Growth Equity Group - How 170+ investors were scammed

Andrey Y. · 2019-01-04T14:21:31-08:00

In 2014-2015, more than 170 investors purchased 2 and 3 bedroom condo units from Growth Equity Group. This company specializes in investment properties in a self-directed IRA. More than 85% of their sales are bought in this fashion.Business was solicited mainly at investment conferences (Las Vegas a popular site), and some here at BP. I was one of those people who fell for their marketing.I was sold a condo in a neighborhood in Virginia (specific details to be disclosed later). They sold me the condo for almost $90K. The property value was however, at best, $65K. They came with sweet talk, a personable friendly nature, like a predator (although I didn't know it at the time.) They only allowed an appraisal to be performed through them. One can see why, a legitimate appraiser operating legally would not appraise these condos for what they were selling for.Growth Equity Group sold units to more than 170+ investors. 3BRs went for $96K, 2BR for $86K. Of course, they also used an "in house" lender specializing in non-recourse loans. They wouldn't allow you to use your own lender. It sounds fishy looking back at it, but not when they present it in a such a welcoming and favorable way. The rate would be 5%, which would balloon to 9% in 4 years!I see three main issues with what transpired:1. Sales. Growth Equity Group knowingly sold condos which were valued at $60-65K, for $85K-100K. They did this with open eyes and a smile. They even rushed me to sign on the dotted line.2. The Appraisal process. Appraisers in the past have been fined and jailed for falsifying numbers, for elevating the appraisal amount. If the appraiser is on the payroll of the company who is selling you a property, or they are getting business or money from the company who is selling you the property, this is a major conflict of interest.3. Financing. Industry standard for a non-resource loan is - during the balloon period, the interest rate cannot go up more than 0.5% per year or more than 2% total, no matter the interest rate environment. Growth Equity Group again used a lender that they were "working with" and did not let you use your own lender. Their loans carried an interest rate of 5%, which immediately jumps to 9% at the 4 year mark.

Mary M.

Rental Property Investor · Portland OR · Member since 2018 · 2k+ posts · 3k+ votes

7y

I know this wont really help the big picture, but might alleviate some stress: I am not sure how turnover can cost 3k unless large damage was done. You must have a deposit from the tenant?

If they destroy carpet replace with laminate. And painting should last several tenants.

You should be out very little in between tenants - unless this is a lower type of tenant?

But, i would still contact an atty and see if what the sellers/loan holders did was even legal.

1 Reply

Brian Ploszay

Investor · Chicago, IL · Member since 2009 · 1k+ posts · 1k+ votes

7y

I find that quite a few turn key investment groups are selling "cash flow" properties at prices that exceed their market value. Your group, it seems, was selling bad investments. They need to be exposed in the marketplace with your dissatisfaction.

5 Reply

Marian Smith

Real Estate Investor · Williamson County, TX · Member since 2011 · 1k+ posts · 961 votes

7y

@Andrey Y. You and your group are not by any means alone. There are some condos here that were previously apartments. Sold to out of state investors for over the price of nearby single family homes, and not even renovated. Investors bought multiple units. Those condos hit the courthouse steps in droves 2008-13. I thought appraisers by law had to be round robin selected from the area by law now days. I guess once 3 units sell they become the comps for all future appraisals. Have you submitted your story to your state ag? Fraud report or some such?

2 Reply

Jay HinrichsBusiness Member

Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes

7y

Originally posted by @Victor S.:

Andrey it sucks, and thank you for posting this, but if Clayton can pull off his scams in the wild (still), I don't see what can be done about these guys. Have there been other posts of this nature before? Can you not refi this condo at all? What is the rent on it that you can't even break-even at $360 pmt?

Victor I was going to mention Clayton Morris scams as being so much worse than over paying for a rental. I am sure Andrey can refi.

the issue is there are VERY FEW lenders that will do non recourse lending for IRA's and IRAs can only use non recourse lending they are not allowed any other type of loans.. So for Andrey he has a double whammy a small balance loan and a non recourse.. rates on those will be easily 8 to 9% with a company like Peak lending in Kc that does none recourse. there are a few banks that do non recourse but they are super picky on what they lend on and generally wont lend on an asset that has been bought through a turn key company. AS what we are talking about they worry about values being inflated .. But lets be honest we see this from all turn key markets.. and the locals are always saying the out of state people are over paying.. I mean those in TK have to buy the asset they have to refurb it there is a cost of capital and just like any other flipper they deserve a profit for their efforts.. and that usually makes turn key houses sale price be the very tippy top of values.. We see some TK companies disclose right up front if appraisal comes in low you have to make up the difference in cash .. I think the real issue here is these are not cash flowing .. And I suspect Andrey knew that his rate would jump going into the deal.. unless he is saying that this was not disclosed and he did not read his note terms.. the exit here is a sale. Or just hang on.

Lender is in good position even with the inflated value they are still at 70% or so.. but it would be good to talk to lender. These being private lenders they are more apt to modify terms..

lastly on the value or what is the true value.. I use this analogy.. we build new construction these days and sell to homeowners.

We obviously do this to make a profit.. its common in the industry to make 10 to 20% net profit on gross sales price and if we are lucky a tad more.. So in essence every one buying a new construction home from any builder is paying 10 to 20% more than it cost to replace it or what they may be able to get it built for if they did it themselves.. so everyone is over paying :) Anytime you buy a completely refurbed or remolded or new construction there is always a profit unless of course the builder had over runs or market retreated sometimes builders and rehabbers lose money. So In my mind the only way to get what is actual market price is to scout your own deals buy off of MLS and do your own refurb..

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8 Reply

Andrey Y.

OP

Specialist · Honolulu, HI · Member since 2014 · 1k+ posts · 1k+ votes

7y

Originally posted by @Joel Owens:

Putting other items aside. Did the mortgage note say it would reset in so many years and go to 9%? There are usury laws in every state. You might want to see a litigation attorney for a review. Were proper IRA investment procedures followed? Some, all, or part of the note may be deemed invalid if proper steps were not made to create it and service it. You might could try and get the note discounted where you sell at breakeven for current market value to preserve your down payment or force the original sellers to buy back the property at what you paid for it.

I do not know this situation and talking in generalities. Basically the attorney would be looking for any angle of attack where the seller did not give proper notice or structure to the deals they were selling for recourse.

No legal advice given.

Joel,

It says something to the effect in the amortization schedule. 5% ... Feb 2020 9%. I am not exactly familiar with the terminology so when you say, "were urusy laws followed" "were proper IRA investment procedures followed" I don't know exactly what is meant. The contract and lending contract you could tell were thrown together and it was not like any buying experience I've had before or after that.

I will shoot you an email. If you don't mind, we could discuss over email and over the phone next week when you're available. I need to know exactly what I should be telling the attorney when I speak with them and I think us chatting would clarify this.

0 Reply

Jay HinrichsBusiness Member

Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes

7y

Originally posted by @Andrey Y.:

Originally posted by @Joel Owens:

Putting other items aside. Did the mortgage note say it would reset in so many years and go to 9%? There are usury laws in every state. You might want to see a litigation attorney for a review. Were proper IRA investment procedures followed? Some, all, or part of the note may be deemed invalid if proper steps were not made to create it and service it. You might could try and get the note discounted where you sell at breakeven for current market value to preserve your down payment or force the original sellers to buy back the property at what you paid for it.

I do not know this situation and talking in generalities. Basically the attorney would be looking for any angle of attack where the seller did not give proper notice or structure to the deals they were selling for recourse.

No legal advice given.

Joel,

It says something to the effect in the amortization schedule. 5% ... Feb 2020 9%. I am not exactly familiar with the terminology so when you say, "were urusy laws followed" "were proper IRA investment procedures followed" I don't know exactly what is meant. The contract and lending contract you could tell were thrown together and it was not like any buying experience I've had before or after that.

I will shoot you an email. If you don't mind, we could discuss over email and over the phone next week when you're available. I need to know exactly what I should be telling the attorney when I speak with them and I think us chatting would clarify this.

Andrey I am a licensed ( not active ) NMLS mortgage banker.. i can answer these quickly here for you in the thread.

Usury is the maximum rate allowed by states for mortgage or private unsecured loans like pay day loans.. and of course real estate loans. some states have no limit others do.. with the lowest i think i have seen is 12% like I highly doubt 9% is usurious.. But worth checking. The other thing to check on is if that state requires license to originate these loans.. there are 12 states that do.. Like Oregon is one that's why i have my inactive license there if I want to start another lending company i fire it up.. NV>. CA does.. WA no. it not required on non owner commercial loans. which is what you got. I have done hundreds of loans to IRA clients over the years.. the IRA requirements are simply the NOTE has to clearly state its NON RECOURSE your IRA custodian usually reviews the note before they allow you to make the loan.. if you have a check book IRA its your duty to know what is correct or not. However keep in mind if the note is flawed its not the lenders fault its your risk and liability IRS could ding your IRA..

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2 Reply

Jay HinrichsBusiness Member

Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes

7y

Originally posted by @Marian Smith:

@Andrey Y. You and your group are not by any means alone. There are some condos here that were previously apartments. Sold to out of state investors for over the price of nearby single family homes, and not even renovated. Investors bought multiple units. Those condos hit the courthouse steps in droves 2008-13. I thought appraisers by law had to be round robin selected from the area by law now days. I guess once 3 units sell they become the comps for all future appraisals. Have you submitted your story to your state ag? Fraud report or some such?

Marian these are private loans.. the appraisal rules only apply to banks and mortgage loans that are sold to FHA etc etc..

Private loans have no appraisal requirements you don't even need one if you don't want one as a lender. Just like a company like Lendinghome they do internal valuations.. no appraisals.. and they may have a non recourse product i have not checked.. its a very niche space..

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Jay HinrichsBusiness Member

Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes

7y

@Andrey Y. Chris C and I were having a chat off line about Morris.. and he brought up that there could be securities issues with the way they marketed.. I would look down that path.. its a catch all.. but since your going to engage an attorney ask him that one..

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Andrey Y.

OP

Specialist · Honolulu, HI · Member since 2014 · 1k+ posts · 1k+ votes

7y

Originally posted by @Jay Hinrichs:

Originally posted by @Andrey Y.:

Originally posted by @Joel Owens:

Putting other items aside. Did the mortgage note say it would reset in so many years and go to 9%? There are usury laws in every state. You might want to see a litigation attorney for a review. Were proper IRA investment procedures followed? Some, all, or part of the note may be deemed invalid if proper steps were not made to create it and service it. You might could try and get the note discounted where you sell at breakeven for current market value to preserve your down payment or force the original sellers to buy back the property at what you paid for it.

I do not know this situation and talking in generalities. Basically the attorney would be looking for any angle of attack where the seller did not give proper notice or structure to the deals they were selling for recourse.

No legal advice given.

Joel,

It says something to the effect in the amortization schedule. 5% ... Feb 2020 9%. I am not exactly familiar with the terminology so when you say, "were urusy laws followed" "were proper IRA investment procedures followed" I don't know exactly what is meant. The contract and lending contract you could tell were thrown together and it was not like any buying experience I've had before or after that.

I will shoot you an email. If you don't mind, we could discuss over email and over the phone next week when you're available. I need to know exactly what I should be telling the attorney when I speak with them and I think us chatting would clarify this.

Andrey I am a licensed ( not active ) NMLS mortgage banker.. i can answer these quickly here for you in the thread.

Usury is the maximum rate allowed by states for mortgage or private unsecured loans like pay day loans.. and of course real estate loans. some states have no limit others do.. with the lowest i think i have seen is 12% like I highly doubt 9% is usurious.. But worth checking. The other thing to check on is if that state requires license to originate these loans.. there are 12 states that do.. Like Oregon is one that's why i have my inactive license there if I want to start another lending company i fire it up.. NV>. CA does.. WA no. it not required on non owner commercial loans. which is what you got. I have done hundreds of loans to IRA clients over the years.. the IRA requirements are simply the NOTE has to clearly state its NON RECOURSE your IRA custodian usually reviews the note before they allow you to make the loan.. if you have a check book IRA its your duty to know what is correct or not. However keep in mind if the note is flawed its not the lenders fault its your risk and liability IRS could ding your IRA..

From what you are saying.. I bet these guys looked into that before they started this pathetic outfit. It seems like a long shot to press them legally. Those things you mention, could they be found out via the internet or should I ask the attorney about it?

The other thing is, if there is a handyman or builder from the Newport News VA area that could look at the unit and tell me if its worth doing a turn over rehab (and to what extent), then trying to rent it out again. At that point a one year clock will start to see if anyone will lend to me after I've been sold an asset that was so overpriced.

The property management company is telling me that the average turnover has been $2900 - $3300 for them. There is no way this property will ever make money if I have to pay that much for a turnover on a $63,000 "asset".

I've talked to a financial advisor and someone else and they were leaning towards just selling it, taking the $20-30K loss, and moving on. I think having a rental in a self-directed IRA isn't that great to start, lending out of it seems like a better plan.