Lessons From Prior Downturns

Yes, we're in a recession. Some companies will continue to fail and more people will lose jobs, in every sector of the economy. That's life.

But we're all in the real estate industry, and we all know - or should know, that is - that these cycles are natural. Anybody in this business in 1991 and 1992 remembers the last large-scale downturn, not to mention the early 80's oil bust, the late 80's S&L debacles, the effects of the Arab oil embargo and inflation of the 70's, and the more limited geographical impact of the 2001 tech bust.

The good part is that each one of those downturns comes with a list of "lessons learned". This one will be no different. I'd like to share some of my past lessons, and how they shaped the culture of our company, and therefore affect you.

In 1983, I was a student at the University of Oklahoma who had been appraising since high school, starting off holding the "dumb end of the tape" for my dad. I went to college right as the oil bust hit hard, as foreclosures skyrocketed, and as the S&L mess unfolded. Money was tight.

I worked with my dad during every spring break, every summer, and every Christmas - and sometimes missing class when there was no break - to help him run the appraisal business and to earn as much as I could for school and living expenses. My mom was a full time real estate broker, and at any given moment we'd have a couple of small single family rentals she'd found as fixer-uppers. I naturally was the designated sheetrocker, painter, carpenter, tile and carpet installer, and trash hauler. (Today, it would be a reality show on HGTV. Back then, it was just reality, period.)

In short, I grew up a typical middle class kid of a career Army vet and a frugal German mom whose formative years were during World War II in Germany. We all worked hard, we didn't borrow money, and we didn't live lavishly. I suspect I was raised a lot like most of you were, judging from the comments I get in e-mails and at seminars and conventions.

But apparently, you and I grew up very differently than many who've owned businesses these past few decades, judging by the mistakes we keep seeing repeated over and over on Wall Street, in Silicon Valley, in Washington, and even in our own little appraisal industry. Or, maybe those owners simply forgot basic things along the way.

As a 21 year old in 1985, I wound up accidentally finding my way into the appraisal software business. My dad decided he needed a PC and software, so he chose the same path as countless other technically challenged parents: He told me to take care of it. I looked at the offerings from large companies back then - names like United Systems, FormFill, MCS, and Day One - and decided that they all were terrible and overpriced.

That's where my lessons really began. Youthful ignorance led me to believe that one of my buddies and I could write better software, quickly and easily, as a side job. I'm pretty sure I got one part right - we did indeed write better software. But it wasn't quick. It wasn't easy. And it wasn't a side job. I had to drop out of college to finish it, spent three years barely scraping by financially to just get it even self-sustaining, and I missed most of my childrens' early years pulling all-nighters writing code.

And there's Lesson #1: It's harder than it looks. There are no shortcuts.

Lesson #1 seems to be collectively buried in our national consciousness under a mental pile of "Get rich quick" website pages and clips from "Flip this house" TV shows. The mortgage mess is a great example, but now we see that even in sophisticated Wall Street instruments, much of it is indeed based on a "Pig, I'd like you to meet lipstick" philosophy. That never works over the long term.

In my own industry, I see competitors of ours constantly announcing "new" products which we've had for years, but then they don't invest in the development effort and infrastructure to do their own versions properly. Then they're surprised when their "knockoff" doesn't make money, and they blame our success on "just marketing". Marketing is secondary. You just can't throw a couple of cheap servers in a rack with some public domain web software and a few web themes that you got from a freeware site, and call it an XSite competitor.(pq)

Likewise, you can't take a handheld Pocket or Palm PC, throw some generic forms software and a list of appraisal-like fields on screen, and declare that you have a field data gathering product. Nor can you hawk a cheap FTP site as the equivalent of an appraiser-specific online Vault product and think that appraisers won't be able to figure out pretty quickly that it's smoke and mirrors. Don't even get me started on the "24 hour phone support" that's really just voice mail and a pager that wakes some guy up at home, who may or may not call you before morning. No, you really have to staff a cluster of desks all night, every night, if you want to sell 24 hour support.

I could recite multiple examples - there are dozens - but the bottom line is that it's indeed harder than it looks. If you're small, you better be prepared to invest countless hours of painful sweat equity. If you're large, you better remember that it takes lots of dollars and resources to build it right, whatever "it" may be.

And that leads me to Lesson #2: Size matters. Until you screw it up.

It would have been unthinkable in 2007 to suggest that before 2008 was over, companies like Bear Stearns, AIG, Lehman Brothers, and both Fannie and Freddie would find themselves at or near bankruptcy, and rescued at pennies on the dollar in mergers or government bailouts. After all, these companies were icons on the international stage. They had billions, if not trillions, at their disposal. But size alone doesn't insulate a company from its own stupidity or from competitors' actions.

As I mentioned above, the names that dominated when I started a la mode were United Systems, FormFill, MCS, and Day One. We were a couple of flat broke kids eating ramen soup and writing code while these were large, well-staffed, well-funded companies. Now, they're either gone or are shadows of their former selves.

What happened? Whether on the global scale or in our little appraisal world, it's awfully easy to become so complacent, so arrogant, so convinced that you're at the top because you deserve to be, that logic flies out the window. The next thing you know, a smaller competitor has your number, or a market downturn takes you out with it.

Mark my words: Downturns like we're seeing today, and as we've seen before, will take out or critically injure one or more of the appraisal software firms out there. It's happened every time.

But, my company won't be one of them. Why? There's a long list of reasons, but the most important may be the simplest. Unlike most companies - and definitely unlike Wall Street - we don't borrow and we don't have any "investors". I own 100% of the stock and we grow by reinvesting positive cash flow, not by taking on debt.

And there's the basis of Lesson #3: Cash is king, but borrowing is royally stupid.

Back when I started, I walked into several lenders all bright eyed and bushy tailed and thought I could get a small business loan. Mind you, in 1985, a 21 year old kid starting a computer company was a lot more unusual than today. The bankers literally laughed at me. They not-so-politely suggested that I call the Small Business Administration. I did, and was told the minimum annual revenues needed for them to guarantee a loan was $500,000 a year. I remember asking if there was a Tiny Business Administration. They didn't laugh.

But, it helped me realize I had no options. Growing my company the old fashioned way became a source of pride, and still is. Now I scratch my head at the fact that few other businesses understand the noose around their necks created by rampant borrowing.

Post-9/11, following closely on the heels of the tech bust, a steady stream of talking heads implored everyone to "spend, spend, spend" for the country. Borrowing was patriotic. Fed rates fell and money flowed like champagne on New Year's Eve. Couple that with the nonsense that similarly flows out of venture capitalists (I'm firmly convinced that watching PowerPoint slides, not TV, rots the human brain), and it's clear why lots and lots of unbelievably stupid deals "got funded".

In our own little industry, everyone knows examples of companies backed by VC leverage, traditional debt, or publicly traded investor capital, who didn't make it. There are more lined up now staring at the firing squad. (Here's a fun thing to do in your spare time - look up the Dun & Bradstreet ratings of companies in the appraisal industry. It's enlightening.)

The thing most dumb money misunderstands is that customers aren't as dumb as the bankers. On an Excel spreadsheet loaded with dollar signs and commas, it's easy to believe that if they build it, or even if they just fake it, you will come. But, you're smarter than that. Eventually, you see that the emperor not only is naked, but he doesn't understand how to work Excel, either.

And that's the final Lesson #4: Customers aren't stupid.

Inevitably, all the slick marketing and websites and fast-talking salespeople go on the garbage heap of history when customers reach that collective tipping point and realize that they're being used. There's nothing more fascinating than watching companies - both large and small - implode in a business nanosecond when that happens.

Why are they so clueless? I've said many times that businesspeople look at terms like "goodwill" as a weird abstract term on a balance sheet. It's not. Goodwill is evident as both a blessing and a curse any time a company reaches out to its customers. If your goodwill is positive, it's apparent immediately. Customers go to bat for you. If your goodwill is negative, they eat you alive. I've been on both sides of it, and I know. It's not abstract at all - it's quite tangible. One of the most valuable lessons I learned long ago is that just being forthright with customers can quickly tip the goodwill back over into the positive, as long as you back up your candid words with solid action.

Unfortunately, that's a rarity these days. We live in an age where hype and spin are considered a praiseworthy skill. Hopefully, the pendulum will swing and that will change. As money becomes more expensive, maybe that sort of talk will become less cheap.

Either way, there will be new names added to the list of appraisal industry vendors that don't make it through this downturn. Besides those I listed above, do you remember companies like Haltech, who produced Haldraw? Or Microform? Or CSA? Or Dynamic Computing? How about Appraisal Partner? Or the creepy ads for 4th Generation Software, from the creatively named Appraisal Software Company? If you don't remember them, don't feel bad. I had to look them up in old magazines myself.

So who will be next to fade from memory? I'm not sure. I just know it won't be us, because we also live by the last Lesson, #5: "Never believe you've learned all the lessons".

It keeps us nimble and alert, and self-critical in ways other organizations can't fathom. That will get us past this downturn, and the next, and the one after that. See you there.