I found this article, “Your Business Model Doesn’t Work Anymore” by Geoff Colvin, interesting for the real estate industry and our entrepreneurial business in particular.
In the mid-90s, I started a business model that had recent college graduates with little to no real estate training buying $100s of Millions worth of real estate. The model was simple. My first acquisitions associate started in Philadelphia, whose streets are in a simple grid system. It was very easy to put Philadelphia’s map into a spreadsheet and then measure progress and results. Progress was based on how many offers were made to owners of apartment buildings, and results were measured on the number of purchased buildings.
At the time, the process of buying and selling buildings was very inefficient, so we were buying the buildings that were too big for the small residential brokers to sell and too small for the big commercial brokers to bother with. We found an inefficiency in the marketplace, and we took full advantage The first year I started this model, we bought 26 buildings, all in separate one-off transactions. Within a very short period of time we realized an increase in value, on average, of about 20% of purchase price. In today’s market that is considered a grand slam. We went on for 10 years replicating this model in 18 different US markets and purchased over 500 separate apartment buildings to create what was one of the largest first-generation, private (no outside capital) multi-family portfolios.
“Change before you have to.” - Jack Welch
Inevitably, the model stopped working. Looking back I can see what killed my model and how we should have pivoted, but hindsight is 20/20. In 2005, the real estate market started getting hotter; however, more influential on my model, the inefficiencies of the buy/sell process were fading. I am one of the many business owners that can say the Internet destroyed my business model. Before 2005, a broker would send marketing packages out to 20 to 50 buyers, typically by US mail or fax. After 2005, with advancements in desktop publishing and email, those same packages were being sent to 200 to 500 prospects. Today, a typical multi-family deal is seen by more than 1,000 potential buyers. This has created a very efficient market that doomed my model of buying at discounted prices.
“If you do not change direction, you may end up where you are heading.” - Lao Tzu
I look back and realize that we not only should have stopped trying to buy under our broken model, but we should have pivoted 180 degrees and sold into this high-priced and very efficient sales process. When 100 people are interested in your assets, it’s time to be a seller. When no one is interested in an asset, it’s time to be a buyer.
“Efficiency is doing things right; effectiveness is doing the right things.” - Peter Ducker
As we look forward, we have created new business models that we feel work in today’s environment and will work going forward. We still find undervalued assets and make them more valuable. That is simply what we do and what we intend to continue doing down the road. But we have pivoted the execution of our model into the more efficient buy/sell atmosphere and are now focused on a number of opportunities that we believe will make the types of gains that we saw in the 90s. Signature is reinvented, and we intend to move forward with resilience.
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