customization), scaling a consulting practice is difficult. Consulting is the business of leasing a limited portion of human brainpower for a limited period of time to accomplish a task. Unless the human brains in your employ can be programmed to think faster and more effectively at the same time, increasing the productivity of the fundamental resource (brains) has natural limits.
  • But scaling can be done, and in order to do so, the metric that I find natural and easy to focus on is the implied professional fee that is being charged to the client. This can be done in almost any service industry: think about what you’re charging the client in terms of an implied per hour cost. Take your fee and divide it by the number of hours you or your people will work. Whether it is $100, $200, $500, $1000+, the principle is the same.
  • If you want to scale and grow, you need to ruthlessly outsource tasks that can be performed at an equivalent level to those with the lowest rate. If your rate is $500/hour, does it make sense for you to be doing document preparation or formatting that you can pay $15 to $20/hour for? Or even to be maintaining a model yourself? The argument to this is that by removing yourself from the work, the overall work will lose quality. As a thought experiment, does a film lose quality because a director is not doing the cinematography or acting himself? This is a big problem in small consulting companies where everyone is expected to do everything. My experience has suggested to me that this is immensely inefficient.
  • Merely going through this exercise will force you to develop systems, templates, methods, and training, which will increase the productivity of the entire team. Another issue at play here is the sheer economics of batch tasking and the costs of switching. Switching tasks incurs mental and thus temporal costs. Even if, theoretically, there were a ‘superstar’ consultant who could do each of 5 individual tasks at a superior rate than anyone else in the organization, this person may still be slower to complete the entire ‘set’ of tasks than 5 different people specializing in those tasks, because of the switching costs.
  • This is the kind of issue you deal with as you make the transition from entry-level positions to higher ones, and you’ll have to abandon old habits and gain new ones. This is the kind of struggle you experience at any professional services firm. Where you go from being a person who produces work, to the one who guides and oversees it, and then finally who ‘manages’ and sells it. You remove yourself from the work that you were originally hired to do, and you need to develop new skills to adapt.
  • It may very well be the case that you are content with the level of sales and work-to-reward ratio you are experiencing. Then none of this applies. But in a changing world, stagnation is by definition a regression. To even keep up, we must keep growing and optimizing.
  • More on people — who as brain-carriers, are a consulting firm’s primary asset, as the saying goes. Programmers talk about the 10x programmer, and to a certain extent I believe this is true of people in any service-oriented industry. Performance conforms to a distribution with fat tails on either end. 80% of the people are in the middle, which does not imply mediocre. It just means everyone is clustered there. Then there are the 1–5% who are outliers in either direction. Alternatively, if you think about the 80/20 rule, it is saying that a sufficing level of work, the 80%, is easy to achieve. This is the equivalent to getting a solid B in a bell-curve weighted class. I hated this system in college, by the way. But the 20% is the spread field, where you distinguish yourself from others. It’s a wide open field. 20% is the details, and this is where people differentiate themselves by adding more value than others.
  • Think of it this way. Say you hire a painter to paint your walls. Both cover the walls in paint, but one of them pays attention to the details. He covers your existing furniture, he pays attention to the finishes, making sure the edges and corners are perfect, nothing is smudged, no glue is on the ground, nothing has been broken, making sure there is absolutely no blemish anywhere, everywhere. Conscientiousness and care go a long way in differentiating yourself from the pack. To use a consulting example, at the analyst level, this would be someone who works faster and harder than others, builds new frameworks and approaches, even while paying attention to formatting and presentation, to typos, wording, someone who builds models that can be easily followed by others, someone who integrates frameworks located across different sources, someone who doesn’t hard-code inputs in Excel, etc.
  • All of the above is in the name of widening the gap between implied hours charged for, and hours actually worked. The other way to do this, obviously, is by increasing the number of implied hours charged for; i.e. charging more. The easiest thing to envision, in theory, is the hardest to pull off, and this is to develop a truly unique skill. A moat skill, a monopoly skill, one that no one else has. As in the story of the repairman and the hammer. When you develop a skill like this, you can charge whatever you want. But this is incredibly difficult to do.
  • The more realistic thing that can be done is develop a brand and a reputation for good work. A brand is something that does marketing for you even while you sleep. A brand helps you charge more for work of an equivalent quality, because in consulting, the hardest thing to realize is that people are not buying the service itself — they are buying the reassurance. This is why lawyers can get paid even when there is a risk of losing, and consultants can get paid when there is the clear possibility of finding nothing new. This relates back to the old saying that consultants are in the business of using the client’s watch and getting paid to tell them what time it is. But people hire them anyway.