My friend that lost big and how to avoid it

I have a friend, we will call him Tom.

Tom is an airline pilot here in the US for one of the majors.

He called me one day saying he had been interested in investing with our company , but a friend of his who is also from Colombia, lived in the Houston, TX area and was going to start building houses and offered him a partnership opportunity.

Apparently, his Colombian friend had an impeccable business track record, although Tom could not define for me what this meant. Tom would simply say words that made his Colombian friend look good.

The purpose of Tom calling me that day he said, was to ask me for advice on what to look out for in this partnership and if the business was viable.

Before giving any advice I wanted to understand the business a little bit better.

I asked Tom, who lives in 1,000 miles away from Houston, what his role in this potential partnership opportunity would be?

He told me that his friend simply needed someone with good credit and that could obtain a loan large enough to build the first house.

I asked him if the fact that his friend (who is supposed to have an impeccable business track record) needed someone with good credit and ability to obtain a measly house loan was not a red flag to him?

He said no, he had spoken with him, and they sounded honest and had shown him on paper "very detailed the 5 year projections" of how they would go from building 1 house, to start building communities.

I then asked him more about their "business track record." Tom said that these potential business partners had extensive track record flipping houses for years!

I told Tom that was another red flag to me. If they had been flipping houses for years, they surely had to be familiar with all sorts of loan options, ranging from private money, to hard money lenders, and traditional financing.

Any flipper that flips houses at scale has to borrow money in order to do so.

So if they had an extensive track record flipping houses, and still could not find a way to obtain a loan on their own to build a house, something was off in my opinion.

They either had not been successful in business, or everything they have told him was a lie.

He dismissed my concern as if it was not a big deal.

I then told him I didn't know if the business was viable or not, and since he sounded very convinced that he was going to move forward with this, then I suggested he got a lawyer to make sure he sheltered himself from any liability if these partners were to do something that would hurt him.

Sure enough, 8 months later, he called me saying he went through the entire process getting a HELOC on his house and dumping money into the business partnership only to have the business partners buy all sorts of stuff including vehicles with that money and disappear.

So he was stuck now trying to consolidate all sorts of debts that were legally tied to him and paying things off.

He felt ashamed, I could tell in his voice, he didn't want to talk much about it.

The point of me telling this story is to tell you that this happens to MANY people, and could potentially happen to you if you ignore the red flags.

People get drawn in by the allure of outrageous returns and a beautiful "out of this world 5 year projection."

Whenever you are about to do a parntership or business venture with someone, always make sure you completely understand what the business plan is, what legal consequences you will be held accountable for if something goes side ways, and what the overall risks are.

But most importantly, beyond the business plan in my opinion, is the people involved.

What does your gut feeling tell you? Can you trust them? Do you have any references about them? What do they have to lose? Can you do a background check on them? How is their credit and reputation among others?

People say don't judge a book by its cover...

I 100% judge people by their cover and how they make me feel.

I was at a real estate conference one time talking to a few folks, and this one guy came into our small circle mildly abruptly and started chiming in wanting to join the conversation.

He was dressed in a striped suit that appeared like a car salesman from the 60's with a hairstyle like he belonged in The Godfather movies.

He gave us all his business card, we all then politely gave ours to him, and he moved on.

He has been calling me for over a year every week since then (not sure why I haven't blocked him), wanting me to partner with him in his deals. I never answer the phone, but I hear his voicemails.

My gut feeling tells me there is something off about him. I don't care how good his track record is, I would not do business with someone if I get a bad feeling.

In summary, don't be tempted by outrageous returns and projections that look out of this world.

In my opinion, slow and steady wins the race. Cookie cutter business plans, with good trustworthy people who have skin in the game in terms of reputation and money are far better business partners. (And who don't need someone with good credit).

Best,

Satch Bernhardt

V1 Capital

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About the author

Satch Bernhardt is an airline pilot and the CEO and founder of V1 Capital, a private equity firm that provides investors the opportunity to invest in their highly curated selection of real estate investments. Focused on value-add multifamily and Short-Term Rental portfolios, V1 Capital has a portfolio with an equity stake in over 1,354 units, with a combined value exceeding $246MM..

Satch’s main responsibilities include developing partnerships with top tier operators, investor relations, and allocating the company’s funds to minimize risk and maximize investor’s returns.