Partnership Gone Bad: What would you do?

Partnership Gone Bad: What would you do?

Shiloh LundahlPro Member
Rental Property Investor · Gilbert, AZ · Member since 2016 · 3k+ posts · 4k+ votes

Here are the facts. I'll try keep it as unbiased as possible to get some honest feedback from other investors.

Last year I met an investor who was flipping houses in Phoenix. I connected with him by email a couple of times and then by phone to ask him some questions. Later he sent me an email outlining a deal and stated he was looking for an investor. The email stated the following:

"Hello Investors! I have a couple deals that I am looking for some 50-50 partners. I will summarize in this email but I have attached the detailed formulas for you to look at. If you have any questions, please feel free to call, text, or email me.

I am looking for partners to help with funding these projects. We just need the gap money (down payment, remodel, and holding costs). For this investment, the investor gets 50% of the net profits at the Sale of the property. I need approx. $117,000 and your potential profit is about $22,000 in about 5 1/2 months. That is a 41% APR"

I am including the documents and contracts in case you want to see what I saw when I decided to invest with him.

Here is the projected ROI that I got in the email:

Now here is deed of trust and the contract that I got when I invested with him:

Now, I recognize that I made plenty of mistakes with this process.  This was one of my first partnerships and I didn't look at the fine print of the contract as I should have.  I didn't realize that this investor, acting as the realtor, would add in a commission when purchasing this from a wholesaler thus increasing the cost of the property.  Then he would get commissions again when selling the property.  And then he would split the leftovers "profit" at the end 50/50.  

Things seemed to be going well at first with the above property so when this investor sent out another property in Scottsdale with the following numbers I decided to invest again with him.

Total investor portion $127,000

Potential Return on Investment (ROI): $22,000

Annual Percentage Return: 35%

Projected Total Days from Buy to Sell: 174

The rehab seemed to go pretty quickly and the houses were on the market within a couple of months of being purchased.  And then they sat, and sat, and sat.  I called the investor regularly every couple of weeks to see the progress on the properties but there was very little progress made.  After several months on the market with very few showings on the property in Scottsdale and still no offers on the one in Phoenix, I started to get nervous and I called up this investor and I asked him if we were still going to be making a profit on the properties.  He said that it didn't look like we were.  Then I asked him if I would be getting all of my investor monies back as it stated in the contract.  He said that I probably wouldn't.  At this point, he was paid commissions on the buy side and he had very little money into the properties himself while I had a combination of 117k and 127k into them for a total of 244k invested with him.  The property in Phoenix had had some showings and one lowball offer.  The property in Scottsdale had only had about one showing in 7 months.  At this time I found out that he had 6 other properties out on the market that were just sitting there and he didn't have any other exit strategies.

Now I have already felt the sting of my mistakes, and there is no need to shoot a wounded man, so I am not so much looking for criticism for investing with him, rather, I would like to know what you would do if you were in my situation and you had just heard that you would not be getting all of your investor monies back and that he didn't have any other strategy besides waiting for them to sell.

Thanks for your comments.

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Linda WeygantPro Member
Investor and CPA · Arvada, CO · Member since 2015 · 2k+ posts · 3k+ votes
9y

I would contact any other real estate agent in those markets and ask them to give you comps for these two properties and find out if the list price is anywhere close to market price.  The only reason a house doesn't sell is that it is priced wrong.  Real estate always moves, you just have to have the right price.    

Find out from that agent if these houses are even listed (I wonder....)

I can't think of a reason why this would be a good business model for this guy, but clearly he has some kind of system he's using to have so many projects sitting and not moving.  Trying to think of the scam or angle, but having a tough time coming up with something.

If the other agent says that the price is right, then ask your partner to relist the properties with this other agent (they should get something for the work they've done for you) because clearly this guy is either screwing something up intentionally, is a crappy marketer or something like that.

See this reply in the discussion

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  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    9y

    @Shiloh Lundahl  your contract with this guy in my mind is over.. you want to continue with him I think that's a total waste of time.. been there done that for many years it NEVER gets better

  • Shiloh LundahlPro Member
    OP
    Rental Property Investor · Gilbert, AZ · Member since 2016 · 3k+ posts · 4k+ votes
    9y

    So  after I took over the properties, I contacted my buddy @Jason Moss the realtor I do  most of my deals with. He agreed to sell both properties for me at 3.5% (1% for him and 2.5% for the buyers realtor).  We staged the properties and did some repairs (one property cost about 10k in repairs because of bad plumbing that we had to completely replace during the inspection period  The other property cost about 5k in repairs to repair part of the roof and do some other fixes).  My contractor and my stager both charged me a minimum rate in order to help me get out of these properties. Then we priced them competitively and sold the property in Scottsdale within a month and a half. 

    We just closed on the property in Phoenix last Thursday. I still haven't reconciled all of the numbers that went into these two properties, but I think that my total loss is between 30K and 40K. I am just happy that the bleeding stopped.

  • Fort Collins, CO · Member since 2016 · 45 posts · 23 votes
    9y

    @Shiloh Lundahl

    Good to hear you're making sure you're whole first and foremost. However like Jay mentioned, I wouldn't even consider this guy getting another penny. Delete his contact info and just chalk him up to a bad learning experience. Incompetence and greed is the underlying issue of the entire thing, and that is the point of contention for myself and a few others (I think). 

  • Shiloh LundahlPro Member
    OP
    Rental Property Investor · Gilbert, AZ · Member since 2016 · 3k+ posts · 4k+ votes
    9y

    @Kyle Blake

    Through this whole situation I have gained a lot of knowledge and experience.  I think it has helped me see red flags in partnerships and it helped me learn what not to do.  I just wish that the lesson had been cheaper.  

  • Fort Collins, CO · Member since 2016 · 45 posts · 23 votes
    9y

    @Shiloh Lundahl

    Tact isn't my strong point at all, and I think that is obvious, haha. I try to assume the worst case in everything and I still am stuck eating $3k I shouldn't have to on this last flip, as of a few hours ago. But no such thing as a free lunch as we all know. 

    If you're looking to invest again, I'll be looking for another flip in a few weeks, haha. 

  • Shawn AckermanPro Member
    Real Estate Entrepreneur · Mid West, East Coast · Member since 2015 · 3k+ posts · 1k+ votes
    9y

    @Shiloh Lundahl The instruction for deeding the property back to you was an excellent play! I would have, once I retained control of the properties, Put a HELOC or do a cash out refi for 75% of the value on each then turned them into rentals. Perhaps that wouldn't be the best way to go without boots on the ground but an option. Also you mentioned in your post above that he did not comp the properties property however I'd argue that you didn't. But in the spirit of not shooting a wounded man while he's down, you've just received an expensive education in REI. This experience is something you'll never repeat and will make you a better investor. Best of luck to you. Always remember to persist and you will WIN!!

  • Shiloh LundahlPro Member
    OP
    Rental Property Investor · Gilbert, AZ · Member since 2016 · 3k+ posts · 4k+ votes
    9y

    @Shawn Ackerman Thanks for your comment. I considered making the properties rentals or lease options. As I did the numbers I could have broken even in about five years.  However, it would have tied up over 200K invested between the two properties.  So the opportunity cost was to keep the properties for five years so that I didn't lose any money in them and tie up 200K, or I could just take the 30k - 40k loss and I could reinvest that 200k into more deals and likely get my money back within a year or two. So I chose to just take the loss and move forward.

  • Shawn AckermanPro Member
    Real Estate Entrepreneur · Mid West, East Coast · Member since 2015 · 3k+ posts · 1k+ votes
    9y

    @Shiloh Lundahl I think that was a sound decision.  You gotta no when to fold e'm....You'll be ok man.  Just don't stop moving.  You can pass this education on to someone else and save them $30-$40K.  And just know that if you keep hustling it will come back to you 10 fold!  There is a ton of value in this single post.  Thank you for sharing it.  Takes a man to admit when he made a mistake. I make them all of the time....Don't think that will ever stop.  Should never stop you!  Godspeed to you my friend.

  • Real Estate Agent · Scottsdale, AZ · Member since 2016 · 53 posts · 10 votes
    9y

    @Shiloh Lundahl

    I just quickly read through this thread and wow, unreal.  At least you know what to look for in a real estate partnerships when it comes to investing properties (fix & flips and/or long-term rentals on multi-family residences, etc.).  Sometimes we all go thru these kinds of experiences to become better and more knowledgeable real estate investors - unfortunately, some very expensive ones.

    The way I work as a real estate professional working with investors, I always tell them upfront about everything (comps, market values & condition, estimated rehab budget, estimated ARV, etc.) when it comes to any investment properties (both buy and sell) like if I were to do it myself. In my opinion, communication is one of, in not, the major key(s) in any real estate transactions.

    Even though you may be taking a bit of a loss, it could have ended much worse if you had to hire an attorney and take it to court.  So, I'd say you did a good job minimizing your potential loss.  

    Best of luck to you moving forward.

  • Shiloh LundahlPro Member
    OP
    Rental Property Investor · Gilbert, AZ · Member since 2016 · 3k+ posts · 4k+ votes
    9y

    Thanks @Dalton Kiley. One of my biggest mistakes was not to double check his comps and not to look more in depth at his prior properties and the profits he and his  investors made from them.

  • Engineer · Portland, OR · Member since 2014 · 1k+ posts · 1k+ votes
    9y
    The mistake you need not to ever repeat is letting someone else project your margins and profits. If you can't figure out yourself how the numbers play out in each scenario you need to stay away from investing in that area. I once had a "Realtor" send me elaborate spreadsheets with "worst case scenario" numbers based on misapplied formulas in the wrong context. I often wonder how many rubes he was fooling with his ersatz due diligence
  • Isaac S.Pro Member
    Northern, CA · Member since 2017 · 49 posts · 25 votes
    9y

    @Shiloh Lundahl I do hope you are able to break even with this event. I'm sure the lessons learned by you and all of us reading your experiences are greatly valuable. Very noble of you to be willing to make him whole before you take any profits if there are any to be had. Hard for me to say what I would do in that situation. Thank you for sharing. Best of luck!

  • Investor · Scottsdale, AZ · Member since 2016 · 1k+ posts · 885 votes
    9y

    One showing in seven months? Ouch.   Couldn't sell it in the hot Scottsdale market? Double Ouch. Revoke that boy's real estate license! Seriously now, did you ask the agent what he did with his time?

  • Shiloh LundahlPro Member
    OP
    Rental Property Investor · Gilbert, AZ · Member since 2016 · 3k+ posts · 4k+ votes
    9y

    Hi @Matthew Ladner thanks for the comment and the offer. I have continued to partner up with other investors only smarter now. Right now I am investing mostly in Arizona and a little in Indianapolis and I am entering the California market with a live in flip and house hack.  So I am not looking to enter into other markets at the moment, but thanks again for the offer.

  • Shiloh LundahlPro Member
    OP
    Rental Property Investor · Gilbert, AZ · Member since 2016 · 3k+ posts · 4k+ votes
    9y

    @Isaac S. I wished that I had broken even on these two properties but, even though not all the numbers are in yet, it is pretty evident that I have experienced a major loss.

  • Shiloh LundahlPro Member
    OP
    Rental Property Investor · Gilbert, AZ · Member since 2016 · 3k+ posts · 4k+ votes
    9y

    @Steve B. You are absolutely right. Knowing how to run numbers is absolutely necessary to be successful as a real estate investor. This was another one of my mistakes. I saw his numbers and didn't cross check his comps or the ARV on the properties. Because I had met him through other people that seemed credible to me, and because my life got really busy at the time, I just trusted his numbers rather than doing my own due diligence.

    Lesson #1: trust, but verify.

  • Investor · Scottsdale, AZ · Member since 2016 · 1k+ posts · 885 votes
    9y

    @Shiloh Lundahl No arrows being slung from here. Lord knows I've made many a mistake in my real estate investing. Since we recently had coffee, and briefly discussed the situation, I think I've been able to identify the property in Scottsdale if the address starts with 18. Here is my opinion and I'd like to hear other's opinions of what I think.

    1. It is a marketing problem. 

    Redfin, they tend to be reasonably good, thinks the property is worth about $420,000 It was sold recently for considerably less than that, in the mid $300's.  Another companies Comps - you had comps of

    4 bed/3 bath .5 miles away sell for $490k

    3 bed/2 bath .5 miles away sell for $455k

    3 bed/2 bath .4 miles away sell for $432K

    2. You had it listed for 5 bed 3 bath. I currently have a 5 bed 3 bath for sale in N. Phoenix but listed as 4+ bed 3 bath. Having it as 5 bed takes it out of the online search range for most people. I think you lose a lot of searches because people don't think in terms of 5 beds. My search hits skyrocketed when I made the change to 4 beds.

    3. You used wide plank dark wood or laminate in the living room. That works well in Seattle when I do a project there, but for some reason, people in AZ want 16" wide or bigger, light colored, tile. Local BPers, is that what you have found?

    4. The house is nicely staged

    5. The shower, and floor, though nicely updated, is the same as the living room, with dark wide, "wood plank looking" tile. I'm just not sure that is in demand here. BPers speak up and let us know. I just haven't seen it.

    6. The carpet in the bedrooms is pretty dark.

    7. The listing shows 26 price drops with the same MLS number, so I suspect it is the same agent's listing. That tells me that rather than marketing the property, his solution was to drop the price every couple of weeks. It became "shop worn".

    That's the best I can do without knowing for sure if it the subject property, but I'm pretty sure it is, since the documents I found support that thesis.

    So, my conclusion is that your partner is good at finding deals but bad at getting them sold. I think it could have been a money maker. Sorry, gotta be honest.

  • Real Estate Agent · Princeton, NJ · Member since 2016 · 1k+ posts · 1k+ votes
    9y

    @Shiloh Lundahl - What excuses were you getting between September and now? The goal DOM was 46 after a quick rehab. How did he explain to you in July and August that the property wasn't getting any offers (or even any showings) and he's not doing anything about it? 

    I'm in my own pickle where I've invested gap money and the flippers haven't even listed it yet. They offered to let me buy out their private money lender and get the deed, but the house doesn't have final permits and each plumbing/electrical contractor I take through essentially wants me to pay thousands to replumb/rewire stuff to pass code before it can be sold. I also don't have $200k cash readily available to buy the property. Sighs.

    In my project, before I was involved, another project manager / realtor who helped the flippers buy the house took a portion of the GC's rehab money too. I wonder if you can prove for any reason that your project manager double-dipped on taking any of the $51,000 in rehab money when hiring contractors. Also, if the property wasn't sold, then the project didn't pay out any portion of the $26,000 in closing costs, realtor fees and property taxes, so all that should be repaid to you pronto. In theory, this should all still be in his bank account. I imagine he could ask you to pay his 2-3% listing commission on sale, regardless of selling it or not. But definitely not 6%. Probably when giving over the deed and other things, you've signed some settlement or waiver paperwork, right?

    At this point, do you have any recourse to get back the $26k in fake closing costs?

  • Shiloh LundahlPro Member
    OP
    Rental Property Investor · Gilbert, AZ · Member since 2016 · 3k+ posts · 4k+ votes
    9y

    @Account Closed Good detective work. And I agree, I don't think he marketed the property very well. But also, the pictures you saw on Redfin were the pictures that we had done after we took the property over and staged it. We also spent money to change the front of the house to add curb appeal.  It was very plain before and had no curb appeal. The house was also on a busier street and it had no pool and no garage (only a carport that was accessible from the back of the house). In this area I think not having those features and being on a busier street brought the value of the house down a lot. My buddy who has been an appraiser for years and who is excellent at running comps for properties couldn't find any like houses that would support a higher price point and once we spruced up the front, staged it, and lowered the price, it got under contract right away.

    I appreciate the tip about changing the number of bedrooms to increase the searchability of the house. I will use that going further. Also, thanks for the tile suggestion. I will also keep that in mind for my future flips.

  • Shiloh LundahlPro Member
    OP
    Rental Property Investor · Gilbert, AZ · Member since 2016 · 3k+ posts · 4k+ votes
    9y

    @Natalie Schanne  At first he was confident that the house would sell quickly. But then after a few months he started to say "I don't know why the house isn't selling. I have looked at the comps and I have it priced right." Although I think the comps that he used may not have been good comparables.

     Then he started to say that he didn't know what else to do to get it sold other then lowering the price. So he lowered the price about $1000 every other week or so but that really didn't do anything to increase foot traffic to the house. 

    The thing that propelled me towards taking the properties over was when he said that he didn't know if I would be getting all of my investor money is back and that he didn't know what else to do to sell the house. At that point I felt like I was much more concerned about my money than he was and he didn't have any other plans than what he had been doing for the past seven months. 

  • Shiloh LundahlPro Member
    OP
    Rental Property Investor · Gilbert, AZ · Member since 2016 · 3k+ posts · 4k+ votes
    9y

    @Natalie Schanne As far as your situation goes, you will likely have to get the house wired correctly in order for it to pass inspection in order for a buyer to get a loan on the property (unless you get an all cash offer from somebody who waves the inspection). 

    It looks like you are in a similar situation as I was in. You may want to talk to a private money lender or a hard money lender and buy out their position in order to take over the property and protect your investment.

    As far as whether the investor on my property took money and paid himself as part of the rehab, I am not sure. In fact, I don't have a good accounting of what the money I gave him was used for. 

    Big Lesson #2: Don't give gap money to other investors directly. Have all of your money go through the title company and directly to contractors on draw schedules. This way you know exactly where your money goes.

  • Investor · Saint Louis, MO · Member since 2016 · 970 posts · 1k+ votes
    9y

    @Shiloh Lundahl your kindness is going to eat you alive one day. This guy clearly is just looking out for himself. Screw him. I think stupidity should be punished just as equally as lying for the same outcome. He's going to learn that he can always cover his a** and screw investors over and over again if you "make him whole"

  • Shiloh LundahlPro Member
    OP
    Rental Property Investor · Gilbert, AZ · Member since 2016 · 3k+ posts · 4k+ votes
    9y

    @David Zheng I appreciate you saying that I am kind. But the truth is, I had already done the numbers in my head before I offered to make him whole and I knew that I would be losing money. So I knew that I most likely wouldn't be paying out more money to him.

  • Investor · Scottsdale, AZ · Member since 2016 · 1k+ posts · 885 votes
    9y
    Originally posted by @Natalie Schanne:

    @Shiloh Lundahl - What excuses were you getting between September and now? The goal DOM was 46 after a quick rehab. How did he explain to you in July and August that the property wasn't getting any offers (or even any showings) and he's not doing anything about it? 

    I'm in my own pickle where I've invested gap money and the flippers haven't even listed it yet. They offered to let me buy out their private money lender and get the deed, but the house doesn't have final permits and each plumbing/electrical contractor I take through essentially wants me to pay thousands to replumb/rewire stuff to pass code before it can be sold. I also don't have $200k cash readily available to buy the property. Sighs.

    In my project, before I was involved, another project manager / realtor who helped the flippers buy the house took a portion of the GC's rehab money too. I wonder if you can prove for any reason that your project manager double-dipped on taking any of the $51,000 in rehab money when hiring contractors. Also, if the property wasn't sold, then the project didn't pay out any portion of the $26,000 in closing costs, realtor fees and property taxes, so all that should be repaid to you pronto. In theory, this should all still be in his bank account. I imagine he could ask you to pay his 2-3% listing commission on sale, regardless of selling it or not. But definitely not 6%. Probably when giving over the deed and other things, you've signed some settlement or waiver paperwork, right?

    At this point, do you have any recourse to get back the $26k in fake closing costs?

    "How did he explain to you in July and August that the property wasn't getting any offers"

    Scottsdale can be a little warm in the summers and lots of people leave town for cooler places. Kind of like Wisconsin in the winter gets a little cold. We get lots of people from Wisconsin here all winter long when it is 80 degrees out. It's kind of like a trade agreement. :-)

    So, you have to work a lot harder to get traffic in the summer. That being said, when I started business a long time ago, I had someone teach me that when business slows down, you don't take a vacation, you increase your advertising. Seems the realtor didn't take the same advice.

  • Investor · Scottsdale, AZ · Member since 2016 · 1k+ posts · 885 votes
    9y

    duplicate by mistake

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