Enlightened Capitalism

Essays about how to harness people's natural desire to create wealth and improve their quality of life to solve global problems such as war and poverty.

Wednesday, January 26, 2005

Creating Wealth By Beautifying Neighborhoods

Introduction
I’m going to start by giving a little background on the company I work for, Affinity Neighborhoods.

Affinity was born of our desire for satisfying and rewarding work. My partners and I had careers like most people, and we were very successful, climbing our corporate ladders and getting paid. Clearly, success and accomplishment are important. But What we succeed at and What we accomplish are important too.

True job satisfaction comes from continually taking on bigger challenges in areas that we really care about; not just solving problems, but solving problems that are worthy of our lives. The catch though, is how to make money doing what we believe in and working on what we care about. Affinity is our solution.

What we care about is the quality of life in neighborhoods where children are growing up. Since we can make money by improving conditions in these neighborhoods, places largely overlooked by society, government, and other investors, we have a wonderful combination, work that is both highly rewarding and deeply connected to our values.

Affinity creates wealth by transforming distressed neighborhoods into beautiful, safe, and vibrant communities.

We define "wealth" as a high quality of life. This includes not only money, but a wide variety of healthy things to spend money on; convenient shopping centers, markets, and entertainment. It includes interesting and satisfying work, and clean, attractive, safe housing.

I can't emphasise this point enough: creating wealth means improving the quality of life in our target neighborhoods. A recurring problem in history is that we define wealth as money, or control, or popularity, rather than quality of life. The story of King Midas illustrates how gold doesn't make us rich. High quality of life requires security, health, supportive relationships, education -- all the things that make life great. To focus only on money is to be a slumlord. It puts us in competition with everyone else. Wealth as Quality of Life is cooperative, mutually beneficial, win-win.

Neighborhood Selection
Now, exactly how do we transform neighborhoods? I’ll give a brief overview of our methodology. Affinity targets neighborhoods based on two criteria. First, the quality of life there must be unacceptable, which is our definition of a distressed neighborhood - conditions in which no child should have to grow up. Second, we have to see a clear opportunity to substantially improve the situation, within our schedule and budget.

To pick our neighborhoods, we research and analyse every zip code in the country, on all the factors which we know affect quality of life. By the way, if you’re interested in working cooperatively with us, we’ll be happy to explain the details of this selection process. We are always looking to share the wealth with people who share our vision. Because we know all the intimate details of real estate investing and property management, we can rank each zip code based on the impact we can have there.

As long as we are a small company, we’ll continue to target the very best zip codes, to ensure a successful project. After each investment cycle, we compare our predictions to national real estate appreciation data, which so far has confirmed our selection process. As we succeed and grow, fewer and fewer neighborhoods will meet the first criteria (that is, distressed), because we revitalise them one by one, and the transformation we cause is self-perpetuating.

At the same time, as we grow, we have more resources to invest, so more neighborhoods meet the second criteria – that we can have a significant impact there. The more properties we can buy in a given area, the more certain our results are, and the more consistent our performance. When every neighborhood in the world is beautiful and safe, and every child is growing up in a place they can be proud of, then we’ll make our final distribution to investors and work on something else -- perhaps transportation, or renewable energy. But for now the priority is clear: children don’t choose to grow up surrounded by drugs, violence, and urban blight. It is unthinkable to allow these conditions to persist when we can get paid to do something about it.

Property Selection
After selecting our target area, we begin the selection process for individual properties, using a detailed comparative analysis of all the properties available for sale (and even some that aren’t). We rank each one and select the best deals. As with neighborhoods, we choose properties on two basic criteria. First, we look for the properties that are "bringing down the neighborhood". Dilapidated buildings, neglected landscaping, piles of debris, building and health code violations, public nuisances, law enforcement problems, drug hangouts -- we see golden opportunities in each one of these, because we ask the question, “How nice would this neighborhood be if that situation were cleaned up?”

Next, we ensure that each transaction is profitable. So the set of properties we buy is the intersection of the ones that are crying out to be fixed up, and the ones that will make the most money for our investors. This set changes constantly, based on market conditions, our purchasing activity (which rapidly eliminates the low end of the market), and our other activities in the neighborhood. So typically we download a complete list of available properties each morning and do the whole analysis over again to determine which ones to bid on that afternoon.

If you've been a home buyer recently, you know what it means when the seller gets multiple offers. Prices tend to go up rapidly. Our persistent bidding on all the most underpriced properties in our target area causes a technical jump in home values. Low priced properties no longer sit on the market for months and months, but are sold within weeks or even days. When new properties come on the market in this environment, they tend to be more aggressively priced, and realtors and investors start to get interested.

Note that, by definition, "underpriced" means that, initially, realtors and investors are not interested in the areas we target. In our neighborhoods, realtors would have to work harder, even risking their lives in many cases, and get paid half as much as in affluent neighborhoods, so it is rare to find any local realtors serving the communities we invest in. As for investors, we are usually the only bidder on the properties we buy, at least until our project gets going. When realtors and investors get interested, money flows in, and the community starts to deal more effectively with its quality of life issues.

Another point to keep in mind is that when home values rise, so does the net worth of homeowners. Even in some of the most distressed neighborhoods homeowners make up a substantial portion of the residents. These owners receive a huge windfall when their home value rises, bringing an influx of money into the local economy. Property tax revenues also rise substantially as properties change hands in a seller's market. Investors who pay more to buy into the neighborhood are more likely to make necessary improvements, and building codes are often enforced as part of the conditions of sale. These are just some of the effects of our buying activity on the local economy.

Negotiating Purchases
When one of our offers is accepted, we begin negotiations with the sellers, agents, appraisers, escrow officers, home inspectors, and all the other services required for closing the deal. In our experience, the fees charged by all these middlemen are wildly variable and difficult to decypher. In the first 50 deals in which we tracked all closing costs, I don't think any two of them even had the same names for the fees, much less amounts. Clearly there is a lot of negotiating latitude here.

Because we use these services over and over, we have hired many of these people on as partners, so we pay low fixed transaction fees or hourly wages rather than commissions. In exchange our agents get a steady stream of work and they participate in the ownership of the company and profit sharing. Hiring local people, who spend their incomes locally, also helps the economy.

Rehabilitiation
Once a property is acquired, we enter what we call the "fix up" phase. First we address all health, safety, and habitability issues, such as broken windows, missing stairway railings, and faulty plumbing or electrical. Next we upgrade the "curb appeal", replacing chain link fences with cute wooden ones, planting flowers and vines, patching stucco, and repainting flaky exteriors.

And finally, we focus on the "walkthrough impression", refinishing wood floors, remodeling kitchens and bathrooms and adding skylights, where cost effective. We pay special attention to everything in the house that humans interact with, such as door handles, faucets, window latches, and light switches. These improvements have a huge impact on the quality of life of the inhabitants, which means we create wealth when we transform the property in this way. Our typical rehabilitation costs range from five to twenty-five thousand dollars, and we typically expect twice that amount back in equity from this portion of the investment.

But the larger impact (and much of our job satisfaction) comes from the reaction of the local community to the visible work we do. When we proactively clean up piles of trash that have been sitting there for years, people’s attitudes change. Neighbors start to clean up their yards and fix their fences. People outside maintaining and beautifying their properties becomes a common sight. Each small visible improvement spawns a series of similar actions. This is why we don’t have to buy every property. A certain amount of care and attention is required to tip the neighborhood over the edge, toward becoming a sustainable community. Catalysing this process is far less effort than actually doing all the work involved, because the number of people affected by each change is enormous, particularly when we are focusing on visible beautification and the neutralisation of eyesores.

Rentals
When we advertise a property for rent, we select for tenants who are optimistic about the neighborhood and interested in getting involved and doing something positive. Our rental agreements mandate a high standard of property maintenance and ongoing litter cleanup, and of course we have zero tolerance for any behaviors that might lower our neighbor’s quality of life. We encourage tenants to become buyers and investors, and we educate and support them in this process. We’ve prompted just about everyone we know to purchase their first and second homes, many of whom had thought this was utterly impossible before they talked to us.

Conclusion
Of course, there are always obstacles to overcome. We get a huge boost when a city wakes up the way Oakland did in 1997, or like Long Beach in 2001. We are eagerly awaiting this in Compton and Los Angeles, when the government starts investing strategically in their infrastructure and other quality of life issues. But effective government arises from an engaged populace.

Our strategy is to empower the people to create wealth and show them what is possible, even if it means in some cases doing the government’s job for a while. We plant and maintain hundreds of trees, paint over graffiti, haul away trash, and beautify public spaces, especially those visible from our properties. We even landscape the neighbor’s property and replace their falling down fences if necessary. Remember, we’re being paid to do this, because it causes our properties to rise in value. Wouldn’t it be nice if the government were paid this same way? We’re treated with respect by our neighbors, (including drug dealers and gang members) because our mission is to improve their quality of life, and this shows.

Given our commitment to improving the quality of life in our target area, I’m sure you can imagine the sorts of schemes and programs we experiment with; some work and we expand those; others don’t and we scrap them. Our results speak for themselves. Consistent net investment returns of over 20% annualised in project after project, year after year, accompanied by a precipitous drop in crime in places most people wouldn't have dared to get out of their car. Now those places have been transformed into attractive, peaceful destinations. That’s what we call creating wealth.

3 Comments:

  • At 10:24 pm, Blogger Dale said…

    I'm sure you've considered the scrape and rebuild model. Many homes are a waste of money to rehab. Have you done much new construction in the bad neighborhoods?

     
  • At 11:49 pm, Blogger Dale said…

    Dave,

    What's your opinion about tearing down the old and rebuilding vs. rehabbing?
    Is it gentrifying too much? I just hate throwing money at a house that is functionally obsolete.

     
  • At 8:03 pm, Blogger Awkwarddilemma-Hmj said…

    I was working 80-90 hours a week until I came across a program to make money and get out of the rat race in just a few months.Take a look for yourself.

     

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