One Fatal Flaw Can Destroy a Real Estate Deal|Dr. Norm M. on Due Diligence,Valuation & CRE Investing

Dr. Norm Miller (00:00) I think historically the private sector, private

investors, wealth managers, they like the status quo when things are

going well. And they tend to be fairly closed minded when things are

going well. And they don’t keep learning and they don’t keep

Updating that due diligence list, and they don’t keep asking if their

models and their forecast could use a few more considerations or

variables, if you will.

Scott Bursey (01:56) Welcome back to the Real Estate Pros podcast,

powered by Investor Fuel. I’m your host, Scott Bursey. And pros, today

we have a legend joining us, Dr. Norm Miller. Dr. Miller is the

co-author behind the Global Industry Standard Textbook Commercial Real

Estate Analysis and Investment. We’re going to get an inside look at the

future of commercial real estate and how the academic perspective keeps

you ahead of the curve. Norm.

Welcome to the show.

Dr. Norm Miller (02:28) Thank you very much, Scott.

Scott Bursey (02:30) It is awesome having you here, Doctor. And to get

our listeners up to speed, please give us the ninety second highlight

reel, if you will, on how your career ignited and where you’re pouring

your fuel now.

Dr. Norm Miller (02:45) I wanted to be an architectural engineer. ⁓

somehow that led into me taking all the real estate courses at Ohio

State University and ⁓ and then over the last 50 years I’ve lived in

both the private sector and the academic sector. ⁓ very lucky to have

done that, where I was involved with trade groups and the private

sector, investing on my own, and also able to be in the academic world

and try to bring those worlds together.

Scott Bursey (03:15) That’s an amazing origin story, Doctor. You’ve

bridged that gap between the lecture hall and the boardroom like very

few have. And what really caught my attention about you was the way

you’ve been able to define the standard of commercial real estate

education globally while at the same time consulting for heavyweights

like CoStar and Black Knight to develop automated valuation models.

That’s quite fascinating.

Dr. Norm Miller (03:46) Well, thank you. We try.

Scott Bursey (03:50) And curious to know, Doctor, looking at your career

achievements, what was the most turning point project you worked on that

forced you to change your perspective, if you will, on how capital

markets function?

Dr. Norm Miller (04:05) Wow.

I think there’s not a turning point or an aha moment ⁓ I can point to

with respect to investing. But I think ⁓ two key influences. One was

finding a mentor while I was young early on, who pushed me to do my

first investment. It it actually happened while I was still an

undergraduate. And his name was Dick Royer in Columbus, Ohio.

and ⁓ so ⁓ having a mentor is such a great thing at all stages of your

life, all the way to the end. You need mentors, and sometimes they’re

just colleagues, but they’re really mentors as well. I think the other

thing was by really investing in property when I had no money, I had to

do my own maintenance maintenance, my own management, you know, lay

carpeting, lay floors, fix the plumbing.

do everything. ⁓ you really learn how to nail down those pro formas and

make them accurate. And and ⁓ and also you learn the nuances of what’s

important ⁓ versus what’s theory. So again, that marriage of the private

sector by really doing it with the academic world. I I don’t think you

can beat and when I hired professors later on, I tried to

Hired people that had some consulting and private sector experience for

that same reason.

Scott Bursey (06:27) And on that note, Norm, curious to know when you

look at the landscape of CRE education, what do you see as your biggest

strength in communicating complex financial concepts to students versus

practitioners?

Dr. Norm Miller (06:43) Well I was

I was always fairly fairly good at market analysis. And I think that

that’s kind of where the name of the game starts on investing as well.

To one of the things that I try to teach the students is that it only

takes one fatal flaw to mess up a deal. So if we’re doing our market

analysis or due diligence, if you will, we can’t miss anything

important.

We can’t miss anything. And I have to tell you, I’ve missed things. I

have made my share of mistakes. There was there was an investment I made

in Japan where I happened to miss ⁓ refinancing risk. And it later came

back to haunt me and I lost money. put that on the due diligence list as

you know, one thing you emphasize next time you look at a project. So ⁓

so I I think

what I’ve learned and tried to emphasize is start developing your due

diligence list, your market analysis list, because it only takes one

fatal flaw to mess you up and mess up a deal. And if you can avoid

those, you’ll do better than ever.

Scott Bursey (08:00) And we’re interested in your take. Education often

gets a bad rap for being detached. What is the one ⁓ critique you hear

most often from the field that you think is actually a blind spot for

the industry itself, Norm?

Dr. Norm Miller (08:21) I think historically the the the private sector,

private investors, wealth managers, they they like the status quo when

things are going well. And they tend to be fairly closed minded when

things are going well. And they don’t keep learning and they don’t keep

Updating that due diligence list, and they don’t keep asking if their

models and their forecast could use a few more ⁓ considerations or

variables, if you will.

And and so, you know, when things are going well, whether it’s a stock

investor, a real estate investor, or any kind of business whatsoever,

you start getting complacent. And so I I think the biggest problem is

complacency.

And and and right now, as an example, if you’re not embracing AI tools

and becoming more efficient anywhere you can, you’re gonna be out

compete. You know, you you’ll you’ll you’ll be losing in the long run. ⁓

and yet you’ll look at me and say, Hey, ⁓ look at the returns I’m

getting, I’m beating the market or I’m doing well. You absolutely are.

But but

Try not to be complacent and, you know, sit on your laurels when things

are going well.

Scott Bursey (09:49) And let’s continue down that same path, ⁓ Doctor.

Everyone is talking about AI, but you’ve been working on automated

valuation models for years. Where’s the real massive opportunity for a

standard operator to use tech to gain an edge right now, in your view?

Dr. Norm Miller (10:41) Well it’s funny. Well, we call AI today, the

last decade or so was called PropTech. And then before that, it wasn’t

called anything but you know, computers and data. and sometimes, well,

if you go back 30 years, we called it expert systems, you know, ⁓

automating whatever you could and bringing in the experience of experts.

so we’ve been

All working in it for a long time, those opportunities have been there

for a long, long time. some firms have been better at integrating

PropTech and AI than others. ⁓ but in terms of where the opportunities

are, they go across the board on every function that we do. So, for

example, managing a property, tennis communications. Let’s just take a

simple property.

Let’s say that I own single-family, single-family rentals. I want to

have an app on my phone and all of their phones that I own and control,

that I can let someone in, ⁓ that I can provide a key to a tenant that I

can automate as much as possible without having to go physically

anywhere. whether I’m letting in the general contractor, handyman to fix

something, or whether I’m letting in the tenant.

We’re operating the property. I also want that app to collect the rent

automatically. I also want to have a work order request automatically so

that they can tell me what’s wrong and not have to call me and ⁓ there’s

a request in. I’ll get Chris to fix that, blah, blah, blah, communicate.

So as much automation as I can on operating the property.

The same thing goes for everything else. Let’s say I have partners.

Let’s say I’m a general partner and I own retail, office, apartments. My

investor reporting, I can’t imagine doing that without using one of the

major tools out there today. I guess I won’t name vendors, but there’s

two or three that kind of dominate and they’re good. And so, you know,

you don’t have to send your reports to them late. You don’t have to send

your K1s late. You can

Automate that whole process, ⁓ the accounting, the bookkeeping. And it’s

pretty incredible what you can do by setting up agents and cloud or

other AI tools today. So ⁓ investor communications, financing,

documentation, paperwork, avoiding to have to physically go and sign

anywhere. Can you imagine not using DocuSign? Can you imagine? You know,

that that those are AI PropTech tools, they’re just

We used to call them something different, but ⁓ I would use everything I

possibly could, even on the market analysis side. ⁓ I’m gonna be using

the tools, but I’m gonna audit them and I’m gonna use multiple tools.

I’m not gonna trust them without doing some auditing. So ⁓ my valuation,

my market analysis, my investor communication, partner communication,

tenant communication, operations management, I’m gonna use tools every

single place I can.

Scott Bursey (13:59) Is there a specific application that the average

listener is totally ⁓ missing?

Dr. Norm Miller (14:08) ⁓

No, I I’d hate to I’d hate to steer towards ⁓ particular particular

vendors. Right now, there’s around 9,000 PropTechs in the world, maybe

three, four thousand in the US, most of whom call themselves AI. I use

several of them. so screening through those is not easy because you have

I can give you some criteria. If I’m picking a vendor for something, I ⁓

let’s say, let’s say tenant or investor communication. So so one of the

vendors, Juniper Square, ⁓ or Appfolio. ⁓ before I use it, I want to

know some colleagues that have used it. I don’t want to be the first, I

don’t want to be the first one, I wanna be the fast second. so that’s

criteria number number one. Now let’s say it is something.

fairly new and I really want it. I want to try it. ⁓ I’m going to find

out, well, who who started up this firm? How much capital do you have?

Are you profitable yet? Do you have anybody advising you that knows

about commercial real estate? Or is it just a bunch of techies from

Stanford that know how to do coding? So you know, I’m going to do my due

diligence on the vendor before I before I pick them.

And then third, ⁓ does it integrate with my other applications and

software? I don’t want to have 20 different separate software packages.

I want them to talk to each other and be integrated. You know, do you

work with Yardi? Do you work with MRI? Do you you know integrate? ⁓ can

you read Argus and feed out this? I I want to know that they can

integrate because if they’re isolated.

islands, they’re not gonna be as useful to me, ⁓ especially if that firm

goes out of business and I have to replace them. So those are three

things just quick off the top of my head I would be considering.

Scott Bursey (17:02) Norm, if you could help us understand, you’ve been

vocal about the folly of certain market distortions. What are you most

focused on when you look at how policymakers are approaching housing

affordability based rent realities?

Dr. Norm Miller (17:20) So I think ⁓ the most damaging long run ⁓

regulation that we see or policy that we see in cities like San

Francisco and New York City are rent control. And we periodically have

it in a number of cities, even Seattle. ⁓ and then during COVID, we also

had it come in sometimes temporarily, or sometimes you didn’t have you

didn’t have the right to collect the rent at all.

Which is which is really ⁓ which is really damaging. I happen to have a

single family investment home up in ⁓ Washington and I wasn’t allowed to

collect rent on it during COVID. Of course they didn’t freeze my

property tax expenses or anything else, did they? So so rent control is

is number one. and if I see a market going towards rent control, if I

see the mayor and the city council and

the county leaders or rivers involved, ⁓ pushing for rent controls, that

that’s a big red flag to me. sometimes there’s other regulations, the

number of affordable units required if you do a ⁓ a new development or ⁓

Or the restrictions on rent on some of the units. So you have to charge

higher rents on the other units. ⁓ those are also long-term damaging for

the housing market. They help a few people, they hurt a lot of others.

So ⁓ rent controls or ⁓ or units that have to be below market, those are

probably the the biggest ones.

Scott Bursey (19:05) Doctor, you have a global view of urban economic

trends. What is a trend you’re seeing in global urban centers that will

hit the US markets in the next eighteen months, in your view?

Dr. Norm Miller (19:20) Well, if we look at history, ⁓ the last five

years, we saw after COVID and we learned to have meetings like you and I

are having right now, all of a sudden work from home ⁓ accelerated. Some

of those jobs continue to be work from home. and and we saw a lot of

downsizing in the office market. And we also saw sharing desk. So I

think the sharing desk trend that’s gonna continue.

we’re starting in the next 18 months. If you’re in the office market,

we’re seeing a little bit of a pendulum swing back, come into the office

a little more often on a regular basis. ⁓ we found out that we really

need to do that for mentoring and onboarding and training and just to

find out what everybody’s working on. so the next 18 months in the

office market, I’m I’m watching that trend. And in the multifamily

market, single-family rental market.

I’m kind of watching this big city versus second and third tier city ⁓

swing down to the second and third tier cities, swinging back a little

bit when you have to be in the office more. And that affects the

locational demand in turn in terms of where people will be ⁓ wanting to

live. How often do they need to be at work or in the office? How much

can they do remotely? So that remote office train.

Trend is something that I’m watching and I’m seeing it swing back a

little bit. I’ll continue to watch that.

Scott Bursey (20:54) I love that. Thank you for for that excellent

breakdown. And Norm, if a real estate pro has one shot to make a move in

this current shifting cycle, what’s the most important metric they need

to master before they deploy their capital?

Dr. Norm Miller (21:12) Well, they better know valuation. They better

know how to do market valuation. ⁓ they better know how to do a D C pro

forma that looks at at least five years, if not more. They better know

how to feed in leases if they have commercial property, lease rolls.

they better know how to do some demographic analysis. So so they really

need to

To to be pretty good at bringing the components of demand and how much

supply there is ⁓ in their market to do a good pro forma. ⁓ when they do

the valuation, they better be sure that it’s going to exceed the cost

you created or buy it in a fairly short period of time. ⁓ they can’t go

in depending on interest rates going down. ⁓ so so I would

I I would say the the skills they need right now going in, learn how to

value property, learn how to do the pro forma. Everybody else in this

industry that’s been experienced is already pretty good at that. So

don’t assume that you’re gonna make money by finding some some stupid,

naive seller. assume that they’re as smart as you and the only thing

that you can do is outwork them on your due diligence.

So I would work really hard on the evaluation, the performance, and my

due diligence list.

Scott Bursey (22:44) That is some excellent advice, Doctor. And you have

given our listeners just a lot of good words of wisdom here today. But

is there anything that ⁓ else you’d like to leave with the pros as far

as ⁓ words of advice?

Dr. Norm Miller (23:01) Well, I’ve been trying to give back in the last

year or so when we did the fourth edition of our book. And so I do have

a website I’d like to promote. It’s CREBook.net. CREBook.net. And if you

go in the upper right, you’ll see something called Resources Hub.

Everything on the site is free. Free to download, free to link to,

whether it’s videos or lectures or spreadsheets. ⁓

You’re not going to get rich off the site, but you can become educated

in some gaps that you might have. So we have three hundred and fifty

files there and at this stage in life I’m trying to give back and hope

people can take advantage of it.

Scott Bursey (23:47) Well, thank you for that, Norm. And for those of

our listeners that want to keep this conversation moving, stay in your

lane or collaborate with you, what’s the best way for them to reach you?

Dr. Norm Miller (23:58) I do use LinkedIn. I post up once or twice a

month on different topics. ⁓ and so ⁓ send me an invite on LinkedIn. If

you are involved in real estate or one of my universities or

affiliations, I’m likely to say yes. if you are a ⁓ web designer, I get

about five of those a day. No thanks, I’m fine.

So but but if if you if you truly aspire to to be a a professional

involved in the real estate industry, ⁓ or a better investor, a better

citizen, ⁓ I’m happy to connect.

Scott Bursey (24:41) Norm, this has been an absolute masterclass. Thank

you for joining us today on the Real Estate Pros podcast.

Dr. Norm Miller (24:49) you’re welcome, Scott. My pleasure.

Scott Bursey (24:52) And to our listeners, we appreciate you. If you

receive value from today’s episode, please subscribe. We’ll be filling

your tanks with a lineup of elite guests just like Dr. Norm Miller, who

are accelerating and setting the pace for the rest of the industry.

Until next time, keep your standards high and your vision clear. We’ll

see you on the next episode, everyone.