04 March 2011


This blog post is taken from the book

“You want to learn from experience, but you want to learn from other people’s experience if you can.”
Warren Buffett
In writing about my mistakes, my purpose is that I will spare you, the reader, from making similar mistakes. Before touching on basic investment planning and information in subsequent blog chapters here is a story of one of my costly experiences followed by tips you can use to prevent similar missteps. A number of other stories in following blog chapters cover a wide range of other types of my costly investment errors each followed by tips to help you to gain more and lose less.
My greatest weakness as an investor is that I trust people. When they say something or show me an investment plan, I trust that they are telling me the truth. I trust that when they say it is a good investment, they mean it. If they mount a great presentation I trust what it says. If they say they are experts I believe them. Oh boy did my trust get me into trouble!  I trusted so much that I did little checking into either the presenter’s background or the deal. I saw only the dollars I would make. I was a high risk investor.
We attempt to buy a million dollars of property with $70,000 down
“Rich people focus on opportunities. Poor people focus on obstacles.”
T. Harv Eker
Being a novice at purchasing a package of real estate with low money down provided an intense learning curve. We were so inexperienced! There is a saying “buyers are liars” but vendors can also be liars, I found out to my sorrow.
Amusingly, however, the situation also won my lady friend and me trophies from Raymond Aaron, a real estate guru and coach, for being the “Players of the Year.” He told envious meeting attendees that we had bought a million dollars worth of property for $70,000 down. None of them knew that the deal had already collapsed.
My friend, (I’ll call her Ann to protect her privacy), and I enrolled in Raymond Aaron’s Monthly Mentor course. We thought it was going to teach us how to buy real estate, but its focus was goal setting.  However, encouraged by networking with others members we connected with Paul a member of the Real Estate Investment Network (R.E.I.N). Paul (not his real name) told us he had a lead on 7 pieces of property worth at least a million dollars that could be purchased with only $70,000.00 down. He was looking for partners with money. We knew nothing about Paul but he seemed self assured and sounded experienced.

“Often in the real world, it’s not the smart that get ahead
but the bold.”
Robert T .Kiyosaki
Meeting Paul and his friend in a coffee shop we decided to form a joint venture to purchase these properties. We knew nothing about Paul’s background but he sounded knowledgeable. Paul would be the real estate finding partner, his friend the carpenter to make repairs and Ann and I would provide funds. We would all be equal partners.
Tailoring a R.E.I.N joint venture agreement to suit our circumstances, Paul took it to a real estate lawyer. The lawyer recommended that we incorporate a company to hold the properties instead of writing a joint venture agreement. 
With the vendor’s addresses in hand we drove around to see the exteriors of the properties that Paul introduced us to. They were a 10 suiter building, two side by side duplexes, a condominium apartment, a half duplex and two houses, one with a basement suite.
The vendor met us and first showed us through the newly painted vacant main floor suite of a nice looking well located up/down house. He said it had already been rented for $850 a month plus utilities.  The basement suite was currently rented for $450.00 to a lady with several cats. The vendor said she had been given a rent increase to $500.00.  It turned out that this house was the nicest of the whole batch.  It certainly whetted our interest.
We signed a conditional purchase agreement in December for $993,000.00 including vendor take back mortgages on most houses totaling $189,920.00. We wrote in conditions of mortgage assumptions, inspections and verification of rents. The vendor provided information about mortgage balances and payments on the properties saying that all mortgages were assumable.  Our lawyer advised in writing that legal fees for this deal would be $5,000.00 plus $2,200.00 of disbursements.
Setting possession for February 1st, we began inspecting interiors. Taking on the financial partner role, I made spread sheets; constantly updating income projections, I had also anticipated repair expense, and estimates of our likely return.
Information provided on the ten suite building indicated a 9.9% cap rate if rents were increased by $25.00 per unit. The numbers looked like we would have good positive cash flow of about $14,000.00 a year after allowing for normal repairs, a 5% vacancy and several small rent increases. We were excited!
Pretty soon it became apparent that Paul’s carpenter friend was not contributing.
We dropped him out leaving three of us to complete our company incorporation. For our protection Ann and I held 51% of the voting shares between us since we were the only ones with anything to lose. We each placed $40,000.00 in the corporate bank account for the $70,000.00 down payment, plus legal and other expenses. Neither of us had additional funds that we could easily contribute.
Then problems reined down on us. Initial inspections of the older apartment building disclosed many needed repairs: carpets to replace; painting to do; and suspect boiler leaks.
Regardless of attempts to persuade him otherwise the second mortgage lender on the building would not let us assume his mortgage. He would have to be paid out. That meant refinancing.
We made an application to a trust company, the current lender, requesting a new mortgage to include $30,000.00 or more for required repairs. Following their inspector’s on site review they required us to obtain a number of reports before they would render their lending decision. They requested a value appraisal, engineer’s reports on roof and boiler systems, and an insurance appraisal. We would also be required to pay to the trust company a 0.5% fee based on mortgage value for their review. We grudgingly accepted, ordering the reports, but expenses were now beginning to badly erode our reduced reserve fund.
 While our purchase price for that building was $300,000.00 the appraisal came back at only $285,000.00. So we negotiated an amendment with the vendor to reduce our contract price by $15,000.00.
My next inspection disclosed several problem tenants that were living in the two run down side by side duplexes. Renovations needed were; paint, replacement of damaged flooring and rotted fences. Several appliance and roof replacements also loomed on the horizon. The vendor said that rent increases had been given out. Up to $750.00 a month each from the $650.00 the tenants told me they were presently paying.
Then we discovered that the vendor did not even have title to the duplexes! He was not even the owner!  His father was. The vendor assured us that his father had agreed to sell.
When the trust company’s mortgage approval was finally received on the 10 suiter, we negotiated a $5,000.00 discount for cash payout of the second mortgage. That would provide us extra funds to offset our rising costs.  However the trust company’s mortgage approval letter added further inspection requirements. These were to be obtained from Emergency Response Department, Building Inspection, utility provider, and an Environmental Law Centre search. It appeared our small payout gain would also be eaten up. Our hearts fell when we discovered we would have to update the fire system to install wired-in heat detectors in every suite. We were relieved when we were able to make a deal with the vendor to cover this expense.
A number of apartment suites and one house was still un-inspected. Looking at that older house on the outside it had water stains on its soffits and stucco walls that to me looked problematic. The stains could be indicating roof and interior damage caused by ice damming, and the potential for mould to start inside the walls.
Time was moving on but our initial requests for information, rent verifications and full building proforma had still not been provided.
Since I was about to embark on a preplanned five week trip to India in early January, Ann and Paul took over. Our lawyers had not received information or adjustments from the vendor’s lawyer so they advised Paul and Ann to extend possession date.  It was extended to March 1st.
On my return in mid February I found out that Paul had cursorily inspected the other properties, without making repair lists. To my horror I learned he had also signed off all conditions without ever having received rent verifications or an actual expense proforma!
Nor had the vendor’s lawyer prepared any of the adjustments yet! Backing out of the deal at this point would mean deposit forfeiture but it was beginning to look like the necessary repairs could bankrupt us in the process.
Telling Raymond Aaron at a meeting in February about our purchase I asked about not having received rent verifications. He replied
  “There is no reason a vendor would not provide this information unless he has something to hide.” 
Now I was doubly concerned.
“Wealth measures how much money your money is making and therefore, your financial survivability.”
Robert T .Kiyosaki
On March 1st we finally received a very simple building proforma.  It did not include caretaking or grounds keeping at all, and indicated different revenue and expense than we had been told. I was very upset.  The other partners were relying on my numbers but with all the extra costs added there was no longer any cash flow left in my projections. It was becoming very dicey. Paul “poo pooed” my concerns saying it was still such a great deal. Of course he had nothing to lose; only Ann and I were at risk.
Our lawyer seemed to be sending out a number of uninitiated letters to us which we asked him to cease. We felt he was just trying to make himself more money. Days passed. Still no information from the vendor’s lawyer, so possession was moved once again first to a date in April and then to May 1st.
In desperation our lawyer’s staff began to prepare the time consuming adjustments with information I submitted. May 1st passed by, and still no verifications were forthcoming. Finally our lawyers arranged a face to face meeting in mid May to see if the deal could be saved.
In a heightened state of anxiety Ann and I went to the lawyer’s office. Facing the vendor and his lawyer across the board room table we finally learned the truth. The vendor had to disclose that there were actually a number of vacancies, including the unrented main floor of the first house we were shown five months before.  Then the vendor sheepishly admitted that rent increases had not been given to any tenants after all. We were thoroughly annoyed to have been deliberately cheated. Perhaps the vendor had seen us as easy marks for his cheating scheme. Our spirits deflated. Any last possibility to make the sale work disappeared at that table. 
The vendor’s failure to provide information requested in the purchase agreement gave us the opportunity to walk away from the sale without forfeiture of our deposit. Our lawyer suggested that a law suit for damages would be expensive so that idea was dropped.
We learned later that the vendor’s lawyer was notorious for his practice of pushing adjustment preparation onto a purchaser’s lawyer to save his client money.
We were shocked to be presented with a bill for $11,357.00 in legal fees. They included charges for unnecessary correspondence work we had earlier chided our lawyer about. We finally settled the total bill for $8,000.00 with the senior partner.
Three months after our settlement was paid we were surprised to receive a letter from our lawyer. It said that two other legal bills were still outstanding for mortgage transfer work by other lawyers. No way were we going to pay the lawyer any more money. In light of our total settlement we refused payment and our lawyer ultimately had to settle with the other firms. 
After this sale collapsed Paul found another property to purchase. An old three story combined commercial and apartment building in a strip mall style. We looked at it from the outside and completed another conditional offer.
My inspection of this building again yielded expensive potential problems. An unfinished part of the basement with cracked concrete and soil floors showed signs of past water problems. The two floors of suites above the offices were in need of painting, carpets and some renovation but were livable and occupied. The parking lot at the rear of the building was in need of patching.
We discovered that the commercial area tenant was a government department whose five year lease was about to expire. Being the only commercial tenant their possible move out could leave both the main and basement levels vacant, a loss of over 60% of the revenue.  That was likely the vendor’s motivation to sell.
We didn’t need any further inspections to tell us to drop it and wisely walked away from this money pit “opportunity” also, with no loss of money. 
“You can’t make  a good deal with a bad person.”
Warren Buffett
We then asked Paul to give up his interest in our corporation to which he agreed. His ideas of good deals certainly did not mesh with ours. In the meantime we had learned more about him. We realized he was too greedy and entrepreneurial with no regard for details or follow up. We had been naïve innocents caught up by our inexperience.
Ann and I paid dearly for these lessons.  Our out of pocket expenses were close to $13,000.00.
  1. When taking on a partner do thorough due diligence into the person’s background and references before agreeing to anything.  Do not presume the person is an expert.
  2. Talk to a lawyer to determine and set up the method by which you will become partners.
  3. Obtain titles to all properties before or as soon as you make your conditional offer.
  4. Verify with the lenders on title all amounts due and whether all mortgages or second mortgages may be assumable.
  5. Do not trust a vendor’s verbal rent statements.  Get proof. 
  6. Request copies and review actual rental lease agreements for length and terms.
  7. Obtain written, signed verifications of rents and utilities from each tenant. When tenant signed verification of rents are not forthcoming in a reasonable time the vendor may have something to hide.
  8. Prepare a spreadsheet to list anticipated expenses and revenue, updating it as new information becomes available.
  9. Obtain an insurance quotation to build the numbers into your spreadsheet.
  10. Limit exposure to expensive lawyer’s fees by doing as much ground work as you can.
  11.  Do you have enough contingency funds to proceed? Costs could be considerably greater than you expect.
  12. Conduct thorough inspections with written repair lists and obtain repair quotations to eliminate surprises prior to being committed to the purchase. Hire an inspection firm to review the property if you have any doubts at all.
13.    Watch for any signs of water problems. Telltale signs of roof ice damming are stains on the siding below the overhanging soffit. Ice damming occurs when freeze thaw cycles gradually build up ice along the roof eaves. The ice expands up the roof pushing under the shingles. The roof eaves are normally protected with a starter course of plastic or tar paper on older homes that does not extend very far up the roof from the edge. When the weather turns warm enough the ice begins to melt and water drips through the soffits and often into the house interior. Moist materials like drywall ceilings and wood framed walls are perfect hosts for the growth of mould. Water in the basement that has seeped in will leave mineral evidence along the joint between floor and wall or along the pathways of flow.
14.    Placing a new mortgage on an old building can be expensive and time consuming. There may be requests for required appraisals, environmental assessment, fire, boiler, roof and other inspections, mortgage placement fees, legal fees, etc. Plus there is the likelihood of having to meet current building and fire codes.
  1. Verify through inspections whether older properties require expensive repairs.
  2. Obtain thorough background and credit checks of tenants with signed lease agreements or you may inherit potential problems trying to collect the rent.
  3. Make certain that condition reports were prepared with the tenants when they moved in. You will need these for damage verification when tenants move out or you will have to pay yourself for any damage restoration expense.
  4. Get assistance from a mentor if tackling something unfamiliar.
  5. In addition when you make a purchase offer:
  • Be sure you list all of your conditions and terms to be provided by the vendor in your offer to purchase.
  • Allow yourself more time than you think may be necessary to obtain the required information or to remove the conditions when buying a commercial property. 
  • If financing is to be obtained allow sufficient time to obtain mortgage approval. A commercial property or an apartment building will require considerably more time to remortgage than a residential purchase. It may take several months time because of the required inspections and reports.
  • Let your lawyer review your agreement before it is presented to the vendor or make one of your conditions a legal review.
  1. Don’t be afraid to challenge your lawyer’s fees if necessary.

Helen M. Hamilton
Copyright 2009

21 October 2009

New Business Paradigm – Engage Today Seminar

The early October four day seminar in Calgary called Engage Today was truly phenomenal. Along with a special address by His Holiness The XIV Dalai Lama, the speakers included Sir Richard Branson, former President DeKlerk of South Africa, Stephen D. Covey, Bill Harris, Tony Hsieh, Vishen Lakhiani, Michael Drew, Rick Frishman and 19 other excellent experts in their fields. Several entrepreneurial presentations impressed me with the direction in which business is moving giving a positive spin on where we are headed.

The Pendulum presentation given by Michael Drew made me aware of a just occurred cycle change that took place in 2003. It affects all of North America. Based on a book called Generations Michael showed us that there are two cycles that interchange every forty years. The first 40 year Idealistic cycle is noted for the focus and development of self interest, and eventually at its 20 year peak it begins to morph into falsity, hidden information, posers, greed, abuse of power and not caring about anyone else. This cycle ends when total self interest is no longer acceptable and a new Civic cycle begins. The 40 year Civic cycle replaces self interest with openness, caring for others and community, truth, authenticity, honesty in business, and transparency. We are on the ascendency of this cycle for the next 14 years portending great things.

Three presenters already enjoying the positive benefits of the Civic cycle change are leading the new direction of business in North America and many parts of the world.

Sir Richard Branson of Virgin Airlines has companies that grew based on caring. I consider Sir Richard to be the poster boy of the new era of business.

Richard’s key business development points are:

  1. Make a difference. Do something radically different and creative that workers can be proud of.
  2. Initially give your full concentration to survival
  3. After the business is over the hump spend your time helping.
  4. Your leader skills are critical.
  5. People skills are most important.
  6. A good leader is not behind a desk. He/she is out meeting people.
  7. Appoint managers with the same philosophy.
  8. Be a good listener
  9. Don’t pose what you think on others
  10. Never lose your temper
  11. Accept suggestions from staff.
  12. Learn from others
  13. Only praise. Lavish praise on employees.
  14. If an employee is not working out see if another job suits them better.
  15. Give staff family time through job sharing, 4 day work weeks, work from home etc.
  16. Have lots of company parties and fun
  17. Humor in marketing is important.

Tony Hsieh the CEO of Zappos.com has modeled his business on the idea of superlative customer service. Zappos is about delivering happiness in a box. They were named in Fortune 100’s list as best company to work for.

Tony’s key business points:

  1. Have a company vision. Whatever you are thinking think bigger.
  2. Chase the vision not the money. Money will follow.
  3. Company with higher purpose leads to happiness, profit, passion, purpose, pleasure. What is your higher purpose?
  4. Maximize customer service. Give more. Focus on after the sale.
  5. Marketing by word of mouth customer referral.
  6. Company culture is of first importance. Other things flow from it. Strong cultures make a company great.
  7. Employees write the culture book
  8. Performance review based on company culture
  9. Fire employee if bad for company culture
  10. Commit and stay aligned to your company’s core values
  11. 5 week training regardless of background. Even a lawyer or accountant works first in warehouse then moves into call center.
  12. End of first week of 5 weeks of training they offer $2,000 plus a bonus to anyone who wishes to leave. Those that stay become the best employees.
  13. Motivation versus inspiration. Inspire employees through core values. It comes from within the employee.
  14. As a manager how can I remove obstacles for my employees. Provide education or mentorships. Teach management and communication skills.
  15. Recognition for promotion for someone. Every department has a different way to be noticed, Congo line, cow bell, whistle etc.
  16. 10% to 20% of manager’s time is spent with your team outside the office.
  17. Commitment to transparency through internet, newsletters etc..
  18. Happy people are more efficient.

Culture Committable core values

  1. Deliver wow through service
  2. Embrace and drive change
  3. Create fun and a little weirdness
  4. Be adventurous, creative and open minded
  5. Pursue growth and leaning
  6. Build open and honest relationship with communication and transparency
  7. Build a positive team and family spirit
  8. Do more with less
  9. Be passionate and determined
  10. Be humble (hardest to do)

When hiring ask “How lucky are you in life?” On scale of 1 bad, to 10 great, don’t hire the 1s. After first 90 days of training you can get the picture. If not a good fit it becomes obvious if person is egotistical or there’s a values disconnect.

Employee Happiness framework

  1. Perceived Control Trust employees to be self responsible
  2. Perceived Progress Create perceived progress by creating progress levels
  3. Connectedness Employee engagement is employment productivity
  4. Vision / Meaning / Purpose Being part of something bigger than yourself

Tony’s Recommended books

Vishen Lakhiani of MindValley.com with headquarters in Malaysia. His company was named the world’s most democratic work place. They have 55 employees from 21 countries.

Vishen recognized four states of mind

a) Negative spiral

b) Current reality trap

c) Stress and anxiety

d) State of flow.

He moved from stress and anxiety where he couldn’t function and switched to a spiritual view. He recognized that thought + emotion = attraction. He changed his mind set and moved into flow by doing a lot of spiritual reading. He learned that being in the flow magnifies.

Vishen’s key points for business development:

  1. Happiness comes from the journey not the destination.
  2. If you do not enjoy what you do you cannot be successful.
  3. If you love what you do and have big dreams even a maple syrup taster can be successful.
  4. Growing a business is a mind set
  5. Happiness is the new productivity.
  6. Work became fun
  7. Team vacations
  8. Great company built from employees
  9. Going in a state of flow fully immersed in what they are doing – a state of supreme activity

“Notice when flow happens and make a conscious effort to stay in the flow” —Tony Hsieh

Ten Tactics to improve employee performance

1. Gratitude – daily

  • Write comments of appreciation at gratitudelog.com
  • What you appreciate appreciates. It increases happiness by 25% after 30 days

2. Awesomeness report – weekly

  • Celebrate what went right each week. Stories and new innovation ideas
  • Awesomeness bell – ring in moments of sheer awesomeness
  • Wonder woman statue – oath of awesomeness for new employees

3. Profit sharing – paid monthly

  • Started lower but now pays 10% every month to employees.

4. The sweet sugar machine

  • Praise makes people flourish. They have software they use to appreciate each other. Pettiness disappeared. Teams became close knot.

5. 45/5 rule

  • Work 45 hours a week but 5 hours must be invested in learning new stuff or attending seminars

6. Weekly sharing and training

  • “You learn from teaching” Steven Covey

7. Group meditation

  • Builds a vision of the future. He uses a guided meditation to visualize your life 6 months down the road in all aspects.

8. Company sponsored fun

  • Parties where employees may bring the two smartest people they know. He may hire them

9. Positive Stamina

  • Shit happens. When it does create a new vision. Focus on the vision not the problem and new solutions will come up.
  • “Manage your mind” Donald Trump

10. Experience and connections

  • The five closest people you associate with will average out who you become.
  • Create friendships in company and clients