Lessons Learned and Earned, Part II

As I wrote last week, Massey Knakal was founded in 1988. People often ask why Paul and I chose that time to start the firm as it had been only about a year since the stock market crash of 1987. The fact is the real estate sales market continued to perform well in 1988. Many principals and brokers who were active in the market at that time remember that even though the stock market crashed in October 1987, the building sales market in New York remained strong in 1988 and even into 1989. In 1990, however, the building sales market came to screeching halt. The volume of sales dropped to the lowest level we had seen since 1984, when Paul and I had started brokering building sales at Coldwell Banker Commercial (now CBRE).

Our overhead at that time was about $15,000 per month and, by late 1990, we were down to our last $15,000 in the bank. We thought about how to deal with this predicament. Should we pay $5,000 in essential bills for each of the next three months? Should we pay 100 percent of the next month’s bills and see what happens? We even seriously thought about going to Atlantic City and putting it all on black.

What we decided to do was to go to every bank we saw and apply for as many credit cards as possible. We were able to obtain a total of $60,000 in credit card lines and took down cash advances on these cards to get us through this period. As a few transactions closed, we were able to pay off these balances and were lucky to have been able to finance our operation in this manner. So …

Lesson 16:
Always maintain a good credit profile.
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By late 1991, the sales market had really not improved all that much. We were not prepared for such a poor market for such a long period of time. We had to take cash advances on the credit cards and when they were maxed out, we were coming up short once again. We approached a client of ours, who was very wealthy, looking for a $75,000 loan to keep the lights on. The client said he would be happy to provide the loan, but he wanted 50 percent of the stock in our firm in exchange for the loan. Paul and I left that meeting with our tails between our legs. We were not prepared for a response like that.

We believed that we would be able to come up with the money, so we approached another individual for the loan, agreeing to give 25 percent of the stock in our firm in exchange. Paul set up a meeting for us with John Holler, a very successful mortgage broker he knew. John agreed to give us the loan, but, to our great surprise, he said, “Guys, I don’t want the equity in your firm. Someday you will be very successful and you will regret that you gave me that equity.” We were completely unprepared for this act of generosity. Since that time, one of our top company awards is named after Mr. Holler as a small token of appreciation for what he did for us. So …

Lesson 17:
Be prepared for the unexpected.
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These trying times after the savings and loan crisis forced us to look brutal reality squarely in the face. There is something called the “Stockdale Paradox,” which derives from the actions of Admiral Jim Stockdale. He was the highest-ranking military P.O.W. during the Vietnam War. He was held captive from 1965 to 1973 and was tortured 28 times. He survived by confronting his reality head on and holding a staunch belief that eventually he would be released. He did not delude himself with unrealistic expectations or blind optimism, but instead maintained a clear focus on his reality and conviction that he would prevail.

During the early 1990’s, we had to face an ugly reality but always believed that we needed to do whatever it was we had to because, ultimately, things would work out. So …

Lessons 18 and 19:
Confront brutal reality directly and honestly; and have unwavering faith that you will succeed.
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During these difficult times, it would have been easy to simply worry about getting the next transaction closed as our economic viability was seemingly dependent upon it. It was a time when property values had plummeted and, for owners who did not have to sell, it was not a good time to be putting assets on the market. As difficult as it was, we advised many clients not to sell at that particular time. This paid off well for us as most of those potential sellers came back to us years later when they wanted to sell, remembering that we gave them the proper advice. So …

Lesson 20:
Regardless of the circumstances, always keep the client’s best interests in mind.
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We will conclude this three-part series next week. Stay tuned.
rknakal@masseyknakal.com

Robert Knakal is the chairman and founding partner of Massey Knakal Realty services and in his career has brokered the sale of more than 1,150 properties totaling over $7.4 billion in value.