My Personal Investment Nightmare, Part 1 of 3

My Personal Investment Nightmare, Part 1 of 3

MY PERSONAL INVESTMENT NIGHTMARE, Part 1 of 3

When you see my credentials, you would think I’m a pretty smart guy. Lawyer, real estate broker, Ph.D., author… lots of great looking things on that resume. No matter how smart you are you can still get sucked into a nightmare.

I’ve been the investor people have come to for funding. One deal in particular looked especially good.

There was a property that used to be a residential dementia-care center. It had gone out of business and the property was at risk of foreclosure. We could get the real estate for a good price, and the idea was to re-open the dementia-care facility.

Why would I go into a deal to open the exact kind of business in a location that was just going out of business? It might seem like a bad investment to try to do what just failed.

We had a ringer. Before the current owner failed in the business, it had been a successful, thriving, profitable business. Under prior management, it generated enough revenue to pay all it’s expenses, service it’s own mortgage, and have $180,000 a year left over for the owners. If the owners actually worked the business, then the salary that would go to that position would also be earned.

We had that current owner on our team. He was there to train, consult and coach. He would work with our manager to train him in the systems he used to make the location profitable. After going over the plan, analyzing the numbers, and doing my due diligence, I was satisfied we had a good and workable plan.

My take would be in two forms. I’d own the real estate and the business would make the mortgage payments. So I’d have real estate building equity as part of my return on investment. I’d also get half of the profits, and estimated $90,000 per year by the third year based upon the projections.

My role was three-fold. They needed a real estate broker who could put together a creative and legal deal since there two properties involved and some other complexities. They needed a lawyer to stop the foreclosure and help set up the business. They needed an investor who could put up a quarter million dollars to make the transaction happen. I fit those criteria. It looked like a good deal. So I invested.

I didn’t know the previous owner. My due diligence showed that he was who he said he was and he did what he said he did. I was comfortable with his experience and his track record.

The other man, Ed, I’d known for years. I knew his wife. I knew his kids. We had served together on a Home School Co-op Board. I knew he was a good Christian man with exemplary character. I knew I could trust him to be honest with me.

That was where I made my big mistake.

CHARACTER IS NOT COMPETENCE

The expensive lesson I learned was that character and competence are two very different things. I could trust his character. I could not trust his competence. I could not trust that he could actually do what he sincerely believed he could do.

One of the things I did not foresee was that our consultant and our lead manager would have a falling out. I was never told what happened even though I asked. Whatever happened, both men were furious at one another and neither one was willing to tell me what happened. They simply declared that they could not and would not ever work together.

I couldn’t even keep the consultant by replacing my manager – though I did have someone in mind that could do the job. The consultant moved away and said that in no uncertain terms would he be involved in the project.

Ed believed he could make it happen. He said he had contacts and resources and that this was a setback, but not a fatal one. First he just had to get the property ready. I gave him a budget and turned him loose on the project. When I’d check in, he assured me that things were moving forward and everything was looking good.

I pressed for more specific reports on what “looking good” meant. I wanted to know what, exactly, had been done and what was on the schedule for the next few weeks. I wanted a projected date the property would be ready. The information was not specific enough for my liking, so I told him that I’d come out to the property and take a look myself.

When I got there, the change in the property was minimal. Some units had been cleared out, some light fixtures had been replaced, and door locks and latches were being replaced. I told him that it didn’t seem to me to constitute the level of work I would expect to have been finished in the nearly a month he’d been onsite.

He explained how long it took to mow the giant lawn, how long it took to clean up the falling leaves, and other day-to-day things that did not advance the property. As you can imagine, I was annoyed.

I looked around the property at things I was told would be done. None of the painting had been done. Almost none of the deeper cleaning had been done. There were a ton of things that had to happen that just weren’t happening.

I DID SOMETHING INVESTORS HATE TO DO

So I did something that investors HATE to do. I stepped in to take over the renovation.

In less than 48 hours I had my own team in there. It took my team three days and we had everything painted, every fixture switched out and tested, every carpet cleaned, and all the deep cleaning done. We even took care of the lawn, the trees, the bushes, and cleared the brush around the fences. We fixed and replaced locks, cleared the parking area, and had the property ready for people.

I had Ed stay away during those days. As upset as I was, I can be forgiving and nice about things like that. Many members of my team were angry – furious even – and had he shown up, several of them said they could not guarantee they would not yell at him.

He was contrite and apologetic. He said that while he knew he could manage the business, getting the property ready was outside of his expertise. He admitted that he should have been forthright with what he was doing, and he should have gotten more help. He tried to do too much by himself to save money even though I’d given him a generous budget to work with.

Ed assured me that now that the property was ready, the next phase would be easy. He was on the job and guaranteed that from here on out, he knew exactly what he was going.

Having just invested three days of my own time and my team of 20 people I knew personally and trusted to do good work, I turned the next phase back over to him.

THE STORY CONTINUES….