Dealing with Unethical Clients: A Story of Deceit in Real Estate Note Buying
A few weeks ago, I painfully lost a deal on a real estate note in Texas. The client note holder (Mr. B) and I had agreed upon a price, my company had reviewed the documents, and an appraisal and title commitment had been ordered. Then, the buyer of the property missed a payment, which dramatically switched up the process.
Want more articles like this?
Create an account today to get BiggerPocket's best blog articles delivered to your inboxSign up for free
Suddenly, a strong note had become non-performing, which completely changed the pricing and outlook. The note holder intended to foreclose but I convinced him to talk with the payer about getting back to current status and potentially modifying the conditions of the note, which were both successful. I told him that we could still buy the note, as it was on a nice house and there was decent equity. However, we would only be able to buy most of the payments instead of the full note, and wanted to wait until two timely payments had been made. To me, this seemed more than reasonable and Mr. B agreed. He was quite thankful for the many hours that I had put in and expertise that I provided.
Then, things turned darker. When I contacted Mr. B a couple of weeks later to see how things were going, he became non-responsive. After several more tries, he sent me a short e-mail that he had decided to sell the note to someone else who would buy it right away and buy the full note. Eventually, I found out that the latter was a lie, as he actually sold a small piece of the note at a terrible price to a competitor. Regardless, the deal was lost, and I had completely wasted a number of hours.
After something like this happens, I get introspective. Did I not do a good job of understanding his needs? Did I upset him in any way? Were there signals that I missed? While I’ll never know the truth, I think that all of those answers were no. What most likely happened is the competitor happened to be speaking with him at the right time, and I should not have waited two weeks to call him again.
What Are Ethics?
My dictionary defines ethics as “the rules or standards governing the conduct of a person or the members of a profession.” Of course, there is no real definition of what is ethical, and a random group of people might have different views on whether reactions to a particular situation were ethical or not. Most of us would agree that lying is unethical, but when is the line crossed from puffery and exaggeration to meaningful lies? To me, always doing what I said that I would is the right and ethical thing to do, but some people feel comfortable saying something and later deciding that it is not important enough to actually complete. I think that Mr. B was unethical for lying and for not telling me when he decided that he wanted to sell the note immediately, though he has probably rationalized that he was the customer and therefore free to do whatever he wanted.
Dealing with Poor Ethics
Mortgage note buyers, like everyone in real estate or any other business, must periodically deal with slime balls that have no moral compass. Occasionally, I’ll have a note seller who changes his mind after we have done many hours of work to complete the note sale. If that happens, I try to understand their current needs and find out what changed. Sometimes, the client just needs some reassurance or we will have to tweak our offer a bit. If the client still wants to cancel the deal, then there are a few actions that we can take, like:
- Appeal to their sense of fairness and ethics, and remind them that they gave their word that they would sell the note at the agreed upon price.
- Nicely remind them that they signed a binding contract clearly stating that they would be liable for all of our expenses if they unilaterally cancelled. At least half of the note holders will re-engage with the note sale, while the remainder will pay the penalty fee, stop corresponding, or say something to the effect of “so sue me.”
- Threatening legal action is a last resort that I rarely use, and I’ve only gone to court on a deal once. Besides the obvious fact that it ruins the relationship, taking legal action is costly and time consuming.
In the end, after I have tried just about everything, I may decide to throw in the towel and stop pursuing them. With most of the clients, I’ll still call them again every few months, and sometimes I’ll land that deal at a later date. For the rest, I just chalk it up as a cost of doing business and recognize that some people are just plain unethical or, at a minimum, have very different values from me.