Out of State investors getting ripped off, heed these warnings!

55 Replies

I am a local investor and I invest heavily in the Cleveland area. But I'm seeing a lot of out of state investors coming and buying here. I use to honestly get a little upset because I was feeling it was going to make investing harder for me or I was going to have to sit back until this trend slowed down or stopped. Because it will, I see investors going out as their coming in due to property management issues ( also I know things that are going to effect out of state investors that the City of Cleveland does that will effect these investors soon. I know this type of information because I worked there 20yrs. Unfortunately I cant spread that on BP. )

But that's just one instance, I know I might of teased you a little but that wasn't the real issue. The issue is that out of state investors are driving prices of homes up. That's going to happen and in most instances it cant be stopped. but there are well known PM on BP that increase these prices more or inflate others. Meaning as far as repairs. 

For instance I have a large network and I should considering I grew up here and am know in my network. I have a large pool of handymen that cover every aspect. I have about 10 full time guys and I can always pull others if needed. Anyways I seen one of my drywall side guys at the gas station. Just in conversation I asked what he's up too. He informed me that he's working with some Cali guys for the next 2 weeks and is " taxing their ***'s". I said really how's that?  "I'm hanging 38 drywall boards for 10k". He was laughing. I was like wow, that's crazy. I can get a whole house rehabbed in my areas for an average of 10-15k material's and labor (on average each house varies). I could easily get that done for 2k easily.  This is just one instance but these are the things that add up. 

My advise is this. Find REAL boots on the ground. Depending on your investment level that could be easier or harder. Create a team and do not depend on what property managers say. Do your own investigation. FLY OUT. Especially before you invest. FLY OUT and meet these people face to face. Two weeks ago I had 4 investors fly out from Cali to do their own investigations on people they wanted to work with. They reached out to me and others in the area. We talked and it went well. They were here for four days. They met with numerous others including PM companies. After it was said in done they contacted me and informed me they were interested in partnering in some ventures that I have. That they were surprised on how many pm companies failed to meet them, didn't answer their phones and weren't what they said they were. This included a popular name in this area that I see on BP all the time.

So keep in mind. These prices are increasing because of you. Not your fault but you are effecting the price. Once this dust settles they will not resell for what you purchased it for so be mindful . Follow trends. The market prices are going to drop ( a sign is no income verification needed loans, 2007 all over again.) You can get better rehab and repair prices. You can. Barter! Hell if that Cali investor would of told my side drywall guy 5k he would of did it still! If your investor you must save save save

My overall point. FLY out occasionally. FIND SOMEONE WITH INTEGRITY THAT YOU CAN TRUST.Never invest or buy from anyone until you meet them face to face. Fly out and check on your investment but don't let your property manager know. Then go to their office and see the books. Fight to get all repairs and rehab work prices lowered. You really can save a lot of money. There shouldn't be a difference between local and out of state prices.  hope this was helpful and good luck with your investments. 

I can agree with most of your post. I helped a member that I met on here from California buy a nice 80k rental that happened to be down the street from my home in a far east of Cleveland suburb. Even mowed the grass for him all summer while it was vacant and did work to help him get it rent ready. I am not a property manager so I declined that aspect but assisted him to get to that point. There are good folks here, you just have to find them. I can agree, take a flight and spend a weekend here, it will be worth it in the long run.

@Frank Wolter You hit the nail on the head. Fly out and see where and with whom you are investing. A growing portion of our business is helping OOS investors pick up turnkey rentals here in Cleveland  and I always tell them the best first investment they can make is a plane ticket.

I would be really carefully buying rentals from companies that will go on to manage the property, because they can then profit from upcoming maintenance that they left undisclosed. We hear that one a lot.

@Peter Ledger or in turn profit by mismanaging it, purchasing it at a discounted price back from the investor, recycling it and then selling it to a new investor. Do that over and over and over and it becomes the Renter Center of homes. Don't think they're not doing that.

dealing with contractors and evaluation of bids is a skill not everyone has.... And it is really highlighted when that person is out of state.

To be fair though, these same people likely get ripped off locally...

I should also add, to some they have far more money then time. Flying out or getting multiple bids as crazy as it seems is more expensive then just paying (a higher amount) to get it done quickly.  But I'm not implying an out of state investor not fly out to see where/what they are buying.

@Frank Wolter   it is an amazing phenomena of out of area investors flocking to cash flow cities.. 

I mean you don't see Me with Oregon and Ca properties running adds in Cleveland for you folks to come buy my properties. but you see all sorts of these companies that advertise their properties out in the areas were the residences are much more investor centric than were you live.. 

but this started in 2000 or so I started funding out of state folks in 2002 and been doing it ever since.. however its tightening its finally got to the point were the recycle like you talk about has really calmed down.. as a whole the buyers are smarter and PM s do a better job.. and the investors have skin in the game so they did not walk from rentals like they did in 08 to 2010..  

then you have the herd factor and what's hot.. 2 years ago it was Texas last year KC and INdy.. Memphis is pretty consistent .. now its Cleveland.. and I just spend the week in Detroit with a new vendor and its ROARing back.. probably has as much upside now as any of these markets and maybe more from what I saw.. 

the locals will always think people over pay.. and we all think that because we are not picking up houses for 30k that were rent ready like you could have 5 years ago in your market. 

I mean I buy Sherriff sales in your market I am still buying basically as many homes as I want to buy for 30k and under.. 

its still there. 

Professional landlords like yourself with substantial portfolio that are local.. are just another business. and successful one.. same equity owning a car dealership.. or a handful of Mickey Ds all make the same kind of revenue.. its just one way to make money in America..  but what creates this out of state frenzy is anyone can do it.. that has 20k in their pocket and desire and a 640 fico.. that's it. LOW barrier to entry..  And were they live rentals are all about appreciation and there are many that are really down on investing for appreciation so the buyers instead of saving up and buying West coast jump into mid west rust belt deed south.. with varying degrees of success.. but burnt out landlord syndrome in these areas is alive and well. that's for sure.  again not to the extent it once was .. but not every one is successful at it.

PS when I was in Detroit 2 nights ago having dinner on my own I struck up a conversation with a guy that sells pharma 

and lives in Cleveland we started to talk about rentals.. he lives there had 4 of them all according to him disasters and he cant wait to sell.. that's were your inventory comes from. and this guy is smart and lived there all his life.. 

so not everyone just because they are local is up to the challenge of rentals.

Originally posted by @Frank Wolter :
@Jay Hinrichs your exactly right. You may have funds. But you'll also need the connection, education and tolerance to perform to my standards. But that's why I'm open to partnerships. I can provide all of that with skin in the game

are you activily looking for partners and or PPM type syndications  where you manage them.. at your level seems like the logical next step.. sure would rather go with someone of your ilk than someone who just took a Brad Sumrok study course and is going to be their very first syndication or partnership.. I kind of cringe at that.. I know everyone has to start somewhere but with all the good experienced operators seems like a big risk for those with limited experience or personal portfolios. 

got it glad we could get your model out there with out you being censored.. !!!! 

I have done that model and seen that model over the years.. one guys in INdy called Holdfolio did this

not sure how it performed but chose the rights assets and proper management and that works.

there was a guy in Ohio also that called him self MR> triple net.. he sold you a home then rented it back from you for a set fee then he leased it out in a master lease situation were he took care of everything.

my model I used a debt instrument equity share model that basically worked like what your talking about but had a pref return no matter what was happening with the asset.. that put big onus on operator to perform..

Lots of interesting stuff here. Keep talking.

I will mention - I don't understand why the pref model isn't the exclusive model of choice. It's what we do in proper syndication. It's the most equitable. The sponsor shouldn't get paid out of the CF until the investor gets paid...

@Jay Hinrichs I totally understand the feeling of wanting to invest with someone with a track record, but first time syndicators aren't always a bad thing.  I am a student of Brad Sumrok's, as well as a member of his team now, but I can tell you that I've passively invested with several of his students, most of whom were first time deal sponsors.  Am i taking on additional risk since they do not have experience?  Possibly.  I didn't blindly throw money at them though.   I have to know them well, know that they've been educated, trust that they're going to ask for help if needed, and most of all, care more about their investors money than their own.  I was absolutely terrified of losing investors money in my first syndication, as well as all subsequent deals, and as long as I get the impression a sponsor feels the same, I'm great with investing in their deal as long as everything else meets my criteria.  

Second to trusting the person, another huge reason I do it is because first timers typically take far less out of the deal than an experienced person would.  I've invested in many deals that have no acquisition fees, no disposition fees, construction management fees, refi fees, and whatever else.  No waterfalls either after a certain return.  Mitigates a lot of risk in my mind.  

I also know that those educated by Brad tend to be pretty conservative in their underwriting.  I can't tell you how many times we've gone after a deal, seen someone pay FAR more than we were willing to, and then receive an offering for it with much more aggressive projections that I'd ever be comfortable with.  These are from "experienced sponsors" too.  Plus they've tacked on all the huge fees!  No idea how those are going to turn out, but I will pass.  

Originally posted by @Tom Lafferty :

@Jay Hinrichs I totally understand the feeling of wanting to invest with someone with a track record, but first time syndicators aren't always a bad thing.  I am a student of Brad Sumrok's, as well as a member of his team now, but I can tell you that I've passively invested with several of his students, most of whom were first time deal sponsors.  Am i taking on additional risk since they do not have experience?  Possibly.  I didn't blindly throw money at them though.   I have to know them well, know that they've been educated, trust that they're going to ask for help if needed, and most of all, care more about their investors money than their own.  I was absolutely terrified of losing investors money in my first syndication, as well as all subsequent deals, and as long as I get the impression a sponsor feels the same, I'm great with investing in their deal as long as everything else meets my criteria.  

Second to trusting the person, another huge reason I do it is because first timers typically take far less out of the deal than an experienced person would.  I've invested in many deals that have no acquisition fees, no disposition fees, construction management fees, refi fees, and whatever else.  No waterfalls either after a certain return.  Mitigates a lot of risk in my mind.  

I also know that those educated by Brad tend to be pretty conservative in their underwriting.  I can't tell you how many times we've gone after a deal, seen someone pay FAR more than we were willing to, and then receive an offering for it with much more aggressive projections that I'd ever be comfortable with.  These are from "experienced sponsors" too.  Plus they've tacked on all the huge fees!  No idea how those are going to turn out, but I will pass.  

SORRY that name just came to mind.. me personally I would never invest in a PPM or multi investor deal with some one new.. I think they should practice with close friends and family.. but that's just me.. I get it.. and I have no clue as to Brad quality of education.. like I said the name just popped into my head.. so please disregard my comment was not aimed at him or his student particularly just sharing my personal thoughts. 

I cant wrap my head around folks who purchase OOS without flying out and visiting the area/people. Apparently this is very common since its been brought up fairly often. Thanks for the insight