- March 25, 2019
- Posted by: august19
- Category: Podcast
Putting ourselves in the shoes of the individual who is funding the deal, Gail and Chris discuss vetting a JV partner. They talk about how to raise money while offering some insights on the things to look for. They explain what TLO is and lay down the questions you should ask when you’ve done a TLO and everything checks out. From there, Gail and Chris then point out some of the red flags that would cause somebody to have a little more caution before a deal.
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Funding A Deal With A JV Partner
Gail, how are you?
I’m wonderful, Chris. It’s great to be with you again.
I’m excited because we’re going to talk about a topic that most people don’t cover. A lot of people ask these questions, but nobody talks about them in substance. It’s going to be a fun show. Let’s talk about what just happened.
In my world, I have gone from renovating very low-value houses that I inadvertently get back in the forfeitures on CFDs. I now have a personal pet project where I am confronted by the biggest renovation I have ever undertaken and I’m doing it at a distance. It’s freaking me out. I should ask you because you built a big house. The hardest thing is I have been sourcing different contractors in an attempt to get the per square foot cost. It seems like everyone in this town has taken a vow that they won’t break or won’t go below a certain number. Is there a generally accepted cost per square foot to either build or renovate?
It’s very difficult because it’s like, “Is there a cost to buy a car?” It depends on what level of quality and finish are you going to be putting in the house. There are certain things that are standard. Certain things like how much it is to flooring? How much is it per square foot to lay carpet or to lay tile or to lay wood?” That’s consistent throughout. The same thing with roofing, siding and a lot of those tasks. In a lot of labor, you can base on the area to come up with unit pricing. It also depends on the quality and level of finish. Drywall, it’s the same thing, people are usually get paid by the sheet. It’s what I’ve seen in the past as well. Right now, with different aspects of things like shortage in labor force, as well as housing is still going pretty strong. You’ve got to pay a little more, unfortunately.
I have two observations. Chris, I adore you but I would not want to live in your head. I was hoping you would say, “$100 to $150 a square foot.”The first time takes the longest. Click To Tweet
Gail, we have about 30-plus episodes. You know I don’t just give three-word answers.
I keep waiting for a regular guy to show up but this engineering guy always comes around. I’m at $124 a square foot. I’m practically having to replace this whole house without doing the easy way of tearing it down and just rebuild it. They have to remove pieces and replace them immediately without the whole thing falling down. Maybe $124 a square foot is not so bad.
On a renovation project, for what you’re undertaking, that number doesn’t seem too bad. I saw your pictures of some of the new foundation work that you had done to the property. People can stand in the building without it falling down on them.
I’ve been showing pictures of my new footings to my friends. I’m like, “Look at this. Isn’t it beautiful?” What just happened to you?
Gail and I released a tape of mostly performing and some nonperforming or sub-performing CFDs and a few notes involved in that. It’s the first time I attempted to sell this many assets. I’ve sold some assets here and there. There are 25-plus assets on this list, which some are still available for people. If you’re interested, please reach out to us. It’s more work than I thought in regards to getting the bids and countering. Some people put in bids and then wait a few days to accept and then you’ve got other bids coming in. You’re trying to do rolling. It’s first come first serve and then you’re still trying to juggle all that as well. The first time you do it, it takes you longer than you anticipate.
I have to say it’s been very surprising that people are not quick to respond when you either accept or counter. My impression was that everybody felt like, “I have to work so hard to get a deal. If I don’t say yes, they’ll sell it to someone else.” Here we are trying not to accept someone else’s bid but thinking, “Most people don’t get back to me. I do have these other bids. I feel weird. Should I say yes?” It’s just odd. It’s as if not RSVP-ing for a wedding. It’s like, “Everybody, get back to your sellers if you’re engaged in a negotiation on a note.” It’s a weird feeling to be sitting by the phone and waiting. It’s like high school all over again.
We’re going to roll into our topic. We’re going to put ourselves in someone else’s shoes of how to vet a JV partner. Not as the individual who’s managing the deal, but as the individual who is funding the deal. It’s going to be a fun show because a lot of times there are topics about how to raise money, but we’re going the opposite direction. If you’re going to be a part of a deal, what are some of the things that you should do and look for?
We could almost do both. If you’re the funder or if you are not the funder, you know what to look for because a lot of the things are pretty similar. This is an intuition of mine. I have done no research. I’m just guessing. Why don’t you start us off, Chris? This was your topic and it is a very good one.
I’m going to go back, I’m going to be the person funding the deal. I have my money, which I’m giving to you, Gail. Before I give Gail my money, what are some of the things that I’m going to do? One of the first things I will do is ask her, “What’s the entity you buy your notes in? Can I get the name of that entity so I can look up the state it’s registered in and make sure it’s still a valid entity?” This seems common sense, but I would still do that. A lot of times, this is somebody you’ve seen on social media or may have met them at an event or something. Just because you meet somebody, it doesn’t mean that they have sound business practices. One of the things I do is check with the state to make sure it’s a registered business and that it is still active and isn’t under any type of scrutiny.
Where would you go to look that up? Would you go look at the Better Business Bureau as well or a state filing like the corporate search?
I’ll start with corporate state filing. I’m in Virginia. If you google Virginia business entity search, State Corporation Commission is the name of it. They have a website where you can look up businesses that shows whether they’re active and it shows the registered agent. It gives the profile of that company. You brought up a good point about the Better Business Bureau as well as a potential research location. I’m not sure if there are going to be a lot of information with the Better Business Bureau.
I don’t know if everyone knows this, but you have to sign up with the Better Business Bureau to be monitored by them. By monitored, they don’t do anything, but if someone complains about you, they’ll keep a record of that. There’s no scrutiny. It’s not like, “I’ve got such a good rating from the BBB.” That means nothing.It's very important to unearth an expectation and deal with it earlier rather than later. Click To Tweet
We’ve touched upon this subject. If I’m lending you money, you’re becoming a borrower. It’s almost similar to sometimes if you’re going to own or finance a property with somebody as them being a borrower. It’s the same thing. You’re giving somebody money for something in return the step should be similar in each case.
Unfortunately, unlike a borrower where you would have a mortgage loan originator doing a very careful deliberate review of someone’s finances and stuff, we don’t get that when we’re thinking about giving money to someone.
I’ve had people ask me for my corporate financials. It’s a private company and I refused. It’s my business decision. I’m not going to go out there and show people how my business is performing. They don’t need to know how much I’m making in that sense, especially when they’re just in one deal.
It is difficult to get real hard data that would either raise a red flag or not on a business or a person. In the era of social media, we have two things to look at. One, it’s very easy to get famous and look very solid in social media, whether you are or not. A lot of times, we have a comfort level because we’ve heard someone’s name a lot and we think, “They’re big. I hear about them all the time.” People say that to me. They’re like, “I heard about you. People say your name.” I’m like, “That’s very nice but that’s not the basis of anything.” The flip side is that it’s also very easy to check people out because if you’re part of a world like ours where everybody knows everybody, if you put out feelers and they ask about people’s experience investing with a particular deal maker, you’re going to get some good information back.
You mentioned about trying to find some hard data and so forth. There is something out there that you can do that I know you’ve used in the past with some borrowers and so forth. It’s called TLO. Can you explain to people what that is?
That’s the TransUnion database, which is one of the three credit reporting agencies. They have compiled a massive amount of data on everybody in the United States or maybe beyond. If you have a TLO membership, which is not easy to get because the information in TLO reports used to give people social security numbers. They don’t do that anymore. Because they make a lot of personal information available in their reports, they have very strict rules about who can have a membership to have access to their database. I am proud to say that I have met all their criteria and I am allowed to access their database. It’s very good. You’ll get tons of phone numbers with the likelihood that any one of them is their current phone number. You’ll get tons of addresses in chronological order going back 20 and 30 years. You’ll get lists of people they might be connected to, which oftentimes when you can’t find a person, you can find a relative and go through them to find the actual person. It’s a big report and there are lots of good stuff.
Is the TLO the same as a skip trace?
When someone says, “I need a skip trace,” someone would respond, “I have a TLO account. Let me run that for you.” If someone has civil judgments against them, criminal record and all these other things, the TLO report will give you the details. There is a much lighter and less expensive version that a friend of mine told me about. He said that he subscribes to Whitepages Premium. What Whitepages Premium will do if you find the right person is it will show you a summary of, “Are there civil judgments? Are there criminal judgments?” It will say, “Civil judgments 5 or 25 criminal judgments.” It doesn’t give you the details. Once you have concerns or questions, you can order a more flushed out report. I’ve never seen one of those. Whitepages Premium is $5 a month and then you just pay extra if you want a deeper report. That’s a good way to go.
The thing to be careful with too in some of these reports is if it pops up and there are civil cases or foreclosures, you have to be careful on whether the individual was the plaintiff or the defendant as well. As note investors, if the company has assets that the borrowers may have vacated and their only recourse was to foreclose, make sure you check and see, “Was it them being foreclosed upon or somebody else or the same thing in somebody’s lawsuits?” There might be somebody went after something for deficiency or whatever it may be. That would show up. Has that person personally or they’re a corporation? Those TLO reports can show the judgments. If they have corporations registered in their names, it shows that. It’s a background check. If somebody says, “Get a background check on somebody,” what they mean is a TLO or a skip trace report.
When you’ve got a more detailed report and there are judgments in lawsuits, they’ll show the amounts and they’ll also show who the other party was. If the person you researched was sued, you can see who the other person is and what jurisdiction it was. You can often look those people up and contact them to find out what happened.
Those are some of the initial things that you can do behind the scenes. The second half component is like, “Gail, I’m going to give you my money.” What are the questions that I should ask you now that I’ve done a TLO and everything’s checked out? The background shows that the businesses are registered. It’s a good entity. It’s like, “You pass stage one of this. I’m going to get on the phone with you.” What are some of the questions that I may want to ask you?
I would be very concerned if I was talking to someone that I was potentially going to give my money to and they were extremely curious about me. We should have a lot of talk about my expectations, because the biggest breakdown in a relationship between a JV and a dealmaker is when people have the wrong and unrealistic expectations. I believe you do this too as part of the three-touch rule of getting to know someone a little before you even talk about the possibility of a specific deal. One of the things that we do is ask people to fill out a profile. I ask people what they’re hoping for as a return and what their long game is as far as what it is that they’re trying to accomplish. People have told me they want 30%. It’s very important to unearth an expectation like that and deal with it early rather than late.Sometimes the best deals are the ones you don't take. Click To Tweet
I’ve had people who would be like, “I want 20% and we should go after vacant homes where they’re easy to foreclose and it’s a higher risk.” I made a mistake early on where I had a JV partner who was interested in something. I wasn’t sold on a property and I let them push me into it. At the end of the day, I didn’t make any money on the deal and the amount of work I had to put into it. I looked back and it was one of those things where you think, “I’ve got somebody who wants to be a part of this and help me grow.” On the flip side, sometimes the best deals are the ones you don’t take and this was one of them.
Why do people even fund deals with more experienced people? They want the comfort and security of feeling that if a mistake is going to get made, it’s certainly not going to be their beginner’s mistake that they would make on their own. Hopefully, it’s something more advanced. This relationship between a dealmaker and a funder, you have to be upfront and honest with people. Be very wary of someone who paints a rosy portrait of exactly how it’s going to go and what they can expect. No one in the world knows how it’s going to go and what they can expect.
It’s as if telling somebody it’s the little kids rollercoaster at the amusement park that goes in a little circle with the twelve months old in it where you have to sit with your child. Reality wise, it’s the Spiderman roller coaster that goes 37 times upside down and 100-foot drop. Don’t sell them on the kiddie ride because it’s not. One of the things you touched upon is being upfront with people. What’s your experience in real estate and in this type of investment? That’s something I would ask somebody. Tell me about some of the deals you’ve done. Tell me how you learn this. What experience did you have? Not only in this but also businesses. Have you ever run a business before? Everyone comes from such a different background. If somebody had never done a few note deals but was running a billion-dollar corporation and then there’s somebody who’s done 30 note deals and this is their first go around in the business industry. Each one has different strengths and weaknesses. There is no right or wrong answer to the question. It’s all about the information and understanding that information and the risk that’s involved based on somebody’s experience.
I would even go a little farther. When I’m talking to someone in the business, we just talk as people first. I find that people who may be very practiced in terms of their responses to the usual business questions, if you talk to them about things going on in their life, you often get little hints about how they deal with and how they problem solve and stuff. Whether they are very willing to skirt the rules or whether they’re very slavish followers of the rules. When they’re more relaxed, they’re more open and they tend to reveal a lot more. I’ve had JVs who live close enough that asked me to go have lunch with them or dinner. I think they’re doing the same thing. They’re like, “I want to get a feel for who you are. I want to get a sense if things were to go bad, how you would react? Are you someone who’s going to feel a tremendous obligation to get me my money back even if you don’t get anything out of that?” Those are the things. If someone has a super fancy car and they talk about money all the time. That would not be somebody that I would want to deal with. Even though they have the trappings of success, I would feel like, “Do they know how to be not successful? What happens when they don’t succeed?”
That’s a great point of asking, “Have you had a bad deal? What happened?” If they have, ask them, “Do you mind if I reach out to an individual to talk about how you managed it?” If they say no, then that would be a warning sign. I’ve had somebody asked me, “What was your worst deal?” My favorite state. I said, “If you want to talk to the person who’s involved, I’ll gladly give you their information.” They can tell you about it. Communication, no matter if it’s good, bad, different or whatever it is, you still need to communicate on both sides. If I’m giving you money, I need to also communicate expectations. I mentioned this to people when I talk to them, “If you feel you’re not getting the service or you have questions that are going unanswered or things aren’t working, let me know so we can talk about it.” What I don’t want to happen at the end of the deal is have you say, “I wish you would have done this better or that better.” It’s like, “Timeout. We had this conversation upfront.” We’re all adults here so sometimes you’ve got to put the elephant in the middle of the room and talk about it. Make sure that certain things do get resolved.
That’s a warning sign if people are not committing upfront to talk to you regularly about what moves to make in the deal. If you’re in a joint venture with someone, that is one of the hallmarks that makes it a joint venture. There has to be collaboration. If you find that you’re passively sitting around and waiting, you don’t want to be in a deal with that. You want to find out before you enter the deal. Is that person planning to consult you on all the big decisions? Do they want you to agree upfront to be a silent partner? Even if they’re reporting to you what they’re doing, you don’t want to hear about it after it happens. You want to be part of that.
What is your reporting process? How often do you report? How often do I get information? How often do I get paid? Those are some of the questions that I would pop in my mind as well.
I have a lot of conversation with the JV before we buy the deal. Before we even buy it, we know what our initial moves are going to be and well-versed on what expenses that are going to be right at the beginning. There’s always stuff you don’t know what the expenses are going to be because you’re not sure what’s going to happen. We try to anticipate as much as possible. Once the deal is underway, I report quarterly. Whether there’s income or not, I send a very detailed expense report every three months. I also send out, if you’re one of the lucky ones who’s getting income already. I send out a detailed income report and check at the same time.
One thing that I had to do is I’ll send out my reports. I try and get them on a monthly basis. Consolidating that report to also make sure that when you send somebody a check, you should send them a balance sheet essentially of, “Here’s where we stand on the deal. Here is what the expenses are. Here’s what the inflows are.” When you’re getting a check, it’s like, “Was this person paying monthly? Was it a one-time thing? Where do we stand on expenses?” That’s one thing that I’ve had to adjust to do. The engineer in me is thinking, “I understand this, but I wasn’t communicating all that information.” That was a lesson learned for me.
I do a profit and loss and that shows the investment income broken down by which loan it is. There’s never any question about where the money comes from.
We talk about some of the questions. One thing we might want to touch base on is if I’m going to give you money and I’m asking questions, what are some of the red flags that would cause somebody to be little more cautious?
My friend said to me when he looks at Whitepages Premium, if there are a couple of civil judgments, he will delve in to see what it is. You can have weird funky stuff in your background’s data. It could be random weird things that are not any kind of deal breakers as far as your ethics and your integrity. If there’s a couple, they’ll get the bigger report. If there’s a bunch, that’s a no for me. I don’t know that I would even put the effort in if someone has criminal things.Be very wary of someone who just paints a rosy portrait of exactly how it's going to be because no one in the world knows what they can expect. Click To Tweet
It depends on what the criminal activity was too. If it was an eighteen-year-old arrested for public intoxication, it’s like, “You’re eighteen, you’re in college.” If somebody was convicted of laundering money, that’s a little different. One thing popped in my head while we’re talking about this topic was background checks. I have a mortgage loan origination license in Virginia. To get that type of license, it’s a federal background check. It’s a state background check. It’s numerous checks that they go through. I was surprised and I was thinking, “I’m out there trying to get people loans and stuff like that. It makes sense, but now I use it as a marketing point of when people ask and stuff, I can say, “I went through a federal background check too. I’m more than happy to pull another one on me.”
One thing I’ll throw out there too is if people won’t give any references. People can put a pitch deck together with deals, but anybody can put something together on a piece of paper that looks good. Whoever worked a 9 to 5 job that have handed somebody a crappy resume? Of course, you’re not going to hand somebody a crappy resume. It’s going to be everything you’ve done that is excellent. That’s the same thing as a pitch deck that you’re going to give somebody. It’s good to get that information, but I prefer word of mouth and having references. What are your thoughts on that, Gail?
I love references in the abstract also. Having been taken for some money by contractors who had excellent references, it’s hard to know whether you’re talking to real people who did deals with somebody unless you talk to their mom or their cousins.
That’s why I go back and ask somebody, “What’s a deal that you had that wasn’t the greatest?” Reach out to that person and do check. It’s the same thing with contractors. Nowadays, you should be checking state databases and all this. I had somebody who came and did work on my roof. They hand me insurance certificate, they didn’t do what they said they were going to do. I called the insurance company on it as well because there was an issue. The insurance company said, “He’s not insured to do roof work.” I’m like, “I got insurance certificate.” He goes, “Yeah, but there’s an exclusion to his policy.” I’m like, “There goes $500.” You and I get duped, Gail, coming to business. We talked about running backgrounds, references, and other things. A few tips I can share too in this business is there are other groups. There are Facebook groups and there are BiggerPockets. Post something on one of those sites saying, “What can people tell me about this person?” Just do a search on that person in the groups to see what comes up about that individual, if anything. On those sites, you’re not going to find a lot. If you ask around, people won’t publicly tell you, but somebody may privately let you know something.
The people who run the groups often feel some obligation to protect. When you’re on a Facebook group, it’s not a high level of trust that people have in you. People who take those things seriously, if they have a group on Facebook, they want to protect the members of their group from any predatory things. You can often ask around if anybody knows any reason that you shouldn’t consider dealing with somebody. We are in such a small community. You’re not more than one person removed from someone who’s done a deal with everybody you would think of who’s a star in this world. In a group, there is a search function and you can put someone’s name in and see everything that they either posted or what’s posted about them. That’s a good way to find out. It’s challenging. The sheer volume of information that’s available in some way makes it harder to find.
There’s still the chance that something negative can happen, but if you do some of these steps, 90% of the time you’ll be in a better situation. I don’t know how many phone calls I’ve gotten from people who have asked, “You talked about this attorney because I have this situation.” A lot of times, it’s situations where they joint venture with somebody. The person either has folded the entity and they want to turn the notes over to me and they’re worthless. I don’t want them. I invested in this deal, but I don’t know how to manage them. I’d rather take the buyout, which in this contract may have been 8% initial capital plus 8% back or whatever it was. He was like, “That’s what I want. I don’t want these notes.” Over a few months, I’ve gotten several from people with investors. The names that they’ve dropped, I said, “Do you mind me asking who it was?” They mentioned names and they were like, “Do you know the person?” I was like, “I have never heard of them in my life.” Check to see if this person is a known entity or known in the industry as well. It’s something to ask around.
Great marketing can make people who are not players look as if they’re running the show. You have to have a little skepticism and do the underlying research too. Trust but validate.
Trust but verify. It’s the same thing. If that person doesn’t have a Facebook profile, doesn’t have a LinkedIn profile or a picture anywhere of them, run for the hills. You should at least have a phone conversation with that person multiple. I would do a video webinar of them just so you can see their face on who this individual is. It’s not maybe a meet in person, but at least it’s somebody who is like, “I see who this person is and what they look like. If need to be, I could always pick them out of a lineup.” It’s like I had $50,000 and he ran off with my money. I’m like, “Here is his name.” That doesn’t show up. “Here is his company.” That doesn’t show up. “What does he look like?”
Check to see if they have any assets in the entity name or whatever. If you ever had to go after them, whether you could collect anything. I have a JV who worked with another investor and has a large amount of money tied up in a flip. The dealmaker refuses to sell the house at what he considered a loss. This guy can’t get his money back. He sued successfully but there are no assets. There’s nothing to liquidate in that business name.
Gail, what do you have for your little Notes and Bolts?
I’m going to circle back to something we talked about on here. I want to hammer it home. Don’t get a TLO account. They’re very intrusive. It’s $25 minimum a month. I end up spending so much money. It’s ridiculous. Get that $5 Premium Whitepages account. That will at least give you not just on potential JVs but on your borrower’s, enough information to know whether you need to be a little cautious or not.
Mine is going to be somewhat off topic. It’s something that ties back to our initial discussion about some of these assets we’re selling. In some of these assets, I had provided some ProTitle O&E reports. I mentioned to somebody, “If you let them know that a report was pulled, I want an update on it.” Sometimes they want it to be from the same person, but they’ve been flexible from what I’ve seen. ProTitleUSA will give you an update. It will take from the prior date to the current. It saves some money. If somebody has a report within the last few months, they can do what’s called an update where they don’t run the entire report. They run it from that current date. It’s not the same as a full price cost. It’s a little thing you could do to save a few bucks.We're all adults in the business. Sometimes you’ve got to put the elephant in the middle of the room and talk about it. Click To Tweet
Considering that we generally sell something a few years and a few months after we buy it, will they do an update on a report that’s fifteen months old?
There was a language in there that was within the last 180 days or 100 days. I thought it was some stipulation or timeframe that they would go back to. I bought a pool of assets and I wasn’t going to keep all of them. There’s a few of them that I want to sell off. That’s a process I went through. As part of selling some of those off, I already have some of these reports that I got onboard with Madison. I’m going to turn around and I’ll look for investors if they’re interested in them. If they’re not, then I’m going to keep them in my portfolio. I was looking to now sell off some. I didn’t select which one, but which people are interested in, because I was going to buy them either way. It was my understanding that it was only for three or six months.
That works for performers. Maybe not so much if you’re buying a re-performer that someone’s had for a long time.
Thank you all for joining us. Just a reminder that every Thursday night, we have an open mic night. The link to sign up for that is 7EInvestments.com/PodcastWebinar. These topics are to answer your questions. We have people come on and ask questions in the chat so we can assist you wherever you are in your note journey.
We’re starting to have guests on who are very popular people that a lot of people would like to talk to. Here’s your big chance.
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Thanks, Chris. To all of you, thank you for joining us. Always remember to go out and do some good deeds.
Have a good one. Thank you all.
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