New investors who are giddy to do deals pay a lot of attention to their deals, but they miss this giant risk along the way: What if the people they hire are idiots?
This post isn’t speculative in any way. In fact, I’m saying that almost everyone you run into along your investing career will be hard to do business with. It’s important to shed some light on the realities of how hard deals will be for you. The difficulty is not usually because the unit you buy is so bad, but because of the inept people you’ll be forced to rely on along the way.
Don’t Assume People Are Good at What They Do
Over the last year, I made friends with a new investor and watched him put together his first few deals. He worked diligently to get them done, but he ran into trouble a few times with unexpected failures from his vendors. As of the time of this writing, he has not closed some of deals I’m speaking about, and one of them has been in the works for over a year!
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Now, this is not to say some deals don’t take a long time—many do. This one should have taken about six months at best. That’s when he and the seller agreed on terms and started to move to close. The additional six months had nothing to do with the nature of the transaction or the buyer. The money was in place, and the two interested parties were eager to do business. This was a failure of third party brokers who weren’t necessarily inept, just so lazy that they might as well have been. The title company has dropped the ball to close repeatedly, and one of the lawyers decided to take a long vacation before closing—but after taking payment! Appalling.
This is Not Unique—This is Systemic
I feel bad for this guy! He’s worked hard, and this delay is not because of a lack of ambition, character, or intelligence. Unfortunately, this is standard for doing business in my (and many others’) experience. This is how people become cynical, and it’s frustrating to watch it happen to my young, optimistic friend.
That said, the lesson here is not that business is hard (it is) or that it’s not fair (it’s not). The lesson is to know going in that people are going to disappoint you and to behave accordingly. People may call me brash, rude, or lacking compassion. All three are sometimes true, and it’s not because of a flaw in my personality. Rather, I’ve realized how to deal with the market efficiently. You must be firm and accept no nonsense from people you rely on; otherwise, all you’re going to get from them is continued nonsense.
Early this year, I had a an issue with one of my rentals that needed a repair. I needed a deck rebuilt, and it wasn’t in the scope of my normal contractor. I called a long-time friend who is also a contractor, and I paid him $2,000 up front. After ~2 months of pestering him to do the work, he essentially went ghost on me. I had to shell out another $2,500 to get the deck built by someone else, and I haven’t spoken to the first guy since. Apparently his shame is enough to keep him silent, but his honor is not great enough to make things right. In the end, I’m happy to have only paid $2,000 to shed light on his poor business practice (and ethics) and move on. The point is that this was a long-time friend, a fellow military veteran, and generally good dude—but his business chops are garbage, and that unfortunately is the standard you will come across.
For the beginner about to do your first deal: Do not expect your contractor to be good or even do what they promise. They might be good, but don’t expect it, even if they give you a good pitch. The same goes for property managers, real estate agents, title attorneys, CPAs, and just about everyone you run into. Do not overestimate their ability to deliver. Instead, build incentives to ensure they are motivated the correct way, and don’t be so desperate for a contractor that you take anyone. Everyone would agree it’s better to have a deal go slowly than a deal where your contractor just rips you off and leaves. As the old saying goes: “Slow to hire, quick to fire.” Do your due diligence on vendors.
Related: 20 Must-Have Team Members for Real Estate Investing Newbies
Beware of Mentors
I’ve been fortunate to have some great mentors in my life so far. Most have done right by me, as they have invested in my growth and I’ve (nearly) outgrown them all. I look back now, though, and realize the worship I had for these leaders was many times misplaced. What if I matched my ambition to leaders who just weren’t that good or smart because I simply didn’t know better? Did I overestimate people and then attach my aspirations to them, effectively shorting my own ability?
Well it may sound callous, but it’s absolutely true. Our ambitions are always set by those around us, so choosing the wrong people as role models is costly. Jim Rohn’s famous quote, “You are the average of your five friends” reflects the same premise. Now again, I’ve had great mentors and I’m thankful for that, but as I get older, I realize how important it is to choose the right people as guides. My point here is simply to expect to outgrow your mentors from the very start. Don’t worship them like gods, as it’s most likely they are just human.
No Skin in the Game
Think about it this way: The person at the title agency doesn’t really care about your deal. Most of them are just counting the days until Friday. You know this person. Odds are you work with this person. And this behavior doesn’t change much up the ladder, from attorneys and lenders, to contractors and even underwriters. They are all people with their own lives, problems, and incentives. Most are getting paid salaries or by the hour (not by performance). This means they have all the upside (they get paid no matter what) and have little downside (if your deal falls apart, it doesn’t affect them).
So by design, people are not properly incentivized to work hard for you. It’s not really that these people are lazy inherently; they just have no real good reason to try in the way you need them to. This isn’t to say there aren’t great people out there, but it’s far from all of them, so you’re going to have to work diligently to find the people best for you.
Additionally, it’s important to remember that no one cares about your business more than you. So every day I freak out about these problems, I need to remind myself that they are just my problem. No one else cares (except close partners). The main point here is not to throw shade. Instead, just know that the incentive for people to work hard on your deals is not necessarily in your favor.
How You Can Fix This
First, do not humble yourself to the low standard of those who won’t try. Instead, keep improving, find people who are doing better than you, and leave the slackers in the dust at every chance you get. You’re going to have to deal with lousy performers along the way—lots of them—but you’ll find good ones too. You need to invest in those people.
Part of the problem being new is that you’re forced to deal with lots more lousy vendors. Why? Because the good ones go up the community ladder and get to deal with only the good investors. The bottom is where all the time-wasters go, so when you’re new, it’s an uphill battle to show the world you’re serious, that you can close, and that you’re committed. Sure, you say you’re committed, but talk is cheap. Once you start closing lots of deals and making your vendors money, you’ll have the confidence and the leverage to find the people you need. In the meantime, stay vigilant about finding great people and skeptical of everyone else.
Have you run into disappointing experiences with vendors? What are your best tips for finding the reliable ones?
Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.