Self Storage University Podcast: Episode 23

Why You Can’t Fully Delegate Your Diligence



Buying a self-storage facility is a very important decision. Due diligence is an essential part of the effort to make sure it’s a success. But some buyers try to delegate this work to others. In this Self-Storage University podcast we’re going to review what you can – and can’t – delegate regarding diligence and the reasons for that limitation.

Episode 23: Why You Can’t Fully Delegate Your Diligence Transcript

Ben Franklin said that diligence is the mother of good luck. Ben Franklin never owned a self storage facility, but his words ring true even today. This is Frank Rolfe, the Self Storage University Podcast. We're talking about why you can't fully delegate your due diligence. Now, we live in a society today of the books like The Four Hour Work Week. We all want to believe that we can do almost any task using a virtual assistant, or someone that we pay some amount of money, typically not a whole lot, to do all of the real labor in life. And meanwhile we just sit back as the intelligent person who somehow has the master plan to use a virtual assistant and check their results and basically harness the power of their labor. But the problem is it's really hard to do that when you're doing due diligence on a self storage facility for several important reasons.

The first problem is when you delegate the diligence to another individual are they even really doing the work? Let's say for example you're trying to check the rates among all the various self storage facilities in your market. That's really boring work. You have to call them up, you have to talk to them, you have to call several times to get them to answer the phone, you have to write it all down. So it's something that you don't personally enjoy, but the VA isn't going to really enjoy that necessarily either. So as a result they may cheat. They may just call one facility or two, and then extrapolate that data to everybody else and just start making up numbers. The problem is if they make up those numbers you will not have the actual factual items you need to form the foundation of deciding whether or not to buy that storage facility. So clearly their lack of effort, their falsehoods on what's going to happen could have huge ramifications to you and you would not even know it. So the first problem when you're trying to delegate your diligence is can you actually trust that person. That often is a huge issue.

Another issue is will they ask the right questions. When you're out there trying to vet such issues as the permit with the city and such, the way that you ask the question and the way you ask follow up questions have a huge impact and they may not known enough about the business or just enough about strategy to know the hidden meanings behind what people say. They could just gather the raw data perhaps and just tell you yeah, the person said this or that. But there's sometimes a lot more out there that you're not harnessing. There are unwritten things that are being communicated and they don't have the common sense to know that those things are going on, so you're again not getting the complete picture when you delegate some of the diligence out to people.  Now you might be able to solve that. You could go ahead and hire someone that's someone that you know, so you can trust them as far as gathering the information. No guarantee though you can trust them as far as understanding the meaning of the information.

But the biggest problem we've seen when you delegate your diligence out is will you ever really be comfortable to make the decision at the very end. That's the real problem. All of us, when we look at buying a property, we have to weigh all the facts and figures together in our due diligence to decide whether to pull the trigger or not. And they call it pulling the trigger because it is very similar to somebody in the army pulling a trigger. Once you pull the trigger, you can't go back. You can't fire the rifle and then tell the bullet, "No stop, wait, I didn't mean it." So it's very stressful. What alleviates the stress is when you feel like you have a good handle about all the information coming in the door. But if you don't create the information flow, if you didn't harness all the facts and figures, are you really going to have the guts to do it? Are you really going to feel like you're truly in command?

If you ever watch on PBS when they talk about how an aircraft carrier works, you have sailors around a room somewhere on that aircraft carrier shouting out bits of data, reading computer monitors saying, "Five planes on deck," and, "Incoming plane, 1000 miles." The problem is you have someone in the middle of the room kind of standing there, taking it all in. They have an erasable board and a marker. They jot down notes and then they shout out commands, "Launch those four planes, load four more." "Send anti missile towards the incoming airplane," things like that. Now the reason they do that in the Navy is if there was ever a nuclear strike or a blast, it would blow out all the computers and then the captain would be left by himself to try and navigate the ship and do all the functions manually based on the last bits of information that they have.

Most importantly it comes back to this concept of gut instinct. The gut instinct basically in all humans is greater than a super computer, at least it has been historically. You can make better decisions than the computer because you have more bits of raw data. Basically, you've got billions of bits of raw data for every day that you're alive. The older you are, the even greater your super computer brain can work. But if you don't put all the data in your super computer brain you can't derive your gut feel, your gut instinct, should you buy that storage facility or should you not. That is a terrible, terrible stress filled problem. Nothing is going to have a greater likelihood of you doing a bad job in buying that storage facility than making a bad decision via having bad due diligence, and also making a bad decision because you didn't really understand fully all the due diligence coming in the door.

It's not really so much an issue of can you hire people to do the various parts of diligence. The bigger issue is you can't hire the actual decision. Now you might say well there are groups out there that I can actually have them do the whole thing. They can do all of the due diligence for me, and even give me their opinion. Yeah, it's their opinion. They have no skin in the game at all. They have nothing in it. You write the down payment check. They never see you again after the closing. Anything they told you will have a million disclaimers that it was just their opinion at the time, so it's not going to do you a stick of good doing that.

There really is sadly no substitute for doing due diligence on any self storage property than you doing it yourself. Now, that does not mean you can't have trusted others to gather the raw data because sometimes gathering the data is one of the most time consuming features. But at a minimum you've got to put the data together and you've got to make that decision based on your gut instinct. That's what we really all get paid for from investors is that we have the skin in the game, and we made the decision. But sometimes making that decision and writing that big down payment check can be very, very scary. You're getting compensated for that risk with your reward of how the investment turns out. But it's very important at all times that you be fully in charge. If there are any complicated issues that turn up in due diligence you must certainly be the quarterback on any such items.

If for example there's an issue with the permit, with the survey, with the easements, with the building itself you cannot delegate those really, really complicated decisions to others because at the end of the day not only do they not know what they're doing but they don't have any skin in the game. We talk all the time about skin in the game and what it really means. It simply means that no one can make a decision, no one cares as much and puts as much serious thought into it as you do because you're risking your money and people who don't risk their own money just don't tend to put as much thought and worry into making decisions. The person you're delegating to do the diligence, it's a bigger decision for them maybe what time they get off, when they can stop doing work for you because that's the very day they're going to go and propose to their soon to be fiancée. So their skin in the game may be a whole other category than your skin in the game. And you can't really convey that feel. You can't convey that skin in the game. That's something that you can't pay a little extra for with a virtual assistant to get them to truly be concerned on your behalf. So simply you're simply at their whim of what's going on with them.

But again, if you have a trusted person, perhaps a family member, someone your really believe will do you a good job, you can have them gather all of the data. But simply don't let them make the decision. You need to read their data, ponder their data, and move forward. Because at the end of the day as much as you may want to delegate, delegation in this case may be destruction. So just be smart about your due diligence. It's also not that great an idea for you as a potential buyer to be so distanced from the transaction, even regarding your investors if in fact you're not buying this with your own money but with others. It's even more important that you know what you're doing before you pull the trigger because whatever bad decision you make could fall back on your investors as well. Whether that's friends and family, or just some other person who wants to invest money with you. It's even more critical now because it's not just your future at stake, it's theirs too.

This is Frank Rolfe the Self Storage University Podcast. Just wanted to talk about the problems with delegating due diligence. It's not always the worst thing you can do, but it's very important if you do want to use diligence delegation that you do it in the correct manner. Because at the end of the day, once you pull the trigger you can't stop and you've got to make sure that you hold the key to all the knowledge before you go forward. Talk to you again soon.