I’m convinced that most of us are our own worst enemies. That’s true for mere mortals like you and me and for the fellow I call “Ivan IQ.” Obviously, that’s a made-up name, but it conveys he has a lot of brain power.
When I first met him, he seemed “practically perfect in every way” like Mary Poppins. He was Hollywood handsome and used to quickly understanding things that most people didn’t get. That made it hard for him to understand when he got a good result that could have been much better.
This is the story of Ivan and me and how we learned from each other. When we met, Ivan had no investment real estate experience but assumed he could master it quickly.
My Craft
A high school student can learn the math part of my job in less than a month. Rookies who do arithmetic can understand ways to measure value. Divide value by the number of units, square footage of improvements, or gross scheduled income (all the income from all the units) or divide the cash flow before mortgage payment by the value. Those calculations show several of the most common measures of value.
However, it takes longer to learn how much difference there is between a nightly news zip code and a prime beach zip code. Likewise, judgment and experience are needed to estimate how much rent can be raised or how much renovation might cost. Likewise, there are some zip codes where three bedrooms are highly appropriate and others where studios make more sense.
Mastering the basics is straightforward. The rules of thumb are easy to master. Learning the exceptions to those rules of thumb takes longer and can be more important.
A Bit About Ivan
Ivan was brilliant, and he was used to both being right and being deferred to. He bristled and became defensive when anyone suggested he was wrong or that his way might not be the best.
Ivan had been a passive partner in some apartments that had increased in value. He obtained a good result but missed his two best options.
Ivan was in a 1031 exchange, moving his equity from an expensive condo rental to apartments. He was deferring his taxable gain using section 1031 of the tax code. I suggested the experienced agent who was selling his rental, how Ivan could gain extra time to find his purchase, his new property called “the upleg.”
But, when it came time to negotiate with the buyer, Ivan pushed hard for an extra $5k on the sale price and didn’t even try to gain time to look for a great acquisition. The unintended consequence of his choice meant his time deadline expired before the best option became available. The $5k higher sale price was trivial in relation to the potential gain he might have obtained from the better property. That choice meant that Ivan saw fewer options. He assumed that he would have an immense number of options to choose from. His assumption was wrong. He later wished he had acted on his expert’s counsel.
The Good News is that Ivan Learns
A month after the close of the escrow, we were celebrating at a prestigious restaurant. Ivan was savoring the view across San Diego Bay, enjoying the downtown skyline. We reviewed the deal, and I was able to use some of my coaching skills to draw some questions out of Ivan.
As he was summing up the transaction and the process, he suddenly smiled and said, ” Now I get it! I was so focused on the pennies that I missed the dollars!” Actually, that was part of what I tried unsuccessfully to convey earlier.
There’s a Lot for Us to Learn
Ivan is brilliant, but there are some fundamental tools that he didn’t use. He had not used debt to leverage his equity or scale his value creation ability by selling for a profit, trading up into a bigger asset, and repeat the process. He was unfamiliar with the power tool of compounded growth. He didn’t grasp that the power tool was the ability to raise the cash flow because the market would pay more for the extra income. Ivan ignored the immense potential of upgrading neglected older properties and lower education neighborhoods. He was distracted by current appearance and could not imagine the greater potential that could be earned by solving the right kind of problems.
There’s much more for Ivan to learn. The good news is that Ivan knows more now. Because he is driven to achieve, we’ll do better next time. And with Ivan, there will be many “next times.”
I remembered, AGAIN, that coaching skills and tact are often more important than being the subject matter expert. Success for both of us involved helping Ivan accomplish a great result without offending him. That helped me develop awareness that will benefit future clients.
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Have you experienced a situation where interpersonal skills were more important than expertise?
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Terry Moore, CCIM, is the author of Building Legacy Wealth: How to Build Wealth and Live a Life Worth Imitating. Read his “Welcome to My Blog.”