Beware of the Investor
Almost all of us have seen the ads about how you can buy or invest in real estate with little or no money down, and many residential real estate investors have come to believe that they can do that in the note investing and commercial real estate world as well. They quite literally are trying to do such deals “naked”. They have no funding, no accounting, no legal team or expertise available to help them with their due diligence. They are just looking to make a quick buck on a deal.
As many of you know, I represent investors who invest in various types of deals. My involvement has ranged from dealing with investors when they have already done the deal and come to me for help in figuring out what went wrong, to orchestrating the deal from inception. From that perspective, I want to share with you some observations.
1. “Naked” commercial real estate or note investors are typically bad business associates. They do not have the resources to get things done in a timely manner. They will cut corners and try to be their own lawyer and accountant. I know that sounds appealing, but it doesn’t work.
I received a phone call in my office from a commercial real estate investor. The first question I asked was, “Why isn’t your lawyer calling me instead of you?” The answer was that their lawyer was busy doing something else, which is code for “I don’t care what the rules of ethics say, I’m trying to save a dime and I want to do this my way, not the right way.”
2. Another detriment to dealing with such “naked” investors is that due to their lack of funds, they quite often rely upon hard money lending sources which can be unpredictable and extremely expensive. Not all “hard money” sources are unreliable, but I’ve seen it happen a lot.
3. “Naked” investors are often their own document drafters, which means that they, with their lay skills, are trying to draft and write complex legal documents that apply to multi-million dollar real estate deals. Think about that for a second. Investors who don’t have a few thousand dollars to hire a lawyer to write a document are to be trusted with writing a document that governs a multi-million dollar real estate deal. I’m sorry, but that just does not make sense to me.
I admit that I am biased. The fact that I am a lawyer does not mean that I always want lawyers to have work. I have dealt with ignorant, offensive lawyers who did their best to screw up a deal because they didn’t understand what was going on. In fact, that kind of lawyer is worse than the “naked” commercial real estate investor, and I’ll write about them another time.
When investing in deals that may involve hundreds of thousands of dollars or more, do not try to cut corners by being or associating yourself with a “naked” investor. Seeking competent help from an attorney or accountant at the beginning of the deal can save you time, money and problems in the end.