Bad Advice Leads To Real Estate Investing Disaster

I remember years ago when a good acquaintance of mine used a better-buddy realtor friend to buy three fourplexes up in Kansas City, Kansas.  He followed a few simple mathematical formulas that he had learned (his Realtor buddy leading him all the way) and decided that not only would these properties pay for themselves but they would also kick-off cash flow.  After all, they were priced about $15,000-$20,000 under the available comps in the area.

Titanic sinking - mcaronNow, I have never, nor will I ever, advise a client of mine to buy investment property in this area of Kansas City, Kansas. The value of the investment property there was not realistic for KC rental property.  Way over-valued.  Crime is/was abundant.  Quality tenant?  No.  Housing voucher bums that float from apartment to apartment after dismantling the one they are in were plentiful.  (No.  Not everyone that uses a housing voucher is a bum. Just most of them in this area.)  And they weren’t in that great of repair, anyway.

Have I ever been in his units?  No.  I don’t need to.  I’ve seen others in the neighborhood.  He bought at $140,000.  Rents were about $525/mo.  Slam dunk, right?  NOOOOOOOOOOOOO!

He called me earlier this week.  He had comped the area (with the same agent he used before!) and said that the values were down to about $40,000 each in today’s market.  That’s $100,000 less than what he paid for each of the three four years ago.  Vacancy?  He’s currently half full.

He’s going to attempt a short sale and was seeking buyers.  What’s worse is his notes are held by Bank of America.  Now, Bank of America can get you loans.  They can even service them to a certain extent.  But when it comes to work-outs and short sales I cannot imagine a more incompetent bunch of case managers.  I mean, without a single exception, none of them understands what is going on and how long buyers will/will not wait around.

And there could be more trouble brewing.  What if he does get them short saled?  When does the statute of limitations end for BOA to come back in and try to recover their losses from the personal assets of this individual?  He has a nice income, an even nicer personal residence and other assets.  I like this guy.  I really do.  But it’s frustrating when I hear people choose to let the banks take the loss or share in the loss and hope to have no more responsibility.  If he had made $100,000 per unit would he have allowed anyone, BOA for instance, to share in the responsibility of the profits?

You simply must get professional advice before investing in real estate.  QUIT USING REALTORS THAT DON’T KNOW WHICH WAY IS NORTH ON A MAP REGARDING INVESTMENT PROPERTY!!!!!!!!!   (Phrase borrowed from Jeff Brown. – I had another phrase in mind.)  Or it could cost you just about everything you’ve worked for.

I pray for this guy and others like him.


Filed under Investment Property, Kansas City Real Estate, Legal Issues

20 responses to “Bad Advice Leads To Real Estate Investing Disaster

  1. Another Investor

    His chances of getting short sales on investment properties from Bank of Ameriwide are zero. His choices are to walk or to learn how to manage these units very aggressively himself and hope for that bigger fool down the road a few years. If he walks or by some miracle gets a short sale, he will have to deal with the deficiency. And let’s not forget the IRS, since these are not owner-occupied residences.

  2. I was thinking of something else too. 🙂

  3. AI – I agree. The words “personal bakruptcy” keep coming to mind.

    BG – I would imagine we are using the same swear words. 🙂

  4. Another Investor

    Personal bankruptcy may absolve him of the deficiencies with the lenders but it probably won’t help with the IRS. He certainly isn’t insolvent by any stretch of the imagination.

  5. You are probably correct. Especially with the current bankruptcy laws as I understand them.

  6. Pat

    If the properties had been in an LLC, would that have protected him?

  7. Pat, almost never. You see, banks won’t loan to LLCs for real estate 99% of the time. I’ve seen it once in 7 years and that was because the buyer had so much business with the bank and an excellent track record. And yet, he still had to be the personal guarantor.

    I have a couple of business loans for some other projects. And while the loan is to my “S” Corp my wife and I are still personal guarantors.

    Banks don’t want to loan money to entities wherein they have no recourse.

  8. Chris — The current LLC craze has an even my sinister ambush awaiting their owners. When they sell the property five years from now in anticipation of a tax deferred exchange, they’ll find their ‘upleg’ and call their favorite lender for the new loan. Said lender will respond as you’ve predicted.

    That’s where the Rubic’s Cube fun starts. If the investor does what the lender wants, gets out of the LLC, it’s very likely they’ve initiated a ‘taxable event’ which is also very likely to be irreversible.

    End of 1031, and the wait ’till April 15th shows up to write the capital gains/recapture check.

    I’ve seen that exact scenario half a dozen times in the last few years. It ain’t pretty.

  9. Another Investor

    I have never understood the LLC mania. An LLC is a big pain in the neck for a little liability protection. Fully insure yourself, maintain your properties, and comply with all applicable codes. Let the insurance company defend you if you are sued.

  10. AI — An umbrella policy, in addition to the normal property insurance policy will do just fine. Most can very much of it for relatively small premium.

  11. I carry an umbrella. Just makes inexpensive sense. LLC’s, as Jeff mentioned, carry risk. But let’s not forget that they are also a fairly new “invention” as they began to gain in popularity in the ’90s. As I understand from an attorney friend, they are still largely untested/unproven in court.

  12. Another Investor

    Personal umbrella policies are fine if you own a couple of rentals and don’t need a high liability limit. Most carriers limit the number of properties and set a maximum claim amount. From there you move up to commercial umbrella liability policies with higher limits. The rates are higher, but still a LOT less than the cost of creating LLC’s, especially in California. These policies are still underwritten by the same property and casualty companies that write the policies on your home and auto. Beyond the limits of those policies, you move into a different market.

    Some risks are not covered. The classic example is mold. Maintaining your properties and doing repairs and renovations to code reduce your risk. Excluded risks and large damage awards are the main arguments you get ftom LLC proponents.

  13. AI – My problem with LLCs is that your property may be protected…but you aren’t! If you knew, or should have known, about a broken something then you are still personally liable.

    I think the key phrase in your last comments was…”Maintaining your properties and doing repairs and renovations to code reduce your risk.”…

    All we can do is all we can do. But we better do that. 🙂

  14. That’s too bad for that gentleman. Seems like he should just come to you for advice next time. You can never ask for too much input or advice when making a purchase of this extent. Interesting story, I hope eventually it works out for him.

  15. Randy (JCKSRE) – Glad you could visit. Folks, Randy is a pretty busy house agent here in the Johnson County area. He has a very good reputation.

    If you are a new reader understand that I don’t know everything. Not trying to frame myself that way. But I do know investments. And I’m quite certain I would not have made a $300,000 mistake.

  16. Great post, I found it useful information about to Kansas City Real Estate on this site and relationship with my blog too…thanks

  17. Investing in real estate is a big decision and this could affect your life forever. It is very important to seek for professional advice before making a decision.

  18. Rehabbing houses is still the staple for real estate investment but to be able to be successful in real estate you should know the ins and out of it i suggest to vist this

  19. Remember that real estate investing is long term process and anyone who thinks they will make some quick money will most likely lose everything

    The wealth is in the holding


  20. Mike – “The wealth is in the holding.”

    I think you just summed up three years of this blog.

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