The Big Mistake Rookie Investors Overlook: Overestimating People

by | BiggerPockets.com

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.

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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!

Related: 4 Steps Newbies Can Take to Get Ready to Invest (Even if You’re Still Saving Up!)

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.

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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.

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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?

Comment below!

About Author

Alexander Felice

Alex has spent his career in sales and finance industries and now invests in rental real estate along with working in the underwriting department at a bank in Las Vegas. Alex is an expert in long-distance single family rental real estate, debt and leverage strategy, and financial analysis. He spends most of his free time teaching investors through writing and coaching to ensure their best possibility of success. Alex has been buying real estate for nearly three years and currently owns eight single family houses. He also helped fellow investors directly purchase over 20 properties in 2018. Alex’s writing can be found at BrokeIsAChoice.com, and more of his story can be heard on the BiggerPockets Podcast episode 301.

18 Comments

  1. Erin N.

    Thank you for writing this, Alexander. I SO identify with this. All of my deals would have failed miserably if I trusted any of the players – realtors, mortgage brokers, title companies, contractors. And you are absolutely correct that the incompetence, laziness, and just lack of caring are systemic problems. It’s not limited to real estate investing either. I can’t find a good attorney or CPA just for personal stuff. It’s an overall societal issue, IMO.

    • Sam Cherry

      Wow,

      This is only the second article I have ever read of BP that was dead on.

      Newbies think Real Estate Investing is so easy a “cave man can do it” as GEICO says.

      Bottom line: If you are a newbie you better have carpentry skills, a fat wallet, or both. If you don’t then you are saddling up for the road to ruin and heart ache.

      Lucky for me I have a little of both. However, I also have a tremendous amount of patience and don’t do many deals but the ones I do cash flow extremly well. My IRR is normally well above 15% and I am not leveraged to the hilt. ( I dare say that most on this board are and are about to learn a the final lesson in real estate that makes it so difficult nobody can do it)

      i.e. Interest rates are getting ready to go up especially for all the neophytes that have balloon mortgages/notes, ARMS, and cross collateralized loans that are callable.

      On top of that most newbies are so interested to get in the game that they have low cash reserves. So once they get a contractor, real estate agent, or other professional that screws something up they never recover.

      This article plus the advice of having a total of 6 months minimum expenses on hand is what a person should be told by their “Mentor” as the lowest threshold to enter the thuderdome and begin their “road to riches” A “mentor” who doesn’t do this is no “Mentor” at all.

      I agree “PEOPLE SUCK”

      If you just read what I wrote and think I “SUCK” then you have alot of learning to do.

      Just my opinion gathered over 18 years of experience. Take it or leave it.

    • Paul B.

      Not sure about blaming society. Like the article says, the best service providers get to pick and choose their customers. If you’re new, they are taking a chance on you just as much as you are taking a risk with them.

  2. James Gorman IV

    Interesting article, and so true. However, it seems to have left problematic RE brokers & agents out. Those who just want to sit back and wait till a “deal” comes along, and not at all interested in providing real world data to the purchaser or seller. The folks that will list for any price to get a listing, and then sit back and hope something happens.
    Masters of the unrealistic pricing & the crazy value pitch & “nut so wacko” proforma & the “that is the market comments”, and diligent guardians of information to and from the buyer & selling.

    • Alexander Felice

      thanks Andrew! yes underestimating rehab costs is a problem for sure.

      I have a quote among local friends we tell to new investors: it’ll cost 10% more than you think, generate 10% less than you think, and take 10% longer than you think.
      ….plus or minus 10%

      basically, you need GOOD people to help (imo)

  3. Cindy Larsen

    Alexander,

    Great article. I wish I could say that your cynical attitude is unjustified. unfortunately, you are right about the average person in every job you have mentioned, and lots of others. My strategy to deal with this is to find the most competent people I can, and then manage and motivate them to actually work for me.

    I talk to them, and establish a friendly relationship. I explain my situation, and why I need their help. I dangle the prospect of future business. I get them to tell me about their job, the limitations they are under, the steps they have to go through, the roadblocks they might encounter, what they need from me, and from other people, in order to do their job, and the time frames associated with each step of their process. I am genuinely interested in what they have to say.

    I take the time to manage the communication and make sure that handoff of information from person A to person B happens, and that person B is satisfied with what they received. I give praise where it is due, and show dissapointment where it is warranted. If they are late, I call them to find out why, and I get new commitments from them, or help them solve whatever the problem is. When necessary, I am a squeeky wheel. Basically, I use parts of my project mamagement skillset on the whole team that is working on my deal. (20+ years managing software devlopment teams, which can be best described as: herding cats)

    The time spent on all of this interaction results in time saved. I closed 6 deals in 8 months this year, all within 30 days of initial contract. And after all that time spent, I have some great people on my team, some of whom have become friends. The great people got to work on my next deal. The OK ones didn’t. So it got easier each time.

    Getting people to describe their process, their job, and actually listening to them makes them want to help you. Letting them see that what they do matters to you, and that you value them doing a good job makes them want to help you. Being friendly makes people act nicer, and makes them value you more. I am both an ethical person, and am also NOT good at acting, or at bullshit. So for me, being genuine and open is what makes all of the above work.

    But yeah, the default assumption to make is that unless you know a person’s work, trusting anyone to do a good job for you, unsupervised, is not likely to have a good result. If you want a good result, you have to help make it happen.

    • Alexander Felice

      this is a great story Cindy, thank you!

      yeah talking to people intimately about their operations really does help. if you’re just asking “hey can you do this?” “yeah!” then you’re not really learning what they are about AND you’re not building a relationship.
      talk to people, be patient, and really get in there!

    • Kristin Zajac

      Cindy, thank you for sharing your approach. I think that getting to know all those things about what others have to go through is a way to show you are truly interested in partnering in a real way. I’m just getting started and building these relationships is scary for me, but that feels like the right, authentic path. I am saving your comments in my notes!

      By the way I work in software too (product management) so I totally get your day job environment. 🙂

  4. Mark Waldrip

    I have a friend who was a mentor to me starting out in my REI career. He always seemed quick to judge and cynical of people’s intent. Whenever I’d complain about a problem I was having with a tenant, buyer, seller, contractor, etc. he would remind me of something that I now keep in mind in every situation:
    “PEOPLE SUCK!”™
    I know that sounds crass and harsh, but it goes to the nature of humans. When the going get’s tough, people are going to do what’s best for them, not for you; they won’t show up for work, they will not pay their rent, or will move out in the night. Your lease isn’t worth the paper it’s written on, and only serves to tie your hands, not your tenants (perhaps a tad overly dramatic, but pretty much true in my experience). As the article states, you need to factor in that “People Suck”™ with all projects, and prepare for that eventuality. But I STILL love what I do! Haha

  5. Chuck Glover

    A “WOW” article, thanks for this blog! Two points come to mind.

    First, “lazy,” is simply a loss of focus. Just as you set goals that drive you, get to know the goals of those with which you might choose to work. Talking to them in regards to them achieving their goals is more likely to ramp up their motivation. If you are unable to connect on that level, dismiss them and move on. Slackers are usually unable to articulate goals.

    Second, separate business from friendship. I’m preparing to get into a rehab with a friend–a great guy, but still, to his surprise, am drawing up a contract to govern our processes.

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