So, I have a friend in a bit of a pickle…they've done their research on a particular investment in a particular country…received references and done research on the area, the supplier, checked their credit lines, reputation, etc…spoke to a customer or two…all seems "Kosher", and intuition as well seems to agree with the person in charge of the operation (not anything to go on, but certainly serves to confirm/reject an otherwise attractive/suspicious deal in my opinion, once DD has been performed).
Prior to signing, he contacts a lawyer (recommended by the local BAR association) – because…well, because he wants to do it right, it's his first time, and he's aware that there's a limit to how much DD he can perform from overseas. He's also aware of the fact that his experience in this country is non-existent at this point. Afore-mentioned lawyer requests documentation to review before they can quote. Afore-mentioned lawyer also happens to have their own investment vehicle representing investors as a wholesaler and PM of sorts (not an unlikely scenario, considering they're supposed to be real-estate experts in their legal field).
After a brief attempt to convince the potential buyer to invest with them (refused), lawyer reviews documentation over a number of days and, without even quoting on a price for their services at this stage, begins to raise various red flags. Some of these can be double-checked from overseas, some of them, well, you'd just have to take their word for it (and we all know lawyers never lie, right?)
The reason I'm not going into details is because I don't think they really matter in this case – the question is more of a general one, and I'd be really interested in your various thoughts on this one –
What is the limit to DD? In similar fashion to analysis paralysis, when does one stop researching and go with what they believe to be true? Conceivably, no matter how good the supplier looks with DD, there's always the chance they'd turn out to be a rotten apple, or simply make bad a business decision, or have bad luck. So many ways to skin a cat (and fleece a foreign investor). And still, how many "second opinions" do you get? Hire one lawyer to do background checks on the supplier? Then one more lawyer to do background checks on the first lawyer? When does it end, and how, from your experience?
Looking forward to your feedback.
Ziv Nakajima-Magen | Nippon Tradings International (NTI)
http://www.nippontradings.com
Email Me | Phone MeZiv Nakajima-Magen - Partner & Executive Manager, Asia-Pacific @ NTI - Japan Real-Estate Investment Property
Not one single thought from anyone? Seriously?
Ziv Nakajima-Magen | Nippon Tradings International (NTI)
http://www.nippontradings.com
Email Me | Phone MeZiv Nakajima-Magen - Partner & Executive Manager, Asia-Pacific @ NTI - Japan Real-Estate Investment Property
I have seen people analyse things for years.
I had one friend who has a Ph.D and an IT background. He spent years looking at trusts so that he could set up properly. Then when he nearly set up a hybrid trust the ATO had issues with some of them and that through him and then 2 more years went by. Finally he started looking at property and did all sorts of spreadsheets and analysis and lost many a deal because of timing.
Roughly 10 years from when he started he finally purchased a property.
Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
http://www.Structuring.com.au
Email MeLawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au
Terry,
Roughly 10 years from when he started he finally purchased a property.
What's he like at playing heads or tails ?
A bit of a tough question to answer as it is 'subjective' to the individual investor
Everyone has different personalities, different goals and different levels of skills, knowledge, experience and risk tolerance
You probably don't want to jump into any investments too quickly and end up with a lemon, but on the other hand you also so much time that you end up with 'analysis paralysis'
Setting goals, and knowing exactly what you want can make the due diligence process a lot more efficient
Ziv
I would file a Bar complaint against this so called lawyer, if what your saying is true that is totally unethical behavior on the Lawyers part and a huge conflict of interest.
I know many many lawyers over the years, And have never heard of such behavior.
Reputable US lawyers as a matter of course would never enter in business arrangements with clients.
Not that lawyers do not invest and do deals, They certainly do not pimp there product to some small time client that calls for contractual advice.
JLH
I tend to agree, but ufortunately that lawyer is just one such example, a great many more exist, some of which have far better fleecing techniques.
The question was a general one – what is the limit of due diligence? Terry's reply is one end of the spectrum, someone who would have followed the supplier blindly because he sounds like "he can make me some money" is the other.
I believe in the end, like anything, personal common sense, reasonable background and legal checks, coupled with experience and well informed "intuition" makes the perfect recipe for success.
Ziv Nakajima-Magen | Nippon Tradings International (NTI)
http://www.nippontradings.com
Email Me | Phone MeZiv Nakajima-Magen - Partner & Executive Manager, Asia-Pacific @ NTI - Japan Real-Estate Investment Property
Ziv to be specific from a US point of view
Having made over 2,000 hard money loans in my day,, so basically underwriting borrowers is what we do, along with underwriting the properties we are loaning on. here is my quick list. And I believe this is germane to buying from someone who is touting to provide a turnkey experience whether you visit the property or buy from the comfort of your home.
First there is the 3 C's of lending, as it relates to who your doing business with.
1. Character
2. Credit
3. Collateral
What I see most investors buying in the US doing is only focusing on the Collateral and not really focusing on who is bringing the deal to them… At least that was the case when I first joined this site a year and a half ago.. I think we have helped educate many to look at the providers of these homes as more than just a means to an end but who are they, and do they have the 3 C's as just the basics.
When making loans how do I check #1 Character
For me as a lender I do the following …. All of this takes maybe an hour if you know where to look.
a. Check public records in the county they live in… You would be surprised at the entanglements these folks get into from not paying sub contractors to being sued by clients for fraud and other malfeasance. They will never admit this they just talk a good game.. Then as a lender and this is really not feasible for the average Client, ( although I may provide this service)
I run them through my Lexus Nexus fraud detection software.. If their application does not match the info that they have provided me on the application then its a red flagged.
Lexus Nexus is what private detectives and FBI uses to chase down people its also know as a skip tracing software., Only certain companies can subscribe and Lenders with Brick and mortar are one. I can put their name in and in 5 minutes I will know every place in the US where they have lived their next of Kin, any and all utilities in each state that may be in their name,, and liens judgments etc. Its really fascinating what you find out on people. Majority of my borrowers were straight up,, But many of the turnkey companies had major issues with clients chasing them.
b. Credit report, Do you want to trust your hundred thousand dollar investment to someone who has exhibited very poor personal management of their credit.. Here you will see all sorts of things. From Foreclosures to Liens judgments back child support payments etc. You can run a credit report for $30.00 and just asking for one will cut the wheat from the chaff if they give you excuses why they will not do one for you ( like I am selling you this property why do you need my credit) then they by and large are hiding major issues. Those like myself with perfect credit will give this info willingly ( of course not to anybody we make sure we have a willing and able buyer before we provide). As part of my Due Diligence package to my clients I provide on top of this a Criminal background check of FBI quality. And copies of all my license's and the state web sites were you can see if there is any action or activity regarding my license's in a negative manner Along with letters from my banks informing our clients of our cash positions.. Again with the Turnkey guys most of them are not licensed and its caveat Emptor, and they would never share this info.
So just for fun all you folks dealing with US turnkey guys and especially the Aussies that claim to be experts in the US and have expert partners in the US. ask for a credit report and see what answer you get I bet you get a bunch of stumbling and excuses.
c. Collateral. here is where you can get all sorts of info on line, ( although one needs to use on line valuation services as a guide not the rule) they can be wildly in accurate IE too low or too high in Values. Best to always ask for and receive a 3rd party independent appraisal ( which is what we provide for each of our investments) here your getting a much better idea of true value.. You will not end up with a property that is worth 20k that you paid 60k for… And if there is a huge value issue you have the Appraisers E and O to go after. Remember your turnkey guy is long down the road and is near impossible to get to.. Like many have discovered.
So for all you that really want to ferret out the "Spruiekers" give these few suggestions a try and see what responses you get.
Now also realize many of these wholesaler retailers turnkey guys went through some really tough times and have foreclosures and bruised credit you just want them to be honest with you up front.
So when I lend money this is what I do before any loan is made…and I think since your sitting in Oz not knowing who or what to trust this will give you some form of due diligence that 99% of the public would never know how to do or think to do.
So this all said I doubt many or any one of you reading this will have the fortitude to ask these tough questions as they think it may be rude.
I would love to hear from any potential buyer of US properties if they will actually ask these questions and see what responses they get.
Now, just a commentary,, YOu take the post of Cheeves he has been forthright in acknowledging that he had problems in the down turn… I certainly did. So someone like Cheeves who is honest and up front you can get a comfort level with he did not have to offer this info. And other than a few e mails between him and I as peers I do not know him personally and he does not know me so I am not endorsing him.. Just applauding him for his honesty. I probably lost 50 to 60% of my net worth maybe more just to scared to look.. I did though work and fight to keep my credit and have never defaulted on a loan of any kind.. And at the peak I had 18 million in Bank loans. Now I have 2 million… Plus all my rentals but those don't count as they are 30 year fixed.. Although most of those are negative geared a little bit.. ( remember that was ok 8 years ago)… But I hung in there and have paid it all as agreed by the note and terms. And of that I am extremely proud.
So Ziv, that is what I would recommend for Due diligence in more than a few words
And as I stated I doubt many or any of the OZ clients will ask for this but here it is this is what should be done…And if the shoe is on the other foot and your borrowing money from a US bank this is the exact thing the bank will ask of you to qualify YOU as a borrower, I would venture to guess the 3 C;s are alive and well in the world of Mortgage lending in OZ as well. Along with deficiency judgements if you do not pay your OZ bank. . JLH
Jay,
Excellent post. I really enjoy reading your very informative posts.
Thanks for your contribution to this forum.
Karina Perez Ronderos
Select American Homes LLC | Phone +61 412 900 111
Karina,
I certainly do not believe my advice is the end all be all.. however if I can help one person like Gavin not get hooked up with a guy like Jeremy Burgess in Detroit then I have done a service to the community I believe.
If anyone would ask this Burgess character for any of this info he would run for the hills
I quite agree, Jay, but I think that "character" bears a bit more than what you specified. For me it's always the "Prime C".
Public records are great, but they only mean this particular provider (or at least under their current names, you can't imagine the lengths some frauds will go to) hasn't been caught doing anything – nothing about what they're capable of.
For this reason, I also include "infrastructure and size claim verification" in this C of yours – things like structure of company, legal mechanisms, sub-contractors and the relationships with them, and other instruments the provider (borrower in your lending case) uses to provide his wares. Anything un-towards there has to be explained in detail (preferrably prior to engagement and of the provider's own volition), and the picture match the provider's claims from earlier correspondence. This is part of what I was referring to when I mentioned experience and intuition (or empathy, or emotional intelligence, or whatever organizational psychologists are calling it these days in their management training programs).
The more the picture painted initially differs from what the actual infrastructure suggests, the less of a "character" score this company and its principals get in my DD process.
One example of what I mean – a company claiming million dollar offices, hundreds or thousands of clients all spread globally, experience and credentials going back decades etc, had better have the verifiable infrastructure to prove it – I don't mind dealing with young, savvy, single or dual person operations, for example – quite the contrary, I think in many cases they fit the bill perfectly for my investment strategy (although I wouldn't use, say, a young and fledgling insurance company or bank for this purpose) – there are advantages and disadvantages to this profile, and I'm well aware of them – but I do like to get the correct data from day one. If someone chooses to hide or brush something under the carpet prior to engagement, why on earth would they not continue to do so when they don't like the data down the track, when they're already in charge of my money?
This infrastructure verification sometimes requires quite extensive research. On the upside, once you've so verified a company and its principals, you can work with them for a long time (provided, of course, they can actually deliver, for which verifiable reference can vouch).
We all like to say "DD", as if it's a given, but I find it very interesting to find the lengths and types of drill-downs different folk do prior to investing with anyone or anything.
Ziv Nakajima-Magen | Nippon Tradings International (NTI)
http://www.nippontradings.com
Email Me | Phone MeZiv Nakajima-Magen - Partner & Executive Manager, Asia-Pacific @ NTI - Japan Real-Estate Investment Property
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