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The Links Between Enron & Investment Property BusinessesMost of the time, we learn when someone teaches us the right way to invest in property. But, plenty of valuable lessons can be learned from the mistakes of others. Enron is a prime example of the many things that can go right in big business. But also, ultimately Enron is now unfortunately the shining example of the many things that can go seriously wrong. What can you learn from Enron’s mistakes as a real estate investor? There are plenty of lessons, but here are a few critical ones.
These are just a few of the lessons Enron teaches us about good business and bad business. As a real estate investor, you get to gain specific insight into how to run your own real estate business. Invest in property properly! Here’s a breakdown of how to do so wisely whenever you think of acquiring or flipping investment property. Spending Out of Control Even though Enron’s faults can be traced all the way back to its beginnings, top executive Jeff Skilling greatly embellished them. But ironically, spending habits were not a problem until Jeff Skilling came onboard. Skilling’s predecessor Rich Kinder, Chief Operating Officer, was reported as being a tight-fisted, tight wallet commander who looked at spending requests as money coming out of his own pocket. When Jeff Skilling took over, spending habits drastically changed under his reign because he felt it took money to make money. While that’s true, spending habits went haywire while Skilling remained out of touch and relied heavily on what Chief Accounting Officer Rick Causey reported to him. As a real estate investor, you might encounter your own temptations to spend dollars on advertising, marketing, rehabbing, and over-doing the ‘fix-up’ or ‘staging’ of investment property for sale. But, you have to maintain a sense of control. Real estate investing is a very lucrative business for the savvy investor who can find great deals on property. So, enjoy your money! Yet, remember that you will need assets to keep yourself in business. The money you have in the bank is every bit as much of an asset as any property you own. Plus, just because you have the money it takes to fix a property and then flip it, it doesn’t necessarily mean that it’s a good investment. Having the capability to spend money doesn’t mean you necessarily have to do it! Keep that in mind. Invest in property properly! Growth at Any Cost Skilling also ushered in the growth-at-any-cost tactic. There were voices of caution within the company over certain business deals. Those voices were seldom heeded. A system of checks and balances did not exist. The long-term perspective was all but dropped because Skilling only wanted deals he could secure within three months. If it took a year, it was too long even though it might be best for the company. When investing in property, a growth-at-any-cost strategy isn’t good business. A property might look great at first, but further investigations reveal that there are plenty of problems. If there are enough problems that you have to walk away, don’t be foolish and stay because any emotional attachment to a property deal will cost you in the end. Growth at any cost will put you into bankruptcy proceedings in a hot flash instant just like Enron. Take Profits Now, Worry About Details Later As Skilling nurtured more aggressive tactics and recruited hot-to-trot newbies from such schools as Harvard and Yale, the basics of management and deal making went out the window. No one cared about the future of the company. All that mattered was the bottom line in any particular deal and how much profits it could net the company, converting to how much of a bonus deal makers were getting. As a real estate investor, you will feel this same temptation. You see profits in front of you and you sacrifice the long-term deal that you’re making. First of all, there are questions to be asked, like “Is the deal viable?” Are you looking at all the details and making a sound business decision? Investors I’ve seen in this situation almost orget about general business basics. Focus on the costs and look at the profit margin. Because abandoning your principles by staring at the future prospect of a huge paycheck now from a deal outside your strategic plan and marketplace can have you sunk in a business deal and stuck with property you can’t move. Then, the details become problems and you have no idea how to get out of the mess you are facing. I keep saying this over and over, but real estate investing can be very lucrative and virtually an easy business to run. It’s the small mistakes that make for big problems in the long run. So keep that in mind. You must invest in property properly! Inflating Projected Returns In the early years at the beginning of Enron’s fall, deal makers were getting bonuses when the deal was struck, not when the deal started to make profits. Many deal makers were projecting inflated returns so that their bonuses would be rather large compared to what they should have been. What kind of business sense does that make? Enron deal makers were being granted bonuses based off of projections rather than actual profits, and bonuses were being paid before profits were even made on a deal. Walking into a property investment deal, you can’t calculate unrealistic returns. It’s always good to know what trends are taking place in the marketplace your investment property business is operating. It’s better to know the actual value of the property and how much it will take to flip it, as well as how fast you can flip it – or have tenants in it renting to produce a solid positive cash flow. Enron taught us a great deal about ivesting in investment property should be run as a business. Even though many of the points are negative, we as investors can still learn. Don’t spend out of control. Don’t accept growth at any cost. Don’t accept profits now only to worry about the details later. And don’t inflate projected returns. Invest in property properly! Start applying these principles today and begin flipping real estate for FREE by starting your 7 Day Trial at INSTANTRealEstateSolutions.com! Brad Wozny |
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