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Posted about 14 years ago

On Trust and Due Diligence in Real Estate - The JV Deal that We Passed On

Never judge a book by its cover.  Beauty is only skin deep.  All that glitters is not gold.  If it seems too good to be true, it probably is.
All these sayings come back to one thing - find the truth for yourself.
Will I be successful in building wealth through Real Estate?  I don't know yet.  Armando Montelongo, our real estate trainer, says: "You overestimate what you can do in one year, and underestimate what you can do in ten."  I must admit I had hoped for higher profits by this time, but we're still plugging along and keeping our eyes out for good deals. 
I network with other Real Estate Investors in Austin as I'm constantly learning, even though I often invest out of state.  That's where I met this man I'll call "Dude".
We almost went into a JV deal with Dude for a fixer in another state.  As you know, I'll go anywhere to make money if the deal looks good.  This one looked great!  He had the property under contract for $55k, needed $30k to rehab and the ARV was $160k.  His hard money lender backed out at the last minute so we started to discuss the JV idea.  Sounded like a no-brainer.
Dude got his real estate training elsewhere (I will not mention where).  When we took Armando's training, Armando encouraged us to be independent in our business.  This was it.  We had all the knowledge and tools to begin building wealth in real estate.  Yes, he had contractors and real estate professionals lined up to help us, but he also taught us enough about the business to find our own resources.  I didn't realize how important that was until we were about to go into this deal.
Affirmation number 1 - Trust no one.  Always perform your own due diligence.
This guy was nice enough, sincere enough and had a good plan for increasing value in that house.  But as Armando says "Safety, Speed, Money".  What that means is 1. make sure it's safe.  If so, 2. move quickly, and then 3. realize the profit.  So many follow the glamour of the "Money" they forget about, or minimize the importance of the first 2 steps.
We started to perform our own due diligence on the property - the numbers just didn't come up right with the comps.  This deal was handed to him by his former training company.  We said - "Dude, you say the ARV is $160k and it's more like $120k - where did you get your information?"  Then we analyzed the contractor bid and saw they were overcharging for a lot of items.  Then, when we encouraged him to challenge his real estate agent, he was hesitant, even a little afraid to call her.  BIG RED FLAGS started flying everywhere.
Some training companies try to make investing easy for their students.  This one company has a program with a network of Realtors and contractors to help students get started with their first deals.  The reality is it's just a lead capture program full of unsuspecting and trusting students.
This poor guy trusted that the deal his training company sent him was accurate.  We ended up backing out of the deal, and even recommended he back out of the deal as well, which he did.  
As we winded down and were at peace with our decision, we took a moment to validate that the training we received from Armando Montelongo was even more valuable than we originally thought.  Even after a year, we took a moment to reevaluate and appreciate how empowered we are in ourselves to make the right decisions in evaluating real estate investment deals.
Even today, if Armando Montelongo himself brought a deal to me, I will still perform my own due diligence.  I trust no one.

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