Now is Not the Time to be Reactive

Just got off the phone with a broker friend of mine who thinks I’m plainly nuts with all the fearmongering and paranoia about things that will never come to pass.  My recent series on real estate policy has him alternatively dismissive and wanting not to get out of bed in the morning.  So I’d like to tell all of you what I told him.

The reason why I’m being such a chicken little is not to have the industry up in a panic.  It’s to encourage everyone to start planning.  Now is not the time to be reactive, but the time to be proactive in thinking through some of the issues, making contingency plans, and putting a solid strategy in place so that you will know what to do if any of these things should come to pass.

And if none of them materialize, what have you lost?  Keep on keeping on with what you’ve been doing.

People often ask me what the hell I do for a living.  I do corporate strategy.  Part of that is precisely this kind of contingency planning in the event of X.  No matter how many gurus want to pretend that putting up a Facebook page is corporate strategy, it ain’t.  That’s more in the line of tactics and methods.  Strategy is about looking at the overall environment, thinking about competitive factors, assessing capabilities, identifying areas of strength and weakness, and tailoring a plan for imposing your will on the competition, while making contingency plans.

So some free consulting advice for my readers.

On the Importance of Contingency Planning

The foremost strategic organization in the world is probably the United States military.  They have hundreds, thousands of people constantly thinking about “what-ifs” and wargaming various scenarios.  General Petraeus recently said that the U.S. has a contingency plan in place to deal with Iranian nukes:

“It would be almost literally irresponsible if CENTCOM were not to have been thinking about the various ‘what ifs’ and to make plans for a whole variety of different contingencies,” said General David Petraeus, who heads the US Central Command that oversees the Middle East, the Gulf region and Central Asia.

Good.  One would hope that our military would consider any and all possible scenarios and have a plan in place for it.

Even with all the contingency planning in the world, sometimes events overtake us, and we get surprised.  9/11 was such a surprise; no one had actually thought about that particular scenario and put a contingency plan into place for it.  You can bet we now have a bunch of contingency plans at DHS, the Pentagon, FBI, local law enforcement, and other agencies in case of X or Y.

The reason why contingency planning is so important is that it fills the gap for the most important resource in the event of a crisis: rationality.  When bad news hits, most people tend to panic first, get worried, and get confused.  It’s natural.  It’s why disaster victims often walk around with a dazed look on their faces.  Their minds literally go blank.

Take the recent foreclosure crisis in real estate.  A lot of brokers did a significant amount of business from 100% financing sales, where buyers were not required to put any money down at all.  Then lenders started tightening guidelines across the board.  Sad to say, quite a few people never planned for that eventuality; in hindsight, most real estate pros say that the situation was untenable.  You couldn’t continue to loan people 100% of the value of the house and expect that they’d be good homeowners.  But while the 100% financing stuff was going on, very few people even made plans in case that form of financing went away.

Away it did go, and a lot of brokerages suffered huge setbacks in business.  They then started to make plans to deal with the new situation.  Reacting to bad news is not strategy, and when you’re trying to think through how to deal with a problem, while the problem is screwing with your day to day operations, rationality goes out the window.  Plans that people come up with in mid-crisis are rarely good.

That’s why contingency planning is so important.  Yes, you need to be flexible and deal with the actual situation on the ground.  But you have to have something in place to help restore rational thinking, provide at least the feeling of being in control, and tweak that plan in reaction to the actual situation.

So, What Plans Should I Make?

You could go overboard with all the planning stuff.  You don’t really need contingency planning to deal with every little issue.  “In case we run out of coffee, open the file ‘Coffee Contingency Plan 1.22” is a bad, bad thing.  Those planning-obsessed organizations end up doing nothing but making plans, executing on none of them well.

The plans I would make are the ones that deal with what-if scenarios that threaten the existence of the organization.  Maybe 10-15 years ago, that was the what-if of the Internet.  What if some big website pops up that makes real estate agents completely useless?  What if consumers start buying and selling homes on Ebay?  What if, what if, what if?

Today, the Big Bad Voodoo scenarios are almost all government-related.  So I would make contingency plans around those things that you personally think might be likely to happen, or unlikely to happen but with such a negative impact that some planning might not be a bad idea.  And you have to consider just how bad event XYZ could be:

• 80% likelihood x $10 worth of badness = $8
• 10% likelihood x $80 worth of badness = $8

The two are the same; you plan for both.  Don’t just plan for the 80% likely scenario, since that’s far more likely to happen — the impact to your business is the same for both.

How to Do it: Contingency Planning 101

Because each market is local, and each real estate organization is setup differently, with different strategies, different business models, and the like, I would start by assessing likelihood and impact in your market, your business.

For example, suppose the mortgage interest deduction is eliminated.  You could say, “Rob, you’re crazy; that will never happen.”  Fine, then assign 0% to likelihood and don’t plan.  If you think, however, that there’s a 5% chance it will happen, then you need to assess the possible impact.

What do you think will happen to your pool of buyers?  What would happen to home values? Not nationally, or statewide or whatever, but in your neck of the woods.

You think about it a whole bunch, then you say, “Hmm, in my particular neighborhood, the elimination of the MID would mean anywhere from 20-30% of buyers would disappear… and that might mean a 25% drop in home values.”  Now you have impact.  What would happen to your business if 30% of buyer demand went away, and home values dropped by 25%?  You do a bunch of calculations and decide, “I’d go from $10m in GCI to about $4m.”  Holy #*&@!

Since the event has not come to pass yet, you’re able to rationally, coolly, calmly, like a game (there’s a reason why the Pentagon calls it a ‘wargame’), figure out what your response should be if the highly unlikely (5% chance, remember) event were to come to pass.

You put together a contingency plan that might go something like this:

“If MID is eliminated, I’m going to go from $10m in GCI to $4m.  I need to layoff Joey, Carla, and Schmitty.  I’d need to move office space — so let me look at what exit clauses I might have in my lease agreement, or at least look at possible subtenants.  I would eliminate the free sodas in the lounge, the annual employee picnics.  I’d have to go into the higher end luxury markets where buyers aren’t as sensitive to mortgage interest issues.  Let me think about training 3-4 agents more on luxury segment.”

You take that plan and file it away, or maybe you start implementing some of it — like training some agents to do more luxury segment business.  Review it periodically to see if those steps are still what you’d want to do.

Point is, that if the highly unlikely, but highly damaging event like the elimination of the MID were to come to pass, you’re not then reacting in a panic, running around like a poulet sans la tete.  You’re opening up your file, reviewing what you planned on back when things were sane, and feeling like you have at least a path forward.

Be Proactive in Planning; Now is Not the Time to be Reactive

So, if you think I’m totally crazy with all this government policy stuff… that’s your prerogative, of course.  But all I’m suggesting is that my friends and colleagues spend a few hours doing some contingency planning… just in case.

Evaluate likelihood and impact, then decide if you need to put a plan down on paper.  It’s like insurance.  You hope you don’t need it, but if there is a fire, and a total loss… boy you’ll be glad you paid those premiums all those years.  Contingency planning doesn’t require a premium.  So go do it.

These be interesting times; the least you could do is plan ahead.

-rsh