With recent failures in property development likely to result in a default on private investor capital, now would be a good time for investors to draw lessons and refresh their notes around due diligence.
When I read stories of investors impacted by default, a recurring theme is often one of surprise. Surprise that the developer was known, liked and trusted. Perhaps a family business that had operated for many years with the owners apparently demonstrating trust, credibility and expertise - particularly in their local area. They might have talked well, were friendly and appeared professional.
I caution investors to avoid associating ‘likeability’ with ‘investability’. They are two different concepts and the former should not necessarily be seen as enabling the latter. If you found both did exist, the next logical step might be to consider investing in a specific deal. At that point investors should move into full deal-DD mode. More on DD later but the key message here is that passive investors should, at the outset, treat the three concepts of likeability, investability and deal-DD as separate things. Linking the three could result in negative outcomes for the investor.
Human brains are hard-wired to buy from people they know, like and trust (KLT). The psychologist Robert Cialdini, author of the seminal book Influence said we are more inclined to be influenced by people we like and trust. If we like someone we are more likely to do what they ask.
Zig Ziglar wrote: “If people like you they’ll listen to you, but if they trust you they’ll do business with you.”
Seth Godin stated: “People do not buy goods & services. They buy relations, stories and magic.”
Established businesses know the power of creating KLT - it’s often deeply embedded into their marketing tactics. As consumers, we become sold because human instinct kicks in.