Management guru Peter Drucker advocated recording the main factors of a big decision and what you expect. Six to nine months later review what you wrote, what happened, and reflect on it. He claimed the record, review, reflect process was his best way of acquiring wisdom. Warren Bennis, leadership expert, affirmed a similar strategy. I try to practice what they preached.
While purging old files, I recalled this story. I changed the details to preserve anonymity. The fundamentals convey enough for relevant lessons to emerge.
Ryan and Hazel were my clients. They had owned some apartments for more than a generation. As matter of perspective, I’ve been on hundreds of property inspections. At this property I saw and heard the most intense praise of any landlord from any tenant. One lady said Ryan was the best landlord she had ever rented from. She said he cared about her household, fixed problems promptly and well, and was an all-around wonderful fellow.
Ryan and Hazel loved being landlords. But they reached a stage of life where they wanted to move their assets out of apartments and into assets that required less time and attention. They put their property on the market to begin that process.
The units were in a premium zip code. Their size and unit mix made them quite desirable. We quickly had six offers from experienced operators. Savvy buyers toured the property with their contractor or inspector, then submitted an offer “as is where is, with all its faults and defects real or perceived.” Buyer Bob agreed to pay $2.5 million and waived all his contingencies except financing.
Then, a bizarre event temporarily disrupted the lending market. It was a fluke, like the COVID-19 pandemic. Bob made a good faith effort to buy the asset, but the lending environment had changed too much. Bob forfeited some money and cancelled the escrow.
As the disruption calmed several potential buyers showed interest. Broker Rocky and his spouse, Pat presented themselves as seasoned investors and went into escrow for $2.4 million. Ryan and Hazel agreed to the price, as is. Rocky and Pat were gracious and even flattering. It seemed things would end well.
Prudent buyers perform due diligence. Rocky and Pat showed concern and skill with those responsibilities. But Rocky was a residential broker who was just moving from houses and condos to investment property.
Market expectations for property condition of single-family homes are higher than for rentals. People buying their home, expect, ask for, and usually obtain some adjustment to a home purchase price.
Landlords rarely live on site. Rental owners are buying an income stream. The typical standard is “good enough to collect fair rent,” not model home quality.
Inspecting an income property is prudent and appropriate. Rocky and Pat brought two home inspectors. Experienced investment property inspectors evaluate whether a property is rentable. Home inspectors often evaluate whether a property meets current code.
Ryan was installing water heaters before Pat and Rocky rode tricycles. Ryan installed some water heaters in the rentals, exactly as he did in his own home. There was a time when you could do that.
Now the city of San Diego requires a building permit to replace a water heater. California mandates that the water heater be strapped and specifies how many straps, the height of the straps and how they are to be secured to the wall. Ryan’s most recent water heater installation wasn’t perfect, but none of the previous experienced potential buyers mentioned those imperfections.
When the inspectors took four times as long any of the previous buyers, I became concerned.
I mentioned to Rocky that few apartment sellers bring apartments up to same standard as single-family home sellers. Rocky’s response was they knew what they were doing. Then he lectured me about ongoing maintenance costs. This level of friction was unpleasant and surprising.
Within a few days Rocky and Pat submitted a request for repair, a standard form which asks for an adjustment based on the physical inspection. The request as based on an 80+ page inspection report. A typical apartment inspection report might be 20 pages. Rocky and Pat sought single-family home quality. They asked for a concession far more than I thought Ryan and Hazel would grant. We might have gotten past that giant hurdle. Except …
The request was not short, clean, or gracious. Ryan was deeply insulted to read that his work was substandard. Rocky did not use the exact words, but implied that Ryan’s work was reckless endangerment.
Unfortunately, I’m not a perfect broker. As Ryan and Hazel’s agent I attempted to tactfully explain that the law had changed. Part of my work as a broker is to insulate my clients from another broker’s harsh words. I fell short in this case.
Rocky and Pat asked Ryan a series of questions about repair work and history. Every answer brought more questions and often the implication that Ryan was incompetent or corrupt. Ryan felt disrespected.
Rocky and Pat acted as if they thought Ryan was dumb or crooked to do anything differently than they would. More than once they asked a series of questions about minor documentation or previous repairs. When Ryan’s memory or retrieval system was less than perfect, Rocky and Pat seemed to assume that Ryan was hiding something.
Ryan was interested in a buyer, not a district attorney. Ultimately Ryan & Hazel declined to give any concession to Rocky and Pat. The sellers feared that after the close the buyers would ask for more concessions or make more accusations.
Rocky and Pat canceled the transaction. The last contact that I received from Rocky implied that Ryan or I was going to deceive the next buyer.
Shortly thereafter buyer Bob came back closed on the property and was thrilled. Hazel and Ryan were delighted not to be selling to Rocky and Pat.
In the spirit of Peter Drucker and Warren Bennis, I drew three lessons from this brokerage episode. Each one was reinforced by other lessons from other situations.
I learned to be wary when another person uses flattery early. Those situations seem like they will be pleasant, but they rarely end well.
Some people assume they know the only right way to do something. If you disagree with them, they assume you’re stupid, or you’re crooked, or you’re corrupt. It is extremely difficult to do business with people like that.
If you’re the smartest person in a negotiation, don’t let the other side know that you recognize that. In my opinion it is folly to tell the other side you’re smarter or have better ethics.
Those were my lessons. What lessons do you take away from this situation?
Terry Moore, CCIM, is the author of Building Legacy Wealth: How to Build Wealth and Live a Life Worth Imitating. Read his “Welcome to My Blog.”