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Last week I wrote about two different kinds of investors who contacted me about a multi-unit property DBNR is selling in Syracuse, New York. One was a couple who was dedicated to converting a recent inheritance into real estate, looking for quick returns and cascading profits after a series of purchases, flips, and new purchases. The other was a meticulous woman who spends a lot of time researching potential investment properties, asking a lot of questions, and making extensive calculations.

I asked the question, whom do you think I enjoy working with more? The answer may surprise you. I won’t keep you in suspense - I far prefer working with the meticulous woman.

You may think I’d prefer to work with the couple who has scads of cash and is looking at real-estate investing as an exhilarating rollercoaster that will only take them up. But the fact is, I don’t think these people should be buying real estate. Let me explain why.

There are only four things you can do with money: spend it, earn it, save it, or invest it. This couple knows about earning and spending, but they don’t know about saving or investing. You could argue that because they didn’t earn the money that was burning a hole in their pocket, they didn’t know how to deal with it. But the fact is, we just got through a period of history when too many people looked at real estate as a quick path to riches. You can’t look at it that way anymore.

Even more important, you need to have a plan. Clearly, they don’t have one (which is how they got to this point in their life where they had no savings). When I asked them when they thought they would want to take the money out of real estate, they didn’t know. When I asked them what they might do with their profits, they didn’t know. All they know is that they had a problem - no money for retirement - and now they have a solution - the inheritance. Everything else will take care of itself. They don’t know about cash flow. They don’t know about return on investment. They don’t even want to be landlords. They just want to flip real estate.

You might think that having a client like this is perfect for someone like me. They have no metrics for success, so no matter what happens, I can’t be held accountable for not meeting non-existent goals. But more likely, whatever happens, they’ll blame their advisors because their expectations are no match for reality.

I would much prefer the woman who does her homework, even when, as it turns out with this one, she didn’t buy the property. Why not? As part of her research, she talked to another investor who already had property in that neighborhood. That investor told her that the people who rented in that neighborhood were difficult to deal with; they’d pay rent when they could, skip it when they couldn’t, and work the system to stay in the property until they were evicted. Being a landlord in that situation would have either been too time-consuming for her or too expensive to have someone else manage it. She passed.

But I want to work with her again. Because she’s smart, patient, and conducts appropriate due diligence. That’s the kind of client I prefer, because in the long run, that’s the kind of person who’s going to appreciate the work that I do and have realistic expectations about the outcome.

You may think that dealing in real estate, I’m happy to see anybody come in the door (or over the Internet) as long as they have money. Nothing could be further from the truth. Imagine a house-painter - one who takes pride in his work - with a client who wanted a house painted mango orange. Do you think that house-painter would point to that house as an example of his or her best work? Probably not.

I’m the same way. Let me illustrate by telling the story of two investors. You pick whom you think I like working with best.

Let’s start with a couple who called me about a property in Syracuse, New York. She was a social worker and he was an Internet researcher. It was a classic bad news/good news situation. The bad news was that, though they had been married a while and had three kids, they hadn’t put much aside for their retirement. The good news was that one of their parents had passed away and left them a sizable inheritance with which to rectify their financial situation.

These people looked upon real estate investing as something akin to a trip to Disneyland. They are throwing money into it with abandon. They wanted to buy houses, fix them up, and sell ‘em for a profit, and then start over again. They look at real estate investing with an unalloyed optimism, thinking of it as a money machine. When I asked them how well they wanted to do, they said, “As well as we can.”

Does that sound like heaven? A couple with money, optimism, and time.

Let’s contrast them with someone working from a different perspective, a woman who called me about the same multi-unit property in Syracuse. She’s a very studious investor. When she called, she interrogated me about our business model. She spent a lot of time mulling over a potential investment, even though she is already familiar with that particular area. She visited the properties to see their condition in person. She sent a contractor over to get an estimate of how much it would cost to get the property in shape. She even took the time to research the title, making sure DBNR actually owned the property and that there weren’t any liens against it.

She spent a long time on the phone, explaining to me with her extremely meticulous strategy. She buys properties and holds them until they increase in value, unless she derives significant cash flow from them. She determines whether the cash flow is sufficient by looking at what she gets in tax deductions and her return over three years. No matter what, she says, she needs to see a realistic exit strategy within five years.

Whom do you think I enjoy working with more? The answer next week…

In The Shawshank Redemption, Morgan Freeman played a convict who could “get things for you.” Whether it was plum job assignments or pin-up posters, he was the go-to guy within the confines of that community.

The idea of a go-to guy in a community is a common prospect, especially in real estate — without the criminal aspect, of course. There’s somebody (or multiple somebody’s) in every metropolitan area who knows the best contractors, the richest investors, the savviest real estate agents, the smartest mortgage brokers, and are even on a first-name basis with the folks in the municipal permits department. And as a result of knowing all these people, they have a keen insight of what’s happening in real estate in that community.

We’ve recently met a guy named Charles who fills this role in Chicago, Atlanta, & Dallas. He’s been doing it for fifteen years and he’s well-connected. He not only knows what properties are undervalued, he also understands financing. Best of all he has a database of local investors with cash on hand. He is a one-stop shop for anybody who wants to do business in Chicago.

What Charles doesn’t have is that same capability in other communities.

As DBNR expands its focus to include “light rehab” properties, we see a strong value in connecting with people like Charles. It dovetails with the trend we’ve been seeing (and writing about) of a trend away from regional real estate expertise toward national real estate expertise, in which professionals can take advantage of investment opportunities beyond a particular area. Imagine Charles’ counterpart in highly depressed Las Vegas want to share insight — and risk — with people in other parts of the country, as opposed to betting on the revival of his overbuilt city.

I’m working toward becoming a different type of valuable resource like Charles in Silicon Valley. We want to be his partner and the partner of his counterparts elsewhere. The problem — as always when people first come together through electronic and other impersonal methods — is trust. Establishing trust within the confines of a any community is easy. You say what you’re going to do and you do it, on time, and everybody in the neighborhood knows you stand behind your word. That’s not so easy when someone isn’t from the neighborhood.

The problem comes when someone’s stock-in-trade (who they know) are also their references. People are cagey about sharing that kind of information. We’re working through that. We’re still doing due diligence to confirm that Charles and others like him are who they say they are. We’re using social networking tools, like national real estate forums, to find people who know them or know of them. The tools are there. The process may take a little longer. But the ability to go to one person and spread your real estate investments nationally rather than locally is becoming a viable reality.

Even Bill Gates would tell you that some of the hardest — and most necessary — moments in the life of a business are the ones when you stop, take a breath, and ask yourself some questions: is this strategy working properly, just as he did in 1996 when he “redirected Microsoft to become an Internet-focused company”. Can I make adjustments to be more profitable?

It’s almost an antithetical move for entrepreneurs, who are supposed to be confident in their strategies even in the face of setbacks. But once you’ve been speeding down the road for a while, it makes a great deal of sense to pull over to the side and recheck your roadmap. After all, if you headed off to a ski vacation in Tahoe, but you hear the highway is snowed in, you’ll have to find a different route to get there.

That’s what we’re doing here at DBNR right now. We knew there would be challenges like these:

Speed. Cities and municipalities are razing dilapidated properties more quickly than in the past. We had one property in Indianapolis that we had no illusions about — in the initial photographs we received, there were tarps on the roof — but it was demolished last week without us being notified. As the economy improves, cities are moving faster than in the past to rehabilitate “blighted” neighborhoods.

Lack of motivation. We were highly altruistic going into this project, hoping to put people who hadn’t had the opportunity to have homes previously into properties that they themselves would fix up. We’ve spent hours on the phone talking to people who are supposed to call back, but they didn’t because they were apparently wrapped up in March Madness. On one property in Detroit, I’ve talked to 15 people and we still don’t have anybody who is willing to do what it takes — small though that might be — to get in there. Why is that?

So what do we do? Every entrepreneur knows that out of challenge comes opportunity and we have found one we like a lot. Over the last several months we’ve built relationships with other bulk REO investors and told them our story. Turns out we’re not the only ones encountering these issues. What a surprise! One investor even told us how he’s changed his business to adapt.

Mike from Pleasanton, CA told us that now, instead of purchasing “C” class property, he purchases property that doesn’t need nearly as much rehab. He then hires a local contractor to rehab and then sell on a land contract just as we are doing. He’s found that using this method his hassles have gone way down. He has a greater number of sales, his default rate is lower and since he “cherry picks” the properties he buys he gets to weed out the nightmares. Yes, his properties cost more, but overall he says it’s worth it.

How do we take advantage of this? We think we’re no more than 30-60 days away from getting additional investors on board. In addition to being able to purchase more property, we’ll be able to test various adjustments to our model to improve performance, including Mike’s. We’re building relationships with real estate professionals and contractors in Chicago to be able to test this “light rehab” model as soon as we’re funded, and possibly on property we now own.

Every entrepreneur likes to hear and act on new ideas. We’re excited to evolve and adapt to challenges we face and we don’t have a problem adjusting our business when an opportunity presents itself. After all, there are many roads ahead you can take to get to your destination.