Tuesday, May 18, 2010

Basic Business Principles Knows No Boundaries

I've just returned from my semi-annual visit to California where I stayed with some close friends who reside in Orange County. The wife is a retired teacher so she and I can chat for a (very) long time about special education and learning disabilities (which is a deep-rooted interest of mine). The husband is a real estate developer (in which I have a side-line interest); and although he and I operate in different business spheres (he has no interest whatsoever in my "techie world"), I am always struck by how basic business practices and principles are ... well, "basic"!

Consider how he is starting up his latest new real estate venture: Purchasing distressed properties to renovate and then re-sell at below market prices. As he described his venture, I thought of my checklist for entrepreneurs:

(1) What is the problem? i.e. What is the market opportunity? Recent rough economic times have forced banks to foreclose on real estate properties; leaving them with large inventories of real estate that they have no desire to keep or manage. Despite the overall improving US economy, there are pockets of residential markets (my friend's specialty) where there is opportunity to buy, renovate and re-sell single family homes ... for the "right" financial terms.

(2) What is the solution? i.e. What is the value proposition? My friend has put together an attractive financing package to purchase single family homes from willing banks who hold the mortgages on these properties.

(3) Why do you think you would succeed? i.e. What is your competitive advantage? Recall I mentioned residential housing markets - particularly single family homes - are my friend's specialty? He's been in the real estate development business for over 35 years where he's experienced several up and down cycles in real estate markets all over North America. He's done this before with different real estate products and accompanying financing packages. He's well networked in both the buy-side and sell-side in his industry - and works with a few trusted partners to identify pockets where there is opportunity.

(4) How do you plan to succeed? i.e. What is your business model and how are you going to execute it? He's listened to the needs of the sell-side (in this case, the banks holding the mortgages) and developed a financing package accordingly. He's identified a real estate market where he's already has other real estate development projects; so he can be there "on the ground" (so to speak) to monitor his latest venture. He's using his own funds (no partners yet) to make a small investment in a few single family homes to "test" his venture. If this "prototype" works, then (and only then) will he ask his trusted partners to help him iterate the process. If it has potential for scale, then watch out for a mass marketing campaign for a real estate venture coming soon to your neighbourhood!

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