The Importance of Reputation

I just came back from a real estate forum in Florida where I was speaking on a panel answering questions about real estate and turnkey operators in the industry. As it turns out, I was asked a very important question about building your reputation in an industry with shady operators. Unfortunately, they only gave me two minutes to answer a question that required at lease 15 minutes.

So, I felt the question was important enough to cover as a podcast episode. Especially in our industry where there truly are shady operators.

And if you missed last week’s episode, be sure to listen to Common Investor Questions (Part 1).

Enjoy the show!

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Today’s show is about the importance of reputation. I’ll tell you why I have chosen this topic for today’s episode. I just came back from Miami, Florida for the 4th Annual Single-Family Rental Investment Forum. It was great. I had a lot of fun. I got to network with a lot of people that I know in the industry. I was actually speaking on a panel there on turnkey operators. We all got asked questions of various sorts about the industry and turnkey providers specifically and how we operate and just what is going on. It was interesting. I got asked one question that was, “How do you build your reputation in an environment with some shady operators?” There’s just no way that I could’ve answered this question in the 30 seconds or a minute or two minutes that they gave me to answer this particular question. I thought it would be a good idea to actually have a podcast episode on the importance of reputation, especially in an industry like ours where let’s say, nine out of ten operators are actually worthy and ethical and have a decent or good reputation and one or maybe two out of ten, don’t.

You as a consumer, you as an investor, need to know, you should want to know who has a good reputation and who doesn’t because obviously, you don’t want to work with somebody who’s going to sell you a lemon or a money pit for a property or tell you one thing and it’s something else like you’re in a good neighborhood, but then you end up finding out there are a bunch of crack dealers down the street. This is not a good thing. I have seen this happen. Having been in this industry for 12.5 years, again, being one of the first turnkey providers in the country on a nationwide basis, I’ve seen a lot of people come and go. I’ve seen a lot of operators die on the vine.

PREI 045 | Reputation — The reputation of a business is essential to its survival. You have to have trust and confidence.

The reputation of a business is essential to its survival. You have to have trust and confidence. The trust and confidence of the consumer does have a direct and profound effect on a company’s bottom line. While reputation is an intangible concept, having a good reputation can benefit a business in many, many ways. It expands from consumer preference to support foreign organization when it’s in times of crisis or controversy. It also affects the future value of an organization in a marketplace. Having a good reputation just adds to a company’s brand strength and goodwill.

I was doing a little research and I came across a reference to a study that indicated there were ten main components to an organization’s reputation. The first of those ten is ethics. An organization that behaves ethically is admirable, is worthy of respect and is trustworthy. I think this is a very important thing, especially as the first item on this particular list because a company needs to be ethical before it can be a leader in the industry or have any kind of social responsibility or fiduciary responsibility or even be good to its employees.

The second item on this list is about its workplace and employees. It talks about an organization having talented employees, will treat its people well and has an appeal in its workplace. You actually draw people to you. I’ve actually seen this here in the last few years where I’ve had at least four people come forward from other companies saying, “I’m just wondering if you guys are hiring. I’d love to work with you guys because we hear good things about you, you have a good reputation.” Obviously, that shines through. Third is the financial performance. An organization that is financially strong and has a record of profitability, it has growth prospects, makes a company stand-out and gives you good reputation.

Leadership: An organization with a good leader will have followers and will be innovative, better to be a leader than a follower. Management: The organization that is well managed will have a high quality management. It has a clear vision for the future. That’s important. Good social responsibility. A good customer focus: An organization that cares about and is strongly committed to its customers will obviously have a good reputation. Quality: The organization that offers high quality products and services obviously will stand out. You build a reputation on providing good product, in our case, good income rental properties in good neighborhoods, in good markets that are well-managed. That is quality. Reliability: Does the company stand behind its products and services? Does it provide consistent service? You need to be reliable. This is a very important one for me because I strongly believe that good, clear communication adds to that reliability.

Last but not the least, emotional appeal. If people feel good about your company and it gives them a sense of trust, it just brings people in and has a strong appeal. Look at a company like Apple. There’s a company that has a very strong brand and a great reputation and they draw people in because you know what you’re going to get, you’re rarely disappointed even though your expectations are set very high. They’ve got that emotional appeal nailed down in everything they do.

That is the ten components of an organization’s reputation. I like to break reputation down into three areas, at least for my business and our industry. The way I look at reputation and the way it’s built for our company really stands on three pillars. The first one is our clients. Obviously, we want to have a good reputation with our clients, people who are doing business with us or have done business with us. We obviously want them to be repeat customers. Investors don’t just buy one property. Investors typically buy a portfolio of properties. We want to make sure that they have a good experience the first time, good communication the first time, so they become repeat buyers, they become repeat clients. On top of that, we want to make sure that clients send us referrals. If they have a good experience and they like what we do and like what we offer, then they’ll tell their friends and their family and they will refer people to us. We get a good percentage of our business through those referrals. That obviously speaks volumes.

The second pillar to reputation comes with our providers. We want to have a good reputation not just with our investor clients, but we want to have a good reputation with our providers. Why? Because first and foremost, we want our providers to treat our clients really, really well. We want them to get A+ service from our providers. We want them to be responsive. We treat our providers well, they treat our clients well. We want access to their product, we want access to their new product, we want access to their best product. We don’t want them to hold it or hide it from us for their clients or for another provider out there. We want them to deal with client issues. We want them to handle anything that comes up during the escrow process. We want them to handle any issues that come up in the inspection when the inspection is done by our clients. Having a good relationship and a good reputation with our providers is very important. We want them to like working with us because we want to like working with them. That happens when they treat our clients well.

The third pillar is the public pillar. Obviously, the outside perception of a company is very important because for new investors or prospective clients that haven’t done business with us yet, we want them to come to us knowing that we are a trustworthy, ethical company to work with. Today, with the internet, it’s just so easy to dig up a bunch of information on virtually anybody or any company out there. Unfortunately, there’s also misinformation out there, not just factual information so you have to do a little bit more digging and research to figure out what is actually fact and what is not fact or what has been embellished or fabricated information. Having the internet makes it so much easier to do your research on anything online. You’ve got all these websites out there like the Better Business Bureau, which is an organization that we belong to and we have an A+ rating with them. There are consumer advocacy websites like RipoffReport.com and others. The problem with those websites is anybody can post anything about anyone at any time and there’s no verification or fact checking being done. It’s sad in a way that you can just post anything about anybody or any company for that matter, even if you’re just mildly disgruntled and make it sound really, really bad. They do exist. You can find stuff on companies out there on these websites. Of course, there are all kinds of public forums out there where it’s just a free for all or anybody can say anything about anybody once again. There’s more debate and opinion and conversation going back and forth. Public reputation is very important especially for a company like ours.

Some people will ask us, “If you’re working with local providers, how do you find out about their reputation so it doesn’t reflect poorly on you?” It’s a good question. Fortunately, there is a way to vet them. We do vet our providers, but that’s not a 100% guaranteed, foolproof method of assuring that you’re not going to ever have problems down the road. I’m going to give you an example here because they do change. We go to through a vetting process with our providers. We look into them, talk to some of the people that they’ve worked with, we look at their product, where they’re rehabbing properties or building properties, we’ll check out the neighborhoods. In many cases, we’ll visit with them. We just do a bunch of things to vet out our providers. After a period of time, some of them do go sideways or rouge.

Here’s a good example of one. There is a particular company that we worked with for about two years. We sold a lot of their properties, we had a good experience with them, very rarely had any issue. In fact, I think for the first year, we never had any complaints whatsoever. Then in the last four months or so, four, five months of working with this particular provider, which by the way, we did fire earlier this year, we have come to find out that last six or seven properties that they sold to our clients had issues. Some of them were relatively minor, not necessarily inexpensive, but things that could’ve gotten fixed and did get fixed. Unfortunately, it took a period of time, weeks to get things resolved. There is one property in particular that was an absolute nightmare. I’ll go as far as calling it a money pit. The reason I say that is because there were some issues in the beginning. Our client did have an inspection done, the inspection was done and it showed few problems. I actually do question the quality of that inspection. I think the client in hindsight should’ve actually gone back and maybe questioned the inspector about it or had another inspection done. At this point, I think there is a case to be made that a client could sue this inspector for doing a poor job.

On this particular property, there were numerous problems that had come up after the fact, after he closed escrow. There were leaks in the roof, which you couldn’t identify unless it rain, but it didn’t rain at the time of the inspection so it was either known and hidden or unknown and then came up after the fact. Often, our providers will go and fix these problems if they come up during or after the close of escrow. In this case, there were multiple issues that didn’t get addressed, at least not right away. Then when they were addressed, they were addressed very superficially. They were just glossed over and nothing was really fixed. Some items were properly fixed, but most things were just glossed over.

Fast forward to today, we have a situation where we have a bad roof, a vertical crack in the foundation, which again, these two things did not show up at the time of the inspection. We have all kinds of little odds and ends or what a friend of mine calls, ticky-tacky stuff throughout the property. Some of the things in the property were not properly seated or mounted, such as cabinets and doors. Those are just a laundry list of things. I tried working with this provider to get them to go back and fix it. They did go back and fix it once, but like I said, they glossed over much of the stuff.

What ended up happening is they just wanted to back away and say, “No, I’m not paying for anything more. The inspection was done. The buyer accepted it as-is. I’m done with it.” That leaves the buyer, our client, in a situation where they are now responsible for it legally, contractually in every way. I really feel bad for this person because this is not how it should’ve unfolded. What I did is I just went ahead, authorized the replacement of the roof, that was a $5,720 repair. They literally took the roof off down to the boards and put a brand new roof on. I told the client this and he was ecstatic about the fact because he’s been having problems with tenants moving in and then moving out when it rains because the roof was leaking into their units, into their rooms.

It didn’t stop there. I had one of our construction engineers, go out, walk the property, write up a detailed scope of work. That scope of work came out to be over $10,000. I went back to this previous, now fired provider who at the time, didn’t know he was fired because I was using that as leverage and tried to negotiate where he would actually go back and fix these problems. I turned it around and I told him, “Look, I don’t want you going out there. I want you to let me bring in my crew, have it fixed properly and then you pay for this.” He didn’t want to pay for it. He was willing to give up some, but he wasn’t going to pay for all of it.

I guess the goodness of heart, I just went ahead, authorized the repair and it’s actually being done as we speak right now. That, at this point in time, is my expense. I have gone very deep into the red, which means that I am not generating a profit on this property, I’m taking a big loss. We’ve got a $5,700 roof and a $10,000 scope of work that I am now on the hook for and I am going to hopefully get at least half, which I don’t think will happen but close to, if I can from this particular provider.

This is how I am unfortunately, protecting our reputation as a turnkey provider and promoter. Do we do this for everybody? Fortunately, no because we don’t have to. This situation rarely, rarely comes up. Once in a while, it does come up. In those situations where it does come up, where we have issues, we have providers that we work with and builders that will go in without question, without blinking an eye and just go and deal with the problem, fix the problem. Once in a while you get something like this situation with this property I was just describing. You just have to deal with it however you need to deal with it. Anyway, that’s my long rant about reputation. I apologize for it being so call, winded about it but it bugs me and gets under my skin.

I just want to take a listener question, an email from Carlos. I thought it was a good set of questions that I think a lot of listeners probably have asked or will ask at some point in the future. He says, “Hello, Marco. I live in Houston, Texas. I recently read some of Kiyosaki’s books and others related to real estate. I am really excited about this way to achieve financial freedom. I discovered your podcast program and I love it. I am new on this and understanding that your company offers turnkey properties, ready to buy and producing money. I would like to ask you the following:” His first question is, “Why will someone sell a property with a tenant and a positive cashflow? If the property is producing money, why sell it?”

Good question. We get asked this question from time to time. I think I might have touched upon this in a previous episode. The short answer is this: we do buy and keep some of our own properties obviously, because we are investors too. The bulk of the properties that we have and that we sell and that we acquire and renovate are meant to be resold as turnkey, tenant occupied, professionally managed investment properties. That is our business model. We are here to help you invest and build your portfolio. We do that with the product that we sell, which are typically one to four unit residential properties in the markets of our choosing, the markets that make sense where you can step in and with little effort, just some due diligence, financing, acquire these properties to build your portfolio. That’s a simple answer and a short answer to the question. It’s basically our business model. It’s the value and the service that we provide to investors like yourself.

His second question is, “What happens if the tenant leaves the property right after I buy a turnkey property? I will need to pay for everything until I find another tenant. Panic. Is there any strategy to deal with the situation with minimum negative impact?” The odds of that happening are very, very slim. It’s not impossible, but I rarely see that happen. If there’s a tenant in place, 99% of the time, they were properly screened and qualified. The odds of them leaving in the first year are pretty slim. The odds are actually stacked in your favor that they’re going to stay for an extra year or two. They may be there one to three years. I’ve seen and heard of tenants staying as many as eight years. The fact is, if they do leave, it’s your responsibility. What happens is, your professional property management company will just turnover the property. They will just clean it out if there’s anything to clean out. They’ll basically make sure it is ready to lease and lease it to the next qualified tenant that they find. However, some management companies do charge a lease up fee, which could be 50% to 100% of the first month’s rent. If that’s the case, they’re going to basically keep that first month’s rent. It’s a cost of doing business, it’s an expense to you.

Sometimes, property management companies that are tied into a property right from the beginning not always, but often will give you a break on that turnover. They will give you a break by reducing or waving the lease up fee if they have a tenant that they placed and they happen to leave within a few months after you’ve purchase the property. This is not a black and white thing. It’s not chiseled in stone or written anywhere. There are a few companies out there, a few property management companies that will offer a tenant placement guarantee, which means that within the first two or three months, if the tenant actually leaves for whatever reason, they will replace that tenant with another tenant without incurring any placement fees on your part. That’s something to keep in mind.

Carlos’ third question is, “How should I know that I am ready to enter the business?” I assume what you’re asking is how do you know if you’re ready to invest. I’m not sure I can answer that question for you, but you will know when you know. Let’s put it that way. If you’ve got the capacity to invest, if you’ve got some credit and some capital, qualifying credit and capital for a down payment, then you’ll probably be ready. The first step is always to educate yourself, build your knowledge. If you feel really confident that this is the way to achieve financial freedom, if real estate is the way to do it over any other asset class, then move forward. Do it, call one of our investment counselors, ask questions. We’ll spend time with you and go through what we just simply referred to as a strategy session. Hopefully, by the end of that phone call, you will know if this is the direction you want to move in or if you need to take another path. I would say that nine times out of ten, this is the right answer or the best way to go about it. I don’t recommend things like stock market, mutual funds, but if you’re looking for a passive investment, it’s really hard to beat real estate. I don’t know of anything that comes close.

Anyway, Carlos, thank you for your questions. I appreciate it. Hopefully, I’ve answered them well enough for you. That’s it for today. I want to just go over that reputation stuff with you and just take one of our listener questions. If you have any question for me, just submit it on PassiveRealEstateInvesting.com, just click on Ask Marco and I will try to cover that on one of the future episodes. Anyway, I appreciate you being here. Download our free report, The Ultimate Guide to Passive Real Estate Investing. You can find it on NoradaRealEstate.com. You can also get to it from our podcast’s website.

Feel free to contact our investment counselors if you are thinking about real estate or thinking about expanding your existing portfolio, we’ll be happy to spend some time with you. Remember to subscribe if you haven’t done so already. That’s it for this week. Thanks again for listening. We will see you on our next episode.