7
just ask the customer
A BUSINESS TRUISM: The best place to go for advice is to the consumer. It doesn’t sound like rocket science, and it isn’t. In big business, decisions are often many times removed from the actual transaction with the customer. By the time a problem gets resolved, the customer has been lost. This is a place where the little guy can gain an advantage.
Take the American automobile companies—the Big Three. For years, they built gas guzzlers that people often did not want to buy; in the case of the Hummer, General Motors was forced to subsidize customers’ fuel purchases by offering buyers free gas for a year. Building cars without asking people what they want in a car was one of the things that led to foreign automakers’ seizing control of the U.S. market, as well as two of the Big Three going bust and running to Congress for a taxpayer-funded bailout.
For me, going to the consumer changed how I did business in residential real estate. The consumer is the last person in the food chain in the housing industry. The developer buys the land, pays an architect to design the houses, and then contracts with a construction company to build them. The broker shows houses that are available, and the consumer buys one. Short of renovating or building a custom house, the consumer is exposed to what is available.
I also operate on the theory that consumers should get what they want. What is the point of superimposing what I love about a house on someone who has different taste? Why would you sit with an architect and let him tell you what he thinks is beautiful about a house and then design it his way? He is a technician. You are the customer. After the house is finished, he is probably never going to set foot in it again, while you might be there for twenty-five years. Sometimes this can be more difficult than you might imagine. The fact of the matter is that the consumer often does not feel in charge, even though he is the one paying.
In the case of residential real estate, the consumer is the woman of the house. You can learn more about what to build from married women than from any male realtor, builder, or architect. Never go against this rule. Women are almost always the ones who choose the house.
Every time I start a new housing development, I go to the neighborhood where I am going to build and literally knock on people’s doors. I introduce myself and tell them that I am going to build some houses in their area. Next typically comes an awkward silence, sometimes followed by “Aren’t you that actor?” Then I am usually invited in. I tell them that I want to find out what they like about their house and what they don’t like.
One of the first things I learned in my door-to-door research concerned the master bathroom. Everyone has seen those houses with the huge master baths. There is a long double sink, a Jacuzzi tub, a glass-enclosed shower, and a separate nook for the toilet.
Originally, that was the plan the architect designed.
I showed the bathroom plan to a woman who was newly married. She nodded and remarked that it looked very spacious and that a couple could easily use the space at the same time.
“Are you and your husband often in the bathroom at the same time?” I asked.
“No, not really,” she replied.
“Do you like it when he is in the bathroom?”
“Would you like being in the bathroom with my husband?” she asked rhetorically (I hope).
“Then you would prefer your own bathroom,” I offered.
“Of course, but that would be too expensive,” she said.
This became a “why not?” issue. Why does the master bathroom have a double sink and only one toilet? Because that is the way it is always been done. Well, why not design to the function? A man showers, shaves, and leaves. Women spend far longer beautifying themselves. Therefore, why not build two separate bathrooms? Yes, it is a little more expensive, roughly $3 per square foot in 2010 price terms, but in a two-thousand-square foot house, that is returned in greater sales because we are producing a house that no one else has built in that area, thereby giving the homebuyer a better product. We do the same thing with condos, which again gives us an edge on the competition in both the sales and the rental markets.
I once had a conflict with an architect when my partners and I were building some townhouses in Pasadena for the city’s redevelopment agency. We had submitted the plans for the townhouses to the agency’s oversight board. For political reasons, it selected an award-winning architect named Piero Patri to design the houses.
Now Piero was a wonderful guy who had a real flair for work and life. He was well known for helping re-create many areas of his native San Francisco, including the conversion of the Hills Brothers coffee plant on the waterfront into the mixed-use Hills Plaza. I began meeting with Piero. After all, he had an impressive reputation. Who was I to object? But my relationship with him was not architect/client; it was a running cat-and-mouse negotiation.
Every time I sat down with him, there was an issue. Prior to each meeting, I would go through seemingly endless sets of plans and drawings and would always find something he had done that was slightly different from what I had asked for. He would not tell me what it was; I had to catch it on my own. A spirited dialogue would ensue.
Me: Wait a second, this was not on the last set of plans.
Piero: Oh, I changed that.
Me: Why?
Piero: It makes a nice exterior roof line if I cut that overhang back.
Me: Yes, that’s true. But when it rains, the patio will flood.
Piero: (Shrug)
The next time, he would alter a furniture wall for what his eye told him was aesthetic reasons. Very nice, but it begged the practical question of where the owners were going to put their furniture.
It reached the point where our meetings would start by my asking him what he had tinkered with. He would give me a perplexed look, and I would say, “I’m going to find it, so you might as well tell me up front.”
My point is that the consumer is going to buy the house, so the best place to go for advice is to the consumer. I go to the homebuyers and design according to what they want, not to win an architectural award. Once you have the consumer’s input, you need to follow it—even if you have a renowned architect adding elegant design touches.
ask questions and shut up
To paraphrase the late Speaker of the House Tip O’Neill’s astute observation on politics, all housing is local. Everyone talks about a “housing crisis.” Housing is not national. There is no such thing as national housing; it is all local. You can agglomerate all the statistics in the world, but every market is geographically different from every other one.
In 2008, my partners and I made a plan to build five hundred houses in Crestview, Florida, because we found out that five thousand people were going to be transferred to nearby Eglin Air Force Base from two North Carolina bases over a three- to five-year period. Since the population of Crestview is only about twenty thousand, there would be a need for more housing.
How did we know about the transfer? We did our homework. The information is all public. We subscribed to Armed Forces News to follow the BRAC (base realignment and closure) news. When we read that the 7th Special Forces Group was moving soldiers from Fayetteville, North Carolina, to Eglin Air Force Base and that the F-35 fighter program was moving some operations from Fort Bragg to Eglin, my mind began whirring. If they are going to increase the population of a small community by 30 percent, these people will need somewhere to live.
What else did we learn about this transfer? The army publishes the average pay scale of soldiers, as well as guidelines for how much they should spend on off-base housing. This told me the price range of houses we needed to build, so we started by designing a house that our customers could afford.
We then thought about financing. Because the army is involved, these houses would qualify for Federal Housing Admin-istration (FHA) and Veterans Administration (VA) financing. FHA loans are given to qualifying individuals who would not otherwise be able to afford such a loan, and they are insured by the Federal Housing Administration. VA loans are given to military personnel and are backed by the Department of Veterans Affairs. This allowed us to go to a local bank in advance and arrange mortgages based on the pay scale of the buyer and the resale of the loans to the government agencies. It is a win-win situation for the banks because they sell the loans and then collect a fee to service them.
Next, it was time to ask the consumer’s advice. Rather than wait for the people to cross the state line, I flew up to Fort Bragg with my friend General Mike Speigelmyer, a retired three-star general who once commanded the Army Special Forces. We sat down with these families. “I am going to show you a design, and you tell me what is wrong,” I said. “I want you to design the house for me.”
We started by saying, “Tell us what you would like in your dream house. Money is no object. Make a list, and then we’ll start editing the list. What are the priorities? A deck? A pool? A screened porch? What?”
Out of those sit-downs came a desire for a third garage space (two slots for their automobiles and one for the boat, motorcycle, or Skidoo and space for a lawn mower or anything else), something that once again would distinguish our product from that of our competitors. Again, the couple buying the house is not looking at overall cost; they are looking at the mortgage payment. The cost of an extra $5,000 spread over a thirty-year mortgage is a few dollars a month.
Because most people think conventionally and not outside the box, they generally deliver convention. This kind of person would look at my plans and scratch his or her head. “Three garages? Who can afford three cars?” This thinking comes from the fact that the people manufacturing an item do not go to the customer. They think, “I’ve done this for twenty years, and I know what I’m doing.” Without fail, I have found that if I ask questions and keep my yap shut, I will learn a hell of a lot from the consumer.
Residential building is, in fact, all about serving the customer. If a developer or architect makes it about anything else, that person will end up with a cluster of magnificent empty homes and a pile of debt to service.
In 2005, I was presented with a residential housing opportunity in a place called Farmington, New Mexico. I had never heard of it, much less been there. Farmington is near the Four Corners, where Colorado, New Mexico, Arizona, and Utah all meet. The town is also adjacent to one of the largest gas fields in the United States.
At the time, the price of gas was skyrocketing, creating a demand for more workers and supervisors. Most of the workers were living in manufactured houses or mobile homes, so my partners and I developed houses of between 1,200 and 1,500 square feet that were priced to sell in that market.
yet another benefit of serving the customer well
Serving the customer in real estate can also help you turn a problem into a positive. We were building a housing development on the north side of Phoenix that backed up to the Tapatio Wildlife Reserve. It was an infill area that had somehow been overlooked. The parcel of land was hilly and rocky and contiguous to an older development, but it had the advantage of backing up to a protected area. The other advantage was that this parcel was slightly elevated, and in that area any house that is built ten feet above the flat desert floor has a view of downtown Phoenix. Such a view is a major selling point.
We designed a subdivision of eighty houses, but the local planning department made us construct a wall that surrounded the development at an estimated cost of $500,000. I lodged a major complaint with the city for imposing this extra expense on the project, but it turned out to be a serendipitous selling point because the walled-in development created the feeling of an exclusive community.
We started out building houses that would sell in the $375,000–$400,000 range, a price point supported by the local market. These were designed as old adobe-type, Spanish homes using stucco and with tile roofs. But, as it turned out, once the exclusiveness of the area was established, we were able to sell the last ones for as much as $700,000.
As the houses in our “walled community” began selling during the building process, we also made design changes that played into that concept. We discovered a stone and statuary business nearby. A dealer had bought hundreds of old stone statues, could not sell them, and filed for bankruptcy. We bought the entire business and used the stone for the houses. Again, distress created opportunity.
Many of the houses had a patio wall in the rear, so we would take one of these stone lions, bury it in the wall, and rig a fountain so that water would spew out of the lion’s mouth. It looked like a lot of classic statuary stonework. Next, we extended the tile from the patio so that it became part of the pool area and then built a glass partition you could swim under, making an indoor-outdoor pool with a patio on both sides.
All of these touches gave the houses an exclusive quality, but they were not expensive relative to their return. They set the product apart from anything else in the area, thereby giving the customer something unique. A win-win.
in the hospitality business customer relations rule
There is no business that can’t benefit from good customer relations. Of course, many businesses depend upon customer service. The restaurant and the hotel businesses are two prime examples.
It used to be that as a hotel owner you could do something different in the restaurant or the bar to give it enough flair to fill the rooms. But the one constant that draws return business to hotels is customer service. My friend Steve Wynn exemplifies this principle. He spends more money training his employees than any other hotel operator in Las Vegas, and the results prove it.
Or take the Carlyle Hotel in New York, which my old friend and partner Lew Wolff co-owns. The simplest rooms can run $1,000 a night, and yet it continues to be full. Because the building was built before World War II, the rooms have small bathrooms—the opposite of what has been demanded by consumers in recent times. However, the customer does not object because of the attention paid to every other detail. The Carlyle uses the finest silky Italian linen sheets and top-of-the-line Kiehl’s bathroom products and has exquisitely attractive furnishings. It even has a dog-walking service.
The Carlyle is also a one-of-kind property. It has the stylishly old-world Bemelmans Bar, so named because its walls were hand-painted by Ludwig von Bemelmans, the creator of the Madeline books, and a “proper” salon for high tea. There is also the famous cabaret room the Café Carlyle, immortalized by Bobby Short’s performances and the longtime home of Woody Allen’s jazz band.
Above all, the Carlyle has something even more essential: outstanding customer service. Repeat guests are treated as if they were residents. They are greeted by name at the front desk. (Clearly, a solid management team is necessary to keep the same employees in place to recognize returning guests.) Their initials are monogrammed on the pillowcases, and any requests from the previous stay, such as extra towels or a specific snack, are already in place in the room. The waiters remember the guests’ names and ask if they want “the usual.” Without that kind of service, the martinis wouldn’t taste as good.
Some hotel brands sell franchises, like Hilton, and they have a certain set of rules that owners must follow. These rules are not rigid, but they do impose some conditions; for example, you must keep “Hilton” in the name. It is advantageous for the franchisee to run those hotels because if you want to offer different things to the customer, you are able to do that. But brands like Fairmont, W, and Four Seasons insist on being the manager. Those companies have much more rigid requirements.
As part of the redevelopment of Burbank, a group that included Lew Wolff and me built the Burbank Hilton. In order to improve service by charting customer preferences and habits and to book more reservations, we installed a new software system. This was done by two Harvard MBAs who had no hotel experience. Why them? Because, once again, they weren’t bound by conventions. These two MBAs applied different business techniques and allowed us to install a more sophisticated software system than most Hiltons had at that time.
The Burbank Hilton software system became a model for other Hiltons. Lew once went to a meeting at the Chicago Air-port Hilton and signed in as an owner of the Burbank Hilton. The woman behind the desk told him that they could not run the Chicago hotel without help from the Burbank Hilton. When he asked what she meant, she told him that anytime there was a computer question, they called Burbank.
But customer service comes at a price, and in the recent recession many luxury owners began asking if that price was too high. The Four Seasons, for example, had long refused to cut any staff or offer special rates because it thought that doing so diluted the product. This left the owners paying out large amounts for employees at hotels with empty rooms and without enough convention and catering business to justify the expense.
Part of the problem stemmed from the fact that the Four Seasons management company is overleveraged. The company was taken private at a very high figure, about $85 a share, and sold to Prince Alwaleed, the billionaire Saudi investor, and Bill Gates. On top of that, the purchase was leveraged. Therefore, when the hotel owners asked the Four Seasons management company to reduce fees and expenses to get through the tough period, the management company balked because it was having problems satisfying its corporate owners.
Rosewood, another luxury chain that manages such properties as the Carlyle and Las Ventanas in Cabo San Lucas, is much smaller and has no debt against it. Therefore, in tough times, it can afford to be more flexible with its property owners.
To a large degree, the hotel business is a marketing business. If you don’t have a brand to sell, you have just got a building with beds in it. A unique brand attracts a certain following at a certain price point—Four Seasons at the high end, Hilton in the middle, and Days Inn at the low end. During the robust world economy of the late 1990s, the high-end brands proliferated, and therefore the marketplace was less able to distinguish among them. How can individual hotels distinguish themselves? Customer service.
Harry Gordon Selfridge, founder of London’s Selfridge department store, is credited with coining the phrase “The customer is always right” in 1909. It has become one of the great clichés of business. As much as I like to avoid clichés, this is one that I abide by.