Trust But Verify

Suzanne Massie, an American scholar, met with President Ronald Reagan many times between 1984 and 1987. She taught him the Russian proverb Doveryai, no proveryai (Trust, but verify). The proverb was adopted as a signature phrase by Reagan.

And quite frankly that phrase/practice should be adopted in our real estate industry. During my career, I have noticed areas that go “unverified” especially when it comes to partnerships and joint ventures:

1. How easily beginner investors are drawn to perceived success like a moth to a flame
2. How investors will cut corners on business matters to save the expense of attorneys, business planning, property managers, and other professionals- services that are there to protect them
3. Simply relying on someone’s word or a handshake to do business

At last month’s meeting, my final thought was around a matter that took up a great deal of my time. When joining ICOR, members agree to a code of ethics (www.icorockies.com/code-of-ethics). In my tenure, I’ve only been called to act upon a matter that was deemed unethical now twice, (nine years since the first one). For reference, when a complaint is made, ample time is given to the accused to respond to the matter. If the matter involves agreements and contracts, ICOR will engage its legal counsel to review and provide direction. Both parties are then brought together to share our findings and make a ruling on the matter resulting up to dismissal from the organization. In a recent conversation, someone asked me how that helps the matter, and in response, I said simply that it would prevent this from happening again within ICOR.

To my knowledge, there isn’t a meetup or investing group that goes above and beyond to provide that type of advocacy or accountability for their members.

Over the past month, it occurred to me that taking time to have a conversation on updates to your due diligence process is worth taking the time to do so! Especially since every single individual I spoke to fell into one of the three scenarios I mentioned previously.

 As we head into ICOR’s October monthly meeting, I will address three common mistakes from investors regarding their level of experience.

1. Perceived Success: “I want to help mentor others!” “I’ve got access to everything you need to get started!” “It will be easy, I promise!”

Beginners, I know it’s hard and daunting but nothing about this business is easy. The only saving grace is that it does get easier over time, and specifically you get better over time. My friend Dave Lund once said to me, “You remove the fear by becoming an informed investor, you show up, surround yourself by the right people and they will help guide you.” Unfortunately, there are people whose intentions are not in the right spot and prey upon beginner investors for their own personal gain, and those people present themselves as subject matter experts. As a beginner, we sometimes rely on their word because the “carrot” they dangle will get us closer to our own success, and that’s where trouble begins. In the same way you look at a property, don’t get emotional, refrain from making hasty decisions based on what you are told. You ultimately need to know what is most important to you and consistently follow your own due diligence process…just like you screen your tenants to avoid fair housing issues. Be consistent and trust in your own process.

2. Cutting Corners: Real Estate investing is a business…and not a hobby.

Again, another reason ICOR stands out is that we are not a “club.” ICOR is a trade association of likeminded business owners looking to stay current with laws, codes, and best practices. Business owners know and prepare for the cost of doing business. Clubs are for hobbyists, and hobbyists dabble and do something leisurely. If I cobble my lease together with articles that I like or don’t like, it may negate the entire lease nullifying the entire document or process. Don’t fall into the trap of “hiring myself to do the job of a trained professional” in the hopes of saving some money to make the numbers work. If you aren’t up to being a business owner and all that goes with it, you want to reconsider if investing is for you.

3. Someone’s word or a handshake: My friend Jeff Watson, a fellow investor and attorney, once impressed upon me that in real estate, “If we’re good enough friends to not have a contract, we’re good enough friends TO have a contract.”

This goes for partnership agreements, promissory notes, change orders, construction draws, and operating agreements. Often, I have heard of investors solely relying on talking through things and documenting on a bar napkin at most. Truthfully, I have seen agreements that were perfectly lawful, but the individual was unethical and deceptive in nature, making the agreement only as good as the word of the person who inked it. This takes me back to #2, in having an attorney review your agreement to ensure it provides you with the protection or support you need to feel comfortable. Better yet, give the person you are working with the old gut check. If you don’t feel good about it, chances are there’s a reason why that perhaps you should explore.

At the end of the day, the decision is yours to make. There is inherit risk that comes with investing that you must feel comfortable with assuming. Remembering what I said, be consistent and trust in your own process, and if you haven’t created one or it’s been a while since you’ve reviewed…join me at October’s meeting to discuss doing due diligence on your next partnership and joint venture!