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.