“You only find out who is swimming naked when the tide goes out.” Warren Buffet, 28 Feb 2002, in his Chairman’s Letter to the Berkshire Hathaway Shareholders.
Introduction
In late May 2009 I embarked on a project to have a house built in Alice Springs. I bought into the “New Homes” package being offered locally by a nationally known real estate agency. They touted a one stop shop where they promised – in writing – to “oversee the entire project from start to finish.”
There’s a severe housing shortage in Alice Springs. I figured I’d do my part to help out and take on the risk of building. I normally just buy existing houses. Also, the government was offering incentives for people to build. I figured, why not?
It’s now late March 2010. My new house is not finished. It’s been a disaster. The nationally known real estate agency is washing their hands of the whole deal. The builder they recommended has gone broke. A builder, it turns out, that had a “bad rap sheet” several kilometers long. And, the entire business community seemed to know about it; all except the nationally known real estate agency. Hmmm? It’ll cost me an extra $85,000 to have the house completed. Not exciting.
The good news is I seem to learn more from my mistakes than from my victories. So, I have a feeling when this story is done, I’m going to learn a lot! Sometimes, I wish learning wasn’t so painful. But, I didn’t make up the rules of life; that seems to be the way it is. I’ll just have to pick myself up, dust off the dirt and get back on the playing field. I figure, you never lose until you quit. So, as long as I get back on the field, I’m still in the game. Maybe limping a bit, but that’s ok.
This story is happening right now. I’m right in the thick of it. And, I’m at an unpleasant and uncomfortable stage. But, it’s probably just as important to share the struggles as it is to share the victories. So, as much as I’d prefer not to, I’ll tell the story.
What do you mean by “swimming naked?”
What does Warren Buffet’s quote about “swimming naked” have to do with this story? Let me explain.
Warren is talking about insurance. Amateur investors “swim naked.” They invest with no insurance. Then when the tide goes out – disaster hits – they are “exposed.” We then find out who was swimming naked. In other words, who was investing without insurance. As long as the tide is in (the deal goes according to plan and according to promises) we don’t know who’s swimming naked. But, when the tide goes out (deal goes sour) then we find out who’s swimming without a bathing suit (no insurance).
In this story I’m not swimming naked but my bathers are very skimpy; a tight fitting Speedo. Very uncomfortable. I’ve got insurance but it’s not elegant. It’s not sophisticated and it’s costly. Warren Buffet would probably scoff at my lame excuse for insurance. But, it’ll work and it’ll get me out of my present ugly property investment situation. If you find yourself scratching your head right now asking something like, “What on earth is he talking about?” Please read on and you’ll find the answer at the end of the article!
Some expert?
After all these years of property investing, I like to think of myself as somewhat of an expert and less prone to making mistakes. But, this story will show, I still stumble every once in a while. And, I’ll probably make more mistakes in the future. The one advantage I may have is the habit of looking at situations long term and therefore giving myself time to find creative ways to turn a lemon into lemonade. I figure that’s one of the biggest lessons I can pass on to other investors. Property is generally forgiving if you’re patient. So, when you hit “snags” in your property investment journey, remember, you probably have more options available than you realize; options that may turn your disaster into a winner. I can hardly wait to see how I turn my current situation around. But, I have a plan and I have confidence it’ll work.
And now, here’s the story.
Buying the concept
I liked the agent from the first minute I met him; personable, easy to talk to, smiling. All the features that make you warm up to a person. He represented the local real estate agency in their New Homes Division; a trusted, well known and recognized nationwide firm with a very good reputation for service.
“You can build a three bedroom home on a block of land for a great price. No way can an existing home touch it. It’s the only way to go – build new. I’d never touch an existing home. I always build.” He declared emphatically with drips of saliva flying out of his mouth into the dry outback air. He was excited. He came across confident and sure of himself. Even using some old tried and trusted psychological sales tactics.
“If you don’t buy, that’s ok. I’ve got a list of people ready to take action right now.” He stated with a change of emotion; calmness with a touch of arrogance.
I took at quick look at the numbers and the deal stacked up. I could buy this product and, when the home was completed, have a positive cash flow investment property. I based this assessment on the total home and land package price and the current interest rates and the current rental market. It made sense from a numbers perspective.
Now my mind moved to the intangibles. What about the building process? Is it manageable? Are there any hidden pitfalls? Let’s “sus it out.”
“Building is easy. We take care of everything for you. We’ll organize the builder. We’ll project manage the whole operation from start to finish. We’ll just give you a call to tell you the keys are ready to pick up.” The agent promised with the most sincere puppy dog looking honesty.
And then, to add the final touch of credibility, he handed me a document with all these promises written down as follows:
• “The total quote for the new home includes a commission fee to [AGENCY] to oversee the entire project from start to finish.”
• “All communications between the builder and you will go through the [AGENCY] representative to ensure Variations to Contract Forms are completed and costed by the builder for any changes over and above the agreed market price.”
• “[AGENCY] will be inspecting the building regularly during construction to ensure quality and accuracy are maintained.”
• “They will also be there at the Progress Inspections with the builder and lender to once again ensure all expectations are met.”
• “When the final installment is paid on completion, [AGENCY] will ensure the home is not signed off as being complete until you are totally satisfied with the end result.”
• “[AGENCY] have provided this service through the obvious need to provide a link between the design process and the builders in this area.”
I was buying what he was selling. And, why not? He was offering to take all the worries and hassles out of the equation. I don’t even have to deal with the builder. And, it’s all in writing.
What could possibly go wrong? I’ve got all the angles covered. Or, did I?
But, as in every deal that looks promising, I wanted to do some more investigating. For instance, I wanted to see if the agent believed in his own product. This would give me an additional “warm fuzzy” that everything is above board. So, I asked what I considered a clever question. I wanted to gauge his sincerity.
“Do you have a block of land in this development?” I asked as another way of saying, “Do you believe in your product?”
“Of course. My wife and I are going to build our house here.” He quickly and cheerfully responded.
You be the Judge: When land titles were issued, the agent did not purchase a block of land. He may have had an option to buy when he answered my question. Therefore his response may have been true at the time. But, in the end, he did not have enough belief in his own product to buy it. Yet, he assured me he was buying. When he changed his mind about the buying decision, did he have a moral obligation to share this with his trusting customers? The ones who were under the impression that he was buying his own product? You be the judge.
Boy Do We Have A Builder For You!
“I can’t get any of the other builders to quote.” Said the New Home and Land Package agent. “Besides all the local builders are too expensive. They’ve been ripping off the locals for years. This guy will give you the lowest price. He comes in about $70 thousand less than any other builder in town.”
I went along with the agent’s assertions. If he recommends this builder, who am I to argue? After all, I’m hiring this agent and the nationally known and reputable agency to provide guidance and advice. It would be like arguing with your doctor. Sure, you can do it, but does it make sense to ask the doctor for advice then to say, “No, you’re wrong Doc!” It does make sense to ask for a second opinion and it turns out that’s what I should have done. My mistake. A mistake that would cost me tens of thousands of dollars! Ouch!
Again, to see if the agent was buying what he was selling, I asked, “Are you using this builder to build your house?”
“Of course. I wouldn’t use anyone else.” He replied with a big toothy grin.
You be the Judge: The agent never bought a piece of land and never built under his own New Home scheme. Consequently he is not caught in the present trap and disaster he’s left in his wake. How convenient. Did he have a moral obligation to let his clients know he was not buying his own product? Did he ever put a deposit against a block of land? He implies that he did. If he backed out of the house and land deal, did he have a moral obligation to tell his clients of this action? This would have given the clients an opportunity to ask why; “Why are you no longer buying your own product?” Does it remind you of insider trading? When all the guys on the inside start selling shares before the clients are told the “bad” news. Then the clients are left “holding the bag.” You be the judge.
Let the games begin!
The games – I mean project – started in May 2009. There were some warning signs that this may be a risky venture.
First, the agent put up a sign on our vacant block of land. It was a big ugly orange sign declaring another New Home going up. The next day I noticed it was down.
“The owner of the block doesn’t want the sign up until after settlement.” Said the agent. “He doesn’t want the sign up while he still owns the block.”
I didn’t think much of it at the time. But, recently – 30 March 2010 – I called the previous owner to determine why he asked for the sign to be taken down. This is what he told me.
‘Your agent came to my shop asking for building quotes. I gave him the quotes and he told me they were too high. He told me I was ripping off the locals. He told me he could get it cheaper interstate. He told me he would run me out of business by sourcing out of town. So, when I saw his sign up on my block I told him he had a half hour to get it down or I’d tear it down.’
I should have asked him this question a year ago. But, I didn’t. Big mistake.
Next, the local newspaper ran a story on my “National Real Estate Agency New Homes” recommended builder. It was damning. “He doesn’t pay his subbies. He’s gone broke before. He’s got a bad name in the industry.” I called my agent for reassurance. He was glad to provide it.
“The local builders are just jealous. He’s taking all the work from them. They’re trying to drive him out of town. Don’t worry. It’ll be fine.”
You Be The Judge: I have a few questions for my audience; especially anyone caught up in this fiasco. Assuming this agent pulled out of his personal New Home deal, wouldn’t you like to know the date of this event? I wonder if it coincided with this news article? And, again, did he have a moral obligation to disclose this information? Let his clients know? Maybe recommend another builder?
But, his approach was misleading. As he’s providing reassurance that the builder is ok, I’m under the impression he’s using the same builder. I ask myself, “If he’s using this builder, if he’s got faith in this builder; why shouldn’t I?” But, the truth is, he’s not. He’s bailed out. He’s already bolted. Like the inside trader, he’s sold his shares. Is this not deceitful and underhanded business practice? You be the judge.
The games come to an end
Finally, the contract end date came and went. The project was supposed to be completed by 14 Dec 2009. The house was not even close to being finished. Then the builder assured me in writing that he’d have it done by the end of January 2010.
Then on 11 Mar 2010 the whole charade came crumbling down. I had a meeting with the builder and my “New Home” agent at the Juicy Rump Restaurant in the Alice Springs Casino. The agent was no longer associated with the New Home Deals. He’d quit and gone into business for himself. Guess what? He sells new home and land packages. Want to buy one from him?
This agent was the same guy who was not present at any of my previous meetings with the builder and had not provided any of the support he promised. Support promised in writing and I paid for as a commission to the real estate agency. Now, he shows up at this meeting. I figured something was up.
I called this meeting. I wrote a contract addendum and I wanted the builder to sign it; get the project moving again. It was already 12 weeks overdue and we had no plan in place to get the house completed. The builder’s standard reply, “Can’t find workers … Don’t know when I can get the house completed.” How do you work off that schedule? So, I decided to hold a meeting to get the project back on-track. And, my plan called for terminating the contract if the builder would not sign my contract addendum. I didn’t need to bring it. I didn’t need to write it. I didn’t even need to show it to him. The conversation never got that far.
“What have you got for me?” I asked almost sarcastically. He never had anything for me before; why would he have something now?
“David, I can’t finish your house.” He stated with a somber looking face.
A feeling of relief came over me when he said it. I wanted to stand up in the Casino and shout out to the world – “You’ve finally told me the truth! It took you a year, but you did it! Congratulations!”
But, I resisted. Too bad I couldn’t say the same thing about the real estate agent (e.g. telling the truth; coming clean, end the deceipt, stop the cover-up).
“The ABC called me and they want a statement. So, my lawyers typed up something for me to release. Do you want to read it?” The builder talked on for what reason I don’t know. We were having a coffee and he paid for it so I thought I’d stick around long enough to finish my coffee. At least he told me he paid for the coffee. Maybe I owe the casino four bucks.
He slid the paper across the table and I read the one little paragraph dwarfed by the massive blank white page around it. I don’t really remember what it said; something about his company being in receivership. But, all I could think of was how was any of this going to get my home completed. Am I supposed to feel bad for him? Is that what’s going on here?
Let’s role reverse. Let’s say I owed the builder $50,000 and he was sitting across the table asking for his money. And, on top of that, I was 12 weeks overdue on payment. How would he react to my saying, “Well, I had the money but I lent it to my brother-in-law and he hasn’t paid me back yet. So, as soon as my brother-in-law pays me back, you’ll get your money. Trust me.”
Let’s do a multiple choice. Would the builder’s reaction be A) Ok. B) Sure, I understand. C) You’re nuts! or D) I didn’t come here to listen to a story about your brother in law. I want the money now. Or, I’ll get you fitted for a pair of cement shoes and I’ll even let you pick out the colour!”
For me, I selected answer “C”. I looked at the builder as if he was nuts.
I didn’t even look at the agent. I don’t even know why he was at the meeting. Yes he created the whole mess; he let the evil genie out of the bottle. He let the rogue builder run roughshod through town leaving destruction in his wake. There are over ten homes in Alice Springs left unfinished as part of this New Homes Deal! So, he can take credit for that. But, he was never part of any solution and I don’t see that changing. So why was he at this meeting?
The builder and the New Home agent had been giving me excuses for almost a year. It’s just that this time the builder had a bigger more grand excuse. “Hey, I’m bankrupt! Now I really, really, really can’t finish your house!” Let’s face it, it’s just another excuse. One excuse is as good as another. For instance, check out this dialog as follows:
“Hey David, can’t finish your house.”
“Why not?”
“Don’t feel like it”
I probably would have respected him more if he just said that. Remember, one excuse is as good as another.
I finished my coffee. Looked up at the builder and said, “I’ve got to go. I’ve got work to do.” Then I did something I somewhat regret. The builder reached his hand across the table and I shook it. It seemed ridiculous. Like shaking the policeman’s hand after he gives you a $100 parking fine. “Thank you sir.” Only my fine from the builder and my New Home deal is over $85,000!
How do I arrive at the $85,000 figure you ask? Easy, I’ve got two builder quotes showing it’ll cost approximately $110,000 to complete the home. I only had one final payment of $23,500 on the original building contract. Take the difference and you get my fine – my penalty – my punishment – for selecting this nationally recognized real estate agency to manage my New Home project.
Then I made it worst – even more ridiculous – by shaking the hand of the agent! Again, I have no idea why he was at the meeting. I know he didn’t offer any financial assistance; he didn’t offer any constructive advice and he didn’t even offer me another cup of coffee. I suppose it was my “have a nice life” handshake. I just knew I had to get out of their presence and get into the presence of people who could assist with getting my house completed. I gave these guys almost a year – and a whole bunch of money – and they couldn’t (or should I say, wouldn’t) do it.
I left.
“The Project” 30 March 2010
Now What?
Now comes the easy part. Having the New Homes real estate agency and the builder out of the way is a relief. The house should be finished in 8 weeks. I’ll write about it when it’s done.
Swimming Naked can be Embarrassing and Expensive.
Swimming naked is fine when the tides is in. But, when the tide goes out – when the deal goes sour – it can be very embarrassing and costly. And that essentially sums up this story. The tide went out and I was swimming “nearly” naked.
Swimming naked means you have no insurance. It’s that simple. And, I’m learning – the hard way – that every deal I enter should have solid insurance in place to mitigate losses. To make sure if the deal turns to “peanut butter” my losses are minimized. Some people call it having an “exit strategy.”
Now, I’m using the word insurance and that’s probably throwing some people off. “How can you get insurance for a business deal?” Good question. Let me explain.
Believe it or not, I have insurance for this present New Homes disaster. It’s not sophisticated and it’s costly but it’ll work. It’s better than nothing. Granted not much better.
It’s called solvency. I have the funds to complete the project. This is a form of insurance. I can almost hear what you’re saying, “Come on, that’s not insurance!” Think about it some more and see if you can convince yourself that it is. I’m self-insured covering my own losses. It’s just another form of insurance.
Challenge
I’d like to end this story by throwing down a challenge. I’d like to hear from you. What are other ways to insure your business deals? Remember, insurance just means you are covered against a disaster. It doesn’t have to mean you walk into TIO (Territory Insurance Office) and say, “I just lent my neighbor $5,000 can you give me insurance?” They’ll probably laugh you out of the office. But, you could draw up a contract that says you take possession of your neighbor’s car – worth easily $15,000 – until the money is paid back. Isn’t that insurance? Doesn’t that put you in a much more comfortable position? Isn’t that better than stewing because he’s late paying you back and you see him out spending money like a drunken sailor?
By the way, I have much better insurance in place for the new phase of my building project. I’ll tell you what it is – and how well it works – when my home is completed. The new completion target date is 25 May 2010. I’ll keep you posted.
Your Feedback?
So, I’d like to hear from you. If you’re affected by this “rogue” New Homes deal, let me hear your story. If you want to take up the challenge and share your ideas on how to make business deals “disaster proof”, let me know.
No more swimming naked!
Story Continues … Click here to read “Swimming Naked – Part 2“