Why Are Real Estate Companies with Zero Profit Being Valued at Billions?

wall st

$18.6 Million. $36.4 Million. $10.7 Million. Nope, those aren’t profit numbers, or even revenue. Those are the net losses sustained by Zillow, Redfin, and eXp, respectively, in the first quarter of 2018. And yet, those three companies combined are valued at over $3.3 BILLION dollars. How? Why? Why are these real estate companies receiving massive valuations when they are not even turning a profit?

In this new era of technology, the 4th industrial revolution, Wall Street is buying into the negative losses and placing bets on which real estate company will be able to “Amazon it”. These real estate companies are betting on themselves too, along with private equity firms, that they will be the next Amazon, except that there is only one Amazon. And only one, maybe two of these real estate companies are going to have explosive success, everyone else is going to lose.

On the other hand, Realogy, Remax, and Keller Williams Realty (if it were publicly traded) are valued at $3 Billion (Realogy) and $1.6 Billion (Remax), the difference is they are all highly profitable. But Wall Street continues to bet on eXp, Redfin, Open Door, etc. to be the ONE successful tech disrupter instead of betting on proven companies with positive cash flow. It blows my mind that companies can have such massive loses ($36.4 Million in one quarter!) and yet still be valued at over a billion dollars. And these aren’t just loses for one quarter, these loses are over several years and continue to increase year over year.

How can these companies sustain such loses and keep pushing forward? Why are they okay with such big loses in the first place? Well, venture capitalists and private equity firms are injecting money into those organizations (based on the hope that they will be one of the few successful tech disrupters). With these huge cash infusions, these real estate companies don’t actually have to figure out how to make money, it just shows up. They are not holding their money accountable. Sure, many of these companies are increasing their revenue, but they are also increasing their expenses, and thus their losses. Now, I’m not saying capital contributions aren’t helpful for fast growth. They can be a great way to hire more people and to build a stronger business foundation through systems and technology. But how much risk, how much loss is too much? Is there a smarter and more sustainable way to grow?

I think it should be noted that Warren Buffet got into the real estate game, but bought a profitable business; he didn’t invest into technology. He is looking for a cash on cash return while Wall Street and private equity is looking to make a fortune at each evaluation and round of investing. We’re seeing the largest growth in real estate right now, and venture capitalists are naturally hoping to capitalize on that. I’m not knocking their method; they are playing the game effectively. But what happens when the market shifts? What happens when Wall Street says enough? A shift in the economy could end the game. They will just loose more and more money. At some point it becomes unsustainable.

What we’re doing at Hergenrother Realty Group, and many other Expansion Teams are doing around the country, is quite similar to Redfin, eXp, and Compass. The biggest differences are that we are building these big companies within an existing real estate company that has proven systems and infrastructure, zero debt, and high profitability and we’re doing it at a slightly slower pace (to maintain said profit). We may not have these high valuations and capital injections, but we have profit. Other companies are not holding their money accountable. We are. Think of it from a personal perspective. When  you only have $100 to spend, you look closely at where even penny is going. When you have $100,000 in the bank, spending $20, $50, or $5 here and there doesn’t seem to make a difference… but it adds up. Quick. If you make $100K, but spend $150K, then you are worse off then if you made $50K and only spent $40k. It’s simple math.

If nothing else, it is a definitely an exciting time to be in real estate. The 4th Industrial Revolution is here and we’re just starting to scratch the surface of what that means for real estate and business in general. As challenging as it will be over the next few years, I wouldn’t want to be anywhere else. It’s those are that are hustling, that are grinding, that are in the arena, who will ultimate succeed when this all shakes out. I, for one, look forward to being part of history.

 

 

 

 

Advertisements

The 3 Key Hires You Need for Any Business

hires

“You don’t build a business.
You build people, and people build the business.”
-Zig Ziglar

Whether you are a sole-proprietor looking to grow your retail store, an investor looking for their next project, a CEO of a multi-million dollar conglomerate, or a small online business owner, you need people to help your business operate, grow, thrive, and survive. If you don’t want to hire and lead people, that’s fine too. But that is not running a business. Read more about that in a blog I wrote last year called 5 Things You Need to Decide Before You Become an Entrepreneur.

So, let’s assume you have your heart set on building a business. Great. It’s time to invest into people. But who do you hire first? I actually don’t think the answer to this is as cut and dry as one might think. It all depends on you – your natural skills and behavior, and your goals. Let’s say you are a master salesman, well, your first hire then shouldn’t be another sales guy. Hire someone who can fill in for your weaknesses (likely an administrative or operations professional). If you get lost in spreadsheets, love to organize and analyze data, and find enjoyment in creating detailed business plans, then it may behoove you to hire that sales guy!

Regardless of where you land, there are three key hires you will need to make in order to build a solid foundation, successfully operate your business, and ultimately grow. Now, one of these people may be you for a period of time. That’s fine, hire the other two first. However, eventually, if done right, with the right people, you will get to a point where you will have to replace yourself too. I was the sales guy for a while. That was the last piece of the puzzle that I hired for, but I hired administrative/operational and finance staff almost immediately once I knew I wanted to build a business.

Here are the three key hires you need for any business:

  1. Administrative/Operations Staff – Whatever sexy title de jour you choose to use – COO, Executive Assistant, Director of Administration & Operations, Chief Chaos Coordinator – this person will be your organizational and operational wizard. This hire is usually a Jack or Jill of all trades – they are essentially handling everything but sales, assuming you hire this person first. They may manage your personal life, creating systems and process, recruit and hire other team members, HR, bookkeeping, training staff, marketing, and more. As you leverage everything to this person, you are able to focus more on sales and eventually will reach a critical tipping point where this role begins to break off into more than one position. Usually financials (if you haven’t already leveraged that piece) will move first, followed quickly by the EA/PA portion of the position, so that your Jack/Jill of all trades becomes a full on Operations expert who will focus on running the business.
  2. Finance Staff – Is this a bookkeeper? Controller? CFO? Depends on the size of your business. Start small and allow the person to grow with your company, or top grade if necessary. Whatever level this person is at, their basic responsibilities remain the same, handling the financials – from budgets, to billing, to cash flow and expense management.  This person will work incredibly close to your Operations staff  member to handle all the day to day functions of the business, as well as help you plan for and manage growth. Having someone’s eyes on the money at all times is critical, especially in a high growth company where you have to play the money matrix game – constantly shifting where money goes so that it has the most impact and ROI. Without accurate and timely financial data, as a business owner, you could be left in the dark. The financials are critical for making smart, well-informed decisions that could either make or break your organization.
  3. Sales Staff – In my case, this was the last piece to be leveraged. Whoever you choose to lead the sales efforts of your organization must be able to do it better than you (and as the leader of the business, those are big shoes to fill). Sales drive the business, we know this. The more sales, the more clients and customers, the bigger profit, enables you to circle back and add additional operations staff and sales people and it becomes this beautiful, virtuous, cycle. I don’t care what business you are in, without sales, you don’t have a business. Which is why this is usually the last position that a leader will leverage. As this sales staff member grows, they will be responsible for sales goals, as well as for recruiting, hiring, and training additional sales people. Again, sales drives the business.

Operations. Money. Sales. The three pillars of any good business. Now, these are not your only three hires, but they are the first key hires of your business. As your company grows you can start to hire those “value add staff” like that Chief Fun Officer or office Massage Therapist. But find those three incredibly talent individuals to run each component first, then get out of their way, and watch your business grow.

Would you add any other critical team member to this list?

 

Why Work-Life Balance is Not a Worthy Goal

balance
For the last few years every water cooler conversation, aspirational Instagram post,  business blog or podcast, and phone call with your mother has centered around the work-life balance debate. And yes, I call it a debate because as great as work-life balance sounds, is it really all it’s cracked up to be? Do the people who are looking for work-life balance really know what it is they are after? What does work-life balance even mean?
As Gary Keller and Jay Papasan explained in their best-selling book, The One Thing, work-life balance is a myth. They wrote, “Seen as something we ultimately attain, balance is actually something we constantly do. A ‘balanced life’ is a myth — a misleading concept most accept as a worthy and attainable goal without ever stopping to truly consider it.”
Well, let’s stop and consider it. Why would you want a balanced life in the first place? If you think about it, a week has 168 hours, and in theory, most Americans are only working 40-50 hours of that, which leaves well over 100 hours a week for “life.” That already sounds pretty balanced to me. And really, if your life was perfectly balanced between work and life, then wouldn’t that just mean you are living in the middle (i.e. living in mediocrity)? Success doesn’t happen in the middle. Success and growth happens at the extremes. That means that some days you may be working for 16 hours and taking a three day weekend. It may also mean that you could be working for 16 hours a day for three months to push a project forward or build your business and then you counter-balance that with a three week vacation with your family. Work and life will require different amounts of time and energy and focus in different phases of you life (and can often change daily). If work and life were truly balanced, it would not only be pretty boring, you would end up ultimately accomplishing very little in any area of your life. Sometimes, you just need to put a disproportionate amount of time or energy in to your physical health, or to your spouse, or a work project. That’s just life.
Now, I think what people really mean by work-life balance is that they want freedom and flexibility. They want the option to work from home, to travel and work remotely, to set their own hours, to run errands in the middle of the day, and to integrate their work into their life. That concept, I can get behind. Work-life balance for some people may mean not working nights and weekends to be there for their kid’s activities. For others, it means only working nights and weekends in order to take care of an aging parent or small children during the day.
One of the reasons I first got into real estate and starting building my own businesses was for that concept of freedom. Not work-life balance. Freedom and flexibility. I probably “work” more now than ever, but I don’t really consider it work. It’s a part of my life, a part of who I am. I wanted a life that worked for me and my family, where I could work when and where I wanted to and take time for hobbies, vacations, family-time, fitness training, conferences, etc. when I wanted to. A recent analysis by Indeed actually found that of the 15 companies with the best work-life balance, three were real estate companies (Keller Williams Realty ranking #1). For that reason, and many more, a lot of people begin careers in real estate. Note how I said, begin? Well… not everyone is cut out for a career in real estate.
Since this blog post is all about dispelling myths, let’s break down another one. Real estate careers may offer freedom and flexibility, but they don’t necessarily offer “balance.” And it certainly isn’t a career where you can just sit back and have that “work-life” balance without a lot of, well, work (Newsflash: Real estate is nothing like it looks on HGTV or Bravo). Especially not in the early stages of your career. And real estate professionals will never achieve the freedom they are ultimately after if they don’t have great systems, efficiencies, consistent lead generations habits, and a whole lot of support behind them. Beginning a career in real estate as an individual agent is harder today, even with all the technological advances. Why? Because individual agents just can’t compete with the models, systems, marketing, and administrative/operational support that they get by being on a team.
Regardless if Realtors opt to join a team or go it on their own, without a steady stream of business and a whole lot of leverage (again, systems, marketing, administrative support, etc.) then they will not achieve freedom and instead will remain at the mercy of their clients. If you are desperate for business and only have two clients to work work, you’re going to miss a lot of those life things that you are working so hard for just to make a deal. On the flip side, once you have cultivated a business with many clients in the pipeline, you are in control. You feel confident saying no and only working with the clients that you want to work with. Now, joining a team doesn’t magically create this freedom for you, but it does fast-track your success as long as you follow the model laid out for you. And who wouldn’t want that life of control, freedom, and “work-life balance” faster? If that sounds like something you want, just shoot us an email and we’ll tell you exactly how to get there. 
Work-life balance, or rather work-life integration with freedom and flexibility isn’t exclusive to entrepreneurs, business owners, or real estate professionals. If you prefer to be an intraprenuer (an employee), great! It will be your responsibility to align yourself with an organization that gets it – that understands the importance of, and encourages, creating a work schedule that allows you to integrate your kid’s activities, date nights, morning training sessions, and long weekends. One of my employees, Ben Avery, has this concept figured out better than almost anyone I know and wrote about it in a blog post for us last Fall.
He says, “…we always seem to be everywhere we want to be, all the time, and from a life experience standpoint, we leave nothing on the table!” He goes on to explain, “Our rule of thumb is called the 50/50, 50 days a year on the ski slopes and 50 nights a year on the boat. Sounds crazy, but we almost always exceed that and our lives are so much richer for it. Vacation for us isn’t yearly, or even monthly… its WEEKLY! That is the goal… We make the time, we execute on the plans and subsequently, we are always where WE want to be!”
This may sound like work-life balance to some, but if that were the case, Ben would only work 50 days a year! He works much more than that, but has figured out a way to incorporate his family and life and work in such a way that he disproportionately focuses on different aspects of his life at different times.
Now that we know that work-life balance is a bunch of BS, take a hard look at what you are really after. Have you been too far out of balance for so long on the work side of the equation that you are burned out and need to swing in the other direction? Maybe you took a break from work and are ready to get back at it. Do you need to make a career change that allows for more flexibility and for you to feel fulfilled? Do you need to volunteer more? Do you need to find a company that aligns with your values? I don’t think what you are really after is balance, it’s these things above.
In a perfect world most people want to create income doing something that fulfills them, while being able to integrate their work and life. Attack life. Make every minute count. Balance be damned.