Relationship Management 101

I received a phone call today from a professor of an esteemed university offering to teach a class on relationship management right here on Whiskey & Gunpowder. I was initially skeptical, and it took a bit of persuasion on his part, but once I heard a synopsis of the lessons, I agreed the topic was fine. Still, everything on Whiskey is free, I insisted.

Eventually we came to terms, and the professor agreed to teach a few lessons at the bargain-basement price of nothing. Without further ado, here is professor Hardious Knocks of the prestigious School of Hard Knocks, teaching Relationship Management 101. Each lesson in this series is based on current events. There will be a written assignment after each lesson. Class is now in session.

Lesson 1
Relationship Management by the Book

“The stalled real estate market turned Stoneybrook at Venice into a very different community than its residents paid for: a half-built subdivision dotted with slow-moving construction sites and ‘For Sale’ signs.

“Many residents of the 560-acre east Venice subdivision said they are willing to weather those inconveniences. But the latest news — that mega-developer Lennar will dump more than $6 million in costs on homeowners — has Stoneybrook residents crying foul and preparing a lawsuit…

“Lennar had asked the county for designation as a community development district, a special taxing district that issues bonds to pay for things such as drainage and roads.

“The commission’s vote was 3-2 in favor of Lennar’s request…

“The tax will add more than $700 a year to some residents’ yearly payments…

“Residents said they were under the impression they would only have to pay for future maintenance through their homeowners dues. But commissioners ruled the developer did everything by the book.

“The decision, coupled with Lennar’s recent increase in some homeowner’s dues by $200 a year — another move residents say wasn’t properly announced — has a group of more than 150 Stoneybrook residents ready to take Lennar to court…

“Stoneybrook residents loudly applauded a speech by [resident community group leader Gary] Natiss, in which Natiss threatened a lawsuit and said the ‘only thing Lennar could be building in this county are license plates while they are wearing their little orange uniforms’…

“Others cited a petition, with more than 150 signatures, protesting the levy. Many residents held signs with slogans such as, ‘We have been Lennarred.’

“Lennar attorney Dan Bailey called the residents’ claims ‘reckless allegations.’ He said Lennar made clear there would be more costs when it started selling homes in Stoneybrook…

“Today, the complex is about 43% sold, which county staff said is less than two-thirds as far along as Lennar hoped. County staff said Lennar will fall almost $8 million short of its revenue goals for its first two years if the sales trend keeps up.”

Homework Assignment 1

  • Discuss the need to get it in writing and read the fine print
  • Is “by the book” the best way to treat customers?
  • Does Lennar care about its relationships once the closing is finished?
  • If you have to enter a lottery to start a relationship, what can you expect out of the relationship down the road?
  • Is the proposed relationship the homeowners have with a lawyer likely to be beneficial to anyone but the lawyer?
  • Does the commission just want the work done regardless of who pays?
  • Is the commission just acting to avoid a lawsuit by Lennar?
  • Do you even know who your commissioners are?

Lesson 2
You Are No Longer Needed. Goodbye.

“Centex Sees More Layoffs to Get to ‘Fighting Weight’

“Centex Corp. chief executive Tim Eller, during the company’s quarterly earnings call Wednesday, said the homebuilder’s head count is down 17% since the beginning of its fiscal year. ‘There will be more reductions in the [fiscal] fourth quarter,’ the CEO said. ‘We’re taking the necessary steps to get our balance sheet and our organization to their fighting weight,’ he added.”

Homework Assignment 2

  • You think you have a job in an industry going gangbusters
  • You are a loyal employee in for the long haul
  • Does it matter?
  • Who are golden parachutes for, anyway?
  • Do you have a plan in case you are fired?
  • Should you?

Lesson 3
Blame the Auctioneer

“Low Bids Take Glow off Property Auction

“One Cape Coral homeowner left an auction sponsored by the Miloff Aubuchon Realty Group Inc. elated her home fetched a $400,000 bid.

“Then, the bottom fell out.

“‘The bid came over the Internet. They said there was a computer glitch,’ said Rosemarie Leibert, 79. ‘They put it back on auction and the bid was $250,000.’

“Leibert declined to take the bid…

“Leibert was upset with the auction, calling it a ‘farce.’ She believes the bids were too low and the auction didn’t deliver serious bidders…

“Calling the effort a learning experience, Jeff Miloff, the realty group’s sales manager, said another auction planned for March could have different rules.

“The bids were so unrealistic the auction showed people didn’t do their homework, Miloff said.

“‘The next auction could have suggested opening bids,’ Miloff said. ‘People had no sense of what they were bidding. It made no sense.'”

Homework Assignment 3

  • Is the auctioneer to blame for low bids?
  • Will any bids come in if there are minimums?
  • Who has no sense here, the bidders or the sellers?
  • Exactly who failed to do their homework?
  • Assign the blame in percentages to the bidders, the sellers, and the auctioneer.

Lesson 4
We’re All in This Together

“Foreclosures Put Added Burden on Association-Run Communities

“If you think you’re paying more to live in your condo, townhouse, or gated community, consider this: It may get worse before it gets better.

“Experts fear that with homes selling slowly, owners who can no longer afford payments may soon abandon them. If that happens, those left behind in communities run by associations must make up the missing share of money to maintain roofs, roads, landscaping, and pools.

“‘We’re seeing a 100% increase in the number of files turned over to us [by associations] for lien and foreclosure,’ said Gary Poliakoff, whose Fort Lauderdale-based law firm, Becker & Poliakoff, represents 4,200 associations in Florida…

“An association’s expenses are constant, so budgets are based on the community’s number of homes and apartments.

“‘Other owners have to make up the shortfall because service providers aren’t going to say, “We feel sorry for you and will reduce the cost,”‘ said Poliakoff.”

Homework Assignment 4

  • If a condo tower is only 50% sold, who is going to pay those dues for the empty units?
  • Should one believe that initial assessment the builder/developer stipulated?
  • What happens if your neighbor defaults on his mortgage and the bank owns the property before the condo association failed to get a lien for assessments?
  • How will increasing insurance rates affect your neighbor’s ability to pay?
  • What about the guy 18 stories up whom you’ve never met?
  • When the tuckpointing fails, how many new relationships will be formed?

Lesson 5
Who Do You Believe?

“The 0.8% drop in sales in December came after two straight months of improving sales, the first back-to-back sales gains since the spring of 2005.

“David Lereah, chief economist for the Realtors, said that even with the December setback, he still believes that sales of existing homes have hit bottom and will start to gradually improve.

“‘With fingers and toes crossed, it appears that we have hit bottom in the existing home market,’ he said.

“In other economic news, the number of Americans filing applications for unemployment benefits shot up last week by the largest amount in 16 months, reversing two weeks of big declines.

“The Labor Department reported that 325,000 newly laid-off workers filed claims for jobless benefits last week, an increase of 36,000 from the previous week. That was the biggest one-week rise since a surge of 96,000 claims the week of Sept. 10, 2005, when devastated Gulf Coast businesses laid off workers following Hurricane Katrina.

“But economists said they believe the low point for housing has been reached and they are forecasting a slow rebound in 2007. Because of that optimism, analysts don’t believe the slump in housing will drag the overall economy into a recession.”

Homework Assignment 5

  • Is Lereah believable?
  • Is the NAR believable?
  • Who do you believe?
  • If you cross your fingers and toes, does it help?
  • What about wishing on a star?
  • 36,000 more people formed a new relationship with their local unemployment office. Estimate the percentage of those above who were prepared for this new relationship.

Extra Credit Assignment
Lower Your Costs or You’re Fired

“Faced with a $195.6 million loss in the fourth quarter, the Miami-based homebuilder is telling subcontractors that it wants further cost cuts or they’ll be excluded for six months from future bidding.

“Lennar Corp. is asking its homebuilding subcontractors to cut their current charges by 5% or more or face a minimum six-month ban on bidding for work, a company executive said late Tuesday…

“‘As our customers continue to pay us a lower price for our homes, we must in turn pay you a lower price for your services,’ said a letter circulated to subcontractors in Lennar’s Orange Coast, Corona, Temecula, and Palm Springs divisions.

“[Lennar Southwestern U.S. regional Vice President Jeff] Roos, said similar requests are being made of Lennar subcontractors nationally.

“‘Every builder is doing the same thing,’ added Roos, who works in the company’s Western region office in Aliso Viejo. ‘Everybody understands that the market has softened…I think everybody realizes in times like this…they need to manage their business accordingly.’

“Roos said 90% of the subcontractors in the region had a positive response to the letters.”

Extra Credit Homework

  • How likely is it that there was a “positive response” from the subcontractors when asked to cut prices?
  • Will the subcontractors cut prices anyway?
  • Find at least three more “special relationships” involving Lennar and report on them.

Hmmm. There seem to be some questions for professor Hardious Knocks about this extra credit assignment.

Mr. Plumber: I can’t cut my costs, I have bills to pay.

Professor Knocks: It seems you have a relationship problem with your bills. We cover that in Relationship Management 102. The first two lessons are “How to avoid paying your creditors” and “How to terminate expensive relationships.”

Mr. Carpenter: This sounds like extortion. My inventory is stacking up, and if I cut prices, I will lose money on the bid.

Professor Knocks: It does not matter what your costs are. You can lower your prices and lose money, or not lower them and do no business.

Mr. Economist: You can’t fool me. This extra credit assignment is really about deflation.

Professor Knocks: Don’t confuse falling prices with deflation or rising prices with inflation. I highly recommend that you take Deflation 101. The first lesson is how to put the horse in front of the cart. But if the carpenters and plumbers of the world go bankrupt, or if too many of those new relationships at the unemployment line end up in bankruptcy court, then yes, we are talking deflation. I look forward to seeing you in class next semester.

Please e-mail your finished assignments to HardiusKnocks@SchoolofHardKnocks.Edu

Class dismissed.

Mike Shedlock ~ “Mish”

January 29, 2007

The Daily Reckoning