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.

Elements – Philippines Edition

1. This rooftop garden in the foreground, at bottom, hovering above Makati.  So lush and alluring.  I’ve decided that my company’s future office will be located in such a setting.

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2.  In most developed countries, furniture has become disposable.  Of course there’s a role for disposable furniture, but there’s a role for solid, permanent furniture too.  I present this picture of a table setting in El Nido to introduce a single thing – the sheer mass of the table and chairs.  These chairs were at least 40 pounds each and were difficult to move just with an arm.  And no, I didn’t even try moving the table.  This is the kind of furniture that will stock the office in our rooftop garden.

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3.  Bedside tables/reading desks built right into the bedframe.  Why is this not more of a thing?  And as expected, solid.  Could probably have supported by weight as a chair.

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4.  This is where I stayed in El Nido, and I moved the desk from the corner to here.  I tried for many years to work out of minimalist virtual offices where my desk was nothing but an empty surface surrounded by nothing but blank walls.  And while that might work for some people, I couldn’t work more than an hour before needing refreshment or a walk outside.  Eventually I moved out of the private offices to cheaper hotdesks where I was surrounded by ambient conversation, open space, and windows.  This, is a natural extension of the ‘office’ setting that works for me, and will serve as inspiration for my eventual rooftop garden office.

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The Audacity of Slope

After a decade in real estate, I can safely say that right now, if you want to see the most creative buildings and structures in the world, you go to China.  It’s not Dubai.

On almost every trip, I’m left speechless by a building or structure that is breath-taking in its creativity and sheer audacity.

Let me present Exhibit H.  Nestled deep in the mountains west of Beijing, this serpentine structure is so large as to be visible, several zoom levels up on Google Earth.

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What is it?

This is none other than the longest waterslide in the world.  Made of some kind of welded metal, meant to be ridden on these bamboo rafts with no harnesses, and shooting through power transmission lines and what looks like a transformer, this slide starts 500 feet up.  At ground level, you can’t even see the beginning.  The edges of the slide look uneven and the contraption looks completely unsafe.

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The local story (in my mind: legend) is that the villagers ignored the authorities, who told them not to build it because it was unsafe, and they built it anyway.

I would like to nominate this ride for an award.

On another note, the sheer audacity and the mind-blowingness of this waterslide reminds me of the time I was in Changchun and stumbled on an AK-47 shooting attraction at a theme park, but that’s a story for another time.

China is in many ways a blank slate.  It’s a country that few outsiders understand.  Visiting it always leaves me in awe.  If you think you know China, you likely don’t.

RE Voyeurism: Koh Samui Edition

When I was on Samui a few months for a project, I did a little “side”-seeing at some villa projects around the island.  Overall, with average prices in the nice areas at about ~$200/sf, I was seriously considering a purchase for a while.

What drew me to this particular project was the view.  The pictures don’t do it justice; when you’re in the villa and looking out over this Chaweng Hills vista, you feel like you’re flying.  I would like to know where in the world you can get this combination of a) this hill + beach view, b) located in a relatively urban area with most conveniences nearby (e.g. Tesco), c) in a growing tourism market, d) luxury build, e) listed at less than $1m.

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The Asset:

  • 3br villa at the Verano Residences (1 left in Phase II) as of November 2017.
  • 760 sqm of land, 340 total built area – 180 sqm indoor, 160 sqm outdoor (patio, balconies, terraces, pool).
  • Villa situated 100+(?) feet above Chaweng district in eastern Samui.
  • Price is 18.7m THB for villa only, 19.7m THB with furniture included. This is less expensive than many 3br developments in Samui, given its land plot size and views.

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Verdict:

A very, very reluctant monitor.  With an expected return of around 5-7%, I would classify this as a vacation property rather than an investment.  If we categorize it as a vacation property, ~$600,000 is a little too much for us for right now to plunk down in cash.

Actually, once I have the cash I’d rather develop my own villa and save about 30% on the overall price.  Most developers/contractors I talked to on the island noted that luxury villas can be built for about 10m THB.  Add that to land in similar locations going for 3-6m THB, and the better play is to live on the island for a year while managing the construction 🙂

Rationale:

  • Yield – yield is uncertain.  Little evidence of yields being in double-digits unless oceanfront.  Asset is fairly priced, but a 6% yield doesn’t compensate for currency and geopolitical risks and the ever-present risk of coups or other political instability in Thailand that keep people away.  Also, the airport is a privately-owned single runway.As a note, the pro forma that the developer sent to me illustrates 10-15%.  I think it may be a little high given the assumptions he uses of between $330-$700/night.  Airbnb is showing rates of at least 30-40% less for similarly-sized units and I discounted it somewhat.  There is also a long history on the island of buyers being promised double-digit yields and ending up with ones in the 6-8% range – the most notorious being the Aqua development, which is nearby, although it doesn’t have nearly the awesomeness in view or finishings.The yield is nothing to sneeze at, but you can get this yield in US SFRs in mid-size cities for much less risk, much less capital, and I can at least leverage it.My estimate may be way off, but I think even 10% isn’t enough to compensate for the various risks, especially if the point below is true.
  • Cap gains – Appreciation potential is uncertain.  Little evidence that price/sqm has risen much over the past 10 years.  Some of this may be because Samui also went through the 2007-2009 bust, but still.See below for an excerpt from decade-old newsletter from Berkeley Investment Advisors (red annotations are mine):
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  • Supply – Continuing supply that does not seem to have a natural limit.  Lots of land sales.  Although as a positive, premium product is being priced HIGHER than the target.  The big one will be Anamaya, which is directly on the coast and at a lower elevation, but right next to the beach.
  • Demand – Tourism is growing at double-digit rates per year.  No broker could or would give me an estimate of how many villas are sold per year, but I’d estimate an estimated 20-50 3BR sell per year on the island based on the absorption of the big projects.Samui is on the cusp of becoming a lot bigger.  With less than 3 million visitors it’s still on the under-visited side, compared to destinations like Bali/Phuket, but a growing blip on the radar – bigger than places like Boracay or Ko Phi Phi.  The Ritz, Holiday Inn, and Sofitel are entering the market next year..Picture3.png
  • Intangibles – Views are unparalleled for the price.  For ocean/island views with decent infrastructure and fairly urban locations (Bali, Honolulu, Malibu, Phuket, etc.), mid-$500k price leans towards a bargain.  Location in Chaweng Hills, one of the premium locations on the island.

Here’s a gratuitous picture again of the view.  Yes, that bathtub is on the balcony.

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sigh.

RE Voyeurism: Ellui City, Seoul Edition

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Officetels are residential/commercial zoned mini-apartments in Korea.  This one happened to be in my neighborhood, which has great location characteristics:

  • Next to Lotte World Tower, the 5th tallest building in the world and tallest in Korea.  The combination of this, the Lotte World Mall, Lotte World Department Store, and Lotte World (1 of 2 largest theme parks in Korea) within Instagramming distance of the project puts it in one of the most trafficked tourism areas in Seoul.
  • Next to Samsung SDS, National Pension Service (Korea’s SWF), Coupang, other large employers besides Lotte, who owns the subdistrict.
  • Next to 2 existing subway stops, with construction happening on a 3rd gives it premium access.

The location can’t get better for a residential district in South Seoul.  Office-adjacency wise, you can probably find better around Gangnam Station proper and the Samseong (Trade Tower) areas, but Jamsil is a rising office subdistrict.

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Return characteristics are a bit flimsy for foreigners though:

  • Smallest units are ~170 SF, and go for 195m KRW, which is more or less $180k.  Foreigners will pay an acquisitions tax on top of this.
  • Payment structure is 10% down, 60% over a 2-year construction period, with the remainder due at the end.
  • Residents only can qualify for a interest free loan for the 60%, during the construction period, which converts in a permanent IO loan @ 3% after delivery.
  • Rents forecasted at about 750k KRW, with a 10m KRW deposit.  You are reading that right, welcome to the Korean lease system.
  • Returns for domestics would thus be around ~8% on equity.  For foreigners, according to my calculations, maybe 3-4% at full occupancy.
  • They claim that actual market prices for this type are about 240m, so you would instantly have some cap gains at delivery.

Verdict: worth a look but pass.  I like the product type; Korea faces the same demographic issues as Japan – lots of singles who marry (if ever) at older ages – and the product type is amenable to AirBnB’ing.  The numbers more or less check out, but the lack of financing makes it not so good for me.  Also, KRW/USD is not particularly cheap ATM.

Also didn’t like the shifty typical RE-agent ways of the sales team.  An agent initially told me it was a 100m KRW sales price when I was passing by him on my bike, then the actual price turned out to be 2x.  Also claimed it was only 50% sold but then when we looked at the units, only 3 of the 10+ floors are still available.  Also, the closer guy they brought in to try to pressure us had these smoke-stained lips and kept leaning in with cigarette breath.  He looked disinterested the whole time.