EQ Journal Archive 26

By Bruce Firestone | Uncategorized

May 15

https://www.eqjournal.org/?paged=26


         Why Teams don’t Work in the REALTOR Space        

       
   Posted on
       Thursday 19 November 2009  
     
   
       

I have come to believe that the REALTOR is a lot like a
sports agent or an agent to the stars—in other words, it’s a personal
services type of business. If Vince (while he is in Italy) asks Ari Gold
(these are characters from HBO’s show, Entourage) to deliver an apology
to someone that Vince has wronged, he expects Ari to deliver it himself
not to task it out to one of his 300 or so flunkies.

Does it make sense for Ari to act the role of courier? Here is a
(fictitious) executive that runs an agency that bills in the hundreds of
millions each year. Yet he will personally drop everything to take care
of Vince.

The reasons? 1. Vince bills $20 million a film. 2. Vince is an
important client of the firm. Not only is Vince himself a mega star he
will also help Ari’s firm attract dozens of other high profile and up
and coming stars. 3. Ari will convey the message with the right spin on
it, just as Vince would have done if he had been there or perhaps even
better than Vince could have done. He will prevent bad PR and maybe
forestall a lawsuit too. 4. Vince wants ‘love’ and personal attention
from his agent. He doesn’t want to talk to anyone other than his  agent. He doesn’t want to call Ari and have E (Eric) call back.

If you don’t think celebrities want ‘love’ look at what happened to
the Ottawa Senators during the summer of 2009 when one of their
superstars wanted more love from the team. His demand for and eventual
trade from the team damaged the Senators—in terms of the team’s
marketing and sales as well as performance on the ice…

So if you have a team of, say, three REALTORS, you would hope that
the team’s productivity would look something like this: 1 + 1 + 1 >
3. But if I am right, every client will want to talk to the team leader,
his or her agent, the person who signed them to a listing agreement or
buyer agency, not one of the acolytes. Every deal, every offer, every
problem, every opportunity, the client will want to talk to the team
leader. So instead your team’s productivity might look like this: 1 + 1 +
1 = 1, which is horrible*.

Prof Bruce

* The obvious corollary is that if you break up these teams and
release each agent to do his or her own thing, individual productivity
will (on average) increase, client satisfaction will increase and the
Agency itself will be larger and more profitable as will the individuals
in the firm. The acolytes will have to find their own clients but, in a
personal services business, this is better for their clients and for
them.

       
       
       
     Prof Bruce @ 9:21 am

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         Lack of Creativity is Hurting Chartered Banks        

       
   Posted on
       Tuesday 17 November 2009  
     
   
       

Workouts are Times for Creativity and Flexibility

A friend of mine who manages real estate workouts for a private
lending group sent me this comment recently which I wanted to share.

“You know, over my 15+ years with our private lending group, I’ve
found myself having to deal with institutional first mortgagees on a
number of occasions and it always amazes me how inflexible and
un-creative their ‘work out’ departments are.  Major Chartered Banks are
the worst.  If we took the approach to defaulted mortgages that these
guys take, then we would have simply written off 50% of our portfolio
more than a decade ago and ruined many of our investor’s retirement
plans…

But because we opened our minds to other possibilities and had the
courage to pursue them, those people are all quite comfortable as they
retire.  Imagine having a business strategy that is simply “Plan A at
all costs!” or “No deals for anyone!”

In workouts, you need to be flexible and creative—you can’t just say:
“Our first mortgage position is $273,785 plus accrued interest of
another $14,263.94 plus legal costs and disbursements of $1,282.00 +
GST, so send us a cheque for the full amount and only then will we
discharge the property.”

Life and business just doesn’t work that way,” Senior Manager, Anonymous Private Lender, Ottawa ON, Nov. 2009.

For example, what is the value of a half finished project, a half
finished house? If you leave it exposed to the elements for long enough
(especially in a place like Ottawa which goes from +40 degrees Celsius
to -40 degrees Celsius), it can have a negative value—the amount of
money it could cost you take it down and dispose of it can be more than
the value of the underlying land.

So if the Bank is expecting a cheque for $289,330.94 (plus some GST)
but further delay will cause the property to decay beyond redemption,
you could argue that they can and must accept less from a Buyer willing
to act now to save the property.

In Canada, these construction mortgages may be insured by CMHC, which
means the Bank, by doing nothing, might not suffer at all if they can
get the full value of their loan simply by waiting for insurance
proceeds. This is bad for Canada, wasteful and bad for the environment
(think of all the energy and material needed to build even a modest
home) but not necessarily bad for the Bank or the Bank’s shareholders.

One factor that could prompt the Banks to change their behaviour is a
requirement under common law to mitigate losses. If you suffer damages
in a contract, whether you are a Landlord, Lender, builder, supplier,
tradesperson, what have you, you can’t just sit around drinking beer and
do nothing. You are required to act in a way to mitigate (reduce) your
losses. If you just signed a tenant to a two year lease and they do a
midnight move on you after two months, you just can’t sue them for 22
month’s rent. You have to clean up the place, do your best to re-rent
it—and then you have a claim against your erstwhile tenant for whatever
your actual losses are.

So creativity and flexibility is an important characteristic for
entrepreneurs when they are building their enterprises but it’s also
needed when things don’t go well, maybe even more so then.

Prof Bruce

Postscript: My friend had another comment to pass on: “I like your
suggestion that Banks should (as required under Common Law) act in a way
to mitigate their losses.  But because Banks have been allowed to be so
risk averse and because they are underwritten by CMHC insurance, in
practice, I fear requiring them to open up and ‘make a deal’ might make
them that much more stringent when they do their up-front risk analysis…
so even less would get approved and built in Eastern Ontario!”

       
       
       
     Prof Bruce @ 3:03 pm

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         How to Measure the Value of Earned Media (Guerrilla Marketing, GM)        

       
   Posted on
       Monday 16 November 2009  
     
   
       

The Québec-based founder of a high profile, world spanning
entertainment colossus hired a PR firm to calculate the value of his
recent junket off planet. (He spent 11 days at the ISS after blasting
off from the Russian spaceport at Baikonur.)

The trip cost him $35 million USD but generated $592,425,679 in terms
of earned media according to today’s report in the Globe and Mail
(Monday November 16th, 2009). Now that’s a pretty good ROI.

But how did they calculate that?

If you do a search with Google using the search term ‘Bruce
Firestone’, you will find there are about 729,000 mentions of moi on the
Internet. Typically, an ad agency might value these mentions using a
CPM (cost per thousand) of around $15*. So after fooling around on the
Internet for 15 years, building my own (10 cent) websites (about 20 of
them) and doing lots of stuff, the GM of Bruce Firestone is worth a
princely total of $10,935. Pretty measly, wouldn’t you agree?

(* Media buys range from a low of around $5 for bus boards to $15 for
a major newspaper or magazine to as high as $40 or $60 for targeted
Internet ads. Direct mail (depending on national postal rates) range
from about $120 to $150 per thousand drops.)

The formula is trivial:

V = (n/1,000) x CPM,

where,

V is the value of mentions,
n is the number of mentions.

Obviously, we can invert the formula to determine the number of mentions when you know the CPM and value, viz:

n = (V/CPM) x 1,000.

That means this trip to the International Space Station had to
produce almost 39.5 billion mentions (in just 4 months) to generate this
type of return. We have to assume that the Montreal-based PR firm that
was tracking all this knew how to do it properly.

But as simple as the calculations are, it is a highly useful thing to
be able to determine the value of the work you do to generate earned
media.

Prof Bruce

Postscript: here are my calcs:

GM and Bruce Firestone

Mentions of Bruce Firestone on the Internet 729,000 (Google Nov. 16, 2009)
CPM $15
Value of these mentions $10,935

Value of mentions of Guy Laliberté, Founder of Cirque du soleil, going to ISS $592,425,679 (G+M Nov. 16, 2009)
CPM $15
Number of Mentions (over 4 months in 2009) 39,495,045,267

       
       
       
     Prof Bruce @ 8:56 pm

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         A Joke for Your Kids (G, for General Audiences)        

       
   Posted on
       Monday 16 November 2009  
     
   
       

The next time your son or daughter asks for something,
challenge them to a simple word game (from the 1964 film Father Goose
with Cary Grant and Leslie Caron). If they can successfully repeat just
three words, they’ll get what they want. If they don’t, you get what you
want from them.

Your daughter, Shelly, has been asking for a new bike every couple of
minutes for, say, the last three weeks, and you have been asking her to
clean up her room for about the last two years*.

Parent: “OK, if you can repeat three words, we’ll get you a new bike. If you can’t, you go clean up your room, deal?”

Shelly: “Sure.”

Parent: “Elephant.”

Shelly: “Elephant.”

Parent: “Rhinoceros.”

Shelly: “Rhinoceros.”

Parent (right away and with a disapproving look plus using a lower pitch voice for emphasis): “Wrong.”

Shelly: “Why was that wrong?”

Parent: “No, ‘wrong’ was the third word. Now go clean up your room!”

Prof Bruce

* Here is why kids so often get their own way. You spend about 1% of
your time thinking about why you won’t buy Shelly a new bike this year
and Shelly spends 99% of her waking hours thinking of ways to part you
and your money. It also reminds me of an experiment we did when I was a
Beaver Leader (pre-Cub Scouts). We took 25 Beavers ages 5, 6 and 7 and
pitted them against six or seven big Leaders each weighing over 200 lbs
in a tug-of-war contest. Who wins? That’s easy: the Beavers.

The calculations are straightforward: assume each Beaver weighs 60
lbs. and each Leader weighs 210. The total weight of 25 little kids is
1,500 lbs. The six Leaders weigh 1,260 lbs. So for a starter, the
Beavers weigh more.

But they also have another advantage: they have 50 little feet on the
ground. The total surface area they have on the ground to generate
friction totals 1,381 sq. in. The Leaders only have 12 shoes in contact
with the surface—just 612 sq. in.

If we assume that they both apply force to the rope at 60 degrees (30
degrees from the Normal), we can calculate friction as tan (60)
multiplied by the total surface area of each team or 0.320 times 1,381
sq. in. for the little guys and 0.320 times 612 sq. in. for the big
guys.

Thus, the Beavers are applying 480 lbs. of force to the rope and the
Leaders are applying 403 lbs. Now adjusting for the greater friction
that the Beavers enjoy, you end up with a modified force of 910 lbs. for
the Beavers versus 403 for the adults. It’s no contest.

If you don’t believe me, get a rope and try it at the company picnic
next year. It’s hilarious watching adult men get beat by a bunch of
munchkins… At first, they’ll try to take it easy on the kids. But as
they get pulled in, they apply more and more force, uselessly.

It’s all about leverage—the huge advantage of the little guys in
terms of friction is the equivalent of giving them a bigger lever arm to
work with. Archimedes said: “Give me a long enough lever and a platform
and I shall move the Earth.”

[It’s also why in business, research and sports, entrepreneurs,
academics or athletes who narrow their focus so they gain expertise in a
niche tend to perform significantly better than generalists. It also
explains why the Pros do better than the Joes in fields as widely
divergent as stock trading and politics—they benefit from their narrow
focus as well as intimate knowledge of the field and, as a result, they
benefit from asymmetric information.]

You can safely add more men—up to about 11 or so before the contest gets pretty even. At 14 men, it’s over for the Beavers.

One thing: you can’t let the men apply force rhythmically. By jerking
on the rope (which is not allowed in tug-of-war contests), the men can
win. But in a steady application of force, the Beavers are fine.

Here are the calculations:

Beavers and Tug-Of-War

Beavers 25
60 lbs. per Beaver
Total 1500 lbs.  

Leaders 6
210 lbs. per Leader
1260 lbs.  

Beavers 55.25 sq. in. 8.5 inches 3.25 inches
1381.25 sq. in.

Leaders 102 sq. in. 12.75 inches 4 inches
612 sq. in.

Tan 60 0.320040389

Beavers 480.0605835 lbs.   1.085972851 psi

Leaders 403.2508901 lbs.   2.058823529 psi 1.895833333 ratio

Beavers 910.1148562 lbs.  

Leaders 403.2508901 lbs.  

Force Multiple 2.256944444

Weight Multiple 1.19047619

       
       
       
     Prof Bruce @ 8:14 pm

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         A Product Manager’s Fatal Mistake        

       
   Posted on
       Monday 16 November 2009  
     
   
       

What is one mistake product managers make that is absolutely
unforgivable? They substitute their own views in place of the market’s.

Remember this: the market is always right even when it is wrong. Or put another way: you are not the market.

Take for example the early days of pre-packaged graphics
software—Corel Draw was in a race with Adobe Photoshop for world
dominance. Photoshop had greater functionality but Corel’s products were
simpler and easier to use.

What if you are the product manager for Corel Draw and an engineer to
boot? You are likely to develop envy for the greater functionality of
Adobe’s product—that is what engineers tend to be about—they want their
products to do more and to solve more problems.

So maybe you gather your development team together and put a list of
things that your product does next to your competitor’s list and you
yell: “Why isn’t our list as long as theirs?”

What you don’t realize is that your competitive advantage is the fact
that your software is easier to use with a learning curve that is short
and not too steep—users don’t need to be on it every day—they can
remember all the tips and tricks to do basic photo editing without
having to put in (Malcolm Gladwell’s) 10,000 hours to become (and stay)
an expert.

Most products or services should have one or at most two or three
compelling, easily explained features for a user to focus on. More and
you lose their attention. If you make Draw more like Photoshop, your
market share may plummet.

Listen to the market not your inner engineer.

Prof Bruce

       
       
       
     Prof Bruce @ 4:00 pm

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Why Businesses Fail

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         Profession to Watch for in the 21st Century: Curator        

       
   Posted on
       Sunday 15 November 2009  
     
   
       

The proliferation of information in the last Century and
this one is beyond belief. In 2008 alone, 487 million gigabytes were
added to the collection of digital information world-wide according to
an IDC study titled: “As the Economy Contracts, the Digital Universe
Expands”, May 2009.

As part of our on-going study into business models, we are always
trying to distill the essence of any business: the ‘pixie dust’ that
makes it all work. It occurred to me that what has created some
extraordinarily profitable and valuable corporations in the last 15
years is a surprising resurgence of an old profession—the curator.

What do Google, IBM Tech Services, Hotel Concierge, Bloomberg
Financial and Hudson Bay Company have in common? They all curate
information, products and services for their audience—this is, at the
nano scale of things, what they actually do.

A curator is a steward, factor, majordomo, butler, MC, proctor,
guardian, librarian, cleric and custodian of things (taken from The
Original Roget’s International Thesaurus, 5th Edition). But he or she is
more than that—an intelligent agent who curates these things on behalf
of their stakeholders.

• Google curates WWW information.
• IBM Tech Services helps clients negotiate through the thicket of info
tech infrastructure alternatives and then help them put it all in place
plus run it too. They will spec non-IBM equipment if it better suits the
job.
• The Concierge curates myriad tourist attractions in a city and much more besides.
• Bloomberg LP provides industrial scale data organized into coherent patterns for traders around the globe.
• Hudson Bay Company is staking its future on curating interesting
merchandise in patterns that it would take an individual much too long
to do on their own.

I think it will help entrepreneurs create more powerful and more
sustainable business models if they look at their enterprises with a new
thought—that they are adopting the attributes of an art
curator—creative presentation of alternatives and intelligent advice to
help them choose.

Amazon’s amazing use of their relational data base (“Would you like
to see what other people who bought this book also purchased?”) is a
form of curating their incredible number of titles. It also was one of
the things that helped make Amazon (finally) profitable by increasing
the volume from each sale. It is also incredibly helpful to researchers
like me by putting some really smart people to work for me for free—they
tell me what else I should be reading on a particular subject.

Artful, intelligent curating can lead to big businesses like Digg.com
(which curates mostly science, technology and business news for a
largely male demographic aged 15 to 55 using the competitive instincts
of readers to dig up stories and the intelligence of readers to either
vote them up or down) or smaller ones: I suspect someone will curate the
more than 80,000 iPhone apps for a very receptive audience one of these
days (if it doesn’t already exist). Services that artfully and
intelligently guide users have a great future and they will be hard
enterprises to knock off because their sustainable competitive advantage
is the ‘mechanical Turk’ inside the black box: intelligence and
creativity are not easily outsourced to low wage nations and once you
have embedded them in your business model as Digg.com has done, it isn’t
easy to replicate or to migrate to a competitor.

Prof Bruce

Postscript: I read today (it now being Saturday Dec. 17th, 2011) on https://mashable.com/2011/12/16/sweden-twitter-acount that:

‘Sweden’s people have officially taken over the @sweden Twitter
account — and with the blessing of the Swedish government. One Swedish
citizen will control the handle each week, tweeting about whatever
they’d like, as part of a new project called Curators of Sweden.

“No one owns the brand of Sweden more than its people. With this
initiative we let them show their Sweden to the world,” says Thomas
Brühl, CEO of VisitSweden, the tourism ministry that had been updating
the @sweden account since January 2009.

Curators of Sweden is based around the idea that no single voice can
represent the country, so a slew of guest Swedish curators will do the
best job to portray the national character.’

Now this is a pretty cool idea and I can see a lot of uses for this.
Say, you manage the National Gallery of Canada, why not create a Guest
Twitter account and let visitors curate the collection for other Canuks?

Outside the National Gallery of Canada: Maman Sculpture*

Companies, not-for-profits, charities, NGOs, political movements could all do a riff on this.

Artful curating is really what Twitter is all about, at least for me
and I suspect many people like me. I rely on folks I follow there to
curate the world for me– to parse ideas and news from the firehose of
information being created each day in the vast Metaverse that the
Internet has become. This story came via one of them: Pete Cashmore, https://twitter.com/#!/mashable who has more than 2.6 million followers.

I can see cities setting up @Ottawa or @NewYork this way and letting
visitors as well as residents curate their towns for each other and the
world beyond. Maybe you could create @Cisco or @IBM too although I can
see the obvious corporate risks that would come from bad PR generated by
obnoxious tweets or offensive ones. But I think that you could
formulate an application process whereby people would have to sign up in
advance for a chance to be guest Twitter Master for @IBM or @NewYork
and then you’d vet them and screen out weirdos (maybe) or shut them down
if they are.

Perhaps it only works in Sweden because they are all nice, non crazy people.  But I would give it a go.

Prof Bruce

* The giant spider called Maman was created by French-Born artist
Louise Bourgeois, who died in New York on the 31st of May, 2010, age 98.

       
       
       
     Prof Bruce @ 1:12 pm

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         Negative Cost Selling and Bootstrap Capitalization        

       
   Posted on
       Sunday 15 November 2009  
     
   
       

I realized recently that the flip side to bootstrapping yourself to entrepreneurial success is negative cost selling.

In the case of Maple Leaf Design and Construction, a home builder
that bootstrapped their way to success, their source of capital
(essentially supplier credit) is a form of negative cost selling for
their suppliers. Let me explain.

Maple Leaf was able to convince friendly landowners to provide them
with options on their land, basically at no cost. The landowners only
get paid when Maple Leaf completes and sells the homes. So the lot owner
is getting paid by the home buyer not Maple Leaf.

From the lot owner’s perspective, he or she has land that isn’t
moving. In effect, they can go to a home builder and say: “You can have
an option on my land for six months for $2 per lot provided that you
will come up with great floor plans and designs, put signage and a
trailer on my property and sell, sell, sell homes to home buyers…You
only pay me when the property sells.”

For Maple Leaf, they pay $2 for each lot. (The reason they pay
anything at all has to do with common law—an agreement has to have
offer, acceptance and consideration. The $2 is the consideration without
which the agreement would not be legally binding.) Now if they take a
$20,000 deposit with each home sale, their cost for the lot (in terms of
cash) is a negative $19,998. That is an attractive selling proposition
for the landowner to use and a compelling value proposition in the eyes
of Maple Leaf.

Now what about other suppliers such as drywallers, plumbers, truss
manufacturers, electricians, roofers and so forth? Could they use this
approach too? Sure. If you are new to a market, you can use it as a
competitive advantage—go to home builders and offer them terms. Again,
you are prepared to wait to get paid in exchange for helping the builder
win more business.

Now there is risk in this approach—you may be giving up your lien
rights or, if you are the friendly landowner, what do you do if the home
builder collapses mid-project? Half completed homes on your property
may have a negative value. If you have postponed your Seller Take Back
Mortgage (basically, the lot price you and the builder have agreed to
which has been secured by way of a mortgage in favour of the landowner)
to a Lender who is providing construction finance (and they are in first
position), you may get nothing for your land if there is a problem.

Bootstrapping and negative cost selling may be flip sides of the same
coin but both have risks associated with them. That, of course, is the
nature of entrepreneurial approaches to anything—the risk profile is
much higher but it is the only way entrepreneurs can start a business in
a tough competitive world that really doesn’t want to give them a
break. The harder you work, the luckier you get.

Prof Bruce

Postscript1: To further demonstrate how Bootstrapping and Negative
Cost Selling are related, think about the above example from the Land
Owner’s POV. Perhaps he or she might have approached the two young
founders of Maple Leaf, Fred Carmosino (a Sprott School of Business
grad) and Brian Saumure (an architect trained at Carleton University’s
Azrieli School of Architecture) rather than the other way round. If so,
he or she would have had an irresistible (negative cost selling)
proposition: “How would you like to buy my lots for a negative $19,998
each?”

In essence, the landowner is recruiting Maple Leaf to turn a
money-sucking, vacant piece of property into income by: a) giving Maple
Leaf an option on each lot for $2, b) allowing Maple Leaf to set up a
sales office and pre-sell lots, collecting a $20,000 deposit on each lot
sold to a homeowner (hence, the -$19,998 ‘cost’ of each lot) and c)
only actually getting paid for the lots when Maple Leaf completes each
house and transfers title to the homeowner. So at no time is Maple Leaf
out of pocket, so-to-speak, for the lots and this is a true negative
cost for Maple Leaf.

It turns out that negative cost selling and bootstrapping are two
sides of the same coin: you just have to change POV and it becomes self
evident how they are in fact related one to the other.

Postscript2: Maybe you could use this approach to sell a piece of
property to a condo builder using a negative cost value proposition.

Here is how it might work—assume you have a well-located property
selling for about $240 per sq. ft. of land area. It is about ¾ of an
acre. Thus, the cost for the property is $7.84 million. The FSI (Floor
Space Index) is 6.0 which yields a built-up area of 196,020 sq. ft.
(land area x FSI). With circulation space and common area eating up
about 26% of the built form and a unit size which averages 1,350 sq.
ft., the yield is 105 units. The cost to construct (including land, hard
construction costs, finance, contingencies, soft costs, marketing and
profit margin) is $585 per sq. ft. which results in an average selling
price of $790,000 per door. Land costs are less than 10% of the total so
the price for the land is not out of line with market realities.

However, the problem is finding a buyer with $7.84 million. What if
they bought an option on the property for $2 and collected $40,000 in
deposits for every unit pre-sold and they pre-sell half of their
inventory? That would mean they would have just over $2 million in cash
on deposit. Their cost to buy the property? A negative $2,090,878 in
terms of cash.

[In Ontario, Tarion Warranty Corporation limits how much condo
builders can take in terms of deposits and what they can do with those
deposits. That is why the condo market is so tough to break into for
entrepreneurs—the markets are regulated to prevent consumer losses but
it also means that funds are not necessarily available to the builder to
fund their operations.]

Here are my sample calculations:

Nov. 15, 2009 Condo Example

Condo Site 0.75 acres 43560 sq. ft. per acre
32670 sq. ft.

Price $240 per sq. ft.
$7,840,800

FSI 6.0
Built-up Area 196020 sq. ft.
Circulation Space 31363.2 16%
Common Area 23522.4 12%
Net Built-up Area 141134.4
Average Unit Size 1350 sq. ft.
Number of Units 105
Land Cost per Unit $75,000.00
$55.56 per sq. ft. 9.5%
Hard Construction Cost $325 per sq. ft.
Other Costs* $61.75 per sq. ft. 19.0%
Profit Margin $105 per sq. ft. 17.9%
Sub-Total $547.31 per sq. ft.
Marketing $38.31 per sq. ft. 7.0%
Total $585.62 per sq. ft.
Price $790,582.88 per unit
Total Revenue $82,650,696.08 project
Profit Margin $14,819,112
Margin 17.9%

* Soft costs, finance costs, contingencies

Deposit $40,000 per door
Number of pre-sales 52 50%
Deposits $2,090,880

E&OE

You can download my spreadsheet in .xls format: https://www.ottawarealestatenews.ca/CondoSales.xls

       
       
       
     Prof Bruce @ 12:12 pm

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         Two Nation-States        

       
   Posted on
       Sunday 15 November 2009  
     
   
       

Suburban v. Urban II

Another way to look at the urban-suburban dichotomy is to view them as different nation-states with their own currencies.

The urban housing economy experiences: multiple offers on properties,
less choice, higher costs, fewer amenities, more noise, less room for
automobiles, more rapid increases in price year over year, lower
commuting times and petrol consumption and, of course, higher density.

The suburban housing sector has: more choices and more amenities both
in terms of the housing product itself and in the public room, newer
inventory, more space per dollar spent, fewer buyers, less housing
inflation, lower density, higher commuting times and distances and
probably less crime (although vandalism and graffiti may be a
significant issue for suburban populations.)

One can easily see why families prefer, for the most part, suburban
locations, not least because they can buy a lot more bedrooms with their
dollars. Educational opportunities may also be more diverse in suburbia
simply because there are more children there anyway.

In the example I used earlier (https://www.eqjournalblog.com/?p=467)
of a pair of matched  towns (one urban, one suburban), $1,000 bought
6.7 sq. ft. of housing in suburbia but just 3.9 sq. ft. in urban
locations. Put another way, ONE SUBURBAN DOLLAR, let’s call it $1 SUB
when exchanged for URBAN currency only gets you $0.57 URB.

So moving from the nation-state of suburbia to the nation-state of
urban locales can be a difficult move unless you temper your
expectations in terms of accepting less space and more crowding, as well
as higher prices for your ‘weaker dollar’.

Prof Bruce

Here are the calculations:

Nov. 15, 2009 Purchase Area Price $1,000
Price per Sq. Ft. Buys

Suburban Town $230,000 1550 sq. ft. $148.39 per sq. ft. 6.739130435 sq. ft.

Urban Town $401,000 1550 sq. ft. $258.71 per sq. ft. 3.865336658 sq. ft.

Ratio of Price per Sq. Ft. 0.573566085 “Exchange Rate”

       
       
       
     Prof Bruce @ 10:48 am

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         Home Staging in a Commercial Setting        

       
   Posted on
       Saturday 14 November 2009  
     
   
       

I am a recent convert to the value of staging. Imagine if
you went to your favourite men’s store to buy a new suit and you found
all the suits strewn about the shop floor. To find one, you had to walk
over others, pick it up, dust it off and try it on? The store probably
wouldn’t sell many suits.

In commercial real estate, I have long known that you need to
merchandise your products. If you own an old industrial building, it
will lease (or sell) a lot faster if: a) it is super clean, b) the paint
is fresh, c) all the ceiling tiles (in the office portion) are in place
and none are water stained, d) the grass is cut, e) the gardens tended
to, f) broken windows or signage are fixed. If you own a piece of land
with an old building that is at the end of its economic life, take it
down, run a dozer over the land and let people see the lot and imagine
the possibilities—trust me, land with nothing on it is worth more than
land with a building on it*.

(* This is similar to when you buy a new car—you spec the colour,
whether it is automatic or not, tint the windows, add fog lights, sun
roof and rear deck spoiler, etc. You drive it off the lot to work where
you are promptly let go so you drive it back to the car lot the same day
you bought it and they offer to take it off your hands for 30% less
than you paid for it a few hours ago. You freak out. But believe it or
not, from the dealers POV, this is rational. Because you have spec’d all
this stuff, they have to find a buyer who wants exactly what you want
plus wants what is now a secondhand car. They have to restock it,
re-warranty it, re-plate it and prep it for a new buyer when one is
found. Plus they have to finance it while it is on the lot. So, if you
have an old building that has to come down, spend the extra money to
take it down—it’s a merchandising cost. If you put up a building,
realize that the moment you do, you have locked in all the options (size
of building, materiality, function and form) which reduces the value of
the land…)

The Broken Windows Syndrome was first discovered in the 1980s and is
now widely applied in the field of urban planning (James Wilson and
George Kelling, The Atlantic Monthly, March 1982). For example, if you
leave a middle-of-the-road car which is clean and in decent shape in a
difficult part of town, it will experience little vandalism even if left
for quite some time. But throw a brick through one window then stand
back and watch—within minutes the car will be stripped to its hubcaps.

When he was Mayor of NYC, Rudolph Giuliani, a former prosecutor, read
about Broken Windows and he knew instinctively that this was the right
approach for his city. He brought in a no-tolerance policy for
vandalism, graffiti and petty crime. He understood that a neighborhood
that looked like it was in decay and that tolerated petty crime
(prostitution and other so-called victimless crime like drug dealing)
would attract major crime and even faster decay would result. In urban
planning, you can not create any value from real estate if public safety
is at risk. Just look at Detroit practically giving away 100s of vacant
homes this year—homes that you can buy for as little as $500 and still
there are few takers.

In NYC, if your outside lamp is busted, a window or fence is broken, a
door askew, graffiti on your wall, whatever, you will get a notice to
fix it and, if you don’t, the City will fix it and charge you for it.
There is no tolerance for decay in either the public room or the
property facing the public room and NYC has become a much safer place as
a result.

Home staging for houses has been known to be an effective selling
tool for a long time—if you are going to sell your home, do a few simple
things that don’t cost very much and you will add a lot of value: a)
clean it up, b) paint what needs to be painted, c) cut the grass, d)
tend the gardens, e) patch any holes in the drywall and fix whatever is
broken, f) de-clutter the home, garage and any outbuildings, g) stage
it.

You notice I don’t say spend thousands of dollars updating your
kitchen and bathrooms, finishing your basement or adding a swimming
pool. The reason for this is simple—almost all major investments like
this have a negative ROI—it costs you more to do it than you can get if
you sell it.

There is a useful online calculator that the Appraisal Institute of Canada has on its site (https://component.aicanada.ca/e/resourcecenter_renova.cfm#select)
that shows a typical investment of $5,000 (say) in a bathroom
renovation and another $15,000 in a kitchen update may yield expected
returns of between 75% and 100% or $15,100 to $20,000*.  I learned a
long time ago not to make investments that turn four quarters into a
dollar and I don’t encourage clients to do that either.

(* I love this one—add a swimming pool for $30,000 and your ROI
ranges from 0 to $7,500. In fact, heating, cleaning, repairing, opening
and closing a pool are so expensive and the risk of accident and home
insurance premium increases that may result from installing the pool in
the first place, make me think that AIC is overestimating the value—it
may well be negative.)

So there are some smart, cost-effective things you can do to help you
merchandise your home or commercial property and one of those things is
home staging.

A recent experience proved that for me: we had taken over leasing of
an office penthouse floor in downtown Ottawa with spectacular views of
the Parliamentary Precinct. The floor had been the head office of a
major company but they had left behind some office furniture in jumbled
heaps, there was garbage everywhere, the place was a mess and the floors
were dirty.

The space is incredibly funky (in a good way) and would make terrific
space for a marketing company, an embassy, a cool tech firm, what have
you. The place has been empty for more than a year.

We finally got the OK from the Landlord to stage it—clean it,
de-clutter it, arrange the furniture, take professional photos and do
basic merchandising.

Before they even finished (the cleaners were just completing
vacuuming), we had a showing and a day later we had an Offer (from a
finance company).

The value proposition of the two ladies who run the local staging
company—unbelievable. The IRR (Internal Rate of Return) on the $1,600
investment (to clean, take photos and stage it) was a ridiculous 10,683%
p.a. for the Landlord.

Prof Bruce

Postscript: I calculated the IRR as follows:

Nov. 14, 2009 Value Proposition: Home Staging in a Commercial Setting

Office Space 5,400 sq. .ft.
Net Rent $15.95 per sq. ft. per year
Op. Costs $16 per sq. ft. per year
Total $31.95 per sq. ft. per year
Total $172,530.00 per year

Cost of Staging $800
Cost of Cleanup $600
Cost of Expert Photos $200
Total Costs $1,600

Time vacant 1 year
Time to offer 15 minutes

IRR

0 ($1,600)
1 $172,530.00

IRR 10683% p.a.

Postscript 2: This is, of course, another example that is ripe for a
negative cost selling approach. If you are a home stager and you can
visit with a Landlord and tell him or her that by hiring you and your
team for $1,600, they will make $172,530 or, put another way, their cost
for hiring you is a negative $170,930, well that is a pretty strong
value proposition. Or to paraphrase one of my students: “I will pay you $170,930 to hire me to stage your office building!”

       
       
       
     Prof Bruce @ 12:52 pm

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         Urban versus Suburban        

       
   Posted on
       Friday 13 November 2009  
     
   
       

The City of Ottawa’s policy on densifying the national
capital region is working, at least if price differentials are any
indication of success: a new 3-bedroom townhome on Centrepointe Drive
(located inside the greenbelt in what used to be Nepean) sold recently
for around $401,000. A similar new townhome built by the same company in
Morgan’s Grant (a western edge suburb in Kanata) sold for about
$230,000. That’s a huge $171,000 price gap and the only real difference I
can find is that one is closer to the urban core than the other.

It may even be that the suburban townhome is a bit nicer—if having a
yard or garden is important to you. The urban town has zero private
space. Plus, since it is part of a condo corp and the owner must pay
condo fees, the urban town is more expensive on a monthly basis
(assuming that the suburban owner values his or her time for lawn
maintenance, snow removal, etc at essentially zero.)

So I wondered why someone would pay $171,000 more for basically the
same product. I think there is one simple reason: the urban town is (on
an as-the-crow-flies basis) just 7.3 km from downtown while the suburban
town is 20.9 km away. Now luckily for this analysis, the two towns were
bought by colleagues of mine and they both work at the same place—the
urban townhome is located about 6 minutes from their office while the
suburban town is about 20 to 25 minutes away. So we have a real-world,
paired sample—rare in urban economics and urban design—and the
comparative analysis is easy to do with no adjustments required for
family size, time, design or location and, thus, highly accurate.

The colleague and his family who live closer save about 500 minutes
per week in commuting time compared to the other family living further
out. They also save petrol—about 53 litres per month. If we value their
time at $45 per hour and gas at 90 cents per litre then the family on
Centrepointe Drive is saving (time and gas) worth $16,185 per annum. On
the extra investment of $171,000 (the increased price of the urban
town), this represents a ROI of (a not-bad) 9.5% p.a. Most of this ROI
derives from time savings—gas savings make up just 3.5% of the total.

While the builder’s costs are somewhat higher for the urban towns
(because of higher land and construction costs), they aren’t that much
higher—in part, because the closer-in development is being built at a
higher density. In other words, the developer is getting a higher yield
of towns on their land on Centrepointe Drive which offsets some of their
higher costs. So most of the price differential they are getting for
their urban towns is probably going to their bottom line. This is good
for the developer but is it good for the urban organism that is called
Ottawa?

I would argue that higher land prices in the urban core is the right
signal to send to the marketplace—it supports the goal of higher density
since developers will act rationally to increase their yield on more
expensive land. From the homeowner’s point of view, they are clearly
prepared to pay more for the benefit of saving time and gas—there are
lineups to buy these urban towns. But they too are acting rationally.
And both are serving the greater good by looking out for their own best
interests, faithfully following Adam Smith’s principal of the invisible
hand.

When people are prepared to pay this much more for an urban town, a
virtuous circle results—developers act in a way that will result in an
increase in the supply of the more urban and higher density towns
because they command a premium price. There are certainly a lot of
teardowns going on inside the Greenbelt in Ottawa where small-scale
builders are buying existing single family homes on larger lots and
replacing them with doubles.

But what the City of Ottawa might also want to recognize is that
there is still a market for suburban property where people trade longer
commutes for lower prices and more space and that isn’t wrong either.
The City just needs to get their price signals right and the market will
respond…

Prof Bruce

Professor Bruce M. Firestone, Entrepreneur-in-Residence, Telfer
School of Management, University of Ottawa; Executive Director,
Exploriem.org; Founder, Ottawa Senators; Real Estate Broker and Mortgage
Broker Email: bfirestone@partnersadvantage.ca Blog:
https://www.eqjournalblog.com/ Twitter: https://twitter.com/ProfBruce

Ps. I posted the spreadsheet I used in .xls format at: https://www.ottawarealestatenews.ca/TownhomeAorB.xls where you can download it and fool around with it yourself.

Pps. Another way to look at the urban-suburban dichotomy is to view
them as different nation-states with their own currencies. The urban
housing economy experiences: multiple offers on properties, less choice,
higher costs, fewer amenities, more noise, less room for automobiles,
more rapid increases in price year over year and, of course, higher
density. The suburban housing sector has: more choices and more
amenities both in terms of the housing product itself and in the public
room, newer inventory, more space per dollar spent, fewer buyers, less
housing inflation, lower density and probably less crime (although
vandalism and graffiti may be a significant issue for suburban
populations.)

One can easily see why families prefer, for the most part, suburban
locations, not least because they can buy a lot more bedrooms with their
dollars.

In the above example, $1,000 buys 6.7 sq. ft. of housing in suburbia
but just 3.9 sq. ft. in urban locations. Put another way, ONE SUBURBAN
DOLLAR, let’s call it $1 SUB when exchanged for URBAN currency only gets
you $0.57 URB. So moving from the nation-state of suburbia to the
nation-state of   urban locales can be a difficult move unless you
temper your expectations in terms of accepting less space and more
crowding, as well as higher prices for your ‘weaker dollar’.

Here are the calculations:

Nov. 15, 2009 Purchase Area      Price               $1,000
                       Price              per Sq. Ft.        Buys

Suburban Town $230,000 1550 sq. ft. $148.39 per sq. ft. 6.739130435 sq. ft.

Urban Town       $401,000 1550 sq. ft. $258.71 per sq. ft. 3.865336658 sq. ft.

Ratio of Price per Sq. Ft. 0.573566085 “Exchange Rate”

       
       
       
     Prof Bruce @ 2:27 pm

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         Warren Buffett’s HR Strategy        

       
   Posted on
       Thursday 12 November 2009  
     
   
       

Readers of this blog will know that I think that after your
decision to actually start a new enterprise, your next most important
decision arrives when you hire your first employee.

It’s talented people that produce revenue streams not assets so
always try to hire ‘up’. I look for people with the right set of skills
and experience but I am also looking for people with ‘good hearts’.
These folks won’t quit when the going (inevitably) gets tough. To read
more about this, see: https://www.eqjournalblog.com/?p=96.

Here is what the Oracle of Omaha had to say on the issue. It may take a few seconds for the lesson to become clear.

“In looking for people to hire, you look for three qualities:
integrity, intelligence and energy. And if you don’t have the first, the
other two will kill you. You think about it; it’s true. If you hire
somebody without [integrity], you really want them to be dumb and lazy,” Warren Buffett.

Prof Bruce

       
       
       
     Prof Bruce @ 10:46 am

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         Planning at Macro and Micro Scales        

       
   Posted on
       Wednesday 11 November 2009  
     
   
       

Let’s say you are a planner, architect or urban designer and
I am a developer or owner or representative of an owner of an important
piece of urban property. The property could be owned by a for-profit
organization or a Government Agency or a Not-for-Profit. Whatever the
case, I give you this assignment: create a superb urban design for this
key piece of property.

It is an island connected to the downtown core. Dirty industry has
left the land in a devastated condition. All you see is the plan I give
you below.

Blank Slate

Now what do you do?

Well, you as an architect (say) have been taught to:

a. First of all, you walk the land.
b. You are trying to develop an over-arching vision and gut feel (at the quantum level of thinking) for the property.
c. You look at the context for the property.
d. What do the adjacent properties look like?
e. What type of development surrounds the property?
f. What structures do you see on this property and adjacent ones?
g. You look at the water features and the topography of the land.
h. You think about soil conditions—their bearing capacity and you think about environmental contamination and related issues.
i. You examine aerial photos of the property to see and understand the
history of the area and specifically the property you are concerned
with.
j. You talk to the neighbours to get a feel for what their vision is for this property.
k. You talk to the former owners of the property if you can find them.
l. You talk to the urban planner(s) responsible at the municipal level for this property.
m. You meet with local councillors to get their views.
n. You meet with the local community association and as many members of the local community as you can.
o. You understand traffic flows—pedestrian as well as vehicular.
p. You take lots of photos and makes lots of hand-drawn sketches.
q. You see not only what is there and what is around you but also what could be there.
r. You are beginning to formulate a functional program—a list of
possible uses which the site could be put to that will produce the
highest and best uses for the property.
s. At the same time, you see in your mind’s eye and in your photos and
sketches a form (actually, a series of forms) taking shape—they appear
to have grown out of the land as if you had planted a series of seeds
and stood back in wonder and watched buildings grow and spaces between
them develop.
t. You understand that form follows function (at least, from a
developer’s point of view) but that function follows form—you know in
your bones that buildings which are designed for one use often house
other uses within their lifetimes so while the developer may be more
interested in the functional program (what uses are for the property)
and especially in the revenue streams that flow from them, you are
satisfying (at least) two constituencies—the need of your patron to
realize commercial benefits from the development and your need to create
an enormously complex piece of public art through your design skills
and intellect.

Now you reach a fork in the road—are you designing this for a single
development or will this be open to participation by many groups? Are
you trying to develop a fine scale plan with many development blocks or
are you going to treat this site as a whole?

Since many cities are redeveloping and rediscovering their urban
cores, this question is important to all stakeholders. And this question
may also arise for other properties that are not located in the core
but are of region-wide importance—there could be arenas, stadiums,
airports, trade show centres, convention halls, casinos, employment
hubs, shopping hubs, universities and colleges and many other facilities
that are key economic generators where intense, synergistic development
is warranted but they aren’t downtown.

In my view, it is almost impossible to obtain a highly variegated,
interesting, micro scale plan that produces maximum benefits for an
urban group of stakeholders if you treat a piece of property as if it
was a ‘flat, treeless plain’ subject to a mono-cultured urban plan and
one single development.

The reason that urban cores can be interesting spaces is that over
the years, we have had many, many architects, developers and public
enterprises have a go at designing and building variegated structures on
often tiny pieces of property and thereby making unique contributions
to the public room and the public good

What you get when you permit something like this to take place, what you get is… the Byward Market in Ottawa.

Byward Market

What you get when you allow mono-cultures is an unimaginative
redevelopment of places like Lebtron Flats in Ottawa (by the NCC), which
may easily become a modern no-place.

A New No-Place

Now let’s return to our Island project. What if instead of Condition
1, I gave you a base plan that had many different blocks and a road
pattern that was sensitive to the land forms?

Bounded Condition

What if, as a result, you allowed many different types of uses and
structures to be developed on this micro scale plan? Maybe you would
come up with something that attracts more people (11 million per year)
than every other attraction in Canada except for Niagara Falls… Well,
you would end up with:

Vancouver’s Granville Island

Ottawa has some sites of region-wide importance that are eminently
suited to re-development or more intense development. These include the
lands at Rockcliffe Air Base, Lebreton Flats and Lansdowne Park, the
lands at, around and adjacent to Canadian Tire Centre, the airport,
Algonquin College, Carleton University, the University of Ottawa, the
Domtar lands and the Byward Market. These sites, even if owned or
controlled by a single entity should be opened up to many potential
developments—that way they will generate an optimal stream of benefits
for all stakeholders including ownership.

Prof Bruce

       
       
       
     Prof Bruce @ 11:41 am

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Bruce is an entrepreneur/real estate broker/developer/coach/urban guru/keynote speaker/Sens founder/novelist/columnist/peerless husband/dad.

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