If It Looks Like a Duck and Quacks Like a Duck, Perform Due Diligence
I don't care how excited you get about a deal, PERFORM DUE DILIGENCE!
If you are reading this, you either already made good money investing in real estate or you are considering getting into real estate investing. The point of this post is to emphasize how important it is to perform in-depth due diligence on every deal, every partnership and every loan (if you are a private lender).
When a wholesaler pitches you a great deal, you MUST verify the numbers, the market, the location characteristics and everything else about the deal. The numbers include ARV, the repair estimate including scope of work, the buying costs, holding costs and selling costs. You must assure clear title. You must understand the market cycle not only for the town, you must understand the market characteristics for the specific neighborhood. You must find out if the neighborhood has or had underground oil tanks in the past. You must look at the neighbors' yards and see if they are hoarders or have rusted cars in their backyards that will affect your sale or rental. You must make sure you can get clear title.
This is all obvious, right?
Well, I have seen newbie investors and veterans alike make mistakes by ignoring these "obvious" due diligence factors. The details and specific guidelines for performing due diligence for flips, rentals, wholesale deals and lease-options are described in lectures 3-9, 11-12 and 16-18 of the Smarter Investing home study course.
The same goes for partnerships.
I made the mistake many years ago of forming a partnership for my first flip with a guy who was clearly knowledgeable in rehabbing, articulate, scientifically accurate and financially secure only to find out that he had a Dr. Jekyll and Mr. Hyde personality when things went wrong and his obsessive-compulsive accuracy drove contractors crazy.
As an example, the contractor charged us $32 for an item, brought a receipt for $31.67 and my partner called him out on being inaccurate implying that there cannot not be trust that all other charges were justified. While waiting for the final payment and working on the final punch list (yes, we had forms for changes in the scope of work), the contractor filed a construction lien against the property (that was dismissed). I let the partner take an extra $20,000 from that first deal for "extra work in managing the project" just to get out of the partnership and never have a second deal.
The guy seemed normal when we interacted at REIA meetings and when we customized the LLC operating agreement. I trusted my judgment when considering him as a partner. What I should have done was ask for references from people with whom he worked. My mistake was that I didn't do proper due diligence on the partner and it cost me time, money and aggravation.
Some of you are private lenders or are being approached to make private loans. Most private loans are based on personal relationships. It turns out that even when private loans are based on long-term personal relationships (including family), they don't always work out. In all cases, whether you are a borrower or lender, always do in-depth due diligence on the other party before entering into a private loan transaction. Dozens of people in my sphere of influence were burned by failed transactions in private lending. Many dozens more worked out just fine. The biggest difference between the private loans that worked and those that didn't was the depth of due diligence on the borrower, the paperwork and the property being used for collateral.
The details and specific guidelines for performing due diligence are described in detail in the lecture "Private Lending is Great...Until It Isn't: 19 Things That Can Go Wrong When Private lending and How to Avoid Them" that is part of the Smarter Investing home study course.
The Power of Intuition
Life experience has taught me that when my intuition suggests that something is wrong, my intuition is usually right. When my intuition says that something is great, it is time to perform in-depth due diligence to confirm or refute this intuitive feeling with undeniable hard data before making any decision or taking any action. If you're curious to learn more about my theory of intuition, watch the training video "Decision Making, Happiness & Lifestyle Aspects of Real Estate Investors and Small Business Owners" that is part of the Smarter Investing home study course.
My guideline for what to do with intuition for both good and bad outcomes, has served me well in the past decade, screening tenants, choosing friends, private lending, forming partnerships, starting my self-directed Roth 401k, choosing properties to buy within subdivisions, investing private equity in deals (like Shark Tank), estimating the probability of success of breakthroughs in phase-transfer catalysis and just about everything else.
These guidelines for intuition very often work but they DON'T ALWAYS work, so you MUST perform due diligence!
If it looks like a duck and quacks like a duck, perform due diligence to confirm it is a duck AND that it meets the highest standards for ducks!!!