Joe and Theo are back with updates of their businesses and what they have learned that can help us. Recently, Joe has had some “red flags” come up with potential investors. These red flags have caused him to not work with a couple of potential investors. Tune in to hear what the issues are that makes Joe not want to work with investors. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!
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Joe Fairless: Best Ever listeners, how are you doing? Welcome to the best real estate investing advice ever show. I’m Joe Fairless, and I’m with Theo Hicks, who’s usually with me on Fridays. How are you doing, sir?
Theo Hicks: Doing good, Joe. How are you doing?
Joe Fairless: I’m doing well. Let’s see… For Follow Along Fridays, Best Ever listeners, as you know, we talk about what we’ve got going on, observations, and today we’re gonna talk about some lessons learned from an investor standpoint. How do we wanna get started?
Theo Hicks: We’ll start with our main topic, which is two reasons to not bring on an investor for your apartment deal… And this is something based off of your personal experience, and then we’re gonna wrap it into a bigger picture.
Joe Fairless: Yes, the two reasons… And as you mentioned, this is based on my personal experience. This is something that I’ve come across, and I thought so often in business we’re focused on acquiring customers. And in real estate, if you partner with other people (investors) on deals, then they’re your customers, so the thought process usually is that you want as many customers of investors as possible, right? And the approach that I’ve seen myself take recently has been to be more selective with my investors, and in particular I’ve come across a couple things that have been red flags for me, and they’re things that because of these red flags I’ve chosen not to move forward with some investors.
Let me take a step back, though… What do we ultimately want? We want to grow our business and help others along the way achieve their goals, and in order to do that with real estate it is a long-term play, usually. You might be a fix and flipper who’s listening, you might bring in investors, but even if you’re a fix and flipper who brings an investor, the fix and flip will likely take – start to finish – six months (about), but you’re probably gonna want that investor on multiple deals, so it’s a long-term thing.
With my deals, apartment syndications, they’re projected to be, each of them, five years. So it’s a five-year relationship. Name a five-year relationship you’ve had with someone…
Theo Hicks: Exactly five years?
Joe Fairless: Or more.
Theo Hicks: I don’t even know my wife for five years.
Joe Fairless: Exactly, and we are bringing in business partners who we’re gonna be in relationship with for five years, so we have to be really comfortable with them. You were incredibly selective with Marcella, right?
Theo Hicks: I was.
Joe Fairless: Yes, you chose to marry her; congratulations, by the way. It’s been two or three weeks, right?
Theo Hicks: Yeah.
Joe Fairless: And it’s important that I’m selective with who I bring on for a five-year plan, because we’ve all gotta be selective. So because we need to be selective, because it’s a long-term commitment, we’ve gotta identify what do we look for.
I’ve taken some notes here, so we can have a structured conversation. For me it’s really simple, and we’ll get to two red flags in a second. Let’s talk about what we’re looking for first.
One is it’s someone who trusts me as a person. As a human being, they know or believe or trust in me, they know or believe that I’m a good person. I am a good person, but they have to believe that. If they don’t believe that, if they think I am an evil person or someone who is out to get them, then they’re gonna act differently than someone who trusts me as a human being, and we’ll get into how that could manifest itself later.
Two is I want them to treat me as a partner, not as a vendor, because technically, we are partners. I’m on the general partnership side AND limited partnership side, because I co-invest in all the deals, and they’re on the limited partnership side. Both of those categories have a common word in them, and that’s “partnership”. So we are a partner, and not a vendor.
And third is that I look for someone who I can be in a five-year relationship with. Those are the three things.
Now, have you read the book Blink by Malcolm Gladwell? It talks about thin slicing.
Theo Hicks: Yeah, I’ve read that book.
Joe Fairless: Okay. Well, in the book Blink – and Best Ever listeners, if you haven’t read the book, go read the book; it’s a really good book – he talks about thin slicing. Thin slicing is basically the science of making quick informed decisions within a blink of an eye. You do that based on your previous life experiences and other context clues that are coming at you, and Malcolm Gladwell makes a case that you can make well-informed decisions, in fact more intelligent and accurate decisions in a blink of an eye, compared to if you laboriously look over a problem and you come up with a conclusion five hours later or five weeks later.
Well, in that book there is a study that I’ll always remember, and the study is about couples. For the Best Ever listeners who are listening to the numbers I’m about to say, I don’t exactly remember the exact numbers, but it’s approximately what I’m about to say. Close enough. So in one of the studies in the book, it’s a study on marriages and the likelihood of a couple getting divorced in the future. What they did is they hooked up the couple’s brains with these helmets with sensors and stuff on their brains, and they had the couple in a room, and they asked the couple to talk about a topic that is a point of contention between them, so something they don’t agree on.
When they hooked them up and the couple talked about maybe getting a dog, for example – one doesn’t want a dog, one does want a dog. After just seven seconds of them discussing the dog topic, the scientist was able to determine within 90+ percent accuracy if they were gonna get divorced in two years. If they are gonna be divorced in the future, they could predict with a 90+ percent accuracy based on seven seconds of interaction talking about something that they don’t agree on. It’s in the book Blink, by Malcolm Gladwell.
So that’s interesting, but how do they determine that? What’s the takeaway? The main thing they identified is in the way the face moves and the way your tone is and what you say in that short period of time, they picked up thousands of different cues and they put it in an algorithm and they identified that there’s one leading emotion that if it showed up in that seven-second span, then you’re done as a couple. Guess what that is.
Theo Hicks: I don’t know. I remember the study from the book, but I can’t remember what it was.
Joe Fairless: Guess.
Theo Hicks: Disgust?
Joe Fairless: Close. Contempt. If one person in the couple had contempt towards the other, then marriage is done, absolutely done. I know what contempt is, everyone probably knows what it is, but let me just tell you the Google definition. It’s funny how we don’t do Webster anymore; I just searched in Google. So here’s the definition of contempt – the feeling that a person or a thing is beneath consideration, worthless, or deserving scorn.
I think really the “beneath consideration” is the important part here, because that’s probably what will surface more in a partnership in real estate investing.
So what I look for — now I’m transitioning to the red flag thing… I don’t wanna get a divorce with an investor, I want a long-term relationship, so it’s logical to approach the same partnership that I would have with Colleen, from the screening process, to an investor, and that is I want to make sure that there won’t be contempt in the relationship at the beginning, because if there is, we’re done as a partner.
How it manifests itself is if I’m picking up on contempt from an investor at the beginning where I get a feeling that they think I’m beneath consideration or deserving scorn, then I move on. And you might think, “Dude, does that really happen?” It does happen… Not frequently. I think I’ve had over 1,000 investor calls and this has only happened five times. So it’s a very small percentage, but when you identify people in that category, you’ve gotta move away from them.
Theo Hicks: Were you able to move away from these five investors?
Joe Fairless: I was. Let me give you a real-life example of what contempt in my opinion looks like when an investor reaches out to me. I’ll make this investor anonymous, obviously; I won’t give any person identifiable information, but I’m gonna read you the exact thread and you’ll see why I said “Peace out.” On my website, InvestWithJoe.com, there is a forum for accredited investors who are interested in building a relationship with me and potentially investing in the future – I wanna make sure I accurately say that for SEC purposes – then they can go there (and they do). I get a lot of these submissions every day.
So this is a person, who I’m about to read the info – not personal info, but what they said… This is a person who reached out to me; I didn’t reach out to him, he reached out to me. He submitted his name, his e-mail, his phone number, like everyone does, and the question I have “Are you an accredited investor? Yes/No”, they said yes. “Are you looking to invest at least $50,000? Yes/No”, they said yes. And then I have a question “What would you like to tell me about yourself?” and some people talk about their backgrounds, some people talk about how they got to where they’re at… Some people just write a couple sentences, “Hey, I’m just looking to diversify”, some people might write one sentence, other people might tell me how they’ve succeeded in business… All sorts of varying answers.
This person, here’s what they wrote. Three sentences.
“I’m in deals with XYZ (another multifamily syndicator) and my standards are high. My patience for slick marketing is low.”
That’s it, that’s all he sent over. And I’m wondering why they initially mentioned that to me, because they’re the ones reaching out to me… So it immediately raises a red flag, but not enough for me to say “No, thank you.” So I reply back, and I basically say “Thanks for reaching out to invest with me. I would love to get on a call and get to know you more and learn more about your goals. I have attached some company information about Ashcroft Capital, with case studies, our business model, our approach etc.” and his reply is “Joe, it looks reasonable. So what I’ll need to hear is why do some deals with you, as opposed to continuing with XYZ?”
That message – it doesn’t sit right with me, because first off, I know who he’s investing with, and that person’s a great person. And I actually mentioned that (I skipped over that) to this investor, I said “Who you’re investing with is a great person and I’m glad you’re doing it.” And his follow up is “That looks reasonable, but what I need to know is why invest with you versus keeping to go with this other person.”
First off, I’m not gonna bash anyone, and I don’t think he was looking for me to bash anyone, but I’m also at a place now where I don’t need to beat my chest about “Hey, invest with me, invest with me” over other people. I know what he’s ultimately looking for; he’s looking for diversification among operators.” We both know that, so I’m not sure why he is saying “Okay, that’s reasonable, but what I need to know from you is this…” Perhaps it’s some emotional trigger with me where when people tell me what to do I just don’t like it; I’ve always been that way, so perhaps I’m blowing this out of proportion, which is a possibility… But I took it as “Hey, this is an investor who isn’t treating me as an equal, because he’s telling me he needs me to do something, and basically to sell myself.” Well, I’m not gonna do it, so my reply to him is “If you’re happy with so-and-so, who I’ve met multiple times and I have a high degree of respect for, then I’d just continue doing that. Wish you the best. Joe.”
He replied and said “I’m completely happy with so-and-so, but I like diversification across all variables.” Well, of course you do! We both knew that. That’s the reason you’re reaching out to me. I never replied back, and asked Samantha, I told her I don’t wanna have a call.
I’m sure he’s a nice person, well-intended, and perhaps it’s just the way the writing comes across, but I just don’t want that type of relationship with an investor.
Theo Hicks: Yeah, it definitely didn’t start up on the right foot. I think especially in combination with his initial inquiry, I agree with what you’re saying, that it seems as if it’s not seen as “We’re partners”, it’s more of “Are you useful to me?”, not if it could be a mutual relationship, so…
Joe Fairless: Yeah, exactly, that’s all it is. We’re in a relationship for five years. And the second part of this… So the first one is if you see contempt. If it rears its ugly head in any form or fashion, run the other way, because if you’re a couple, you’re gonna get divorced, and if you’re business partners, then you’re probably gonna get divorced as well.
The second thing to look for is if an investor asks a laundry list of questions in an accusatory tone that doesn’t convey that they trust you as a person.
I want to elaborate on this, because I’m totally fine and I expect to field a lot of questions. I’ve always answered every single question. But if an investor asks them in an accusatory tone where I’m picking up that they just don’t trust me as a person, then it doesn’t matter what my responses are. They could be A+ responses, written in the most grammatically perfect way, covering all the bases; if they don’t trust me as a person and they’re asking the questions in an accusatory tone, they’re not gonna invest, so it’s a waste of time for everyone involved.
I’ve had a couple investors, one recently, who asked literally over 50 questions about the current deal, and he has asked me questions for previous deals. The first conversation I ever had with him was over a year ago, and he’s asked me questions on a couple deals. The current one that we’re about to close on, he asked over 50 questions, which is fine; I answered all of them. But the tone of the questions is accusatory and there’s an underlying feeling that I get that they just don’t trust me as a person. The reason why that’s a problem is because after we close, when I send out my monthly updates to my investors, I do not want 50 questions after sending them the e-mail every month; we don’t have the bandwidth for that. I don’t have one investor who does that, I don’t have one. I certainly get some questions sprinkled in throughout the month once we send out updates on the eleven properties that we have, but I don’t have one investor who’s like “Oh, shoot… Here comes the update, and let me just brace for this list of questions.”
And again, we answer all the questions, but it’s the accusatory tone where they don’t trust me as a person – that’s something that it doesn’t matter what my answers are, you just can’t resolve for… So when you’re speaking to investors, if they’re just not trusting you as a person, then that’s something that I would cut bait and run, or say “Hey, right now it doesn’t look like it’s the best fit because maybe we’re not ready from a relationship standpoint… But let’s just stay in touch, stay on the e-mails; maybe if you’re in town let’s meet up, or if I’m in town, I’ll meet up and we’ll just continue to build our relationship.” Because they just need more hand-holding, and it’s better to do the hand-holding prior to entering the relationship than entering the relationship and them still not feeling comfortable with you for whatever reason.
Theo Hicks: Yeah, it sounds like for both the contempt and them not trusting you, going back to your thin slicing concept, it sounds like the way that you identify that is through thin slicing. You have that gut feeling that like “Okay, this person doesn’t trust me” or “This person thinks that he’s above me or has contempt for me.”
I’m sure anyone [unintelligible [00:18:33].25] conversations with a lot people, private money investors and just investors in general, but for me just getting coffee with certain investors, you sit down and within the first five seconds you can tell “This is gonna be a great conversation, I’m really enjoying talking to this guy” or “Alright, I’m ready to get out of here”, like within five seconds. I think we all have that built-in instinct for people. Again, it’s got nothing to do with you or them [unintelligible [00:18:54].05] you can just tell the vibes are off.
Secondly, I have a quick follow up question for both of these, that I’ve had beforehand; I think I know the answer based off of the two reasons, but is this something that more experienced investors should use, or people that are just starting out, can they still screen out certain investors?
Joe Fairless: Well, the reality is when I was starting out I wouldn’t have screened out anyone; I would have just done what it took to get the deal, and then figured it out along the way. So what I just said is a warning for any investor who is starting out — any syndicator; we’re not inter-changing the terms here… Any syndicator who’s starting out – it’s a warning that if you’re not screening for these two things, then you’re going to come up with issues down the road with individuals, most likely. If you are screening out, then you’ll be set up better in the long run.
Certainly, it can immediately be applied for more medium to experienced syndicators, because we’re able to pick and choose investors, versus having anyone who’s interested and an accredited investor.
Theo Hicks: [unintelligible [00:20:11].23] that’s a really good one. That can be applied to just any relationship in life.
Joe Fairless: Oh yeah, exactly; this isn’t just investor stuff, it’s any relationship. If you’re sensing contempt, if you’re sensing that they think you’re beneath consideration, then screw them. Life’s too short for people like that, and it’s not the right thing.
And again, this is just about the partnership and the relationship. These people — I believe people are good in general, but that doesn’t mean that two good people would always hit it off.
Theo Hicks: Exactly. Awesome. Alright, so moving on, do you wanna just give a quick update on — I don’t think we’ve recorded one last week, did we?
Joe Fairless: No, I was jumping up and down, getting 20,000 steps at a Tony Robbins conference… Unleash The Power Within in Florida. It was incredible. The main distinction I got from it — I have a page and a half of takeaways; I have about eight pages of notes, and then I summarized them on a page and a half of bullet point takeaways for me to actually implement… And two main things – one is that I will bring more energy to my life, because with more energy I experience more emotions, and ultimately we attach our experiences to the emotions we experience during those experiences. So by having more energy and more emotion, then I will have a greater level of experiences in life, and that’s what it’s all about. That’s number one.
Number two, Tony Robbins talks about the six human needs – certainty, uncertainty, love/connection, significance, growth and contribution, and he asked in the conference what are your two driving needs? What two needs are your two that drive your life? And most recently, for the last year or two, it has been love and significance.
Love is good, but significance – it’s not bad because it’s a need, but if it’s one of your two driving needs, then you’re gonna beat your chest more, you’re going to look more out for yourself and getting acknowledgment for yourself than other things. So instead, what I’ve made a commitment to do is have love and contribution as my two driving needs. And it’s so freaking obvious, with contribution as one of my top two needs, that the more I contribute, the more people benefit, and as a result, I’ll benefit.
Zig Ziglar talks about “Help enough people, get what they want, and you’ll get everything you want.” It’s the same approach.
So my vision board for 2018 is gonna have that distinction on there. It’s gonna be love/connection and also contribution.
Theo Hicks: That’s a good goal. I bet a lot of people can relate with that significance being one of their driving motivations.
Joe Fairless: What about you? What’s the latest?
Theo Hicks: I really thankfully don’t have any updates on my properties. Things are starting to go smoothly. I haven’t heard any issues from residents in over a week. I did have an interesting adventure last week with a contractor when I fixed my garage door, and him just falling off the face of the planet. I still haven’t heard back from him to this day.
Joe Fairless: I thought you’d say he fell off the garage.
Theo Hicks: No, no, no… He just didn’t show up, and I had to find a regular garage door repair service, and obviously that was more expensive than having a contractor do it. And then when they were there, they found out — oh, man, I forgot about this…
Joe Fairless: Are you talking about your property or your house?
Theo Hicks: No, my properties. They found out — because I have a fourplex that’s got two garages…
Joe Fairless: Oh, okay.
Theo Hicks: And they went to fix the one garage, because the spring had snapped, so the garage door wouldn’t go up… And I had a plumber working on something in the other garage, and they were kind of just [unintelligible [00:23:59].22] I go “You know, you guys are here… Let’s just check all the other garage doors.” And they checked the first one, and so they got the railings that are connected to the ceiling, and the motor’s sitting on that, and then it’s got a little chain that pulls the garage door up and down… So that rail wasn’t even connected to the ceiling, it was laying on a pipe that was going across the garage, and the pipe had asbestos on it; and the chain, whenever the garage door would go up and down, it would grind against the asbestos and would just flicker asbestos in the air. And the guy is like “This is completely illegal.”
And then on top of that, you know those little sensors that are supposed to be on the bottom of the garage, so if you break it, it’ll stop? For some reason, he taped those to the garage door motor. Obviously, that’s also completely illegal, because…
Joe Fairless: The sensors don’t work.
Theo Hicks: The sensors don’t work, so I had to fix all that. And since the motor wasn’t connected to the ceiling, the motor was basically completely shut… So that was fun. But besides that, everything’s looking good.
Joe Fairless: [laughs] Oh, man… Yeah, I think you conveniently [unintelligible [00:24:59].26] out of your mind. You were like “Everything’s perfect! Wait a second, actually…” Well, that’s a minor thing, and I’m glad that was resolved.
Theo Hicks: I’ve got the lesson now to just inspect the garage doors, all of them; inspect all the garages.
So the last thing we wanted to do today was the new Amazon headquarters prediction.
Joe Fairless: It’s gonna be in Dallas, here it is. This is—
Theo Hicks: You heard it here first.
Joe Fairless: It’s 80% research, 20% wishful/hopeful thinking, because if it goes to Dallas, then we’ll have ten properties that will benefit as a result of it. So that will be a multi-million dollar announcement if it happens to be in Dallas, for our portfolio.
The reason why I say Dallas is because 1) no one knows except for Amazon, and any publication that says “These cities are leading contenders”, they don’t know. They’re only speculating. But it’s fun to speculate, so here’s my part of the speculation.
I believe that Amazon will want to not be on the West Coast. I think all West Coast cities are done; you’re not gonna be on the West Coast, because they’re already on the West Coast. I think they will want to be in a more central to East Coast location, so now we’ve eliminated one-third of the United States.
Now, the remaining two-thirds of the United States, I believe that Dallas-Fort Worth and being close — I think they’re within a five-hour flight from any city in the United States, I believe… That’s gonna be beneficial. Including Seattle, I imagine. And the business-friendly environment of Texas is gonna pull in another company. Plano just got Toyota… Well, not “just” – they just opened up their headquarters… Multi, multi-million dollar headquarters in Plano, which is a suburb of Dallas-Fort Worth.
I believe the two things that would hold DFW back – one is public transportation; it’s not good. And two is access to engineers. I believe those two will not be as high of a priority because with the public transportation – people drive in Texas; it’s just how it is. I don’t think that’s gonna be as high of a factor as the other factors, like being close to all the other cities, having a friendly work environment, having expansive land to grow on, being in a major city with major sports teams, things like that, where people who are employed by Amazon can actually hang out and have fun.
And the other one, the lack of supply of engineers – Texas has some, with some universities… I went to Texas Tech University, and the University of Texas, Texas A&M, but it’s not like maybe Atlanta with Georgia Tech, and other schools like that.
I think you can get people to move to Texas, to move to Dallas, because it’s already been proven; people do move. People are moving to Texas, moving to Dallas all the time. You’re getting 100,000 new jobs I think a year in Dallas-Fort Worth, so that’s gonna continue, and Dallas-Fort Worth is gonna be the winner.
Theo Hicks: Well, I can’t pick Dallas, so I’m gonna go with my original pick, which is Atlanta.
Joe Fairless: Yeah.
Theo Hicks: And that’s just based off of — I used to work for a logistics company and I used to spend so much time running models on the setup of a distribution center… Obviously, I know it’s not gonna be a distribution center, but that’s just the experience I have.
Joe Fairless: If Amazon released a list of top three – which they won’t, for political reasons; they’ll probably tell everyone they got second place… But if they did, then I believe Atlanta would be number two.
Theo Hicks: What would be number three?
Joe Fairless: Chicago.
Theo Hicks: Okay.
Joe Fairless: I think it’s Dallas, Atlanta and Chicago, but Dallas is a good one. Cool.
Theo Hicks: Awesome. Si just a couple additional housekeeping things – the Best Ever Conference. Do we still have the early bird special, or do we just have regular price tickets now?
Joe Fairless: I don’t know, I think it’s regular price tickets. You can go to BestEverConference.com and check that out. Then also the apartment syndication book, we’ve got that… It’ll be published in a couple months, so be on the lookout; any call-to-action there, so they can stay in touch, or stay in the loop?
Theo Hicks: Not yet, but we’re gonna put something together here in the coming months, so that you guys can get some exclusive content.
Joe Fairless: [unintelligible [00:28:56].10]
Theo Hicks: And then real quick, make sure you subscribe to the podcast on iTunes for the opportunity to be the review of the week. This week, a shoutout to Brooke [unintelligible [00:29:03].10] Her reviews was:
“Joe host the best real estate investing advice ever. Highlights all aspects of real estate investing in this can’t-miss podcast. The hosts and expert guests offer insightful advice that is helpful to anyone that listens.”
Joe Fairless: Thank you, Brooke. I appreciate it, and thank you for listening. I am very grateful of that. The more listeners and the more reviews that we get, the higher quality of guests that we’re able to attract to the show, so please continue the reviews and I’ll do my best to do my part and continue with the quality content and bring in quality guests.
With that being said, enjoy the weekend, Best Ever listeners, and talk to you tomorrow.