My daughter recently bought a miniature Australian shepherd puppy. As I was playing with him, I noticed how even the little teeth in his small mouth can make themselves felt when he gets ahold of one of your fingers. This reminded me of the phrase “bit by your own dog” in the business sense.
In my investing experience, I can think of a couple of instances in which I got into house flips or deals with other investors (family members), and I began seeing how the deal was going to go against me due to my lack of due diligence and planning. In my most painful example, due to the enthusiasm and excitement of the opportunity to take a terrible-looking house in a good neighborhood and make it look like one of the best houses in the area, I failed to nail down certain agreements in writing with the other investors. The rehab was managed in a way other than what I would have wanted, and the entire rehab budget was spent way too quickly and failed to get the job even 70 percent done. I realized I was being bitten by my own dog.
In that situation, I did the only thing I could do. I took full control of the project, finished it and liquidated it with as small of a loss as possible.
Here are a couple of ideas to help prevent you from getting into the same situation.
*Have your ground rules and criteria for what kind of deals you will do and under what circumstances. Set certain fundamental rules of business and investing for yourself, and then make sure you stick to them.
Make sure everyone has a clear, written understanding of the percentages of ownership as well as their rights and responsibilities. Don’t let the enthusiasm of getting something going stop you from making sure you have an agreement that is completely prepared and executed and which spells out what will happen in the event of a worst-case scenario.
When you are going into a transaction, investment or deal involving other individuals, ask yourself these questions: What if the other person fails to do what they say they are going to do? Do you have a plan and resources in place to complete the deal? If not, do not proceed.
Attorney Jeff Watson is council to the National Association of Real Estate Investors and an advisor to the Metrolina Real Estate Investors Association, www.metrolinareia.org, which provides education, networking, and mentoring to investors in the greater Charlotte area. You may contact Jeff at firstname.lastname@example.org.