Lessons Learned from A Nightmare Real Estate Investment Deal

Throughout my real estate investing journey,  most of my deals have gone relatively smoothly.  This is a story of the deal that did NOT go smoothly and was the worst experience I’ve had in my investing journey so far. Granted it could’ve ended up much, much worse.

Let’s start at the beginning. I had met with another investor and their partner. This investor was also running a rehab business. All this business did was perform fix and flips. Where they purchase distressed properties that are in need of repair for much less than market value. They then repair, replace, and prepare the properties for sale in hopes of now selling the property at market value, and therefore making quick cash upon the sale of the newly renovated property.

This particular rehab company also worked with a mortgage broker.  The mortgage broker would work with those that had poor credit, have filed bankruptcy in the past, or otherwise could not qualify for a conventional loan. Sometimes these people still made good money, had good jobs, but just could not qualify for financing. The broker would then find investors, like myself, to act as the bank. In other words, I’d fund the deal, and either uses a rent-to-own contract, or contract for deed to sell the property to the unqualified over time.

In this case, I’d buy the property, then immediately sell the property to my buyer using a contract for deed. The buyer will make regular payments to me the seller until the amount owed is paid in full or the buyer finds another means to pay off the balance. My contract was a two-year contract when the buyer should have repaired their credit and could qualify for their own mortgage and then would pay me a balloon payment for the remainder of the balance.  With this instance, I was selling as-is on a contract for deed, and the buyer was going to be responsible for the rehab.  After all, the intent was that they were BUYING the property and would eventually own the property and not just RENT the property.

On paper, this was attractive to me for multiple reasons. I’d make money with this deal multiple ways:

  1. I purchased the property for $171,000 and sell the property for $188,000. This happened using a “double close” or immediately doing one closing after the other with the same title company.  I brought $34k to closing, then immediately received $15,200 down-payment from my buyer. Basically bringing my down payment to $18k.
  2. I then would charge 7% interest to the seller they’d make regular monthly payments for two years of $1303.66 per month for principal, interest, and insurance.  This cash flowed about $300/month during this period
  3. Then the entire balance would be due after two years. I’d receive a large balloon payment, pay off my mortgage I held, and the rest would be my profit.

Simple enough, right?  Yeah…not so fast.  I had provided all the information to set up a TenantCloud account. All my tenants that I manage are required to have one for electronic payment. Well, this was a nightmare. They insisted to provide a check. After multiple visits, and phone calls I caved and said I’d accept checks. Upon the first month, payment was due, I didn’t receive any payment. After a week, I called and emailed regarding payment.  I then received a check. Not just a single check for the amount of the payment of 1303.66. I received multiple checks! One check for $200. Another check fo $300. Then a couple of days later another check for $75. Ummmm… what?!?!  I didn’t understand. And apparently, the buyer didn’t either.  I then would hear from them stating that they don’t have the money, and they’ll get the money by Friday, or by next week. Or whatever…This pattern persists for a few months with a trickle of a couple more payments of a hundred dollars here and fifty dollars there. 

Let’s add insult to injury.  I then started receiving notices that the utilities weren’t getting paid.  The water bill, the gas bill, the garbage bill.  Even city notices stating they had garbage outside the home, I had received a fine. I also even got a notice from the Police Department stating they had an inoperable vehicle on the street in front of the home. 

As I would contact the buyer regarding these issues, it was always something crazy.  It was like it was totally foreign to them that had to pay for the garbage or the water. I had to explain time and time again, they were BUYING the home and they were responsible for these things. 

Another interesting thing was after they had moved in, and knowing that they hadn’t paid, they’d call and say there is water in the basement. While I absolutely empathize and ensured a dehumidifier was there, I told the buyer that they had purchased the home ‘as is’ per the purchase agreement.  I had expressed that there needed some landscaping, and gutters to keep water away from the house. I really started to worry that who I bought the house from, and who had found this buyer didn’t explain all that was included in the contract to them. I felt bad, but also cheated. 

After a few months, I realized that this wasn’t going to work. I attempted to work work with my buyer.  They had started to feel frustrated stating that “they forced her into a house she couldn’t afford”  I tried to negotiate with her regarding just renting the house under a regular rental agreement.  Lowering the monthly payment by $400/month essentially breaking even with the P&I. I thought she’d maybe be able to afford $900/month. The buyer just didn’t understand, and wouldn’t sign the rental agreement.

After another month of frustration. Not really knowing what I was going to do, and a bit desperate, I tried the good ‘ol Cash For Keys option.  Knowing she had provided me the $15K at closing.  I offered them 5,000 back if they could be out in 30 days. Yes. Five. Thousand. Dollars.  I said I’d help them find a new rental to move to. I continued to send them rental listings.  Wait….here is another crazy part.  They finally found a place and emailed me saying they needed another 30 days.  I said if they stay another 30 days, I’d retain the $5000 refund offer. THEY AGREED!  I couldn’t believe it.  But you’ll soon see why I needed to do that.

Upon agreeing on her being vacated within another 30 days, she and I met and had a quitclaim deed signed and notarized.  I then immediately filed it with the county.  The property was mine again. 

They were supposed to be out of the property on a specific date, and of course, they needed another day and another day. It is so crazy how some people just feel rules don’t apply to them.

I was traveling when we got word that they were gone, and the keys were left. My real estate agent said she could stop and walk through and pick up the keys. Well, what did we find there….?  EVERYTHING!  Yeah, man. Jess called me and said, “There is shit in every room!” I couldn’t believe it. Upon my return, I drove over the property, and there was broken furniture, mattress, junk, trash, and just filth everywhere. In the basement, there were boxes and boxes of just junk and garbage. It was musty, moldy, damp and smelled something fierce. It was horrible. And it was just weird, like a gigantic box of VHS Cassette Movies. But gross and filthy.  Also, no rehab was done and the broken car still in the street in front of the house. Ugh…..

Next up…  get rid of this place.  I called a rubbish company and had dumpster delivered. Hired a crew to clear all the junk and fill the dumpster. Hired a cleaning crew to scrub and clean the interior of the home. This had to be done, so I could get pictures taken, and get this listed as soon as I could.  I had my son mow the lawn and were ready to sell. 

It was tough, though. Because of the state of disrepair.  The value was much less than any of the comps.   We had to drop the list price twice before we had any offers.  I started to question on if it was worth it to keep the property, and rehab, but there was so much there and I’m not very experienced in doing rehabs myself. It would’ve taken too much time and money. We did finally sell, but I was underwater on the deal. I had to bring $4k to closing to get rid of this disaster. 

We continue to learn. I learn something with every deal.  This was a different kind of investment deal.  I’ll never do anything like this again. 

Thanks for letting me rant about this experience. Hopefully this helps those that can avoid this type of investment. Horns Up, Everyone! 

One comment

  1. ugh, this is terrible – sorry Chris. Would appreciate knowing the names of the lender and “investor” that put this together in order to avoid, sounds like they are complicit and predatory.

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