The Handshake Deal: Garcia Brothers
“It seems now like, who the hell ... what kind of idiot would agree to this deal?”
As Ivan Garcia said, “The market doesn't reward the lack of risk-taking.” But when is risk acceptable? How do you gauge that? Is the line between being bold and being stupid only a question of whether the risk pays off?
Berto and Ivan Garcia are the co-founders of what has become a St. Louis real estate powerhouse. Garcia Properties is a vertically integrated firm with divisions in construction, property management, buying and selling property, financing and insurance. But just two years into its existence, the company nearly died.
How much risk is acceptable when you’re trying to start something new? And while we love to hear about the risks that paid off, what do we know about the risks that didn’t? These are the questions we confront in this episode.
In the early days, as Ivan was trying to get the company going, he seized on an opportunity to buy the company’s first residential property for $700,000. But the transaction relied on a handshake agreement with the owner.
See, Ivan didn’t have any money. He had time. He had skills. So, under the agreement, Ivan would upgrade the broken-down building and manage it, making sure tenants paid the rent. Two years later, under the agreement, the owner would take out a second mortgage, loan Ivan the down payment and sell the building. Ivan would repay him in two years.
So, when it’s time to sell, guess what? The building is making more money than ever. It’s an attractive location near St. Louis University. The owner balks. The Garcias also learn the owner has $30,000 in liens that would have to be cleared.
Berto and Ivan credit their parents for the skills to navigate the situation. Mexican immigrants who worked hard to make a home for their seven children, they taught the kids early to make their way. If they wanted something, they had to figure out how to get it. They learned resilience.
“There's only one way to get yourself out of trouble,” Ivan said. “And that's to get in trouble. All the soft skills we learned growing up have served us in our professional lives.”
Ultimately, Ivan applied those soft skills and a little financial cunning to get the building owner to close. The Garcias owned the building for 14 years, continued to improve it, and sold it for $2.1 million. The proceeds funded the renovation of the Garcia Properties headquarters in South St. Louis.
Todd Milbourn, WashU Olin’s vice dean of faculty and research and the Hubert C. & Dorothy R. Moog Professor of Finance, uses the story of the Garcia Brothers to put the concept of business risk-taking into context.
“And at the end of the day, business is a risky venture. It's an uncertain venture,” he said. “If it wasn't risky or if it was a certainty, you wouldn't need executives and you wouldn't need to pay them very much. And you really wouldn't have to train anybody because if everything was predetermined, we'd just have one supercomputer that would be programmed up of this is what you do every step of the way.”
He speaks in terms of hedging against risks, net present value (e.g., risk-adjusted bets), grit and survivorship bias (“the benevolent dolphin” story, which speaks about the disasters you don’t hear about).
“I'm always ridiculously grateful that there are people out there that are willing to swing for the fences and go, try something completely new,” Milbourn said. “You know, certainly personally, I benefit from it, but you can think more broadly, society, we benefit from people that are willing to take these long-shot bets that are willing to come up with might look like the craziest idea ever.” video
This podcast is a production of Washington University in St. Louis’s Olin Business School. Contributors include:
- Katie Wools, Cathy Myrick and Judy Milanovits, creative assistance
- Jill Young Miller, fact checking and creative assistance
- Hayden Molinarolo, original music, sound design and editing
- Mike Martin Media, editing
- Sophia Passantino, social media
- Lexie O'Brien and Erik Buschardt, website support
- Mark P. Taylor, strategic support
- Paula Crews, creative vision and strategic support
Special thanks to Ray Irving and his team at WashU Olin’s Center for Digital Education, including our audio engineer, Austin Alred.
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