Made BIG mistake with auction purchase - beware of scams

Made BIG mistake with auction purchase - beware of scams

Rental Property Investor · Columbia, MD · Member since 2019 · 52 posts · 64 votes

Fellow investors,

I expect this topic has been discussed ad nauseam on here but I thought I would share my tale of woe anyway to help others avoid making the same mistakes I did.  In August of last year I came across an advertisement for an online auction which described the property as a "fully leased and updated duplex" in Baltimore.  The photos seemed to indicate a property in very good condition with no major defects, both units were tenant-occupied with 2-year leases in place, and the gross scheduled rents were very attractive for the neighborhood.  Of course the challenge in these situations is gaining access to inspect the inside.  With both units being occupied and with only a few days remaining before the auction closed, I took a gamble and placed a bid.  I was the high bidder.

About 6 weeks later after I had closed on the property, I was notified by Housing Authority of Baltimore City that rent payments for the upstairs unit were abated due to violations and repeated failed inspections.  I got a contractor in there immediately to assess the situation.  Come to find out the condition of the upstairs unit was almost uninhabitable due to water infiltration into the living room ceiling and significant mold growth throughout the ceiling.  It was the opinion of my contractor that the problem had been ongoing for some time and the previous owners either knew or should have known and did nothing.  Long story short it ended up costing me $20K to put in a new roof, gut and rebuild the living room, and make other necessary repairs including replacing both electrical panels which were not up to code.   More recently I just spent another $15K renovating the downstairs unit after that tenant moved out.

To add insult to injury I paid above market value for the property when you include all the closing costs, and now I have $35K more in it, not to mention 2 months of lost rent due to the abatement.  Needless to say these guys pulled off the scam of the century.  They put lipstick on a pig (spent a few grand if that on cheap flooring and a coat of paint), placed an above-market tenant in each unit, and then turned around and sold it via online auction where they can hide behind a contract that gives the purchaser virtually no protection and no recourse.  These guys walked away with a huge chunk of change in their pocket with no liability whatsoever.     

Folks this is probably common sense to most of you but my advice would be to NEVER purchase any property that you cannot fully inspect before hand.  I would also advise against purchasing via online auction unless you really know what you are doing.  It is just too easy for a seller to pass on potentially dangerous defects to an unsuspecting buyer and walk away scot-free.  

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Rental Property Investor · Baltimore, MD · Member since 2014 · 247 posts · 321 votes
7y

Its Baltimore City, there's a reason why the return are so high.  Using my self proclaimed rule, 80% of investors get ripped off in Baltimore, the other 20% have been ripped off already, and wised up.  Call it a blessing in disguise.  That will never happen to you again. Baltimore City is not for amateurs.

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  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    7y
    Originally posted by @Chris Martin:

    How is this a scam, exactly?  Was this a trustee sale advertised otherwise? Just trying to figure this out. Section 10-702... does it apply here?  I'm not making the connection with the title. 

    When they sold the place, did they explicitly exclude you from performing an inspection? I've bought dozens of property from the courthouse steps and like @Jay Hinrichs points out it's up to the buyer to perform their best due diligence. 

    Courthouse auctions are tricky but I've not seen many scams. Maybe this is, but without any details I don't know. I've seen REI arrested (but served no time) in courthouse rigging scams, but this doesn't seem to be one.

    Chris is think it was an auction company..  not a trustee or sherrifs sale..  NC I think had one of the big famous bust by FBI for colluding to stymie competitive bidding.. it was rampant in Oregon in my day.. although it calmed way down with a lot of new players and those that charge to bid and buy for others..  

  • Joseph ODonovanPro Member
    Property Manager · Ridley, PA · Member since 2017 · 427 posts · 449 votes
    7y

    @Phillip Shafer Phillip, did you do any due diligence at all? Was this your first deal? Did you even get eyes on the property?

  • Rental Property Investor · Columbia, MD · Member since 2019 · 52 posts · 64 votes
    7y

    @Joseph ODonovan Because both units were tenant occupied at the time I was only able to conduct a visual inspection of the exterior of the property (which unfortunately didn't include the roof).  Aside from some minor cosmetic issues I didn't notice any major defects.  This was my first time purchasing property in Baltimore City.  I have two other rentals located outside of Baltimore.

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