January 4, 2017

How to Choose the Right Business Partners in Real Estate, Solocast Episode #5

Episode 43:

Mitch Stephen has been a self-employed RE investor for 20+ years. His real estate investing career started at the age of 23 when he read “Nothing Down” by Robert Allen.

REAL ESTATE INVESTOR:
Mitch, together with his wife, Tommi, and his daughter, Shannon purchased their fair share of local houses. Their company, Independence Day, Inc., has bought and sold over 1,400 properties in and about San Antonio, Tx since 1996. This company specializes in buying distressed properties with OPM and the selling of those owner financed properties.

AUTHOR:
Mitch is the author 3 books:

MY LIFE & 1,000 HOUSES:
Failing Forward to Financial Freedom

MY LIFE & 1,000 HOUSES:
200+ Ways to Find Bargain Properties

My Life & 1,000 Houses
The Art of Owner Financing

For more info about these books go to http://1000houses.com/the-book/

EDUCATOR:
Mitch offers Online Education, Group Coaching, and one-on-one Mentorships as it relates to all the aspects of Owner Financing and owner financed properties.

Mitch forged the creation of a mass texting software, LiveComm.com to help solve problems that arise when you get numerous calls from bandit signs and other advertising efforts to sell your houses.

The main reason Mitch wanted this system was to reduce the number of calls from potential buyers (that asked the same questions over and over) to a group of the most qualified buyers, saving time for the sales team. This solves that and much more to streamline you selling process.

What you’ll learn about in this episode:

  • How to choose the right business partners
  • The partnerships that Mitch has entered into
  • Why your partners need to have integrity
  • Why your partners should have subject matter expertise
  • Why your partners need to have strong work ethic
  • Why you should weigh the personal life of someone heavily when deciding whether or not to go into business with them
  • Why you need to outwork your business partner
  • Why you shouldn’t go into business with someone just because you like them
  • Why you need to be different than your business partner

Resources:

Transcript:

Mitch: This is Mitch. And welcome to the Real Estate Summit Podcast. I am your gracious and wonderful-all-knowing-host, of course, Mitch Stephen. I’m glad to be here today, and I am flying solo today. So, am gonna talk to you about partners. Who and how and why partners and maybe why not partners. But, right now, we’ll pay homage to our sponsors and we’ll be right back.

Oh, thank you. Thank you. I love my sponsors. Great people. Go and connect with them. You’ll be glad if you did. Alright, today’s topic is about partners. So, I’ve got tons of partners. In my biggest year which, I say biggest, it was the biggest in volume it wasn’t the most money that I ever made. Because, all I was doing 150 houses that year, purchasing 150 houses, and selling 100 of those houses by the end of the year. Having 50 houses in my inventory on the 1st of January the next year. I had a lot of money at the front door, but I have a whole bunch of money at the back door, because I had it become an experience systems person, you know trying to run it all by myself, and I just shouldn’t cover all the bases.

And if you can’t cover all your bases, people will take advantage of you. So, it’s like 1.7 closings per day, that’s 250 transactions, if you take out weekends and holidays. Not even holidays, you just take out weekends that ends up 1.7 closing transactions per day–working day.

And so, these days are very stressful, and one of the reasons that I was able to do that volume is that we opened up the floodgates in San Antonio, Texas. We told the world–the city, 1.7 million of them, that if they could bring a great deal on property–you know a property that we can buy for 50 cents to a dollar and we would put up the money and partner with them, and they will no longer have to look for money, we’ll just split the deal 50-50. You wouldn’t believe in a short period of time, how many people showed up. There’s a line in our front door, every day. And we were looking at deals like mad men.

It sounds great, it sounds fun. But, let me tell you this is where we met, the good, the bad, and the ugly and boy, some of them get ugly because we were partnering with people simply because they had found a great deal, and we were not factoring anything else into our decision. And we met some real disease let me tell you.

So, let me just tell you a little bit about the partners that I have. Let me say the partners that I have had, I’m talking about legitimate partners and formed an LLC, we went into some kind of business together. Not the partners, like the guys who bought house for sale and I put the money and we partnered on that 1 house.

By, the way, the good thing about partnering, buy the house with that–if we didn’t’ have fun working with that partner or we saw some deficits, or we say some tendencies that we didn’t like or scared us. Usually, liability tendencies like the inability to tell the truth, the inability to collect cash at the house and bring it back to the office, things like that, you know. Just the inability to do basics.

And good thing about partnering the house, is once the house is over, we closed, we don’t have to partner with them anymore. You know, one in and done if we didn’t like you, and then the ones that we liked to do business, that were honest and knew how to get that money down to the bank, or into the office and recorded and knew to be truthful about the house, and to the people that they were trying to sell houses to, truthful to everybody all the way.

We started doing houses over and over with those guys. There was plenty of people that I’ve done over a 100 houses with. And I did that with one of my first real legitimate partners, we formed a company. We formed a land company together, a guy named, Sam. He is a humble guy, he didn’t want me to use his last name. I did my first book,

. I do my first 450 deals with partner and in that book his name was Sam Hombre. Sam, my friend. Truly is, he was my friend then, he is my friend now. We bonded together mostly because we were scared. And we wanted– we didn’t say like that back then, but really we wanted to hold hands and walk as a team what we called, house flipping and try to survive and not get ruined.

And so, Sam and I met one day, talking about houses, I was selling a house. He was trying to buy it. I was wholesaling a house, he was trying to buy it. He asked me how I was buying these houses, I told him I was buying these houses on my credit cards and his eyes just flew wide open. I asked him what he was doing, he said, he was trying to get houses under contract and sell his contract to people like me who had a way to find money, and we started talking about real estate on that day. And I don’t think we ever stopped real estate for 10 years after that. I think, except when we were asleep. We woke up and started talking real estate for one end of the spectrum to the other, and never stopped. He was a great partner. But, we ended up fitting together for the right reasons, but it wasn’t really a conscious decision, will you be a good partner for me, or what.

We just started doing little things together and we started doing more and more together and we grew comfortable with each other, and we grew into this partnership, we formed a corporation, and we took off. We did at least some, 450 houses together, and by the time we finished that many houses, no longer needed the whole hands, we both grown up and we understood what we wanted to do, and how to do it. And it was time for us to become solo entrepreneurs. And we divided everything that we had into 2 piles. One guy divided into piles, the other guy got pile. And we divided down the house that we had down in the middle, and we were on our way, but we still have lingering commercial properties for a long time. But, it was a great partnership, but it wasn’t thought a lot put into it, it was just a partnership that happened. Because, we started doing a deal together, then another deal together, then a couple of deals at the same time together, and then more deals together, and finally we said, we’d better open up a corporation, and decided how we’re gonna do this all legal and legit and become partners. And so, that’s how that partnership started.

On the second partnership, was a little bit different. There was more thought into it, but also have a long track record, ‘cos one of the guy that Sam and I were borrowing money from, his name was Carlos. Carlos was in our eyes, a seasoned, mature, successful businessman and he was loaning us money. Carlos courted us long time before he decided to loan us money. And when I asked him he said, “Okay, boys we’re gonna loan you money”. Then, we asked Carlos, “How much money do you wanna get out”? And I’ll never forgot what he said, he said, “You can’t get out enough, you can’t get enough money”. And so, Sam and I took this as a personal challenge. And that’s when we open up the floodgates that started the whole city that we partnered with him that brought us outstanding deals.

We met Carlos because of high trust factor. Carlos wasn’t my first choice, he was my second choice. I didn’t know Carlos. My friend’s a CEO in the bank referred me to someone, and me and this guy got along great, and we were ready to consummate this business. He brought in his attorney, to sit down with us, to brought the documents and write down what the relationship should be, and the attorney completely screwed the whole relationship. The attorney didn’t want to be in the real estate business, haven’t been in the real estate business, didn’t think that his client should be in the real estate business, and the just poo-pooed all over the meeting, until it just turned into crap, the whole meeting and I walked out of there, and we didn’t– we didn’t partnered. Turned out to be a good thing, ‘cos you know, fast forward 20 years after that event, I always had known that, I’d known that since that day, and I always kind of followed him. I followed him through the talk at the bank, and through people that I knew, and it turned out to be good that I wasn’t partner for that person. So, I learned to believe that things happened for a reason. When that partnership got shut down, I went back to the CEO of the bank and asked my friend, Steve, if he had someone else in mind, because that lawyer had ruined that potential partnership. He told me about Carlos. And it wasn’t really to be partners with this guy, I was looking for money to fund our deals.

And so, Carlos funded hundreds and hundreds of deals for Sam and I. So, when you do business with someone on that level and that closely, you learn who they are. And Carlos was certainly a man of high integrity, the trust factor is very high, he was the person that we admired and was admired by many. He was very wealthy and he had created and sold several major major businesses. After Sam and I went on our own ways, and I took some time off for a few years, then I thought, “Well, I wanna get back into the game”, about that time I had a tragedy happen in my life, 30 days later 9/11 happened, you know, it was just really a bad time all around the globe. I needed to get busy, and get my mind occupied, and so, the first person that I thought to call was Carlos. And I went into the mobile home business with Carlos, and we bought about 140 mobile homes in 6 weeks. And all these mobile homes where other people parks, and so or our mobile homes are sitting on rented lots, and we owner financed the mobile homes.

I picked Carlos, the reason why I [INAUDIBLE] I picked Carlos because of his high trust factor, high integrity, and his financial status. Because, I was gonna need deep pockets to keep rolling. I didn’t necessarily picked him because he was gonna do a lot of work, because he also has an infrastructure in the office already. The man has financed hundreds and hundreds upon hundreds upon hundreds upon hundreds of cars, that were sold on [INAUDIBLE] so, he know about financing. And he seemed like a good fit, someone that I could trust, I didn’t think that he would match in work, though. But, I was willing to work more and he’s gonna be fundamental in funding, everything. So, that was the balance there.

And then, I had another partner that I picked up, because I got so good after the relationship with Carlos and the mobile home thing kind of went it course and we got all the people in the house making payments and there’s not a whole lot to do anymore. We kinda sat down, the private money just kept coming in. I kept finding private investors, and more private investors and then the private investors I had, gave me more money. I started to buy some houses on my own at that time. Just picking up, stick to single houses and buy them for x and owner financed them for two x, plus the down payment and that was doing pretty good. I raised so much private money, that I couldn’t spend it all. I couldn’t find enough houses, and so, I had been rubbing shoulders sort-of with this guy named Raymond. And Raymond was a very talented person. He had a long history, he had a degree in business. He is a licensed CPA. He had a degree from University of Texas, he was a licensed CPA, he was a managing partner, when I say managing partner, that’s like when you have a pure managing partner at law firm, you know, you got your name on the door. Well, he was the managing partner for Coopers and Lybrand in Austin, Texas for 15 years. A highly responsible job, and later become Pricewaterhousecoopers. So, he was managing partner for that company. He was taking the business in public. He was doing the ventures. He was raising capital for– you know, I can’t explain everything he does, because its high level above my head, I don’t even know. I knew he was a highly sophisticated, highly responsible and honest man to be in that position. And when it came to the time I had to pick up a partner, I wanted to start a hard loan business, because, I found I had too much money and I can’t get it out. And people were sitting with money on their sidelines, they would end up losing that money, somehow. Or in some cases, just tying it up to where– when it’s time to go over and borrow it, they don’t have it anymore. So, the way to avoid that,– hard money business and loan the money out myself to my competitors at 50 cents on a dollar. So, when if the house is worth a $100,000 I loan them up to $50,000 -$55,000 or $60,000 maybe at the most, and collect the spread of between what I was paying my private lenders and what they were paying me. And I collect spreads and probably a couple of points and if ever they defaulted, I would just take the houses back and I would get the houses at great deals, as if–the same kind of deals I would want if I was just trying to buy the house directly.

So, I wanted to start this hard money business, so I took on this third partner, when I took him on for certain reasons, you know, this is a thought process. It wasn’t like the first one where I just morphed together. It wasn’t like the second with Carlos, where I had a long relationship with him and I knew who he was, and I dealt with him for a long time. This guy’s pretty much someone I was just meeting for the first time. But, we did researched on each other, that’s another thing.

You know, when you decided to go on partners with other people, you need to know them really well. We put our financials out on the table together, side by side, there was no– because, you don’t wanna go into business with people who are broke, that have financial problems, because desperate people do desperate things. So, you got to make sure that your partners are a certain level on the rise or are running in the background, like they appear to be running in the foreground. And so, Raymond and I picked each other, after researching each other. And we went into that business, let me just say, I was in the business with Sam for probably, close to 8 years, maybe 10 years, if you wanna count on some things that dangle in the background for a long time. We’ve got 10 years, I was partners and still partners with Carlos, we still collect some of those that we created back in 2003, so that’s been in 12 years.

Raymond and I formed our hard money loan company in 2005, so that’s been, you know about 11 years, am a good partner picker and am a good partner, that’s what I wanna talk to you about, is how to pick partners. I have a fourth partner right now, but he found me. And he found me for reasons I picked Carlos. He found someone who is an expert in the field that he wanted to go into, i.e. me, take my humble hat for a second, am an expert in my field. And he picked me for financial ability, he was finding a lot of deals but he wasn’t able to fund his deals and it causes him a lot of stress and sometimes, not making a look back. So, he wanted to solve that problem, and so, I can solve the problem. He also picked me because I also have an infrastructure. He picked me because I have an office, I have a secretary. I have desks and chairs, and computers, and he really didn’t have to reinvent that, I already have that part handled. He liked how my office was. Every office needs improvement, believe me. But, in every day, every week, but you know I had it going on. And we had something to start with that was really pretty good. We had book keepers, we had book keeping systems, and we had everything. And then, last but not the least, he picked me because I have a decent reputation in the town that I lived in and I worked in, and those were the 4 reasons he picked me. And am gonna say, this is the reasons–some of the reasons you should consider when you picked a partner. I mean who is a good partner, what is a good partner. Why is a person maybe a good partner? The number ingredient has to be integrity, you cannot afford a person without integrity. You pick a person without integrity, you picked a real con, a filthy partner, or a dirty smelling partner, one doesn’t have a good reputation around time, that’s gonna rub off on you. Whether you do business with him right from that day forward all the way, people still gonna know that person, and as a bad person. And you know, good reputations are built over years and years. Bad reputations can be built in weeks and months. In trying to get rid of a bad reputations, it is very difficult, to charge undo what people have said, you know, it is almost impossible to undo what people have said in the past. So, you got to have integrity and reputation, please. And if you don’t know who the person is, you got to spend some time. I mean, hire a private detective for 200 bucks, and do research on this person if you don’t know them very well. It is a big sin, if you wanna do business, not really know someone, you know. At least have done a research. 

Number two, it will be nice that you are picking with expertise in the field that you are picking him for. I mean, you know, when my current partner picked me, I was an expert in what he wanna do. There’s no even doubt about it, you know. He wanted to do houses, and I’ve done 1,500 houses. He wanted to do houses in San Antonio. I live in San Antonio, I did my 1,500 houses in San Antonio. And he wanted someone to help him beat a learning curve. I mean, it took me 20 years to where i’m at. This kid’s gonna be, in 5 years, close to where it took me 20 years to get. Because, he picked the right partner quite frankly, am not picking up own horn here, but am saying the guy picked the right partner. Pick a great partner, me. It took him a little while to get to me. I mean, he improved himself, he proved himself, he was not stingy, he brought deals to the table really didn’t have to do anything with me, sometimes. He borrowed and share them into the organization, and volunteer to help my bottom line, and when I saw that kind of attitude, and I saw the honesty and integrity in him, I said yes, actually, it is a little more complicated why I said yes, I mean, we ended up having like 33 deals together and my office was going crazy, trying to keep our deals separate from my deals and finally, the office had enough and just sat us both down, and said, “You guys gotta form another company and break all this out of my personal company, because it is confusing everything”. And then, so we did. Here we are, partners. 

Number three, is work ethic. What is work ethic of a person that you are thinking, teaming up with? Do they have a history in getting up in the morning and going to work and focusing–they might have a great history but, what is their plan going forward? Do they still, or they still wanna get up in the morning and go to work, every day, 5 times a week or 7 times a week as it maybe when you are starting on to do business to proliferate the business or is this person just wanna be a money guy, and he’s gonna be playing golf, while you are busting your arse, I see it work both ways. But, usually, when you are just the money guy, the arse buster out in the field, leaves when he comes of age financially. You know, when the arse buster no longer needs the money men’s money, then there’s no reason to be partners anymore, because the partner is just out playing golf every day. 

So, that what will happen in that relationship, so you need to know, what the person’s work ethic is, and what it was, and what’s the work ethics gonna be moving forward. Is he gonna work, or he’s not gonna work. You need to weigh that heavily. Another important thing check to see–make sure that the person that you are going to partnership is likely stable both financially and emotionally. Because, things that happens in your partner’s life affects you. No matter what, no matter how, it seems like, it is none of your business, but it becomes your business. Even things like, divorce, for heaven’s sakes, divorce, and there’s a way to set up companies by the way, using trust and stuff, so that either partner gets divorce, the spouses can’t mess up a business whole over it. You need to talk to a guy named, Randy “Mr. Land Trust” Hughes about that. And you can find him here at the podcast at the Real Estate Investor Summit Podcast archive series. 

So, what am looking for a partner now, this is what I think about. I think about, if am looking for a partner, there’s 2 kinds of partners, really. There’s partners with money, that don’t have expertise in the business that are not going to help you build your business, they’ll just gonna supply you with money. There’s probably the weakest type of partner, that there is. Because, you are only getting the money, and it takes more than just money to run a business. I would much rather have a partner that had a profile like this, yes he has money, yes, he can help fund the business, or rake the capital, but he also is an expert, and has been long way down the road in the business that am trying to be successful in. Now, at this point of conversation, with this partner, I only not get the money, but I am getting valuable insight and long history of experience from the man. 

And then last but not least, if I had a perfect world, I would want that partner also, to show up the office with me every day and put on the armor and go to work right next to me, you know, be on the horse, right next to me as we charged in the battle every day, and that would be the perfect partner, the guy with the money, the expertise and is willing to work alongside with you. 

I always figure this one thing, though. If this partners bringing everything to the table, then I have to outwork him. Because, he is bringing the money and he is working alongside of me, and he’s not gonna learn it from me. I am going to learn from him. So, I have to outwork him. I mean am the guy that works the weekend just to have someone work the weekend. Not him. I am the guy that stays in the office, not him. And I Malagasy figure, in this situation since am coming to lower the man on a totem pole, in the partnership will be me, then I have to outwork this person. 

And at some point, this person deserves not to work as much against the more powers at home, because he brought more to the table. That’s a con, though. Or you bullet proof to get and set up a system, where you can both can spend more time at home. And let the office run the business.  And that’s where relationships should go. 

You know, I wanted to talk to you title about partners, I think, we probably can talk about it, for hours and hours and hours. But, I think that in a nutshell, a good little conversation to review, if you are thinking about having some partners, don’t get partners because you like each other. Don’t get partners because you are friends. Don’t get partners because, you are exactly the same. You really want partners that are exactly not the same. Like, am really good with X, and this guy’s really good with Y, and because they have to 2 bases covered, this business could really be strong. Trying to have people that have opposite house that you have. And that’s why you should partner, I mean if you are both good at selling houses, that’s not a reason to be in a partnership, you needed one guy just to keep buying houses and the other guys just keep selling houses. Now, we might have a plan, you follow me?

And don’t just pick partners because you are friends. Number one, you’ll lose a great friendship over it. Number two, the business is not gonna work, you to think about it, way harder than just, “We’re really good friends and we get along, get together and we liked each other, so we’re gonna start this business”? That has been the recipe for many many many many failed businesses, I can promise you. Luckily, I haven’t lived it, but I’ve seen it.

All right, my friends, this is Mitch. I hope you like the conversation about partners.