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Be Prepared for Unexpected Shifts in Powerful Trends So You Don't End Up Bankrupt

Mar 20, 2008
Having adapted to using irresistible forces to aid your progress, rather than hindering or redirecting your organization, you must also prepare yourself for the likelihood that the same irresistible forces will shift in new and unpredictable ways and degrees at unforeseen times. One way to do this is to operate as though much greater and more frequent volatility will occur, whether it does or doesn't.

Some property developers think this way. While most developers build too long into an economic expansion and borrow too much money, these developers take a different approach.

They use a strategy along these lines of risk management to grow their businesses. As interest rates drop, they use less and less debt leverage. At some point, they stop developing, even though the near-term environment for starting new developments looks very good.

At such times, they begin to take parcels of land they have assembled and gotten through zoning commissions and sell the parcels to other developers who will pay top dollar in their rush to expand. Thus, by the time the interest rate cycle turns, the developer is sitting on large amounts of cash and no debt. To keep their operations busy, such developers often have a management company that rents and maintains properties for owners.

Then as interest rates rise and business conditions worsen, they gradually look for places to begin assembling low-cost parcels of land from distressed sellers (often other developers). This strategy allows the savvy developers to buy low and sell high while keeping their risk much lower during all phases of the interest rate cycle.

Handled conservatively enough, this strategy can use the volatility of interest rates as well as the level of interest rates to allow the developer to always make lots of money and always have appropriately limited risk. The large residential builders in the United States often use this strategy very successfully.

The wise developer further hedges the interest rate and business cycle risk by developing properties on a smaller scale that allows the developer to survive an occasional stumble, while focusing on projects that have the least risk of not being able to be sold quickly. Others will reduce the sale risk by creating partially-captive operations financed by partners who will buy most of the properties as soon as they are complete. Some developers have used publicly traded real estate investment trusts (REITs) in this way. Done properly, these programs can become breakthrough solutions.

How can you be readier for missteps and changed trend directions?
About the Author
Donald Mitchell is an author of seven books including Adventures of an Optimist, The 2,000 Percent Squared Solution, The 2,000 Percent Solution, The 2,000 Percent Solution Workbook, The Irresistible Growth Enterprise, and The Ultimate Competitive Advantage. Read about creating breakthroughs through 2,000 percent solutions and receive tips by e-mail by registering for free at

http://www.2000percentsolution.com .
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