Do You Always Need Diligence?

Podcast Episode 65:
Diligence with Friends and Experts.”

It doesn’t matter who you are working with in a real estate deal, you still need to do your diligence. This means asking questions and reading the documents—even if dealing with a friend. Don’t assume an expert is infallible either; professionals can still be wrong or make mistakes.

Download the audio file HERE and the text/handout HERE.
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Diligence with Friends and Experts:
A Tale From The Diligence Trenches

Here at Investor Lawyer we talk a lot about diligence. We harp on how important it is to undertake enough diligence to say, “I have done due diligence.” When you can confidently say, “I have done my due diligence,” you can then make a buying decision. Sounds easy. Find a property or investment, work your way through the diligence items, and make a decision. Like all theories, putting it into practice sometimes has speed bumps.

One major speed bump on the road to due diligence is the presence of an ill-informed friend or so-called expert. We all tend to believe what our friends and experts tell us. Don’t do it!!! Here, in his own words, is one investor’s account of a couple of friend/expert situations (slightly edited for flow).

Hi Barry: RRSP Loan inquiry

Long time no hear, from me that is, as I’ve just finished listening to you on “Tales From The Trenches!” Just last night, I sat down with a paper, pen, and AREA contract and listened to your detailed explanation of this contract you went through in March of 2009. There’s always something else that makes us go…..oh wow, I didn’t hear that all the other times I’ve listened to it. I’ve made myself a word document that is now on my USB and will accompany me on all offers. Of course you know that you make an educational impact on us, but please don’t forget that all those recorded meetings are still making an impact on us – A BIG thanks for that!!!

I’ve done a couple of RRSP loans already with 2 REIN members and wondering what a typical time limit would be to complete the documents from your office? I know there will be a lot of questions, but I’ll fill you in the best I can for now.

This would be a loan to a friend who wants to buy an existing Halal grocery store.
– The loan amount would be $40,000 from my Olympia Trust account, which is ready to go.
– It would be for 1 year, monthly payments (We haven’t agreed on an interest rate yet).
– 1st payment January 1st, 2014.
– Mortgage can start when lawyer’s office can have it ready.
– He can pay $20,000 in March, which I’m OK to put in a contract.
– I’m not sure if your office would be OK with it or not, but he can use you as a lawyer as well, if not, it would probably be a Law Office in Calgary.

That’s all I can think of at the moment.

 

Here’s my reply:

Hi there and thanks for those kind words.

With respect to the RRSP I note that you have done a couple already. If you have a lawyer that you have used and you were happy with the service and the fee, then you may be best served by continuing to use that lawyer.

As to the loan itself, it has to be what I believe the CRA calls a “qualified investment.” I don’t think a straight loan is a qualified investment. What security is he giving you for the loan?

I look forward to your comments

Cheers, Barry

 

To: Barry McGuire
Subject: RE: RRSP Loan inquiry

Hi Barry:

Well, in my due diligence stage, my friend could not give me any security, as I asked to put the loan against his home and he couldn’t do it because he plans on building a new home in the new year. I simply told him, I need something to back this loan up and it fell through. We currently own a Rent-To-Own property together and he asked to use that as security and I said no, I want the books clean when it comes time for our Tenant Buyer to purchase, which is the end of the year.

I did ask him a lot of questions and it’s obvious he has not done any homework on this grocery store. He told me that the seller wanted more time with his family, as the business was eating all his time up. I then asked my friend to go and sit with the current owner, if his motivations are what you told me, then maybe the owner can loan you that money and work it into the deal.

I’ve been trying to loan out more RRSP money and it amazes me how many REIN members don’t expect all the questions that I ask. I’ve had one member in Ontario, that when I told him I read the offering memorandums from front to back, he never even sent it. Another mortgage broker sent me a potential lending opportunity and the property owner didn’t even own the land, just the trailer on it, so I asked, where would my security come from, if this trailer got moved and he had no answer. I thought, how can a respected mortgage broker send me something like that. Either I’m reading too much into it or just not experienced enough—I’m going with the “reading too much into it” part.

 

So, there you are! Our investor dealt with a friend and co-investor who wanted to borrow money but did not want to provide any security. Too many people in this situation would have done this on a handshake or perhaps a promissory note. When the deal went bad because the friend hasn’t done any diligence on the grocery store and has no experience in the grocery store business, both the loan and the friendship would be gone. Demand paperwork, then read it thoroughly, twice or three times. If it doesn’t make sense, ask more questions.

When experts like the mortgage broker send you deals to consider, pay no attention to the status of expert. And, keep reviewing your Tales From The Trenches™ and written material. Tales are ‘Gems’ that will save you time, trouble, and a lot of money.

Lessons Learned:

  1. Be careful dealing with friends or experts. Be even more rigorous with them than you would be with any other investor. Take nothing at face value.
  2. Read everything and ask lots of questions.
  3. If you don’t get the right answers, don’t do the deal.
  4. An unsecured loan is not a qualified investment for your RRSP

 

Contact Barry McGuire now. Alberta real estate needs an Alberta lawyer.

Exercise That Diligence” image by Alan Levine used under CC Attribution 2.0 Generic.