Worst Case Scenarios And Close Calls...
Most gurus promise riches and glory if you "follow my fool-proof plan". Although many courses are worth their weight in gold, there are many that lack real-world "slaps in the face". What slaps have you experienced in CREI? Any close calls? Give us Newbies some of the worst cases youve experience and what might have been done to prevent them? Thanks!!![ Edited by ramgon1280 on Date 04/07/2004 ]
Great question! I learn more from my mistakes then I do from my succeess.
A few years ago I bought a $2M subdivision deal with two other partners. Our interest rate on the deal was pushing 10% and we had to pay the interest monthly. We also had a $200K credit line to fund improvements.
Within a few months we had the project complete on budget and the lots on the market. Everythings great, plenty of traffic. No sales! Nobody would buy in the subdivision. In almost a year we only sold one $45k lot. Not good!
On top of no sales, one of my partners is using our credit line for his personel use. Monthly interest is killing my cash flow, no sales, and a crooked partner. This is my worst nightmare.
I got lucky and talked the partners into buying me out at my cost. When it was all said and done I only lost alot of sleep and about $2500 in legal fees.
Actually this situation turned out to be a great deal. For a mere $2500 I got a great education:
1. Know your partners.
2. Have a written Partnership Aggreement.
3. Structure your financing to give you flexibility.
4. Have a exit strategy.
5. Know your market.
6. Make sure you have the ability to carry.
When you realize you have made a bad deal get out as fast as you can, take your losses and learn from your mistakes.
I was trying to fund a commercial deal with an out of state lender. They made great promises about what they could do. One day my mortgage broker (who hadn't worked with them before) called me and said that they needed the earnest money ($3400) THAT DAY otherwise they wouldn't give me some of the rates and terms that I'd negotiated for. I wired the money. They said that everything was fine and ready to close 2 days before close. The day of close came and they faxed me a paper that said that I had breached the contract, bla, bla, bla.
The president of the company is now in the New York State Penetentary for loan fraud, among other things. I helped pay for a really nice car that his wife still drives.
Lesson learned: Don't let other people pressure you into making rash decisions. Ask LOTS of questions, don't pay people until they perform (e.g. close the loan), and use a mortgage broker that is experienced in that arena (They'll all say that they are), and work with companies that he or she has done deals with previously.
Thanks for the replies guys. Keep 'em coming!
I had a MH Park where the seller was supposed to pay off 27,000 in water bills, and fix 40 some code violations within 7 days of closing. In short he didnt. then when I started deducting it off the second he took, he tried to foreclose on me. The guy was a pastor and the furthest thing from being a godly person as you could imagine. The foreclosure went on for 6 months, because I was wrestling with my soul going to hell over sueing a pastor. Finally I said to H..L with it. (Quite literally) and sued the H..L out of him. He ended up using 7 different lawyers because he never paid the previous ones. He actually ended up getting a good one near the end of the mess, and I just let him have the property back, but for spite I kept the mobile homes (20 of them). I eventually just sold them for whatever I could get, and to the lowest lifes I could find at the time. The more the tattoos, the cheaper I sold them. My lesson was just because they wear the cloth doesnt make them any less of a snake in the grass. lol. Also I learned that any and all monies agreed to at closing need to be held at closing until the agreement is completed.
Kyle
great educational stories
thanks
I bought a house from what I call a 3/4 handyman. He would get 3/4 of the way thru a project before moving on to the next one, never finishing the first. He was not very good at the first 3/4 either.
So his house needs all kinds of work, electrical, flooring, plumbing,roofing and structural work on the addition. Anyway, I got a good price on it and agreed to pay him an additional 5k to remove all the wood and trash from the yard. It looked like he had been to every lumber yard & yard sale in the area and purchased every piece of junk they had, but in his typical 3/4 fashion, could not find a way to get it into the house or storage. Well the day of the sale I was running late and did a quick drive by of the property. No more wood or trash piled up in front. Off I went to settlement and bought the house. Two days later when I get to the house I find he has burned a huge pile of wood in the back yard leaving me a huge ashpit. He had attempted to burn all the trash and wood needless to say to his 3/4 abilities. It cost me another 3k to have some guys come and clean up and haul away the mess.
Lesson learned: Hold money in escrow at the title company to be released after you have verified all the work has been done or promises kept by the seller. I also use this with contractors. I will pay a downpayment and up to 50% in draws, but the other 50% is due upon completion of the work and verification that it was done correctly. If they do a good job and it was timely, I'll throw them a bonus to keep them motivated for the next house.
Im seeing a pattern of the usefulness and perhaps necessity of escrow accounts...
"Real World" lesson I've learned the hard way:
We bought our first investment (townhouse) in 1988, then our principal residence 6 months later. Good starter, affordable neighborhood. Few years later, this cute "affordable" neighborhood is where the hoodlums and drug dealers started coming to live. Area went downhill way fast. Had a long term section 8 tenant that moved. House could not be re-rented under Section 8 because county commissioners wouldn't allow any more vouchers in that neighborhood. So we rented to 3 young brothers, tore the place up in less than 10 months. Thought of selling, would not have broke even, decided to press on. We were barely making ends meet while trying to raise 2 young children. This REI was make or break for us. Meanwhile, townhouse next door had been foreclosed upon (HUD). Stock market was on the verge of taking a dive, we decided to cash out every dime of our worldly savings (about $40k in mutual funds) and buy this house. Major rehab, place was a wreck. Renovated the first townhouse (that the brothers trashed), got what we thought would be a great tenant, only to have her bail out one month later, saying she couldnt sleep at night living in that neighborhood. Meanwhile we busted our butts for 2 solid months, day and night, EVERY day, to rehab our new purchase next door. Advertised them both for rent, people called and once I told them where the properties were located, basically most said "thanks but no thanks, dont wanna live there". Then comes September 11. We are 25 miles south of Washington, DC. All we keep seeing are fighter planes flying back and forth constantly, day and night. We are sitting here, 1 rental we make no money on, 2 are empty and no one wants to live there. One Saturday I had 3 showings lined up, not one person came. I stood out on the patio of the townhouse with the worst sinking feeling in my gut I've ever had. Everything we had was tied up right there, every penny we had. No one would rent them. It was horrible. Standing there, watching fighter planes flying overhead, thinking about all the horrible things going on in the world while watching the hoodlums up the street playing basketball, and wondering what the HELL was I doing.
Finally we secured 2 good tenants (one who is still there), neighborhood has improved but is still a hard sell. Best thing - property values have skyrocketed there and my $42k townhouses in the "affordable" (*note* = slummy)neighborhood have a FMV of $105k each. We are making $500 a month on the rental we used to break even on, and have purchased 3 more rentals since. Two within the last 2 months. All have good equity and are making a positive cash flow. My headache now is Allstate giving me a hard time about rehab property, but I think we can work thru that.
Moral of the story, sometimes you have to stick it out and suffer thru the bad to get to the good. Know your end goal before you dive in and have all your scenarios covered. Sometimes REI is like a scary roller coaster ride.
Oh yeah, one more valuable lesson, be careful buying a property close to where the neighborhood basketball hoop is set up, because it usually leads to nothing but trouble. At least in my experience...........
Tracy
The info I have read so far was really good advice. Thanks for the info
Oddly enough, even this is not my worst horror story but I alread had it typed up in response to a question about risk in another forum so I thought I'd post it here too:
So we are renovating this apt. building in Chicago. A real slum. Has a few tenants in the building and we need them to get out if possible if only because they are the kind of people willing to live in a slum and therefore we don't want them in the nice building we are going to have when we are done (they were also in the way of the construction).
So we finally get down to one family (woman, boy friend, her infant child) and we get them to accept moving money and get out. So one of my guys shows up with the moving money check and they say its got to be cash. He calls me on the cell phone, I tell him to take them to the currency exchange and they'll cash the check.
So they're out, right? I call my construction foreman on his cell phone and tell him to go board up the door to the building so they can't get back in.
Meanwhile they are giving my guy in the car so much grief that they are driving him nuts. This is the saturday night before mother's day and he just wants to get home to his wife and take her out to dinner. Finally he throws them out of the car about a block from the currency exchange, says "go cash the check yourself" and drives off.
They turn around, walk the mile back to the building break in and move back into the apartment (moving for these people consists of a bag of clothes, they just abandoned everything else in the apartment).
Meanwhile, her brother, a real no-goodnick doesn't get word that they've moved back into the building. So he torches the place that night in some sort of twisted revenge move to try to get back at us because we are cleaning up a building in his neighborhood making it more difficult for low-lives like himself to hang out there. The boyfriend jumps out of a third floor window and breaks his back ends up in a wheel chair the rest of his life. The infant daughter dies and the mother spends weeks in the hospital recovering from smoke inhalation.
I'm the prime suspect in an arson investigation (after all its my building), made the 6 o'clock news on every tv station in town. and get sued for $10 million.
Risk is part of this business. The more and bigger deals you do the bigger the risks and, sometimes, the bigger the rewards. But either way the bigger the risk the more adrenalin and the better the stories.
Then there was the time I woke up to a phone call from a buddy of mine explaining that he'd heard on the news that the FBI, the Chicago Police, the State Highway Patrol and the EPA were all looking for me because a building a company I owned had once been a tenant in was implicated in a terrorist plot to put cyanide gas in the Chicago subways. But thats a different story. . . .