Advice on a horrible situation

Larry Spradling · 2019-03-28T20:06:41-07:00

Two years ago, I was brand new to real estate and transferred my IRA to a self-directed IRA. I was introduced to a company called Growth Equity Group that specialized in turnkey rentals for folks like me who had IRA funds to invest. I thought I knew enough to move forward, but clearly didn't ask enough questions or exercise enough caution. I received a letter last month from the mortgage company stating that my loan was going to go into default if I didn't make the last 4 payments. Turns out that the tenant wasn't paying rent and the property manager didn't bother to let me know what was going on. I got that straightened out and then started digging more into the property. After running the numbers, my monthly cashflow is NEGATIVE 22.00 a month. I talked to the property manager about selling the property so they sent me a market analysis that shows the average comp is $40,000 to $50,000. I paid $100,900 for this home two years ago. I owe $62,000 on it. This is so upside down that I don't know what to do. Would greatly appreciate some advice. What I don't need is a lecture. This is my fault as I knew just enough to be dangerous and now I'm paying for it. At this point, negative $22.00 a month seems less costly than taking a multi-thousand dollar hit by selling it for signficanly less than what I bought it for. Am I right in this thinking? Are there other options I should consider?

Pete Barrow

Investor · Indianapolis, IN · Member since 2017 · 145 posts · 158 votes

7y

Originally posted by @Dennis M.:

Fix it up and dump it before the economy turns or the ballon begins . Another reason I don’t do balloons in loans

As harsh as it is, this is the best advice. The house is very likely to be worth more now than it will be in a couple of years.

You talk about not wanting to take a hit by selling: actually, you already took the hit when you bought a house for twice what it was worth. The saying is that you make money when you buy, not when you sell. The same is true for losing money.

And in the future, don't believe anything anyone tells you about REI without verifying it yourself. Like the man said, "A more wretched hive of scum and villainy you will not find."

2 Reply

Victor S.

WorldWide · Member since 2016 · 1k+ posts · 1k+ votes

7y

Originally posted by @Account Closed:

Throw it on bigger pockets marketplace for $65,000 .. some newbie will buy it

hopefully, this is a joke. hard to tell online.

what's the point of selling it, if the sale price is not gonna cover the loan? OP, you need to get in touch with somebody familiar with the market the property is in and go from there.

1 Reply

Charles Kao

Specialist · Grand Rapids, MI · Member since 2016 · 1k+ posts · 611 votes

7y

@Larry Spradling

Go with a whole new team and see what they say. Going passive didn't work so its time to be an active investor. If they are that bad why take their advice again. I would not put it above the PM company saying that its worth 50 so they can sell it to another one of your investors.

0 Reply

Robert Matelski

Rental Property Investor · Austin, TX · Member since 2018 · 214 posts · 270 votes

7y

Originally posted by @Irina Belkofer:

First of all, you need new PM who has good reviews in that specific neiborhood of Chicago.

Then, that turn key property might be running a scam involving loan officers, Appraiser, etc

I know a house in Euclid which is sold to an older woman for $125K FHA in a part of city where nothing worth more than$75-80K. The listing agent get a buyer, close sale with no selling agent (marked as no agent, not her as a selling agent). She does that for all their cheap flips, extremely overpriced. It was sold a year ago, now it's foreclosured. Buyer was an out of state older woman.

These companies prey on OOS buyers. There might be some remediation but I'd go and fix what's is still fixable.

1. Hire new PM(huge due diligence)

2. Get CMAs from few agents in the area

3. Try to refinance with an independent company?

Well, #3 won't work since your loamunder water.

Start somewhere! Or you gonna loose money

I am going to take a wild guess that the Euclid house was 2...1 Morris, owned by a lady whose name rhymes with the street! How did she get an FHA loan if she was not an owner-occupant?

0 Reply

Matthew Irish-JonesBusiness Member

Real Estate Agent · Buffalo, NY · Member since 2017 · 2k+ posts · 2k+ votes

7y

@Larry Spradling Did you run your own rental comps? Maybe you can get it to cash flow with some minor upgrades, and the right property management company. I would at the very least find out of your above, at or below market value on the rental amount.

Good luck.

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Irina Belkofer

Real Estate Broker · Cleveland, OH · Member since 2017 · 719 posts · 658 votes

7y

@Robert

I am going to take a wild guess that the Euclid house was 2...1 Morris, owned by a lady whose name rhymes with the street! How did she get an FHA loan if she was not an owner-occupant?

She was an owner occupant and even got the help with closing fees. She moved here from Michigan.

0 Reply

Victor San Gil

Member since 2019 · 21 posts · 7 votes

7y

@Larry Spradling

I would actively mange the property myself! If you're only $-22/month then drop the property management group and do it yourself. It sounds like this is your only property so you can do it yourself if it is! That'll definitely put you back on the positive side. If the property really is only $50k then maybe you can hold it for another year and a half to pay down the mortgage where you'll potentially be able to sell it for the price of the mortgage.

Look at your options, at this point were just minimizing the loss because you already lost $50k from the buy.

Good luck to you!

0 Reply

Dave Chow

Investor · CA · Member since 2017 · 91 posts · 16 votes

7y

they were discussed about 4 years ago :

https://www.biggerpockets.com/forums/92-ask-about-a-real-estate-company/topics/151948-growth-equity-group?page=2#p4080011

0 Reply

Daniel Green

Investor · Cresskill NJ/Pigeon Forge, TN · Member since 2014 · 84 posts · 41 votes

7y

I have a self-direct IRA account and I believe it's totally fine that you manage the property as long as you don't pay yourself for the service. You can't receive any renumeration for you or family members as part of the operation of the SDIRA. Dmitriy Fomichenko would be the guy to ask. https://www.biggerpockets.com/users/SenseFinancial

0 Reply

Steve Vaughan

Rental Property Investor · East Wenatchee, WA · Member since 2014 · 10k+ posts · 16k+ votes

7y

Originally posted by @Clayton Mobley:

@Steve K. thanks for the link - I had not heard of these folks before but WOW, that's a lot of red flags. Not quite the Morris 'model' but the 'only our appraisal' and 'only our financing' stuff is so bogus. One reason it's so important for new investors to know what they can and should expect from a real provider.

@Larry Spradling I agree with others here, your PM has to go. Since the prop is held by an IRA, you will have to be careful about self-managing. It is possible, but you can't collect a fee or commission (obviously), you can't pay for repairs etc out of pocket, you can't accept checks to your personal account - all the financial stuff goes through the IRA. But you CAN be the one that picks tenants, signs leases, and does other non-value-adding activities that the IRS doesn't care about because it doesn't impact the value of the asset (but you CAN'T do any repairs yourself, because that adds value they can't tax). It will be tough long-distance but it is technically possible. You may need to bite the bullet and fly out to inspect, oversee any repairs necessary (hire a contractor through the IRA, of course), and find a new tenant if the current one needs to go as well.

I think the first step is to get a real value estimate not from the current PM. Once you know how much you stand to lose if you sell, you can make the decision about keeping it and trying to boost your cash flow by either forcing some equity with upgrades and upping the rent / self-managing, etc. Just remember that you can do the decision-making, but not the actual work. There are IRA services that facilitate this kind of thing, although that's another expense. I'd talk to a CPA first.

Sorry to hear you got caught up in this scam - best of luck in getting to the other side of it.

Great points, Clayton.

For these reasons plus not even being able to take depreciation during the hold, DO NOT HOLD in an SDIRA!

I would only lend from one. Possibily flip, but nothing disrupts naps like a bunch of rules and no control.

6 Reply

Steve Vaughan

Rental Property Investor · East Wenatchee, WA · Member since 2014 · 10k+ posts · 16k+ votes

7y

Originally posted by @Victor San Gil:

@Larry Spradling

I would actively mange the property myself!

Normally, great advice, Victor. But this is in an IRA and you aren't allowed to do anything as the owner as far as I know. Self-dealing.

Hopefully Daniel Green is correct and you just can't pay yourself, but the rents def need to go straight to the custodian.

0 Reply

Account Closed

Member since 2018 · 78 posts · 63 votes

7y

@Larry Spradling I agree with @Caleb Heimsoth, I wouldn't take ANY advice from the property manager! I'm sorry that you are in this situation. I am not an expert but I would consider this: take the property back under your control and find a way to raise the rent enough so that you are not in the negative. Look back at that appraisal you got when you got a loan and see what that says and consult a real estate agent in the area to get real comps. And don't be so hard on yourself for screwing up, a lot of money will pass through your hands in this lifetime! Good luck!

1 Reply

Jay HinrichsBusiness Member

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

7y

Originally posted by @Steve Vaughan:

Originally posted by @Clayton Mobley:

@Steve K. thanks for the link - I had not heard of these folks before but WOW, that's a lot of red flags. Not quite the Morris 'model' but the 'only our appraisal' and 'only our financing' stuff is so bogus. One reason it's so important for new investors to know what they can and should expect from a real provider.

@Larry Spradling I agree with others here, your PM has to go. Since the prop is held by an IRA, you will have to be careful about self-managing. It is possible, but you can't collect a fee or commission (obviously), you can't pay for repairs etc out of pocket, you can't accept checks to your personal account - all the financial stuff goes through the IRA. But you CAN be the one that picks tenants, signs leases, and does other non-value-adding activities that the IRS doesn't care about because it doesn't impact the value of the asset (but you CAN'T do any repairs yourself, because that adds value they can't tax). It will be tough long-distance but it is technically possible. You may need to bite the bullet and fly out to inspect, oversee any repairs necessary (hire a contractor through the IRA, of course), and find a new tenant if the current one needs to go as well.

I think the first step is to get a real value estimate not from the current PM. Once you know how much you stand to lose if you sell, you can make the decision about keeping it and trying to boost your cash flow by either forcing some equity with upgrades and upping the rent / self-managing, etc. Just remember that you can do the decision-making, but not the actual work. There are IRA services that facilitate this kind of thing, although that's another expense. I'd talk to a CPA first.

Sorry to hear you got caught up in this scam - best of luck in getting to the other side of it.

Great points, Clayton.

For these reasons plus not even being able to take depreciation during the hold, DO NOT HOLD in an SDIRA!

I would only lend from one. Possibily flip, but nothing disrupts naps like a bunch of rules and no control.

Great point Steve I have been preaching that for 20 years.. you only buy the fixed asset in your IRA if you have a very good sense its going to sky rocket in value in a few years.. but if its simply a long term cash flow play... NOTES are far better for IRA. WE see people get stuck all the time buying the asset in their IRA then have a wipe out tenant and don't have enough money in the IRA to fix up the house plus you cant work on it yourself.. ( or your not suppose to).. One of the main aspects of buying rental real estate is to shelter cash flow through depreciation .. U lose that.. so the only other advantage of using the IRA is if your going to have a big gain on values going up.. and we know that in some markets values are stagnet and have been for decades so those are cash flow markets. But if you bought a rental in Seattle 6 years ago with your IRA or in Denver or other hot markets its doubled in value.. so you give up a tad of deprecation to make a significant appreciation tax deferred gain.

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Jay HinrichsBusiness Member

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

7y

@Clayton Mobley @Steve Vaughan @Caleb Heimsoth I can add some color to this.

this is the same company that Andrey the radiologist up on Fairbanks invested with on that townhouse in Virginia remember that long thread he was way peeved... and in the same boat.. same company same model.

Keep in mind this may pre date some of you entering the Turnkey space.

However in the GREAT GFC which put most Turnkey companies out of business because you could not get investor loans. the new ones like this coming up .. had to Target IRA's since that's were the cash was to buy their stock.. And since most people have less than 100k in their IRA it made sense that they needed some financing.. so these companies built their own financing mechanism its quite common in the industry actually. Since the IRA can only borrow NON RECOURSE and there are very few banks or traditional lenders that will do non recourse.. Peak out of KC was one of the first to enter the non recourse private mortgage space.. And they had outlets to sell the paper once written..

That's why you see these threads now.. In markets that stayed firm or rose you see no one complaining but in some markets that did not you see these threads or if the vendor ( company) WE all know there is a premium to turnkey at some level. I see it in every city and every vendor.. so to exit ANY turn key or non appreciation rental house in any market were the values don't really go up is going to create a loss.. don't care who you bought it from or how you got there. These properties need to be held for 10 to 20 years for any hope of coming out of them. and that's any and I mean ANY non appreciating market.. were rents stay stable and values stay stable.

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Clayton MobleyPro Member

Birmingham, AL · Member since 2014 · 875 posts · 947 votes

7y

@Steve Vaughan @Jay Hinrichs thanks for the insight on how this model developed, it makes logical sense given the timing and the economy that folks would try to target what little cash reserves investors had and build off that - although its certainly not the way I would operate... Of course, regardless of the fact that the whole model is convincing people to fork over their retirement money, any 'turnkey' company that ONLY allows their own inspection/appraisal and in-house financing is just.... red flags all over the place.

I agree with Steve, investing in low-tier assets within your IRA is not the best way to put that money to work, more passive stable investments are going to be less headache and less red tape. Yeah REI in a solid market that's fully managed by folks with a track record if your IRA is just overflowing with capital and you want to diversify, maybe, but a C/D class property is always gonna be more complicated than you think, even if you're 'hands off'. Plus we all know that many of the fly-by-night turnkeys target these lower price points because they know inexperienced investors see the affordable price tag and put blinders on to all else, so there's a lot more turnover in that part of the turnkey industry - failing management and being handed off relay-style to whatever PM steps up to take their place is NOT the kind of hassle you want your retirement funds tied up in. Of course that doesn't help OP in this case...

1 Reply

Steve Vaughan

Rental Property Investor · East Wenatchee, WA · Member since 2014 · 10k+ posts · 16k+ votes

7y

Originally posted by @Clayton Mobley:

@Steve Vaughan @Jay Hinrichs thanks for the insight on how this model developed, it makes logical sense given the timing and the economy that folks would try to target what little cash reserves investors had and build off that - although its certainly not the way I would operate... Of course, regardless of the fact that the whole model is convincing people to fork over their retirement money, any 'turnkey' company that ONLY allows their own inspection/appraisal and in-house financing is just.... red flags all over the place.

I agree with Steve, investing in low-tier assets within your IRA is not the best way to put that money to work, more passive stable investments are going to be less headache and less red tape. Yeah REI in a solid market that's fully managed by folks with a track record if your IRA is just overflowing with capital and you want to diversify, maybe, but a C/D class property is always gonna be more complicated than you think, even if you're 'hands off'. Plus we all know that many of the fly-by-night turnkeys target these lower price points because they know inexperienced investors see the affordable price tag and put blinders on to all else, so there's a lot more turnover in that part of the turnkey industry - failing management and being handed off relay-style to whatever PM steps up to take their place is NOT the kind of hassle you want your retirement funds tied up in. Of course that doesn't help OP in this case...

Both Jay and Clayton have just further educated me (and others), so I will amend my don't hold inside an IRA period stance.

It is not a good idea to hold inside an IRA.. unless you 1) Expect massive appreciation. You bought at a huge discount or you buy in path of progress with inside info and/or you are in a historically proven appreciation market like the coasts.

2) Unless it's a small part of your IRA or your financial world and you want to diversify.

Do not hold in an IRA if the only reason you are doing so is because you are undercapitalized. Thank you, gentlemen!

2 Reply

Clayton MobleyPro Member

Birmingham, AL · Member since 2014 · 875 posts · 947 votes

7y

@Steve Vaughan Exactly! There are ways and reasons to invest within a retirement fund - but having no other capital is THE WRONG REASON. If your retirement fund is your only safety net, for the love of god, stick to something more stable than a C-class rental you've never seen. It happens a lot that folks learn about REI, get rightly jazzed about the prospects, and then perform all kinds of financial gymnastics to be able to start investing ASAP because they feel like everyone else is making money and they're missing out. But the reality is, and some folks may not like to hear this - people that already have capital will always be able to turn that capital into more capital a LOT more quickly than someone with none will be able to even get started.

As a new investor on BP, it's really easy to see all the success stories and the whole 'wealth is a mentality' stuff and think that if you just force your way forward you'll be rich. But as a new investor with no liquid assets, comparing yourself to the folks snowballing big portfolios is doing yourself a disservice, and using your one safety net (retirement funds) to try to play with the big kids right away is a dangerous idea. I'm the president of a turnkey company, so it's not like I ever want to talk folks out of REI - but even we don't recommend that people pour all their retirement savings into getting started or take out hard money loans they can't afford. REI is great, but it's better to get started later with more capital than to get started now with risky bets on your entire financial future.

4 Reply

Larry Spradling

OP

Cincinnati, OH · Member since 2018 · 21 posts · 6 votes

7y

@Steve Vaughan @Clayton Mobley @Jay Hinrichs @Caleb Heimsoth thanks for further educating me on this. I first learned about turnkey two years ago listening to Clayton Morris. My IRA had gained about 3% in 20 years. Given that retirement was less than 20 years away I was convinced to do something different and a SDIRA was discussed in his podcast. I went through his company and somehow ended up with Growth Equity Group. I have no idea how that happened, but given what has come to light with Morris Invest, it makes sense. I transferred my IRA which totaled around $65k. They convinced me to purchase two homes and take out a non-recourse loan, which I did. So I also own a home in Tennessee. It's not losing money, thankfully, but cash flow is low. The big issue I'm facing is that I have less than $7000 in my IRA, and with a limit of $6k annual contribution, I don't have enough in it to pay off the loan amount after the sale. That's where I'm stuck. When I dove in, I'd never heard about bigger pockets. Ive learned quite a bit since finding this site and the podcast. I typically have to understand everything before I jump into something. I failed to do that here and trusted the people I was talking to. Shame on me. The worst part about all of this is that's all the retirement money I have. I'm a pastor, so what I save for retirement is on me. My plan is to buy rentals with my HELOC to try and generate passive income that I can retire on in 15-20 years.

@Clayton Mobley, I’m on a waiting list for purchasing a turnkey through your company. Right now I’m just focused on trying to get out of this mess.

Thanks for all of the insight everyone has downloaded to me on this thread. It’s encouraging to see so many people who care about other investors and take the time to offer wise council. Just wish I had heard of this site two years ago!

1 Reply

Clayton MobleyPro Member

Birmingham, AL · Member since 2014 · 875 posts · 947 votes

7y

@Larry Spradling I'm really sorry to hear about this - and yes knowing that you came to these folks through Morris, I guess there was almost no way you'd escape unscathed. I'm sure it's no consolation that other folks are in the same boat, as none of you should be.

I want to be clear that while I do always preach the importance of due diligence, I don't believe the onus for this mess is on the investors. Criminals are always the ones responsible for crimes, not their victims - I realize in this case the word 'crime' might be debatable, since a lot of skeezy business practices are actually perfectly legal, but the point remains. I hope my post about not investing via your IRA didn't come off as accusatory - you shouldn't have been lead down that path to begin with, and no worthy businessperson would have talked you into gambling your retirement like that. The very reason these types of 'companies' target folks like you is exactly that - not on BP, new to investing, feel like it's time to take control and aren't sure what steps to take. It's a specific and targeted scam on the REI industry's most vulnerable demographic, which makes it all the more infuriating.

I know you've likely learned a ton from this experience, which is I guess the silver lining. Hopefully you will come out on the other side stronger and better equipped.

For now, it sounds like your best bet is to get the property cash flowing as best you can until you have more in the IRA and/or it actually appreciates. I would follow the advice of others here saying to see what updates or repairs you can make to force some equity with relatively low costs, replacing light fixtures or window treatments etc. Sometimes just a new coat of paint goes a long way for curb appeal. Getting an outside appraisal and self-managing (to the extent you can) will help as well.

I'm happy to hear you're on our waitlist, but I agree that sorting this out needs to be your top priority, even if the financials don't overlap (this vs a non-ira investment) - just for peace of mind. That being said, you know where to find me if you have any questions.

Best of luck, we're rooting for you.

2 Reply

Pete Barrow

Investor · Indianapolis, IN · Member since 2017 · 145 posts · 158 votes

7y

Originally posted by @Neal Shue:

Maybe the best thing to do is keep it. First fire the PM, and get another one. Hopefully this will get it to cash flow even after the increase in interest rate. Maybe in a few years you won't be upside-down and can get out from under it without much loss, or possibly re-finance it, and keep it for the long term and when you're ready to retire it will be worth more, and cash-flowing.

Real Estate is a long term investment.

==>when you're ready to retire it will be worth more, and cash-flowing.

Uh, it's on the south side of Chicago.

0 Reply

Pete Barrow

Investor · Indianapolis, IN · Member since 2017 · 145 posts · 158 votes

7y

I'm curious as to why you bought in Chicago when you live near Cincy. I've heard the Cincy market is affordable and growing...of course after the last few years of growth it's probably not as affordable as it was...

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Shadonna N.

Developer · . · Member since 2014 · 520 posts · 162 votes

7y

@Larry Spradling sorry to hear about what you are going through. What if you do nothing and mail in the keys. It's contained in the IRA, cashflows are misstated. the lender was part of the scam. How would that affect your credit/finances outside the IRA? Can you breakdown the cashflow, can you sell the property for the amount owed (no profit). If the note is ~100K, the monthly payment amortized over 30 yrs would be cheaper than most rents, you may run into the same issues with appraisals.

0 Reply

Robert TinkerPro Member

Rental Property Investor · Round Rock, TX · Member since 2019 · 251 posts · 159 votes

7y

@Brian Midden If it's an IRA, can he self manage?

0 Reply

Bart H.

Dallas, TX · Member since 2016 · 1k+ posts · 745 votes

7y

Originally posted by @Larry Spradling:

Originally posted by @William Kyle Walker:

What's the area where the property is located doing? If it's up an coming and you can float the $22 a month. Hold until the market rises high enough.

If the city and neighborhood are good, all buildings are cheap if your time horizon is out long enough.

It's in the south side of Chicago.

It sounds like you got scammed, and the landlord/tenant rules are beyond terrible. I would find a good attorney with a well connected Chicago law firm and see if there is any way you can go after the appraiser/lender since they might have committed fraud.

If they aren't paying now, you might find that even the tenants had some ties to the sellers.

Maybe see if an insurance company will pay to make the issue go away etc.

The one saving grace is that the loan is non recourse (or should be), since it sits in an IRA. Check with an attorney to make sure, but I am pretty certain the bank cant come after you for the difference.

In fact if nothing else works, you might go to the bank and see if the lien holder will restructure the note. They basically have an unsecured note, with no other means to recover the shortage if you default. Don't let them talk you into personally securing the loan (in fact I think that messes up your IRA).

Personally I would figure out a way to sell the property.

1 Reply

Christopher Lombardi

Developer · Point Pleasant Beach, NJ · Member since 2015 · 303 posts · 216 votes

7y

@Larry Spradling did you personally guarantee the loan? Is it in an LLC? If not, just give it back to the bank. If you did, you probably need to sell it and take the loss. I would hire an attorney and see what you can recoup from the seller or property manager.

0 Reply

Advice on a horrible situation

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