Tuesday, April 5, 2011

A Newbie Investor's Tale

Wow.. found this blog of a guy in Utah who bought an investment property in Florida. This was his first investment property, bought at the peak of the housing bubble and, as you might imagine, things didn’t quite turn out the way he had hoped.

Reading this, I am struck by several things. There were a huge number of red flags that should have alerted him that something wasn’t right. First, he got into this investment after hearing about it from a friend, who also invested. (I’d like to hear how his friend’s investment turned out.) The deal was a company supposedly buys a bunch of houses at foreclosure and sells them to investors in bulk. (Red flag. The company claims investors come to them and say “I need 50 houses.” No investor I know does that.) What the investors don’t buy, they sell to individuals like this guy. The company selling the houses will also be the management company and find tenants, collect rent, etc. and that the properties are government subsidized and have an occupancy rate of 90%. (Red flag.) The selling company tells him that loans for investment properties will only knock down his credit score by 50 points. (Red flag.) The company will provide down payment assistance. (Red flag.) Later on, he discovers, the company already had the house they wanted to sell him picked out – he didn’t even get to choose the house he was buying. (Red flag.)

Possibly the biggest red flag came when it came time for him to actually get the loan. The “down payment assistance” provided by the company involved them wiring the 20% down payment into this guy’s bank account. He had to sign paperwork saying he wouldn’t move the money or withdraw it, etc. Folks, this is fraud! The company basically is putting this money into his account to fool the lending bank into thinking he has his own money available for investing. And of course, when closing actually rolls around, the amount he needs to come up with is a little more than the amount the company fronted him, so he needs to add in a few thousand of his own money as well.

The selling company also promised him a $5,000 cash incentive and a $5,000 escrow account that could be used for repairs to the house, etc. Although he did get his $5,000 incentive, the $5,000 escrow account never showed up. And of course, that promise was never made in writing. Then the property management company sold his account to another management company. At least the new one sounds like a real management company. Of course, then the repair bills started coming in, tenants stop paying rent, etc. etc. You know the story. It comes time to evict and he makes the mistake of not treating this like a business. He wants to give his tenants more time to pay the rent. Eventually, he did start the eviction process and, lo and behold, the tenant comes up with the rent. This happens multiple times. No surprise to anyone who has done this before. Eventually, the tenants played this game one time too many and actually got evicted. They moved out but, of course, trashed the place before they left. That’s all he’s posted so far, but I’m pretty sure how the next bit goes...

I know he got into this at the height of the real estate bubble. Those were heady times. I also made stupid mistakes. But really, the number of red flags in this deal would have even scared me off. He hasn’t finished writing his story yet and I’m curious to see how it turns out. Anyone want to take bets on if he still owns the place or not? I’m sure he’s underwater on his mortgage, so selling may not be an option. The title of his series is “Life As A Landlord,” so maybe he’s still got the property. Anyway, it sounds like he’s learning a lot.

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