Are Handshakes Better Than Contracts?
There was a time when a lot of business was done on a handshake.
A person’s word was their bond, and a simple agreement between two people was enough to seal a deal.
But in the modern world of property investment, can you still rely on such an old-fashioned code of honour?
Our early days in property sourcing taught us many lessons, often the hard way.
One particular experience with an investor we knew personally showed us exactly what a handshake is worth when money is on the line.
It was a deal that didn't cost us our fee but reinforced a rule we have sworn by ever since: get it in writing.
The "Known" Investor and the Mini-HMO
Back when we were just starting to build our business, we were carving out a niche on one of our patches.
We specialised in sourcing two and three-bedroom houses for a small group of trusted investors. Our reputation was growing, and we were approached by a new potential client.
This person wasn't a stranger. We had known them for some years - not a close friend, but an acquaintance we believed to be honest and straightforward.
They came to us with a specific goal: to acquire three or four properties to use as 'Mini-HMOs' (Houses in Multiple Occupation).
This was a popular and profitable strategy in that area at the time, and the local authority was supportive of the format.
It felt like a perfect fit. We had the local knowledge and the deal flow. The property investor had the capital and a clear strategy.
We shook hands on the arrangement, ready to get to work. We were about to learn that the symbolic power of a handshake didn't hold the same weight it once did.
Sourcing the Deal
It didn't take us long to find an ideal first property. As a dedicated property sourcer, building relationships with local landlords is key.
We knew a landlord in the area who was looking to downsize his portfolio as he headed towards retirement. He had already sold a few properties to our other investors, so there was an established level of trust.
We identified one of his two-bedroom houses that was perfect for our new client. It was already tenanted, and the owner was receiving payments directly from the local authority, which provided a secure, day-one income stream.
We got to work and negotiated a price with the landlord. Everything was aligned and above board.
We had the property, we had the investor, and we had the agreed price. But we made two critical mistakes fuelled by a false sense of security:
We didn't get a formal agreement with the seller to secure the deal for our client.
We didn't have a signed agreement with our investor, because we "knew" them.
We informed the investor of the deal and what our sourcing fee would be - a modest £1,500 at that time.
We conducted a viewing, and they confirmed they were very interested in moving forward.
We took them at their word and waited for them to instruct their solicitor.
The Sound of Silence
Days turned into weeks, and we noticed no progress was being made. The sale wasn't moving forward.
We started to get a feeling that something wasn't right, so we contacted the investor to ask if everything was okay.
That's when the truth came out.
The investor, thinking they were being clever, had done their own digging after our viewing.
They had identified the owner, approached them directly, and brokered their own deal to buy the property, cutting us completely out of the transaction.
Their justification was simple and blunt. "Why should I pay you a fee," they said, "when I can do this on my own?"
The Last Laugh
In that moment, we could have been angry. We had spent our time and used our contacts to find and negotiate a great deal, only to be bypassed by someone we thought we could trust.
But instead of getting into an argument, we just smiled.
Why?
Because in their attempt to save £1,500 on our sourcing fee, the investor had negotiated their own price with the landlord.
And the price they agreed upon was £15,000 more than the one we had secured for them.
They had no idea we had already negotiated a significant discount. The landlord, under no obligation to honour our handshake deal, was more than happy to sell it to the investor for a much higher price.
In trying to be clever and save a small fee, the investor had cost themselves ten times that amount.
So, who really had the last laugh?
The Lesson: Secure Every Deal, Every Time
That day was a turning point. We learned that in the business of property sourcing, trust can't be your only protection.
Even if you know someone, the temptation to cut out the middleman can be strong.
From that deal forward, our process became non-negotiable:
Secure the Seller: We always get a signed agreement with the seller to secure the property for our investor. This prevents them from being approached directly.
Secure the Buyer: We always have a signed agreement with our property investor before we disclose the full details of a deal. This protects our work and our fee.
Relying on a handshake is a noble idea, but it's poor business practice.
A contract isn't about a lack of trust; it's about creating clarity and security for everyone involved - the seller, the buyer, and the sourcer.
It ensures everyone is playing by the same rules and protects all parties from misunderstandings or, in this case, from someone trying to be a little too clever for their own good.
All of the training and documents created at NAPSA not only have compliance regulations in mind, they have been created based on years of actual property sourcing experience.
Our terms of business agreement has been created with Forbes Commercial Contract Solicitors and is 17 pages long for good reason! We used it in our own sourcing business and have kept it updated over the years.
Want to get yourself a copy? You can find out more about our sourcing training and documents right here.
