Real estate investing is all about relationships and dealing with people. In this column I’ve written about the need for trust in order to build long term symbiotic relationships. I’ve also written about using contracts to build a solid legal safety net.
So...which is it? Back in the ‘60s a management theorist Douglas McGregor originally wrote about two theories about managing relationships: Theory X, which is a negative view that assumes that people are inherently lazy, dislike work, and need (want) to be controlled, and Theory Y which argues the opposite – that people are self-motivated and will choose to seek responsibility and do good work.
So...do you control and corral your relationships with contracts (Theory X) or do seek relationships based on trust and mutual interest (Theory Y).
Well..both. And that answer isn’t as wimpy as it sounds. I’m not sitting on the fence; there’s a role for both trust and clear legal boundaries (contracts) in each relationship. This applies to you and your investment partner, you and your broker, you and your property manager - basically any of the many relationships that you have to develop and nurture as a real estate investor.
Basically there are four possible combinations, but only one good one:
- No Trust + No (or bad) Contract = This is a train wreck waiting to happen. Expect to see your partner in court sooner rather than later.
- No Trust + Good Contract = You can keep your partner on his toes with an airtight contract, but it’s a litigious, tense way to do business. Expect to grind your relationship (and your nerves) into powder.
- Trust + No (or bad) Contract = George Bernard Shaw said that “the road to hell is paved with good intentions”. Trust is crucial, but we don’t always communicate well. If you don’t deal with the legal details then expect poor alignment, misunderstandings, and friends that turn into enemies.
- Trust + Good Contract = Voila. Finally. Combined trust with a thoughtful legal framework and you have a better chance of achieving a streamlined partnership that can focus on solving problems.
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