I’ve been having a number of conversations with friends over this past week, as the quarantine situation got serious then even more serious. Some of it was sparked by my series on the aftermath of this crisis for real estate, and others sparked by just general events these days.
As I write this, I’m debating on whether to hit “Publish” or not, because the thoughts in this post are… quite dark, even by my standards. They’re the kinds of thoughts that I know are rational, that I know are necessary, but I really wish I did not have to pursue. So if you’re reading this, it’s because I’ve come to believe you all might get some small benefit from my thoughts that outweigh the discomfort of having to think them.
I will warn everyone in advance that you are NOT going to like this post. You are going to want to disagree and perhaps vehemently. You are going to want to tell me that I have no clue, that I’m off the reservation, that I’m crazy, and so on. I completely understand. I really don’t like where my brain goes sometimes either, and yet, if I do hit “Publish” on this, it’s because I think it might help someone out there and maybe someone more rational has also read it and thinks it’s worth being out in the world.
So with that said… here it is:
It is time to give serious thought to triage.
Actually, that time was likely weeks and months ago, but human beings tend not to engage in the excruciating thought experiments that triage involves. Still, better late than never.
The Necessity of Triage
Most of us have only experienced triage when we visit the hospital emergency room with something we think is major enough to warrant a midnight hospital trip, only to have to sit and wait for hours. That happens because the doctors and nurses on duty have an idea of how urgent one situation is compared to another. Someone with a bad ankle sprain is not going to immediately die or lose the leg if he has to wait a couple of hours, while someone else who just had a heart attack is if not seen to immediately.
Merriam-Webster defines triage as:
1a: the sorting of and allocation of treatment to patients and especially battle and disaster victims according to a system of priorities designed to maximize the number of survivors
1b: the sorting of patients (as in an emergency room) according to the urgency of their need for care
2: the assigning of priority order to projects on the basis of where funds and other resources can be best used, are most needed, or are most likely to achieve success
As a society, we are living through the largest triage exercise in history. The quarantines, the shelter-in-place orders, the reprioritization of resources, etc. that we are all living through is triage. In order the maximize the number of survivors from COVID-19, the government is issuing extraordinary never-before-seen orders, and most of us are willingly complying.
We’ll return to this at the end of this essay.
Triage and Real Estate
My day job as a strategy consultant means that I get to see a lot of company financials. It is why I’ve been sounding the alarm about real estate brokerage for a few years now: I see the Company Dollar numbers, the Net Income numbers, and they simply do not add up for me.
When this crisis hit I volunteered some of my (suddenly freed up) time to consult with brokerage owners who were concerned about their companies. I’ve done a few of those calls and looked at their financials. I’ve gone back and looked at other financials I have access to.
I am forced to conclude that most real estate brokerages in the United States cannot survive a 30% drop in revenues if that goes longer than 3 months. Some cannot survive that kind of a drop for more than a month.
In my COVID 19 and Real Estate post from a couple of weeks ago, I pointed out that Realogy can survive for 7 months with zero income on its current run rate. Everyone is freaking out about the Realogy stock price, piling on hate for whatever reason, but fact of the matter is that Realogy is quite likely to survive. Most brokerages in North America have nowhere near 7 months of operating expenses in cash. Accounts receivable might be an asset, but it’s not cash.
My analysis so far is showing that brokerages, particularly the smaller independents and even franchisees of major national brands, have anywhere from 1 week to 3 months of cash to pay operating expenses, assuming a 30% drop in revenues. Obviously the ones with only a week’s worth of cash are functionally bankrupt, the broker-owner is (has been) funneling personal cash into the business to keep it afloat.
So Just How Much Will Business Drop, and for How Long?
The key question then is just how much business will drop, and for how long?
I’m not an economist, but even if I were, I don’t believe that any economist can say with certainty this early on how much of a hit and for how long it will last. Everybody is guessing. Maybe in 2-3 months, we’ll have sufficient data to make real projections, but right now, everybody is operating in the dark.
So I did some crowdsourcing, to get the gut feelings of brokers and agents who are actually on the ground. This is obviously not scientific, and it is not data. It is merely semi-blind guesses and gut feelings of people who work with and call buyers and sellers every single day. Here’s the Facebook thread of that experiment.
I’ve compiled the responses, and the average broker/agent expectation from that thread right now is business down 40% for 6 months. (I took the low end of every range, and threw out the lowest and the highest.)
Again, I’m not saying there’s any validity to this experiment. These are just individual brokers and agents giving their gut feeling, based on what they’ve seen and experienced. There are plenty of people who have said they saw no changes, a few who think this will all blow over soon, etc.
You can and should make up your own mind. As I tend to believe in the wisdom of crowds a bit, I think 40% for 6 months seems like a reasonable assumption to do strategic contingency planning. So let’s go with that for the sake of discussion.
Triage, Brokerage Style
Obviously, none of us are having to engage in the kind of triage that battlefield medics or doctors in hospitals have to do. None of us are making life-or-death type of decisions here. But you do have to do triage in terms of your business, because in that sense, you may be making life-or-death decisions for your company.
But let’s get one obvious point out of the way first. Triage is not cutting luxury items, or frivolous things. We’re not talking about eliminating agent happy hours here. Triage is being forced to choose the lesser of two evils; it’s like amputating an arm to save a life. Or letting one victim die so that the other one might live.
Looking through brokerage P&L statements, one after another, a few things jump out at me.
First, the single largest “expense” of any split-based brokerage is agent commission. I like to classify that as cost of revenue, but the typical brokerage gives away 75-95% of GCI to the agent in the form of splits. That’s the business model, after all.
Second, the two largest line items in operating expenses for just about every brokerage are Payroll and Occupancy. That means staff, and office space.
Third, if you are a franchisee of most of the large national companies, franchise-related expenses are likely the third largest line item after staff and office space.
Let’s go with the assumption from above that we’re going to see business be down 40% for 6 months. If you have the balance sheet and the cash flow and the income to survive that with some judicious reduction in non-triage spending (maybe get rid of some lead gen programs that aren’t producing a clear ROI, stop subscribing to tech tools that are luxury items, forego happy hour, etc.), then you’re in a fantastic position
The incredibly difficult decisions that you are going to have to make relate to the above three.
Agents
You may need to do some serious productivity analysis of your agents, and figure out who is contributing to your Company Dollar on your current comp plan. The shift in focus is away from market share, away from transactions, volume, etc. and towards, “How much am I, as the broker, making from this agent?”
Include all of the non-split factors you want. Maybe that agent is a wonderful teammate who lifts everybody’s spirits. Maybe that agent is a big draw for recruiting. Maybe the yard signs of that agent helps your other agents. Include everything.
But then you may need to make some seriously difficult choices. Either change the comp plan so that you are generating enough of a profit from that agent, or let the agent go. Fact is, if you have to close your doors in 60 days because you don’t have the cash, that agent is going somewhere else anyway.
That’s triage.
Operating Expenses
As I’ve said, it’s easy to cut the fluff spending that was awesome in the good times. If you think your business will be down 40% for 6 months, you need to start thinking about which of your staff you have to let go. As you can imagine, that is not an easy decision. It is a soul-crushing decision.
But again, if you have to close your doors in a few months, then nobody will have a job. So you, as the broker-owner, have to make some incredibly difficult decisions.
That’s triage.
As for leases… right now, there are programs that the government and companies are rolling out to try and soften the impact of the lockdowns. We already know that evictions are on hold. We know that landlords are offering deferred payments. We know that enormous bailout and stimulus packages are being put together to try and help small businesses stay in business.
All of those may help for a bit. There is no reasonable scenario where those types of things can stay in place long term. A landlord might be able to let you skip one month of rent, maybe even two. Six months? Maybe… you can always ask… but I seriously doubt it. The bank might let you defer paying your credit card for a month or two. Six months? There’s no way.
Depending on how your lease is written, the only way out may be to declare bankruptcy. Or it may be a huge penalty you have to pay for breaking the lease. None of those are desirable outcomes, and yet, you may need to start thinking which horrible path you would choose if push came to shove.
That’s triage.
Franchise Agreements
Clearly, we are going to see all kinds of efforts from the larger national companies to help individual brokerages and agents get through this. But again, it’s impossible to imagine those efforts extending beyond a couple months.
Say your national franchise is willing to waive franchise fees for a month. Will they waive it for 6 months? RE/MAX and Realogy are publicly traded companies — are they going to be able to go report to the public markets that they have chosen to reduce their franchise revenue by 75% for the next year, without facing immediate consequences?
If you are a franchisee, you need to be having serious and painful conversations with your franchisor today, as you may be facing a triage decision in a few month’s time. And rest assured that your franchisor will need to engage in a lot of triage thinking themselves.
What incredibly painful decision will we need to make, in order to save as much as possible?
That’s triage.
One Extremely Important Note
I have to say this, because of my background in the law.
So many of the smaller independent brokerages are operated… how do I put this… in a personal way. What I mean by that is, quite a lot of the smaller companies are used to pay for personal needs of the owner. For example, car leases are often done through the brokerage company. That’s the most common one I’ve seen. But in other cases, I’ve seen some things that raise my eyebrow a touch: personal living expenses paid by the brokerage, personal medical expenses listed as an expense item in the company, etc.
Since such brokerages may be single-owner LLC’s or whatever, this isn’t an accounting issue. At the end of the day, it’s your company, so you do with it whatever you want. This is not about tax treatment of that vacation you wrote off as a business expense, because it coincided with an Inman Connect.
The issue is something else: piercing the corporate veil.
Please consult your attorney, because I am a lawyer-by-training but I am not licensed to practice law and even if I were, I am not your lawyer. But start with this broad description of the concept from Cornell Law:
“Piercing the corporate veil” refers to a situation in which courts put aside limited liability and hold a corporation’s shareholders or directors personally liable for the corporation’s actions or debts. Veil piercing is most common in close corporations.
This area of the law is state-by-state so once again, call your attorney.
However, if you have been treating your brokerage as just another checking account in the mix of various bank accounts you have… you could be looking at any lawsuit trying to pierce the corporate veil and come after your personal assets.
So let’s imagine that you declare bankruptcy for your brokerage, whether strategically to get out of a lease or because you have no choice. Your landlord sues you for the rest of the rent owed as per the terms of your lease. If the corporate veil stands, then your landlord is free to take the remaining few thousand dollars left in your business bank accounts, maybe take your furniture, that Mercedes titled in the company’s name, whatever. If the corporate veil is pierced, your landlord is free to come after your personal residence, your personal assets, etc.
As you are engaging in triage thinking, think very hard about how you have been operating your brokerage for the past several years. Think how much of your personal expenses have been “washed” through the company for tax reasons. Talk to your lawyer and do it today, because it might take you some time to unwind those things, and time may not be on your side.
A Light at the End of a Very Dark Tunnel…
Let me depart from the real estate industry perspective for a bit here, as this has been the subject of numerous conversations with my wife, friends, and colleagues over the past couple of days. And frankly, this is the kind of thinking I do not want to engage in, and yet… this is where my brain goes.
As of today, I do not believe that these lockdowns, shelter-in-place, and social distancing orders will last past 30 days… which is what we’re dealing with here in Nevada.
Let me tell you an anecdote; I promise it’s relevant.
Before Las Vegas, I lived in Houston for many years as a refugee from New Jersey. One of the first things I did when I got there was to think about hurricanes, because Houston has them and New Jersey really didn’t. I didn’t know what to expect should we get hit with a big hurricane.
So I asked a friend who had been a longtime Houston resident, who lived through Hurricane Ike (this is before Harvey in 2017). This is the story he told me, and it stayed with me ever since.
He said that right after the hurricane, with power down everywhere, roads impassable, and the city in recovery mode, things were fantastic. The first night, there was a huge block party in his neighborhood as everyone realized they had to eat the food in the refrigerator. People dragged their grills out to the front, opened beers, and had a big party. The second night was a repeat of the first, but with fewer beers. Everyone was trying to help one another. People pitched in to clear debris, to help repair damage, and so on. It was the best example of a community coming together to help one another.
By the third night, there were no more block parties. Neighbors who were close would come together to share a meal, help each other out, but not the entire neighborhood
By the fifth night, once the frozen food had defrosted and run low, even the neighbors would not come over or invite them over. That’s when people who owned guns started keeping them throughout the house, rather than in the gun safe.
Between the seventh night and the tenth night, when power was finally restored, the streets of the neighborhood were deserted, and people were looking suspiciously at anybody approaching their house. “What in the hell do they want?” would be the most common response, and this could be a neighbor they have known for years.
Nothing terrible happened, of course, and eventually, the city and the region recovered. But that story stayed with me, and right after that, I purchased my first handgun and started light prepping for hurricanes, that turned into pretty serious prepping for hurricanes.
It’s Human Nature
The relevance to our current situation is that his story is about human nature. When hard times hit, and we still have abundance and the abundance mindset, it is natural for human beings to be concerned about others. We are social creatures, and Americans in particular are kind and generous by nature. Rather than see food go to waste, we’d rather have a block party and feed everybody, friends and strangers alike.
Things start to change once the abundance is gone. And once humans start to worry about survival, they become selfish. It’s completely, 100% natural, and… moral even. Everyone might love society, but they love their neighbors more than a faceless group of people, and they might love their neighbors, but they love their family more. The moral thing to do for most people is to take care of their own first and foremost.
Because the lockdown orders and social distancing are still so new — here in Las Vegas, the order came down on Tuesday, March 17th — I believe we are still in the first night after the hurricane. Just about everybody is staying home, being careful, not going out, and coping with the new situation… not because they’re sick or even worried about getting sick, but because they don’t want to get other people sick.
The whole point of the lockdowns is to prevent our medical system from being overwhelmed. “Flatten the curve” doesn’t mean “cure the disease” but “buy time for our hospitals and doctors and nurses.”
We also know that COVID-19 disproportionately impacts the elderly and those who are already in compromised health. Every disease impacts them disproportionately.
So the social pressure is on everyone to not be selfish, not be stupid, and sacrifice for the common good. And everyone is doing his part. So far.
This is human nature on Night One.
30 days of lockdown in Las Vegas, where 35% of the residents work in tourism and tourism-related industries, means the ruin of a great American city. The mayor of Las Vegas is on record as pleading with Gov. Sisolak to shorten the 30-day order, because “we cannot survive.”
So far, we’re still at Night Two mode here in Las Vegas. Businesses remain closed. People are willing to comply.
Let’s see where we’re at by next Friday as more and more people start getting laid off, furloughed, and more and more restaurants, bars, and small businesses start closing their doors.
Social Triage
I believe what we will see is a form of social triage. This is what I was referring to above: making very difficult choices in order to maximize outcomes. We as a society will have to make incredibly painful, soul-crushing decisions.
Basically, we are going to have to accept millions of deaths of the most vulnerable among us in order to save the rest of the country from economic death.
But as I see it, I can’t see our nation and our society making a different decision. We’re already seeing op/ed pieces (albeit, in places like The Federalist) questioning policy decisions. Those pieces are getting condemned on social media, because we’re still in Night One mode.
I think that changes once the economic pain starts to hit the middle class and the upper middle class, and it surely will. There’s not a lot of demand for Directors of Marketing if no one is buying anything other than basic necessities.
When the public sentiment changes, it will change rapidly. It will start at the margins, with people who are easy to blame. You’ve been smoking for 20 years and now you have the WuFlu? Sorry, but you’re not getting a ventilator. Oh, you’re 200 pounds overweight and now you’re sick? Too bad for you; you should have made better choices. But eventually, that sentiment will spread to those whose only “crime” was to get old.
As a nation, we’re not going to be cruel about it. I’m sure local, state and national governments will do everything to help the vulnerable as much as possible. Free food deliveries, assistance with daily tasks, compensation perhaps, but those will come hand in hand with extraordinarily strict restrictions on the higher risk population coupled with, “But if you violate the quarantine, then whatever happens is on you.”
Because that lets the rest of the country get back to work and get back to living.
The Light at the End of the Tunnel
Obviously, I am not an epidemiologist, nor a doctor, nor a scientist. I don’t know squat about the disease itself. I’m not an economist, nor a policy wonk. I am a student of human nature, however, and have lived long enough to know what I know.
The American economy was roaring before the coronavirus crisis hit. The housing market in particular was surging. In the aftermath of this pandemic, even after we have made incredibly difficult triage choices, those who remain will be stronger (built up immunity) than before. Those who survive will actually flourish.
As a country, as a society, after we emerge from the trauma of the pandemic and the economic recession, structural changes will be made to prevent something like this from ever happening again. Manufacturing will be brought back, particularly for important necessities, like pharmaceuticals. A whole lot of regulatory red tape, which we slashed through during emergencies, will be looked at again to see exactly what the benefit of those regulations were. Remote workplaces might go from a novelty to a common business strategy.
We may mourn our losses, but Americans have proven to be tough sons of bitches in the past, and I don’t doubt that Americans — even the oft-maligned Millennials — will turn out to still be tough sons of bitches. We are, after all, fundamentally pragmatic people who cry over our dead, but still forge on to the frontier to settle the wilderness.
In real estate terms, as morbid as it is, we’re talking about millions in additional inventory. We’re talking about lower home values allowing more first-time homebuyers to actually get into homeownership. Even if fewer brokers and agents remain, the ones who remain are the ones who had the strongest financial resources to survive and expand during the dark times.
For us in the real estate industry, there will be massive changes of course, but we’re not going anywhere. Because housing is not an iPhone. It’s not designer shoes, or even professional sports. It’s a fundamental need, along with food, water, and energy. Everyone has to live somewhere. Whatever the real estate industry looks like after the dark tunnel, it will still be here, and it will be boom times.
We just have to get there.
It’s time to start thinking about triage.
-rsh
2 thoughts on “It’s Time to Think About Triage…”
Well said Rob. Expenses and reserves will dictate who survives. Someone smart said that when the tide is out you will see who is wearing any swim trunks. They said it better than that but they meant that profitable models and unprofitable models will be exposed.
Now is a time for triage. Who knows if we are preparing for 3 months or 3 years. That is where the mistakes will be made.
Over optimism and underestimating the impacts of unemployment, stock market changes, government actions, and worst of
all consumer fear.
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