How Not To Find A Business Partner

This is the 2nd in a series about how I got scammed.  See the Table of Contents for links to all the posts.

No good story about a scam begins without Craigslist.  So, let’s start right off with the first lesson in how not to find a business partner:

1. Use Craigslist!

Craigslist is awesome.  I’ve used it countless times to buy, sell, trade, announce, explore, and connect.  It’s (mostly) free, a household name, easy to use, reliable, and by far the largest online classifieds site in North America.  Sure, it’s also a haven for scammers, spammers, or worse.  No worries!  Just apply a little common sense and due diligence to weed out the frauds and discover the gems of legitimate opportunities. Treasures await!

I thought the author of the following post might be offering one of them:

Real Estate Investment Partner or Investor for Expansion

I am an experienced investor in real estate, seeking a partner experienced in new construction and remodels or investors with cash, for expansion in real estate investments and monthly cash flow. If you are looking to make serious money in houses & rental properties, we can share in the financial backing, the remodeling, repairs, marketing, management, etc.. I have experience in all areas of home repair, remodeling, and property management. I am a degreed Architect, have been licensed in real estate, and have several real estate holdings. I have more than tripled my investment equity, as well as receive monthly income from these properties. I know how to incorporate modern and historical materials to maximize profits, stay within the architectural characteristics, and create demand for the properties. I know the locations that offer the best cash flow, lowest cost, least risk, and highest real estate appreciation. I find the properties as well as design, and implement ideas for the fastest turn around.
I have equipment, tradesman contacts, and dedicated assistants. I have worked in the home repair/remodeling, and property management fields for 23 years. I love doing the work and take pride in all that I do. I am seeking an experienced tradesmen or investor to compliment my existing staff of cleaning, general labor, marketing, real estate & leasing agents. The market is huge for rental properties, & house flipping. You can make serious money, and now is the time make these properties rent ready and/or marketable for sale. Believe it or not June and July are great leasing & selling times.
If you’re interested in the number one hedge against inflation, and securing your financial future, feel free to contact me. Please provide your name, phone number, personal skills, and interests related to real estate investing.
Thank You.

2.  Believe promises of great reward with little risk.

When someone claims, “You can make serious money,” “… securing your financial future,” and “I know the locations that offer the best cash flow, lowest cost, least risk, and highest real estate appreciation,” pay attention, because only a successful business guru could possibly be offering these secrets of abundance and wealth.  Nevermind the Federal Trade Commission (FTC) requires him to provide counterbalancing warnings of possible risk and loss.  Granted, someone who hides risk when promising reward is breaking truth-in-advertising laws, but that’s okay as long as he makes you rich.

Reference: Ads for Business Opportunities: How To Detect Deception, by the FTC

3.  Forego requiring proof of history, identity, and claims.

While complete background and credit checks to verify identity and history are at anyone’s fingertips thanks to online sevices, they’re total wastes of time and money.  After all, the past is the past, and someone with a criminal background and/or poor credit history can still be a stellar business partner, especially since he’s a graduate of the Ivy League school of hard knocks.

Moreover, when someone makes such concrete claims that he is a degreed Architect, was licensed in real estate, tripled his investment equity, has decades of experience, and employs a whole support staff, simply take him at his word.  Proof is implied, because if he said it, it must be true.  Sure it may take years to discover he is a pathological liar, but where’s the fun in knowing that from the start?

A few days after I had responded to the above, a gentleman, let’s call him Mr. Sly Russ, contacted me by phone.  He sounded very knowledgeable and sincere, at least sane.  Of course, it was his job to convince me to trust him, and at first, I was simply curious, attentive, and inquisitive.  Over the next weeks, we had many long phone conversations, and we were both feeling each other out.  At best, two honest businessmen were exploring the possibility of pooling resources to create something bigger than either could create himself.  At worst, there was one honest businessman doing this, while the other less honest one was sizing up a possible mark.  I suppose I qualified on all counts.

4.  Do something about which you know little.

No one knows everything, so consider yourself lucky if an expert in a field about which you know little is graciously offering to be your mentor and speed you through the fast track to success.  Just relax and rely on him for everything.

This was the time the real estate market had started to recover from its severe crash, and prices were still low but starting to tick back up.  As the old trading adage goes, “Buy low, sell high.”  This was the time to buy.  Many investors were still suffering from their losses, while I was hoping to catch the recovery wave up.

I knew a little about real estate investing.  I owned a couple properties, and I leased out one single family house, as well as shared my two bedroom condo with a roommate.  I did all the advertising, showing, leasing, maintenance, repairs, collecting, bookkeeping, and overall, it was a very successful business.  I also experienced the risks first hand, having had to deal with a tenant who didn’t pay rent for 9 months, but that is another story for another time.

But compared to Sly, I was in the minor leagues.  He supposedly had decades of experience in every facet of real estate investing and was currently making a nice living by it.  Not only had rental income paid for his properties several times over already, the equity had also tripled in value since he first purchased them.  Making money in real estate was easy!  And he had a grand vision for future expansion:  starting with a few properties, we keep reinvesting the profits to build a real estate empire.  Each of us would be millionaires within a decade.  The plan was simple:  I buy the properties, and he manages them.

It certainly sounded intriguing.  Supposedly, he had all the experience, knowledge, and everything in place to make it happen.  He just needed an investment partner.

I asked the obvious question:  If you’re already so successful, why not just invest your own money into your plan and keep 100% of the profits for yourself?  Why do you need my money and have to share the profits with me?

His answer was simply that it would take much longer to reach his goal by himself.  With the extra resources of an investor, he could do in 5-10 years what it would otherwise take him 15-20 years alone.  That sounded reasonable, especially to someone all too willing to believe.

We met in person a few times, and we drove around a few cities, checking out the property landscape together.  Sly seemed personable, knowledgeable, responsive, professional, and an all-around decent, likable guy.  More and more, I started to believe he could actually do what he envisioned.  And more and more, he must have discovered I really didn’t know much about real estate at a professional level, and if we were to go into business together, he would be essentially in complete control.  After all, I was the “dumb money” guy, and he was the guy who supposedly knew how to use that money to make more.  It was, quite simply, the classic con.

Compared to real estate, I knew even less about business partnerships.  My formal training is in the sciences, where all efforts and relationships were founded upon the common dedication to what is real and true.  I was accustomed to working with intelligent, responsible, honest, trustworthy, and transparent colleagues of the highest ethical character.  I naively assumed everyone operates at the same high level.

5.  Leap before you look.

If a rare opportunity presents itself, grab it at all costs before it gets away!  Another one may never come.

After a couple months of getting to know each other, I still wasn’t ready to commit to a formal partnership.  There was even a period of a couple weeks when we didn’t talk, and I remember thinking, oh well, I’m not ready to do this with him anyway, so no big deal.  I was actually hoping I’d never hear from him again.

But then one day, Sly called and told me about a sealed-bid auction for a million-dollar mansion.  I listened with rapt attention and became excited at this great opportunity.  Because the deadline was just days away, he urged me to act quickly, and I rather impulsively agreed on an amount to bid.  After all, there was no real money required yet, and even if we won, we still had time to inspect the property and relinquish our right to purchase it if we were dissatisfied.  So, we rushed in our bid.  We simply didn’t want to lose the chance to acquire a huge asset for so little.  Unfortunately (or fortunately!), we lost.

The experience was a first shared step, and it opened me up to working with him on a formal basis.  I proposed we needed an official agreement between us to formally define the terms and roles of our partnership, and we started to discuss the details.

Shortly afterward, Sly presented me with another great opportunity to buy a distressed residential-commercial building far below market value.  I went to see it with him and a realtor, and while it wasn’t in the best condition, Sly assured me everything was reparable.  Moreover, the immediate income stream from the already existing tenants could pay for all the repairs and improvements.  It seemed to be a no-brainer.  The catch:  again, Sly urged me to act quickly, because another buyer may very likely scoop this great opportunity out from under us.  The problem:  we still did not have a formal contract for the partnership in place.

Nevertheless, I let expediency get the best of me, and I purchased the property to officially launch our partnership.  I simply trusted things would work out.  I have since learned that naive trust never justifies impatience and greed.

6.  Contracts are optional.

Trust that everyone is fundamentally trustworthy, always chooses to do the right thing, and always works toward the highest good.  Especially a stranger, because a stranger is just a friend you haven’t yet met.  Therefore, contracts are superfluous.

A few more “must-buy” opportunities rapidly followed, and soon we had a decent portfolio of properties, but still no contract between us.  I kept pressing for one, but he kept delaying, his excuse being he was too busy attending to the properties.

Worse than not having a contract, our company also didn’t have an official bank account.  We tried to open a joint account at a credit union right after we acquired the first property, but because I was not a resident of the state, I could not be on the account.  We needed to wait until the company was officially incorporated, after which a company account could be opened.  However, the tenants monthly rent had to go somewhere in the interim, and we agreed to use Sly’s own account.  Big trust.  Not deserved.  Haste truly makes waste.

7.  Be your own lawyer.

Lawyers are expensive.  Trust someone will do what they say, rather than pay a lawyer to make sure he does.  Besides, if shit hits the fan, you’re not going to sue him anyway, so why bother?

Other than the lawyers required to complete real estate transactions, I have never sought the services of a lawyer.  My life was relatively simple, straightforward, and quiet.  I am the furthest thing from being litigious (an important point to remember as my story unfolds), and I always concede to others to avoid conflict.  Where basic human rights are not at stake, I prefer peace over justice.

After many months of discussion, we had a draft of our partnership agreement.  The most important point to me was that we would equally share the net profit after my initial capital contribution and expenses.  That is to say, if I initially invested $100, and in the end, the business made $150 after expenses, then after I receive my initial investment of $100 back, we would each share $25 of the remaining $50 net profit.  In the end, we each would have gained $25 equally.  We shared equally in both reward and risk, since if the venture lost value, I would take the financial hit, while he would have lost time and effort. This is a fair arrangement, so common as to have its own term, profit partners, a term I only learned much later.

After reviewing the draft, Sly hired a lawyer to formalize it into a partnership agreement and incorporate our company.  I tried to read the drafts as best I could, but to be honest, could not understand most of the legalese.  Nor did I really care about the details, because again, I was simply naive.  Of course, the lawyer advised each of us to seek personal legal counsel before signing.  I should have.  Before the day of signing, I simply asked Sly in no uncertain words whether the formal version exactly represented the profit arrangement to which we had agreed.  He assured me it did.  I believed him and left it at that.  I should not have.

I learned the truth only after my tax accountant informed me after reading our agreement that Sly had manipulated it to make him an equal partner, giving him an immediate 50% ownership of the company!  That is, in my example above where I initially invested $100 and in the end the business made $150, according to the final agreement, we would each get $75.  I would have lost $25 overall, while he would have made $75 in profit.  Indeed with this arrangement, I effectively took all the risk, while he enjoyed only reward.  The company would have needed to at least double in value just for me to just break even!  What investor in his right mind would agree to that?

I assured my accountant if the agreement really said this, it was a mistake, and that it will be corrected.  So, I was completely shocked when Sly nonchalantly said this is the way it is supposed to be per what we agreed to from the start!  I still remember his sharp tone:  “We are in no way profit partners; we are equal partners!”  When I objected to the way he had completely misrepresented our agreement (euphemism for “deceived me”), he scoffed, “Too bad.  You’re an adult.  You should’ve had a lawyer review the agreement before you signed it.”

It’s hard to describe the utter betrayal I felt when I realized he had blatantly deceived me this way.  My heart raced, my blood drained, my hands froze yet sweat, my breathing convulsed.  With a quivering voice, I threatened to sue him, and he laughed, “Don’t cut off your nose to spite your face, but you have to do what you have to do.”  I could only respond, “Thanks for everything, Sly,” and hung up.

Upon consulting an attorney,  I learned he had also (no doubt intentionally) worked into the agreement that it supersedes any prior verbal or written agreement, so I had no legal recourse.  The attorney advised me to simply propose to sell all the properties to dissolve the partnership and be happy with my half, because that would be the likely injunction from a judge ruling on this case.  As the realization of how Sly had fully taken advantage of my naive trust sunk in, I went into emotional shock and sunk into depression.

Later, a couple attorneys assured me equal partnership arrangements are not uncommon, and it really isn’t that big a deal, provided the business has a good chance to succeed.  Had Sly just explained to me he wanted this kind of arrangement, I might have considered it, especially if I believed the value he was bringing was worth making him an equal partner from the start.  But the way in which he gained the advantage in our partnership was deliberate and deceptive.  Indeed, the wording of the contract that made us equal partners was very subtle, no doubt intentionally to fly under the radar, stating only that I, the investing partner, contributed $X as my initial capital contributions, while he, the managing partner, contributed $X in services as his initial capital contribution.  To untrained eyes as mine when I reviewed the drafts, this did not appear to say he was getting half of the company immediately.  But in legalese, it did.

How did it happen?

If someone else had written this post and committed all the idiotic mistakes I had, I’d certainly shake my head and say he deserved what he got for being so stupid, and that I’d never be so dumb myself!  I feel embarrassed to share this at all, because it is certainly not my best moment.  I spend a lot of time kicking myself and wondering how so many avoidable pieces could have fallen neatly into place to have completely blinded me.  How could I easily spot the small-time scammers but not avoid falling for a big-time scammer like Sly?

Many reasons …

• The “con” in “con man” stands for “confidence.”  The con man has a certain charm which instills confidence in his marks.  Granted, the marks are just as guilty for being conned by their own greed and willingness to trust.  But the con man is the facilitating agent in this relationship, and he melts away all reasonable doubts with his persistence, promises, and charm.
• Real estate ventures are legitimate business opportunities, and many investors have made their fortunes through it. Calculating the expectancy of a real estate investment is not as easy as that of a mathematically dictated game.
• I met Sly many times in person and talked to him extensively on the phone over several months.  I began to know him as a person, an expert in the field, a possible business partner, and even a friend.  He came across as a decent, rational, and fair businessman.  But see the point about “cons” above.
• Sly gave me a sense of urgency to act, because prices were on the uptick, and competition for the remaining bargains was heating up.  This tactic to inflate the time pressure out of proportion could have been his deliberate way to manipulate me to seal the deal, but the urgency felt real at the time.
• The excitement of a new venture with so many profitable possibilities blinded me.  It was exciting and it felt good.  When you’re dreaming about coins falling from the sky, you don’t consider how they might hurt when they hit your head.  When you’re getting married, you’re not thinking about divorce.

What you really should do …

This post is framed facetiously, because I did pretty much everything I shouldn’t have to find a business partner.  Of course, if you want to find a good business partner …

• Craigslist?  Seriously?
  
• Promises of reward without risk?  Pass!
  
• Comprehensive background, identity, and credit checks at a minimum. 
• Require proof of all claims.
  
• Become an expert in what you want to invest.
• Look before you leap.  It’s better not to act than to act and regret.
• Contract must be first.  Read and fully understand every word in it.
  
• Hire the best lawyer you can afford.
  

Sly’s manipulating the terms in the contract to his advantage completely shattered my trust in him and cements his place as a royally dishonorable scammer, who has absolutely no qualms about unfairly taking advantage of others.  Even so, such a breach of trust may have been overlooked had he really come through to deliver on his promises to build a solid, prosperous business.  Sadly, that would not be the case, as my story unfolds.