(This article first appeared in Real Estate Investor's Monthly.)
People believe that the key to success in business is just to get into one where you “know what you’re doing.” Not so said the late Joseph Schumpeter. According to Schumpeter, the driving force in capitalism is innovation.
Schumpeter is the man who invented the phrase, “creative destruction.” To put it in terms laymen would understand, the home runs in business involve innovation. Look at the owners of Microsoft, Yahoo, Google, Apple, Dell.
Schumpeter, who ended his career as a Harvard professor, is the subject of a current book Prophet of Innovation by Thomas K. McCraw. In this article, I am using the prophet to reveal the profit.
Schumpeter, who died in 1950, is not as well known as prominent economists like Karl Marx, John Maynard Keynes, Adam Smith, and Milton Friedman, but he arguably ought to be more famous, especially in the U.S.
Capitalism was invented long before the Twentieth Century, but prosperity and standards of living exploded around the end of the Nineteenth Century and the beginning of the Twentieth. Why? Innovation. Better ways of doing things are what made us all so much better off. Today’s Americans make about three times as much as their forbears in the ’50s even after adjusting for inflation, 20 times more than in 1800. Why? Innovation.
And let me clear up one misconception right off the bat. When they hear the word “innovation,” most people think “invention,” like the light bulb or the computer chip. That is not how Schumpeter defines it.
Just as we learned in business school that marketing is everything you do, not just advertising, innovation can and does occur in every aspect of business. Henry Ford invented nothing. But he organized the factory more efficiently than ever before and set his price low based on anticipated economies of scale resulting from mass production
Michael Dell did not invent computers. Rather, his innovation was to figure out how to outsource the manufacturing and to eliminate all middlemen in the marketing.
You can and should try to do something similar in real estate investment. Draw up the sequence or chain of events in your real estate investment strategy. For example, if you are a sheriff’s sale investor:
Having identified all the steps, try to think outside the box of ways to improve the sequence, including, but not limited to, eliminating or reducing the cost and/or increasing the speed.
Schumpeter notes that the extraordinary profits of an innovator stem from his having a monopoly on whatever new product or process he developed. Isn’t that illegal? In some circumstances, yes. Microsoft was convicted of criminal violation of anti-monopoly laws. (An appeals court overturned part of the sentence—breaking up Microsoft—but not the verdict.)
But it is also true that monopolies are legal in other circumstances, most notably copyright, patent, and trademark law. The specific laws against monopolies cover a narrow range of circumstances. You should not violate them, but coming up with a new way of doing something rarely does. For example, Microsoft’s crime was to bundle Internet Explorer with Windows, thereby almost wiping Netscape, the leading Web browser at the time, off the face of the earth. Explorer was neither first nor better than Netscape. But everyone had to buy Windows, so by bundling its browser with its monopoly Windows product, Microsoft could extend its Windows monopoly to Web browsers where it had earned no such reward.
I did a slight bit of innovating in real estate. When I was an agent, I developed an approach to cold-calling which churned out the listings like clockwork. Basically, it was oomph. I learned that I had to make 100 cold calls a day by telephone to get one listing a week. I also learned what to say and where to get the phone numbers and how to respond when I got a nibble.
I met my wife and a zillion other attractive women in a similar way. My West Point roommate and I learned that attractive women had their picture in the paper for various reasons and that colleges had old yearbooks in their libraries, along with student directories that gave the parent’s home address and phone number. We developed a letter that explained our unusual approach. We figured out that the best first date (after college) was lunch. We learned that we had to send the letter out two weeks in advance and follow it up with a phone call on the Wednesday or Thursday before the lunch.
And we had to send six letters for every date we got. We sent six out at a time assuming no more than one would accept per week. Once or twice two accepted and we just told the second one who accepted that we needed to change the day.
The first innovation gave me lots of listings in an industry where the other agents were wondering how to get any. The latter got us dozens and dozens of attractive dates when we were being transferred around to multiple Army bases and our peers (junior officers) were having trouble getting any dates at all. (The longest chapter in my Succeeding book gives the details of our dating “System” including the letters we sent.)
Also in real estate, I discovered in the seventies that a lot of apartment buildings had rents that were way below market. At that time, there was a lot of inflation. Most landlords were wimps about raising rents to market. I was not. So I would buy waiting-list buildings and jack the rents 33% or more in a matter of months, thereby jacking the building value by a similar amount.
I also came up with a number of lesser innovations that are depicted in books like my How To Manage Residential Property For Maximum Cash Flow and Resale Value.
My point is that there is plenty of room for innovations in virtually any area of life, including real estate. The basic formula is to believe a better way is there and focus on finding it.
Thomas Edison said that genius was 99% perspiration and 1% inspiration. He famously tried a zillion different filaments before he discovered carbon was best. (GE switched to tungsten apparently because it would burn out, not because it was better. Last I heard, there was still a carbon filament bulb burning after 100 years in Edison’s Fort Myers home.)
Schumpeter’s phrase is that innovation is “not a feat of intellect but of will.”
My innovations in real estate listings, dating, and rent raising were not inspirations—just a guy trying hard to figure something out, not being restricted in my mind to the way it was always done, and sticking with it through failure after failure until I tried the winning formula and recognized it as such.
The common pattern of attending real estate seminar after seminar to get a winning formula makes me laugh. Mainly, those get-rich-quick seminars’ formulas are for making the seminar company rich. But even if they were legit, they would not be teaching innovative approaches. They would be teaching the way it’s always been done.
Innovation is, by definition, a do-it-yourself activity.
Most of the solidly successful real estate investors I know seem to have succeeded similarly to the way I did in real estate and in dating.
That is, they fiddled around with different approaches until they found one that worked for them, then repeated and refined that over the years.
In many, maybe most, cases, they had to do that more than once during their careers. For example, had I stayed in real estate investing longer, I would have had to find a new trick because the trick of buying waiting-list buildings and raising their rents stopped working after the seventies.
So did other tricks like converting apartment buildings to condos, buying rental properties for tax shelter, and so on. I used to meet, at its first stop far from my office, the truck that delivered the multiple listing service books each week. I bought a 12-unit apartment building before anyone else could make an offer as a result. But that stopped working when the MLS went digital.
Laws change. Times change. Technology changes.
So you probably cannot ride a single innovation to real estate riches. Rather you need to follow the example of Apple Computer’s Steve Jobs and come up with a series of innovations. In his case, it was the Macintosh computer, Pixar, and the iPod, among others.
In contrast, Xerox came up with one, photocopying, that it tried to ride too long. Xerox also came up with the mouse and graphical user interface that is the heart of the Mac, but they did not capitalize on it. Polaroid came up with instant photography developing, but tried to ride that one innovation too long.
Not innovating is not an option. One of the great lessons we learned in boxing class at West Point was that you had a stark choice between hitting or being hit. Hitting is better.
In real estate investment, you have a similar choice, although not as immediate in consequence. You can innovate or be innovated against.
Whether they think about it consciously or not, most investors are trying to figure out better ways to do things. If you don’t, they will start beating you for the best deals.
Schumepeter said what I and others have said about motivation. Innovators and capitalists are not motivated solely by money. Schumpeter said, they have “a dream and a will to found a private kingdom.” I often said real estate investors are motivated primarily by a desire to be their own boss.
Innovation creatively destroys. Your creation makes you richer while making those using the less effective, old ways poorer. They typically will fiercely resist your innovation.
Nowadays, the media are full of stories about title companies and real estate agents trying to hold back the tide of digitizing and Internet that will eventually blow away their lucrative monopolies that depend on the old ways of doing things. They are currently fighting fiercely, trying to get laws passed against innovation and discounting and so forth. This is what the Luddites and many other similar groups chronicled in Prophet of Innovation did and still do. Expect it and overcome it. JTR