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Background Checks And Why You Should Use Them
I’m on a trip to London, England and I’m here to give a presentation on the claims that we’ve had, what we see are the common causes, the amounts of these claims and how much they’re going to cost underwriters and insurance companies. I have been tapped by my company to present at Lloyd’s of London in the Old Library, which for me is quite an honor. I know people in London do it all the time, but to have a Texan come across the pond and the company pay for it, to put on an hour and a half presentation, for me, it’s very much a humble brag. Take that for what it’s worth, but at the same time, I am very happy to be here. This is a huge thing for me. It’s on my bucket list and I’m happy to be sharing some of this with you because as a private lender, I still have a day job. That’s what I’m trying to coach with people. Keep your day job, stay on top of it and private lend on the side to help the old retirement out a little bit.
I jumped on the Heathrow Express at Paddington Station and I decided I’m going to cab it over to my hotel. I did that, got checked in, changed in my suit, hoofed it over to the office, gave a presentation for one of the London brokers on fracking, a preview of what I’m going to do. Thankfully, it went very well. For that, I am grateful and very happy, but I have not recorded near as much as I had hoped to. I have a composition book full of notes. It’s my first opportunity to put something meaningful on tape. I’ve been here for about five days, I would hope to have five recordings. I jumped off the plane. I was busy and then I had the presentation. The next day I had coffees, lunches, coffees and pints, dinner with my boss, our chairman. Friday, I ate a meal. It did not agree with me and it didn’t show up until late Friday night. Saturday has been a complete wash, just lying in bed, being miserable and drinking lots of water.
I got up at 6:15, London time. It’s 12:15 for Central Houston time. I fumbled my way on the tube, on the subway, because there are four lines that were closed. One of them was the one that I needed. I ended up going to Paddington Station, which is the completely wrong station I needed for the ticket I wanted. After about £20 of cab fare and some looking on my smartphone, I finally got over to King’s Cross Station in London. I took a train up to Cambridge and I’m so glad I did it. It’s nothing out of the ordinary except when you consider that Cambridge University and Trinity College is where both Stephen Hawking and Sir Isaac Newton attended. Newtonian Physics, black holes, A Brief History of Time, all that was figured out in this town.
Of course, it’s full of tourists. I can’t tell you how many American accents I heard, which normally is disappointing to me when I travel. I’m a snob, I will admit it. I can’t tell you the number of nationalities I heard and saw while I was hoofing it, backpacking it through Cambridge. What an amazing day. Disparagingly, I’m going to say Cambridge is the Oklahoma of the UK. I’ll tell you why. I’ve got family in Oklahoma and every time I go, I’m astonished. There’s a church on every corner in Oklahoma. I know that it’s a hyperbole, but that’s what I feel. Coming over to Cambridge, every college has its own chapel. There are Catholic churches. I thought it was Methodist, but it was non-denominational Church of England, whatever. I did stop into King’s College Chapel and it’s impressive, to say the least. It’s very nice.
If you’re ever over here, I would say Cambridge is a nice day away. It’s an hour from London, north, northeast and just take the train up. It’s about a mile and a half from the train station, not too far. You can hoof it, you can walk it. I know that’s a big thing for us Texans and Americans but you can do it. I highly recommend it. It was a day well spent walking around. In the city right next to the college, there’s The Fitzwilliam Museum and The Fitzwilliam Botanical Gardens. I didn’t go to the botanical gardens. There’s a little bit of rain. The Fitzwilliam Museum is a world-class museum. I highly recommend it. It’s free. They suggest a £5 donation, which is $7. It’s absolutely worth it. If you’re ever in England, check out Cambridge.
Everyone at Cambridge says I made the right choice in not going to Oxford. I had a choice of Oxford, Cambridge or Greenwich. Greenwich is much closer, but I went to Cambridge. There’s a bunch of old gothic architecture buildings and I saw real students. I saw people playing croquet on the yards, on the lawns, inside these colleges. I had a crap lunch. I’m sorry, I love the English. I love London, I love the UK, but not everybody knows how to cook a good steak. That’s my fault for checking a good steak. Before I forget, while I was at the Fitzwilliam Museum, I met a very interesting individual. I saw a very tall white man wearing a jacket that said Cambridge University Baseball. I stopped him and I said, “Excuse me. May I take a photo of the back of your jacket?” He said, “Yes.” He said it in an accent that I recognized. I think this guy is German. I took a photo of the back of his jacket and I struck up a conversation. It turns out I’ve got a new friend and his name is Martine. That’s Martin for us Texans and Americans. Martine is from Bonn, Germany, which is where I spent the entire summer of 1997 doing a study abroad. I got to speak a little German with him.
Background checks can begin in your backyard.
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Thank you to my new friend, Martine, from Cambridge University Baseball. He told me he brought the baseball team to Cambridge. Oxford already had a baseball team and several of the colleges because of the US Military Bases. I can’t verify, never trust, always verify, but this guy told me he started the Cambridge Baseball Team. If that is true, I went ahead and thanked him. If it’s not, I don’t care. I do, but it’s a big story. It made my day. Anyway, a big shout out to Martine.
I was at the open-air market in Cambridge, and there was a bookstore. I see a paperback copy of Fear and Loathing in Las Vegas. I didn’t purchase it because I already have three copies, but I did take a photo of it. Another thing I want to say, Martine from Bonn formed the baseball team at Cambridge and he also studied for a year or two at the University of Texas at Austin. He knew Clear Lake, Sugar Land and Katy. It made me a little uncomfortable when a German knows where I’m from. Anyway, it’s a phenomenal day. I want everyone to know how awesome Cambridge was. You might have a bad time, but I loved Cambridge.
Let’s get to background checks. Should you require a background check when you make a private loan? I have two answers for you. The first one is no, and I’m going to tell you why. The second one is yes. Why no? The real answer is yes, but if you would think about background checks, that’s usually for somebody you don’t know. You’re trying to find out who this person is. You’re trying to gauge their character. The reason I say no is because if you’re a beginner, I don’t want you lending to people whom you don’t know. I want you to start in your backyard, and I mean literally in your backyard. Go to your local REIA. Find people that are investing in your backyard. I want you to look for people that you know personally. You have gripped and grinned. You have shaken their hand, you’ve looked them in the eye, you’ve talked to them and not just once. I’m talking time and time again.
They’re not your buddy, not your cousin’s wife’s, sister’s friend who cuts hair and found out that someone was going to build this duplex based off of a Philadelphia Eagles lineman’s idea. I’m talking about people in your community. I’m talking about whales, the big people. Go to your local REIAs and start talking. You’ve got to open your mouth. You have two ears and one mouth. That is true. You need to listen twice as much as you speak, but before you listen, a lot of times you’ve got to open your mouth and you’ve got to tell people, “I’m thinking about becoming a private lender. Who are the most successful investors in my community?” Ask and find out. Find the whales. Oftentimes, these whales are people who are coaches or mentors in real estate investing in your community. Those are the people you want to begin lending with.
Why, Keith? Because as a private lender, as an investor, there’s only so much due diligence you can do. I want you to avoid paralysis from analysis. I suffered from it for years and I don’t want you to do that. The way to overcome paralysis by analysis is to seek out the whales, seek out the people who have a reputation to lose in your backyard and in your real estate investing community. Those are the people you want to start lending to. I’m talking to the people who are starting off. I’m talking to the guy, the woman in the cubicle going, “I hate my job.” You know you’re not going to quit and become the next Than Merrill flipping houses or the next Chip and Joanna.
This is why I’m putting all of these out here. I have a corporate job here. I am in London for my corporate job, but I still love to invest. I still want to be involved and as a private lender, I can. That is what I am trying to stress to you. When I say a whale, I’m talking about old people, lots of gray hair. Seek those out. Also seek out the young bucks, the people in their twenties, thirties, and forties. The reason my answer is, “No, you don’t need a background check,” is because you should be lending. If you’re beginning, you should be lending to people with something to lose, a reputation to lose. These are presidents of REIAs. These are people who go up in front of the REIAs in the real estate investing meetings and they’re out there. Does that guarantee anything? Absolutely not, but it helps to mitigate your risk. Now that I’ve told you, “No, don’t run a background check, invest with these people,” let’s look at examples where you want a background check.
People with reputation need more thorough background checks.
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My motto is never trust and always verify and don’t lend to people you don’t know. However, you get a few years into this, you get a few loans into it. You start getting comfortable with real estate cycles and you start to get an itch. Let’s say your home turf is Los Angeles. I’m not going to disparage Los Angeles for real estate investing because there’s a whole lot of people who make good money investing in Los Angeles, but when you’re on the coast like that: LA, San Francisco, New York, Miami and East West, they tend to be in a more volatile market. I’m living in Orange County and for me, I would not want to invest or lend in Orange. I would want to invest, but I don’t want to lend in Orange County necessarily until I have a lot of gray hair and I understand the market cycles and I can predict what’s going to happen. Keep in mind what I just said, “Predict.”
At some point in time, I understand complacency is going to kick in and you’re going to start to get this itch. You’re probably going to want to go to another city or across state lines, because that’s where I’m at. I’m totally happy with my loans in and around the greater Houston area but I also see there are some secondary markets that offer a lot more security or tertiary. I consider Houston a secondary market. San Francisco, LA, San Diego, New York and Miami, to give you an idea. Those to me are primary markets. Those are very volatile markets because when it’s great, it’s flipping great. When it’s bad, it’s bad. There are places that I understand such as Indianapolis. Gustavo, my buddy, who I interviewed earlier, he’s in Iowa and other places. Denver is just boom crazy. It’s like LA, San Francisco, San Diego, New York and Miami all rolled up into one. That’s what I understand from some local people because it’s very hot.
I’m not saying don’t invest or lend in Denver. Just be careful. That’s all I’m trying to get across to you. If you get to the point where you’ve got a lot of water under the bridge, you’ve got a lot of experience and you’re ready to lend to people that you don’t know, I would say reach out to me at Keith@PrivateLenderPodcast.com and let’s talk about it. We’ll get some Skype time together. Let’s hash it out. I’m not going to tell you what to do. I want to be able to give you the opportunity to talk it out. I will play devil’s advocate to you. If you’re still convinced that you want to do it, go for it. The idea that I have is to talk to me about it. We’ll see how it fits in your investing criteria. If you choose to go ahead, I want you to look at a few things.
Let’s say you were in Middle America and there’s somebody in Arizona who’s looking for a loan and you want to give it to them. The first thing I’m going to say to you is to never trust and always verify, especially when there’s distance involved. You want to look at this person’s borrower. Let’s look at them. Let’s look at what type of experience do they have. You have to verify it. I’m telling you, put in the extra effort. Do your due diligence and get it done. Look for bankruptcies, evictions, defaults, foreclosures, judgments and liens. If they have any of those, that is a red flag. I’m not saying don’t lend to that person because every person has a past and every person has a story. As long as the past and the story and the present smooth each other out and equate, then you might want to lend to them. If they have a bankruptcy, eviction defaults foreclosures, judgments, and liens, think about it. A lot of real estate investors got their ass handed to them in 2008, 2009 and 2010. That’s why I’m telling you this because my mom always said, “The road to hell is paved with good intentions.” At the end of the day, it’s your money that this person’s borrowing. It’s your retirement.
In my case, most of it is my retirement savings. I’m going to be ultra conservative when I look at these deals. My politics or your politics, you may be conservative or maybe progressive. It doesn’t matter. I don’t care if you’re red or blue or purple. We’re green because we care about money. Why do we care about money? It makes our future that much better. If anyone has a bankruptcy, eviction, default, foreclosure, judgment or a lien on them, that’s a red flag. It doesn’t mean there’s no green light, but it’s a red flag. Look at it. If your gut tells you, “I don’t know,” then don’t do it. I only want you to loan to people when your gut’s like, “Yes, the deal is good.” If this guy has a shoddy record, he’s got a DWI, he’s got a couple of this, he’s got a couple of that, he’s behind on child support. I don’t like deadbeat dads but whatever. There’s a story, there’s a past and there’s a present. If they all equalize, you might want to lend to them. If they don’t, stay away.
A lot of people ask, “What about criminal past?” That’s a very good question. I am fortunate not to have a criminal past, but that’s because I was born a white man in the southern United States. I know I’m pissing off a lot of my conservative friends right now, but it’s the truth. It is not lost on me that I’m a white man born and raised in Texas. That carries a certain cache with it. I have not been to prison and let’s just say that I should have. That’s part one. Part two of this is I signed up for a business coach. I paid a whole lot of money and my wife doesn’t know that I paid them yet. That’s the God honest truth. The man has been to prison twice, but I believe in him because I’ve seen how he has transformed a friend of mine’s life. He has turned him into somebody who didn’t know where his next sale was going to come from into a highly successful mortgage broker. I hope to get him on the show very soon if he’ll ever return one of my emails. Since being on my podcast doesn’t equate to any money, I totally understand being second and third fiddle to this. I get it. I’m not angry but I want to get this guy, Chad, on the show to tell his story because he sells mortgages.
I’m not here to be completely moral with you and everything, but he gets some petty drug crimes. Who hasn’t sparked up a joint in our youth? Who hasn’t imbibed a little too much at a party? Look at the criminal charge. I have two daughters. If I see a rape conviction, you can forget about it. I’m not even sorry. You’re just done, gone. However, I had a guy come up to me one time looking for a private loan and he was upfront and forthright. He told me he had a rape conviction. I said, “What?” He goes, “I was nineteen, she was seventeen. It was statutory.” I did not loan to that individual, but not because of his criminal background. As a father of daughters and I found out my seventeen-year old is having sex with a nineteen-year old, I’m probably going to prosecute. The reason why I didn’t loan to him was partly because of his criminal conviction and partly because of his credit. The guy had bad credit and that gave me an out because of the statutory rape charge.
I’m not saying you need to do that, I’m telling you that’s where my mind was with this. It wasn’t a violent crime. They were boyfriend and girlfriend for quite a long time. I’m pretty sure it was consensual. Her dad got angry. Believe me, I get it. His deal didn’t make sense. He didn’t have a good history of showing that he was going to cut his own throat to pay me back before I lost. I said, “No,” but I want to put it out there that the statutory rape charge was part of it. This has got nothing to do with #MeToo. This is only about me being a father of daughters and trying to raise productive and good women.
Let’s go back to never trust and always verify. If you get to the point where you’re going to lend away from your backyard, you’re going to lend across states, then by all means go and get a background check. I don’t have any affiliates. I’m not going to tell you how I do my background checks because it changes from time to time. Google searches will let you know but I would look for national background checks, not just on the state level. Go national and here’s something else, I don’t want to loan to a deadbeat dad, plain and simple. By saying that, I realized that I have to evaluate things a lot closer and a lot more difficult.
You’ve got to look at everything on a case-by-case basis. That’s my suggestion to you. At the end of the day, this show, my voice, my history, my experience cannot replace your gut instincts. You are in your market, you are dealing with that person, that borrower, that investor. All I can tell you is even if your gut says, “I don’t know,” that’s a no. Walk on, move away and be polite. Be a lady, be a gentleman and say, “I’m not comfortable with this. I wish you all the best,” and move on. The next scenario that could come up from this is one that I’m relatively ignorant on and that is investing overseas. There are organizations and businesses that are set up to help Americans invest overseas.
I have not invested overseas and it becomes very difficult. It doesn’t matter what country they’re from, it’s very difficult to do a background check somebody in another country. Let’s say if I’m going to go to Playa del Carmen or someplace in Mexico, Baja, Cabo, there are people who are set up to help Americans invest down there and you can go to the Commercial Real Estate Guys Podcast. I highly recommend you listen to them if you’re thinking about investing outside of the US, especially in the tourist areas. Why would you invest anywhere else? That’s a little bit beyond the scope of this show and my experience. I don’t want to speak about it. For example, if somebody came to me and said, “I got a smoking hot deal in Playa del Carmen,” you got to look at it with a different set of lenses.
Go to places like the Commercial Real Estate Guys. Listen to their podcast. I hate to send you away from this one, but it’s the truth. You need to go listen. You’ve got to go find them because I’ve yet to invest outside of the US. However, having said that, 2019 has been a very interesting year and I’m hoping that in 2020, I will take some of my harder greenbacks and put them overseas and invest. I’ve got a few people that I’m lining up that we’re talking about doing some JVs. While I’m not going to fund everything, I want to put my toe in the water and I want to invest outside of the United States. That comes with a whole bunch of IRS and everything else. As I get to it, I will report it to you here on this show. If anybody comes to you and says, “Invest in Guatemala, Honduras, Nicaragua,” the Oxford Club has offered investments down in Nicaragua after the cartels and everything had gone away.
Investing internationally is a whole different thing. Whether it’d be abroad, outside of your backyard, interstate, in the US, if anybody comes to you and says, “I’m looking to borrow some private money,” be a hard ass. Don’t be ashamed. It’s your money. In my case, it’s my retirement money, my wife’s retirement money. I want to be ultra conservative with it. I’m going to ask them to give me a portfolio of their properties and their experience. When I say experience, I don’t mean just real estate and investing, I’m talking about everything. Did they go to college? Did they go to the college of hard knocks, the college of the streets? Are they an entrepreneur? I can think of about twenty Indian immigrants in the United States in Houston that have busted their ass and are making themselves and I would invest with them.
They do multifamily and it’s all Indian money. I’m trying to get into it because they’ve had six successful properties. When I say successful, I mean uber successful. I’m trying to get into that, but it doesn’t matter. I have seen their portfolio, I’ve seen their experience and I’ve met every one of them. They pulled themselves up from their bootstraps which is hard to do. You could say, “They’re Indian, they had money to get here.” Not all of them. Some of them borrowed money. They came to the United States on credit, overextended their visa and have made something of themselves. They have produced and paid taxes. I got a lot of time for those people. A few hundred years ago, their people or my people came on over from Germany, coming over from England. I got some Limey in me, I’m admitting it but they came over and they flip and hustled. They didn’t take no for an answer. That is the American way.
I hope you find this useful. I hope this gives you some understanding of where you should be. Always listen to your gut. If your gut says no and it turns out to be a great deal, learn from it. Don’t wash it away. Learn from everything. If this has taught me anything, it is to expand yourself. Let’s say you’re an engineer, an accountant, a dentist, a general surgeon, a tile layer, it doesn’t matter what you do for a living, go learn. If you’re any one of those things, I might suggest you go pick up a book on how to write poetry? I’m serious; poetry, bird watching, pottery, expand your mind. Maybe it’s a business book, maybe it’s a book on how to do Facebook ads or copywriting because that’s what I’m looking at right now, whatever. See Cambridge University, Isaac Newton, Stephen Hawking, A Brief History of Time and black holes. The sad thing is I was in proximity to these buildings where these men studied and wrote and it doesn’t make me any smarter. Proximity is power when it comes to bettering yourself but it’s proximity to people, not just buildings and places.
With that, I want to leave you with positive vibes from London. My hotel window was open and I can hear people partying downstairs. I’m going to have to go down there and ingratiate myself. I hope this ramble serves you well. I hope you take something from it. I hope you realize that if you’re beginning, you should not loan to people you do not know. When I say you do not know, I’m talking about whales and coaches and mentors in your community. I’m talking about people with something to lose, with a reputation to lose, not just money. People will lose other people’s money left and right. They don’t care. This is your cash, this is your retirement. I want you to hold onto it. Start with people who have a reputation to lose. If you get beyond that, then by all means, do the background check. Even as just starting off, tell people up front, “I’m going to do a background check on you. I want to know who I’m lending to.” If they have a problem with it, then you should probably walk away. With that, I’m going to bid you adieu. I wish you a happy, prosperous and safe private lending. I will catch you on the next episode. Take care.
- A Brief History of Time
- Fear and Loathing in Las Vegas
- Commercial Real Estate Guys Podcast
- Gustavo Garza – Past episode