Chris Loeffler | Crain's Phoenix

In this ongoing series, we ask executives, entrepreneurs and business leaders about mistakes that have shaped their business philosophy.

Chris Loeffler

Background:  

Caliber - The Wealth Development Company is a diversified real estate investment firm offering alternative strategies for growing wealth through real estate private equity and creating long-term cash flow. The Scottsdale company ranked second on Real Estate Forum Magazine’s list of fastest-growing, mid-sized U.S. companies in 2016.

The Mistake:

Early on, I didn’t truly understand the concept of alignment of interests, especially as it relates to financial compensation.

When we started our company, we had an auction business. We were buying and selling properties in the foreclosure auctions, so we started adding team members. As we did that, the volume of homes we were buying went up. We went from buying one or two homes per month to buying 30 homes per month.

We had a team member on salary who was bidding on the auctions on a daily basis. We also had a team member on salary who was doing financial analysis for the projects, valuing the homes for what we thought they were worth. Those two team members were really important to the company. We were having a lot of success and we wanted to share that success with them.

So, we decided to pay them a bonus every time we bought a property. We turned over the homes every 90 days or so and three months later the margins started going down. We started losing money on some of the homes, and we wondered what went wrong. Either the bidder was overbidding for homes or the values of the homes were not correct.

We started losing money on some of the homes, and we wondered what went wrong.

The Lesson:

We didn’t have an alignment of interests. Our team was aligned toward acquiring properties, not toward acquiring profitable properties. We’ve now baked the concept of profitability into everything we do. Literally, every one of our models is designed so that if we make a profit, it comes after or with our clients, instead of before.

At the end of the day, if you design a structure where the best possible decision that a team member can make creates the best possible outcome for the company, as well as for your clients, you’ve designed an alignment of interests. It really doesn’t allow people to make decisions that are contrary to our business or our clients.

If you don’t do that, then you’re relying purely on their decision-making ability or their moral compass. Sometimes that breaks down. So, I think that structure is important and, as a business person, I focus a lot on structure.

Follow Caliber on Twitter at @CaliberCo.

Photo courtesy of Chris Loeffler

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