Morgan Friedman: Hey everyone, welcome to the latest episode of Client Horror Stories. I’m being wild and crazy tonight, breaking my discipline and protocol because I’m going right from the intro get-to-know-you call to the recording. That is how great our intro call has been. It’s great to meet you and to record you, Spencer.

Spencer Sutton: Morgan, great to meet you, man. Thanks for having me on the podcast. Yes, I’m excited.

Morgan Friedman: Okay, cool. So, now with my coffee in hand and my NASA mug in hand as well, and some whiskey in here. Whiskey and coffee. I am excited to hear the story that you just hinted at moments ago. Tell us about your craziest client horror story, Spencer.

Spencer Sutton: Wow. This is going to be painful to recount, but I did learn a lot from it.

So, a while ago—I won’t say how old I am, but in my younger years—I was an aspiring real estate investor. Everybody back in those days wanted to own rental property. I loved real estate. I loved going out and looking at houses.

So, what I started doing was buying and selling houses. I started buying and flipping houses and wholesaling houses, which kind of got me into real estate, and I was really excited about it.

But the great thing about wholesaling or flipping properties is you don’t own them for very long, right? You’re buying them and then you’re just selling them to somebody. That investor’s happy, you’re happy, you make a little money.

But I knew, I was convinced, that in order to fulfill my real estate dream, I needed to own rental property.

And so nobody really taught me: how do you own rental property? What is the best way to own rental property? What do landlords really do? I had no clue.

Morgan Friedman: It’s incredible to me how many people, including a younger version of myself, jump into professions truly knowing jack nothing about it. And yeah, it’s, “If I knew then what I knew now, everything would be different.”

Spencer Sutton: Well, it’s really interesting because what happens is, if you don’t learn it in school—if you’re not paying tuition in school to learn something—you’re going to pay tuition somehow. You’re going to pay. It may be painful, but you’re going to pay.

Morgan Friedman: The universe is going to teach you the lessons you need to learn. It might teach it to you in school, it might be through your parents, or maybe just in the school of hard knocks.

There’s a great quote by a guy named Ray Dalio. He says, “Pain plus reflection equals progress.” So there’s got to be pain. However, you have to reflect on it. You have to think about what was so painful. And if you do that over and over in your life, then guess what? It equals progress. You’ll grow. You’ll learn.

Spencer Sutton: Yeah, that’s straight from Ray Dalio. So, he went through a lot of pain in his life, apparently.

So, I thought, you know, I’m going to buy these rental properties. What’s the worst that could happen?

And so, I bought a really, really great property. This was an all-brick rancher, probably built in the mid-’70s. This was a perfect house: three-bedroom, two-and-a-half bath. We finished the basement. I really put a lot of time and effort and money into making this house look really, really good. It was in a great part of town.

Unfortunately, around this time, the rental market started to struggle a little bit. And so I was kind of worried.

But back in those days, there was no Zillow. So I was literally going and putting a sign in the yard: “Hey, house for rent.” I was listing it wherever I could online. And then I probably put it in the newspaper. I don’t want to date myself too badly. I don’t think we were doing the newspaper by then.

So, I just remember marketing it, and I started getting phone calls.

These phone calls were coming to my cell phone, and I was just picking up and saying, “Hey.” And the way it works, or the way I found out it works, is people want to walk through that property and look at it with you.

And I was like, “Okay, great.”

Unfortunately, this property was not close by. It wasn’t like it was in my neighborhood and I could just say, “Yeah, I’ll meet you there in five minutes.” I was driving 30 to 40 minutes out there and then back 30 or 40 minutes to show this property.

And I went and showed it to one person and they were like, “Yeah, this is nice.”

And I’m like, “Well, are you interested in filling out an application? I have a process.”

I knew enough that I needed to have a process to screen people to make sure I got a really good resident in there.

And they were like, “No, I’m not interested in putting in an application.”

A couple other people came by. I went and showed it to them. They put in an application. One of them didn’t meet the criteria, so I couldn’t rent it to them.

Another person didn’t want to put in an application.

So after probably four or five weeks of me showing this property and not getting anybody approved, I started getting a little nervous. Because if you have a house just sitting there without any income, you’re paying the mortgage.

I was paying the mortgage. I was paying for this house, and I wasn’t providing a great house for somebody and I wasn’t getting paid.

So I started getting frustrated and really kind of started getting worried.

Then I remember this nice lady called me, and I was like, “Great.” And she had a daughter, and they wanted to look at the property.

I said, “Great. Yeah, I’d love to show it to you.”

So I drove out there and she walked around, and they just raved about the property.

“Oh, we love this property.”

And I was like, “Oh, this is going really, really well.”

She eventually was like, “We’d love to rent this property. And as a matter of fact, we actually have—we can pay you upfront, like two or three months plus the security deposit.”

And I was like, “Really?”

She goes, “Yeah.”

And I thought, “Wow.”

I started thinking, “Well, you know what? It would be great to go ahead and rent this and not have to really go through the screening criteria.”

What happens if they aren’t approved? Then I’m going to have to tell them no. And I could be showing this thing for another month. I mean, this would be a nightmare for me.

And so what I did was I was like, “Hey, you know what? They’ve got some money upfront. I’m sure they’re good for it. The rest, I think they’re going to be great tenants.”

They were super nice.

And I said, “Yes, let’s do it. I’ve got a lease.”

I went through the lease with them. I showed them everything, saying, “Hey, no pets, no parties, you have to respect your neighbors,” and things like that.

They signed it right there. They gave me cash.

And I was so pumped. I said, “I’m going to make a copy of this lease. I’ll mail it to you, and here are the keys.”

I had their money.

So that’s the way it started.

Morgan Friedman: So far, based only on what you said, the only red flag I see—because I always like identifying red flags—is paying cash. Because in the United States, it’s a little bit weird to pay for anything non-trivial in cash.

Spencer Sutton: Yeah.

Morgan Friedman: So everything seems good so far.

Spencer Sutton: Everything seemed good so far. I was excited about it.

Morgan Friedman: And then?

Spencer Sutton: So, it was like just a few months in, and rent started to become late.

Morgan Friedman: And that’s also a yellow flag.

Spencer Sutton: Yes. Right. If you know what I know now, Morgan, I would even say that somebody paying several months upfront is a red flag.

That’s a red flag because what they’re attempting sometimes is to convince you to bypass your typical screening process. If they’re showing you, “Hey, I’ve got a lot of money. I’m ready to do it.”

Morgan Friedman: By the way, just because I have a lot of experience renting in South America, I’ll point out, on the other side, on the side of the renter, I’ve used that technique for that exact reason many times.

The way it works in Argentina, for example, is you need a guarantor. But the difference is, in the U.S., a guarantor is a person who’s willing to sign for you.

But in Argentina, a guarantor is a piece of property. A piece of property that has no lien or debt or anything on it. Each piece of property can be the guarantor for only one other property, for only one rental, and the value of the property has to be greater than the value of the rental.

So, as a result, me 20 years younger, when I was just exploring South America, I didn’t have anyone that had a property that could be a guarantor.

So I employed the trick, saying, “Oh my God, the rent here is so crazy cheap. I’ll just offer them the first six months upfront,” in a way to get around the guarantor requirement.

So, did it work? Did you do that?

Spencer Sutton: Yeah. Yeah, it worked.

Morgan Friedman: Okay.

Spencer Sutton: I even once paid an entire year upfront. Not only did that give them complete confidence—literally, I gave them all the money—but I freaking hate that it’s the first of the month and I need to go pay this person, pay this person, pay this person. I’m like, I just don’t want to think about it for a year.

So it was win-win because rents were cheap enough. It was basically near free, so it wasn’t even worth thinking about the money.

I tell people now, just set it up for automatic draft at the first of the month and you don’t have to think about it anymore. That’s the easy way.

Morgan Friedman: Totally.

Spencer Sutton: So, I started getting kind of worried, right? Because late payments usually turn into no payments, you know. And I don’t want to paint every situation like that because it’s not true.

However, a telltale sign that is probably about to go south—I learned this the hard way during this experience—is that they stop communicating with you.

So they stopped communicating with me, and I was like, “Yikes.” When somebody won’t call you back, that’s a problem.

Morgan Friedman: I just want to point out: in every single profession, no matter what you do, someone going low-communication is a serious red flag.

Spencer Sutton: Oh, yeah. Yeah. I think that’s something that people don’t teach or don’t learn, maybe in college when they’re younger and growing up, is how to have hard conversations.

I would rather have a hard conversation and say, “Hey, listen. Here’s the situation. I’ve got a problem. I lost my job, or there’s been a sickness in the family,” whatever the reason that you can’t pay.

I’d rather have that conversation than avoid the conversation. It’s better for everybody.

Morgan Friedman: And I agree. That’s really good. It’s a red flag in any situation.

And by the way, no, they never teach that, too. One of the whole objectives of this podcast is to teach lessons exactly like this one that you don’t learn in school or elsewhere.

Spencer Sutton: Yeah. You don’t learn that.

And so I’m starting to get red flags. And so what I decide to do is, like, listen, I’ve got to go and I’m going to have a difficult conversation.

I go down there and basically say, “Hey, listen. What’s going on? What’s happening? What’s going on with the rent?”

And they’re like, “Oh, we’re going to get it to you.”

And then another month goes by.

And then another month goes by.

And at this point I’m like, “Okay, we’ve got a problem.”

I knew that I had to start the eviction process.

I remember thinking, “Okay, I’ve never done this before. I don’t know what I’m doing.”

So I started asking around and talking to people who had been through this before.

Eventually, I realized I had to get the legal process started.

Morgan Friedman: How long had they gone without paying at this point?

Spencer Sutton: It was several months. And that’s where I made another mistake, because I kept thinking, “Okay, they’re going to pay. They’re going to pay.”

I always want to believe the best about somebody.

And so, yeah, month one, I’m okay. I can understand things happen in people’s lives, like sickness and things like that. Sometimes I get behind on rent. That’s not a big deal to me.

But month two, month three, you’re talking about several thousand dollars by the third month.

And then you’ve got to evict.

Well, guess what? An eviction process takes four or five months. You’re still not getting paid.

And you’re paying the attorney and everybody else.

So it’s very painful because I’m paying the mortgage. I’m paying the mortgage every month, and they’re not paying me.

And then the whole time I’m sitting there thinking, “What’s the condition of my house going to be when I go back in there?”

These little Chihuahuas obviously don’t care.

So the day finally came. I’ll never forget the day finally came for them to be evicted, for the sheriff to put them out.

All that’s set up by the court and everything, and so I went out there because I wanted to be there just to lock the property up. I wanted to make sure it was locked up after they were gone.

Morgan Friedman: And did they show up in court?

Spencer Sutton: Correct. That’s right. There’s a process, and the judge is going to give them an opportunity to defend themselves or whatever.

They did not show up.

And the reason they didn’t show up is because they didn’t really have a leg to stand on.

You know, I had a copy of the lease. I had proof that they hadn’t paid.

They could have come and said, “No, we have paid. Here’s the receipt. Here are the money order copies of the money orders or here are the cleared checks or whatever.”

They didn’t have anything.

And so they couldn’t do that.

My buddy Brian helped me with that whole process.

And I remember standing there and watching the sheriff take their stuff to the street.

They left the house with a bunch of stuff, and they didn’t take everything out, but they took a lot of stuff out and set it at the bottom of the street.

And then neighbors kind of walked by and took some stuff.

And I thought, “Wow. This is a horrible way to live.”

I would not want to move from house to house to house.

And at the end of the day, I think they were professional renters. They were essentially professional renters.

Morgan Friedman: Professional renters means that they know what they’re doing. They know how long they can live in a house without paying, or live in an apartment without paying.

They know the system well enough that they just kind of go, “They’re looking for landlords who are rookies like I was. They don’t know anything. And they’re like, ‘How can we fool this rookie?'”

Spencer Sutton: “We can wave some cash in his face and say, ‘Hey, look, we’ve got three months of rent. We’re ready to do that.'”

Morgan Friedman: Interesting.

Spencer Sutton: So I was a sucker. It was my fault. It wasn’t their fault.

I shouldn’t have really gotten super lax with my screening criteria. I should have just stuck to what I knew was right.

Morgan Friedman: So one lesson is you got lax with your screening criteria because someone offered you something disproportionally trustworthy upfront.

Someone did something that looked trustworthy: “Oh, I’ll give you a bunch of money upfront.”

But that makes you relax on your sketchiness-detection radar.

This reminds me of the etymology of the phrase “con man.” The original framing of that was “confidence man,” because it was someone who would give you confidence so you trust them, and then they rip you off after they’ve gained your trust.

Spencer Sutton: That makes me think of the movie with Leonardo DiCaprio, Catch Me If You Can, about Frank Abagnale, the true story of Frank Abagnale.

But I will say this, Morgan: that’s not the only thing.

Yes, it was the temptation of the money, but it was also combined with the pain of going out to that property, spending an hour showing that property.

Guess what? You want to start believing people in the house. That gets frustrating.

And so what happens is rookie landlords are like, “I’m tired of going out and showing this dumb property. I’m going to relax on my screening criteria. I’m going to believe people more.”

And then when they show money, that’s just a perfect storm.

And I’ve seen it happen to a lot of investors over my 20 years of real estate investing.

Morgan Friedman: Interesting.

By the way, what I would add to that is there’s an interesting concept in economics called transaction costs.

When economists talk about transaction costs, they don’t mean it in the particular sense of, “Oh, on your credit card there’s a 3% fee for every transaction.”

Transaction cost in the more general economic sense is anything you do, there’s just some cost to doing that thing. And it’s not necessarily money.

It could be the frustration of dealing with something every time.

Like, if I have to deal with this relative of mine who’s really annoying, then every time doing business with this relative is like, “Oh my God, I need to call them and they’re going to be not nice to me.”

So part of the lesson here is to take into account the transaction cost, and not necessarily the financial one.

You’re going to invest in real estate, okay? You have to show it an average of 30 times before you rent it, and it will be four hours, a half workday, including the transaction cost of driving back and forth.

Just factor that into your analysis to make sure it’s worth it.

Spencer Sutton: 100% agree with that.

I mean, we call that brain damage.

There’s brain damage involved. Cash for keys and brain damage.

Like, do I really want to spend brain damage? Am I going to get brain damage thinking about this?

So you start adding up all those costs, and it really doesn’t make sense.

But I will say, Morgan, you know, in hindsight, of course—15 years past all this—in hindsight, it really is the tuition you pay.

Part of it is sometimes you’ve got to get your teeth kicked in before you realize that maybe this isn’t what I want to do, or maybe this is what I want to do and the pain was worth it because I learned so much.

It’s going to be a lot easier next time.

Morgan Friedman: I want to make an unusually personal point here.

Your story resonates with me in an interesting way because, to use the language that you’ve taught me over the course of our podcast, my grandfather was a professional renter.

I never knew that phrase existed.

I didn’t know—my genetic grandfather is my mother’s father—but what I did know is that between my mom’s birth until she was 18 and went to college, they moved around 25 times.

Spencer Sutton: Wow.

Morgan Friedman: So I never thought about it that way before.

Spencer Sutton: Yeah.

Morgan Friedman: What made you realize that these people might have been professional renters rather than just people who were struggling?

Spencer Sutton: I think it was the pattern.

You know, once you start seeing the pattern, you realize there’s a difference between somebody who’s struggling and somebody who’s actually using the system.

The professional renters were people like my grandfather was. He was kind of the guy who would scrape by, try his best, but it never quite worked out. So they would just move somewhere again and start anew.

But I hadn’t thought about people that have malicious intentions.

Morgan Friedman: But there’s a difference.

Spencer Sutton: There’s a difference. And there are definitely lots of people out there with malicious intentions.

Morgan Friedman: Sure. 100%.

Spencer Sutton: I mean, I see it all the time. Markets like Atlanta are a big one. There’s tons of scams going on in the housing market in Atlanta. It’s gotten really bad.

Morgan Friedman: Okay, so I have a question for you.

We’ve discussed some signs that someone’s a professional renter, and signs that, to us being our ages—I’m 49—are kind of obvious.

Like now I know, “Oh, the con-man scheme of paying a lot of money upfront.” Obvious to me at 49. Or, as you point out, being late with the payments or going incommunicado.

Those are some signs.

What I’m wondering is, are there any less obvious or more subtle signs from the beginning? Like, I don’t know, people talk in a certain way, have certain types of professions or certain interests, dress a certain way, say certain things?

Are there any subtle signs that you look out for?

Spencer Sutton: Yeah, that’s a great question. I’ve got a couple of things that I would probably say to that.

Number one is, just imagine this: if you’re a fantastic resident, and you know you’re going to pay on time, and you know that you’re looking for a place to live and you’ve got choices, great residents have choices. They’re not pigeonholed into something.

But they don’t really need to sell themselves to you.

All they really need to do is fill out the application, show you pay stubs, have you call references, whatever the case is, and they will rent that property.

Now, somebody who maybe isn’t so confident—

Morgan Friedman: Or somebody who’s trying too hard to convince you.

Spencer Sutton: Exactly.

They’re trying to sell themselves to you.

And that can be a yellow flag.

It’s not necessarily proof of anything, but it’s something you should pay attention to.

Morgan Friedman: So, don’t necessarily look for a specific profession or a specific way somebody dresses. Look for behavior.

Spencer Sutton: Yeah. Look for behavior.

And I think that’s something that’s really important.

You can’t just look at somebody and say, “Oh, this person looks like they’re going to be a bad tenant.”

You have to look at the facts.

What’s their income? What’s their rental history? Can you verify what they’re telling you?

That’s what matters.

Morgan Friedman: So let’s go back to the story.

You’ve evicted them. They’re out.

What happened when you finally got into the house?

Spencer Sutton: Great question.

The nightmare was that the sheriff was gone. I had to replace locks on the door, and I go into my house and it’s completely trashed.

And I took pictures.

I don’t know—I don’t think I had an iPhone at this time. It was probably early 2008, late 2007. I know the first one had come out, but I probably took it on a horrible flip phone, maybe a Razr or something like that.

Morgan Friedman: Or one of those Canon digital cameras that you carried around.

Spencer Sutton: Yeah. Yeah. Yeah.

Oh, yeah. I still have the image today.

And so whenever I see that image, I’m just reminded, “Spencer, think about all the valuable lessons you learned.”

It cost me.

This lesson cost me, I don’t know, $15,000, $20,000 by the time I rehabbed the property.

By the time I counted up all the lost rent, the eviction, all of the brain damage that I went through just thinking about this.

But it’s a valuable lesson because it allowed me to change some things.

It taught me a lot.

And, like, even to this day, here I am 15 years later talking about it on a podcast. It had an impact on me.

And to me, these are the types of things that nobody’s going to tell you, nobody’s going to teach you.

Now, I do believe with a lot of education out there, a lot of YouTube, there’s a lot of good people sharing information that can help you.

Morgan Friedman: Exactly.

And there’s another thing I want to emphasize.

When you’re the person who knows the rules, you can become the person who stops following them.

Because you’re like, “I know this. I’ve done this before. I don’t need to worry about it.”

And that’s where the shoemaker’s-children-go-shoeless phenomenon comes in.

Spencer Sutton: Absolutely.

Morgan Friedman: It’s interesting because the lesson isn’t just “screen your tenants.”

It’s also: don’t let your expertise make you careless.

Spencer Sutton: That’s exactly right.

Morgan Friedman: So what happened after that?

Did you keep investing in rental properties?

Spencer Sutton: Yeah. Absolutely.

I learned from it.

And I think that’s the biggest thing.

You can’t let one bad experience completely derail you.

You have to figure out what went wrong, fix it, and keep moving.

And that’s really what I did.

I started learning more about property management. I started learning more about screening residents.

And eventually, that’s what led me into the business I’m in today.

Morgan Friedman: So, in a strange way, this horrible experience helped shape what you do now.

Spencer Sutton: Absolutely.

It was painful, but it was valuable.

Morgan Friedman: And I think that’s actually a perfect way to wrap this up.

Because there’s another lesson hidden in this story.

You said earlier that sometimes you have to pay tuition.

The tuition can be money. It can be time. It can be frustration. It can be brain damage.

But if you’re going to pay the tuition anyway, you might as well learn something from it.

Spencer Sutton: Absolutely.

Morgan Friedman: And one final lesson I’d take from this is something we kept coming back to throughout the conversation:

If something seems too good to be true, it probably is.

And that’s not just about real estate.

It applies to investing, business, relationships, everything.

If you think you’ve found the deal of the century, don’t immediately celebrate.

Ask yourself: what don’t I know that explains why this deal is so good?

Because everything is a trade-off.

You have to identify the yellow flags, and then ask yourself whether those are yellow flags you can live with and manage.

It’s just a little too naive to pretend you’ve found the perfect deal.

Spencer Sutton: That’s true. That’s a great point.

If it seems too good to be true, it probably is.

Morgan Friedman: Exactly.

And with that, these are great words of wisdom to wrap up the podcast.

Spencer, this was surprisingly fun. A little biblical, but sometimes you just need to get biblical. It’s important. The most important things in life.

Don’t reduce to spreadsheets.

Excellent learnings.

Thank you for your time. It’s been wonderful getting to know you, and everyone who’s watched it to the end, thank you for staying to the end. We hope you’ve enjoyed it as much as we had.

Until next time.

Spencer Sutton: Thanks, Morgan.