How we think about talent

Read an article today (on LinkedIn, so I can’t easily provide a link) by a guy who had trouble finding work after taking a few years off to raise his children.

Should start out by acknowledging the irony of me noticing an article about this topic by a guy… this is a problem that women have been dealing with forever.

Anyway, the article got me thinking about my own views / practices around hiring for our business.

Hiring for small business can be extremely challenging. You can’t compete with big business pay / benefits. You’re inherently less stable. And no one is getting any prestige points by telling people at cocktail parties that they work for Adaptive Realty (vs., say, Goldman Sachs).

So, the question is, how do you go about attracting and retaining talented people?

This is not a solved problem for us, but we’ve learned some lessons that I think are relevant to other small businesses:

  1. Hire for “smart / energetic / honest” over “experienced”;
  2. Be open to non-traditional resumes (like, for example, people who have not finished college, or taken some time out of the work world to raise a family);
  3. Give people more responsibility, earlier in their careers;
  4. Minimize annoying bureaucracy / politics in the office;
  5. Avoid micro-managing (I’m not even close to good enough at my own job to do everyone else’s, too!); and
  6. Allow for non-traditional / flexible work schedules

You also need to be on the look-out for talent, even when you’re not actively hiring. Speaking of which: If you, or someone you know, is super-interested in development and/or property management as a career, get in touch… am always happy to sit down with people to see if there is a way for us to work together.

Where pricing is right now

Want to give you a sense for where pricing is, right now.

We look at literally every deal that comes on the market in our target neighborhoods, and everything that looks close to working in other neighborhoods.

For us, the renovated stuff is an obvious pass. We’re value-add buyers, so we focus on the most beat-up properties, the ones where there ought to be embedded value waiting to be unlocked.

But, right now, except in extremely rare instances (almost always off-market), there is no embedded value. Every deal I see on the public market is priced way, way over where I see value.

By “way, way”, I mean 15-30% above the price I would pay… so not within the range where it makes sense to try to make a deal.

It’s hard to understand who, exactly, is buying this stuff. It certainly shouldn’t be buy-and-hold buyers… these deals are real-life 2-3% caps. Even with interest rates down somewhat over the past few months, buying 2-3% caps means little / no cashflow.

So it must be value-add buyers looking to do something like what we do. But we know the numbers, and there’s no way they work paying those prices. I suspect there are loads of sponsors sitting on busted pro formas, having uncomfortable conversations with their lenders and equity partners.

The problem, from our perspective, is that we can’t short projects (in other words, we can’t make money betting against stupid buyers). Instead, we have to wait for enough people to get burned such that demand for beat-up properties falls, allowing prices to re-set to reasonable levels.

Price and value

Can’t tell you how often I read / hear brokers say “Values are really going up in X neighborhood”. This drives me crazy. Why?

What those brokers mean is that they have examined recent sales and concluded that prices are going up. A price is the amount of money someone pays for something. It’s objective; a number.

But price is not equal to value. Value is, basically, “what something is worth to you”.

Notice the “to you” part. Value is subjective. Very often, things are worth more, or less, to me than they are to others.

Investing is about:

  • Finding an asset you can buy for a price which is materially less than the value of that asset to you; and
  • Avoiding buying assets where that margin of safety / profit doesn’t exist

This is why I don’t really care about comps and I get angry when brokers try to use them to convince me to buy something (“this is priced at $350 / ft, when the comps show $375”).

Why should I care what prices other people paid? Other people value assets differently (this is the charitable way to look at it!).

I only care about the relationship between the price and my conception of value.

Fully-upgraded units with significant upside potential

“Fully-upgraded units with significant upside potential”

You’d be amazed at how often I read those words, or something like them, in broker packages. And it still drives me crazy.

You’re telling me someone went to a ton of trouble to renovate all the units in an apartment building and then, when it came to lease-up, decided it would be a good idea to leave money on the table by leasing for less than top dollar?

Nonsense.