Advice on a horrible situation

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Advice on a horrible situation

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

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?

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

@Larry Spradling Just to clarify, the turnkey provider is out of business? Does your PM have any relationship with Turnkey? Why didn't your PM notify you that your tenant was not paying rent?

Based in the info you provided, I would immediately fire PM. Can you self manage the property? If so, do it now! You need to be hands on with this. By self managing, you will probably cash flow positive. If the PM's market analysis is truly accurate, then selling it would create a $50K loss. That being said, you should do your own market analysis as I would not trust the PM's data.

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  • Henry Lazerow
    Real Estate Agent · Chicago, IL · Member since 2017 · 2k+ posts · 2k+ votes
    7y

    If it's on the south side best bet will be getting it rehabbed mildly (new counter tops/sink, update bathroom, repaint the place, etc.. Most areas of chicago if this is 3br with some renovations will sell $80k+. Other then maybe Burnside or South Chicago neighborhood it should be worth more.

    Feel free to PM me the address I can let you know realistically what it's worth with the MLS past solds. I don't do brokerage for low priced properties like this so will give you an honest no conflict of interest answer.

    BTW If it's a $40k house this is not C class. C class in Chicago is $100-300k house. This is most likely D or F class. 

    2Reply
  • Victor San Gil
    Member since 2019 · 21 posts · 7 votes
    7y
    Originally posted by @Steve Vaughan:
    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.

    Ahh thanks for the insight. I had no idea. If something likes this comes up on my side I'll definitely take high precaution!

    0Reply
  • Joe A.Business Member
    Realtor · Waco, TX · Member since 2018 · 76 posts · 80 votes
    7y

    @Larry Spradling

    1. Fire current PM, and either do it yourself or get a new one. If you get a new one, do some research and/or get recommendations.

    2. Evict the tenants. If they haven’t paid for four months, it’s past time for them to go.

    3. Get your own realtor apart from the PM to run comps for you and give you a new CMA.

    4. Run the numbers and make an educated decision.

    254-242-9099
    0Reply
  • Daniel Green
    Investor · Cresskill NJ/Pigeon Forge, TN · Member since 2014 · 84 posts · 41 votes
    7y

    @Dmitriy Fomichenko should chime in on what you can and can not to with a SDIRA. It is my understanding you can manage the property as long as you don't receive any payment from the IRA for your services. All income from the property must go into the LLC's account. But he has far more details than I.

    0Reply
  • Lou Gonzales
    Vendor · Chicago, IL · Member since 2015 · 82 posts · 22 votes
    7y

    Where on the south side are you? I work on the SS. If you what to give an address I can have comps run for you. You may be able to finance to a buyer and sell in a couple years after some fix up and appreciation you may be alright. PM me if your interested.

    0Reply
  • Dmitriy Fomichenko
    Solo 401k Expert · Anaheim Hills, CA · Member since 2012 · 18k+ posts · 6k+ votes
    7y

    @Daniel Green

    You can provide basic administrative functions (hire contractors, place ads for rent, screen tenants, etc.) 

    Providing any labor would not be allowed (painting, fixing, maintenance, etc.)

    1Reply
  • Ruth Lyons
    Investor · Colorado Springs · Member since 2016 · 234 posts · 150 votes
    7y

    I'm so sorry you're going through this. Lots of great suggestions in the posts. Just be careful how "hands on" you get. With a SDIRA, you have to keep an arms length distance from the money. Violating this important rule could get your entire SDIRA money disqualified and you'd owe taxes and penalties. 

    1Reply
  • Larry Spradling
    OP
    Cincinnati, OH · Member since 2018 · 21 posts · 6 votes
    7y
    Originally posted by @Lou Gonzales:

    Where on the south side are you? I work on the SS. If you what to give an address I can have comps run for you. You may be able to finance to a buyer and sell in a couple years after some fix up and appreciation you may be alright. PM me if your interested.

     Sent you a PM

    0Reply
  • Larry Spradling
    OP
    Cincinnati, OH · Member since 2018 · 21 posts · 6 votes
    7y
    Originally posted by @Henry Lazerow:

    If it's on the south side best bet will be getting it rehabbed mildly (new counter tops/sink, update bathroom, repaint the place, etc.. Most areas of chicago if this is 3br with some renovations will sell $80k+. Other then maybe Burnside or South Chicago neighborhood it should be worth more.

    Feel free to PM me the address I can let you know realistically what it's worth with the MLS past solds. I don't do brokerage for low priced properties like this so will give you an honest no conflict of interest answer.

    BTW If it's a $40k house this is not C class. C class in Chicago is $100-300k house. This is most likely D or F class. 

     Sent you a PM

    0Reply
  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    7y
    Originally posted by @Christopher Lombardi:

    @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.

    Chris its not legal to recourse or PG a loan in an IRA.. so I suspect not.. if it is he has IRA trouble to boot.

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  • Jason Bible
    Rental Property Investor · Houston, TX · Member since 2015 · 75 posts · 66 votes
    7y

    Originally posted by @Larry Spradling:

    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?

    Most of these turnkey rental companies are selling garbage to investors that dont know any better. When I see CoC analysis with a CAP rate for SF I know someone is getting rich and someone is getting screwed.

    Get this property out of your IRA ASAP. Sell it and take the loss or owner finance it to the tenant or another buyer and sell the note. My spidey sense tells me there is something else going on here, best to sell and move on.

    2Reply
  • Douglas Pollock
    Rental Property Investor · Tampa, FL · Member since 2014 · 55 posts · 12 votes
    7y

    @Larry Spradling you NEED to use facts going forward, and you already took a great start. You are crowd sourcing information. Don't rely on our information, but do use it to inform you research, action, and speak to some professionals. Since you're dealing with an IRA, take the IRS rules into consideration.

    1. Determine current rental rate. Maybe the new tenants rent rate will result in positive cashflow, or even more negative.

    2. Determine market value of the home. You could pay for an appraisal as well as speaking to a real estate agent and requesting a list of all properties sold in the area for the past 12 months. Provide a similar square footage, number of beds and baths, and look for similar properties. Maybe your home is worth more or less than what your property manager stated.

    3. Based on your time horizon, determine what you want out of your investment. Are you better off with a low cost index fund like VTSAX or VTI from Vanguard? Or, do you want a rental equity with cashflow? Or do you want to build wealth with paying off property and potentially increase cashflow with paid off property?

    4. We’re humans, so emotion is inevitably going to be involved in our decisions. Rational thought should be used. What advice would you give a family member in the same situation? In ten years, What do you want to be able tell people you did with this problem?

    5. We wish you the best. You’re not the only going through this. Thank you for your courage in facing this. A head in the sand will not fix it.

    0Reply
  • William C.
    Real Estate Agent · Souderton, PA · Member since 2016 · 591 posts · 414 votes
    7y

    I am sorry if I missed this, but was there an appraisal done at the time of purchase? I keep seeing advice to get one now. I saw a mention of an “in house” appraiser. That’s an oxymoron. An appraisal is by a unbiased 3rd party who has no hand in the deal. They cost like $300-450. Anyone purchasing real estate, especially out of state, has never seen it in person, and does not get an appraisal, is just asking to be scammed. If the person selling you will not allow it, run as fast as you can. Real estate is SIMPLE people, but not easy. So if there was any opinion of value or appraisal done back at the purchase I would look to see who’s signature is on that.

    0Reply
  • Larry Spradling
    OP
    Cincinnati, OH · Member since 2018 · 21 posts · 6 votes
    7y
    Originally posted by @Jay Hinrichs:
    Originally posted by @Christopher Lombardi:

    @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.

    Chris its not legal to recourse or PG a loan in an IRA.. so I suspect not.. if it is he has IRA trouble to boot.

     It's a non-recourse loan.  As I understand how that works, if it defaults, they take back the property and forgive the balance of the loan.  Do you guys know if that's accurate.  If so, then as bad as I hate to, it seems better to default and foreclose than to sell.  If I sell, I will owe between $15,000 and $20,000 to pay the remaining balance, assuming the house doesn't sell for more than $50k.  

    0Reply
  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    7y
    Originally posted by @Larry Spradling:
    Originally posted by @Jay Hinrichs:
    Originally posted by @Christopher Lombardi:

    @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.

    Chris its not legal to recourse or PG a loan in an IRA.. so I suspect not.. if it is he has IRA trouble to boot.

     It's a non-recourse loan.  As I understand how that works, if it defaults, they take back the property and forgive the balance of the loan.  Do you guys know if that's accurate.  If so, then as bad as I hate to, it seems better to default and foreclose than to sell.  If I sell, I will owe between $15,000 and $20,000 to pay the remaining balance, assuming the house doesn't sell for more than $50k.  

     yes you can simply stop paying and be done but if this is a IL mortgage that takes a long time and expensive for them to foreclose I would try to get a few dollars out of them for just signing a deed in Lui.. worth a shot.. but other yes just stop paying. And when they start sending letters tell them you will sign it back to them for 2500 or 5k.. and if its rented just keep collecting the rent and don't pay.. until they finally take it.. do NOT pay tax's or anything else

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  • Frank Jiang
    Investor · San Diego, CA · Member since 2014 · 592 posts · 765 votes
    7y

    And this is how the next wave of complaints about GEG from the private lenders starts coming in.   Seems inevitable when you're underwriting 5% > 9% balloons on D class properties.

    0Reply
  • Henry Lazerow
    Real Estate Agent · Chicago, IL · Member since 2017 · 2k+ posts · 2k+ votes
    7y

    Reach out to @Mark Ainley he manages there and can give you realistic rental rate. If you can cashflow just keep it. 

    0Reply
  • Andrey Y.
    Specialist · Honolulu, HI · Member since 2014 · 1k+ posts · 1k+ votes
    7y
    Originally posted by @Larry Spradling:

    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?

     https://www.biggerpockets.com/forums/311/topics/65...

    I went through the same thing as you with GEG. As have many others. Take a look at at least the first 2 posts (mine) and may be worth going through all of it.

    0Reply
  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    7y
    Originally posted by @Andrey Y.:
    Originally posted by @Larry Spradling:

    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?

     https://www.biggerpockets.com/forums/311/topics/65...

    I went through the same thing as you with GEG. As have many others. Take a look at at least the first 2 posts (mine) and may be worth going through all of it.

    Andry i tried to tag you as i knew this was the same company and your same scenario

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  • Lynnette E.
    Rental Property Investor · TN · Member since 2018 · 2k+ posts · 2k+ votes
    7y

    And if you do decide to let it go back to the lender, who likely is a crook in on the buy/lend for more than its worth scam and you want to earn some of your money back, consider doing a prepaid lease for your tenants.  If you get rid of the current ones, advertise a 5 year lease for the price of what a 2 or 3 year lease would add up to, but paid fully upfront.  Then you get the $ and when its foreclosed the lender gets tenants under a lease they must honor...and the lease was prepaid to you, so the lender gets no rent.  Tenant come out of this fine, and you come out better, and lender gets to reap what he sowed so well.

    2Reply
  • Larry Spradling
    OP
    Cincinnati, OH · Member since 2018 · 21 posts · 6 votes
    7y
    Originally posted by @Andrey Y.:
    Originally posted by @Larry Spradling:

    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?

     https://www.biggerpockets.com/forums/311/topics/65...

    I went through the same thing as you with GEG. As have many others. Take a look at at least the first 2 posts (mine) and may be worth going through all of it.

    Thanks. How did this end for you? Or are you still working through it? At this point, it looks like my best option is to foreclose. I paid $100,900 for a home that's worth $50k according to 3 different CMA's. No matter how long I hold the property, it's not going to be worth more than what I paid for it. I also have a non-recourse loan, so I'm considering taking my $37k loss and moving on. Not sure what else to do.

    0Reply
  • Larry Spradling
    OP
    Cincinnati, OH · Member since 2018 · 21 posts · 6 votes
    7y
    Originally posted by @Lynnette E.:

    And if you do decide to let it go back to the lender, who likely is a crook in on the buy/lend for more than its worth scam and you want to earn some of your money back, consider doing a prepaid lease for your tenants.  If you get rid of the current ones, advertise a 5 year lease for the price of what a 2 or 3 year lease would add up to, but paid fully upfront.  Then you get the $ and when its foreclosed the lender gets tenants under a lease they must honor...and the lease was prepaid to you, so the lender gets no rent.  Tenant come out of this fine, and you come out better, and lender gets to reap what he sowed so well.

     Interesting.  Have you seen this work?  How do you know that the tenant wouldn't get evicted after the bank takes over the house?  I like this idea, but I wouldn't want the tenant to be out of lease money and a home.  Would love to hear more about how this works.

    1Reply
  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    7y
    Originally posted by @Lynnette E.:

    And if you do decide to let it go back to the lender, who likely is a crook in on the buy/lend for more than its worth scam and you want to earn some of your money back, consider doing a prepaid lease for your tenants.  If you get rid of the current ones, advertise a 5 year lease for the price of what a 2 or 3 year lease would add up to, but paid fully upfront.  Then you get the $ and when its foreclosed the lender gets tenants under a lease they must honor...and the lease was prepaid to you, so the lender gets no rent.  Tenant come out of this fine, and you come out better, and lender gets to reap what he sowed so well.

     keep in mind for this to work the lease must be at market.. I would think getting a tenant to pay 2 to 3 years of market rent in advance would be a nice thought but tough to really do

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  • Mike B.Pro Member
    Developer · Chicago, IL · Member since 2013 · 439 posts · 359 votes
    7y

    90% of turnkey companies suck out every dime of equity when selling the property to the end buyer. They do the least amount of work possible, cash out and get the next sucker on board...and even with this greedy model they still manage to find themselves in the middle of a ponzie scheme because they over promise and under deliver. Referrals mean next to nothing unless the referrer has been invested for 2-3 years. Most people are better off doing the value add themselves. Even if you have to pay someone to watch over the project, you'll likely come out with a lot more equity than using a turnkey company. Good luck and hopefully you can view your loss as an education expense.

    3Reply
  • Larry Spradling
    OP
    Cincinnati, OH · Member since 2018 · 21 posts · 6 votes
    7y

    ****UPDATE****

    I spoke to the property management company yesterday. It's Fairview Realty Group if anyone knows anything about them. They took over the management last year from Growth Equity Group and he told me that he has several landlords in the same position. He has looked into the situation and confirmed that I was part of a scheme between GEG and Genesis 1, LLC. They sold the property to GEG for $70,000 and he said GEG sold it to me the same day for $100,900, and Genesis 1 became the lender. The whole intent was to sell me an upside down property that did not cashflow inevitably forcing foreclosure so that Genesis 1 would get the property back and then rinse and repeat for the next investor.

    He recommended that I stop making mortgage payments and that he would continue to collect rent from the tenant on my behalf. He said that it would take 10-12 months to foreclose, so I could walk away with that much in rent money at the very least. He said that he could not deposit the rent money into my IRA monthly. He would have to keep it and then pay me at the end of the process. I'm not sure why he can't pay me monthly. That sounds fishy to me. I don't know who to trust in this situation, or if I can trust anyone. Can anyone here confirm that I cannot collect rent if I'm not paying the mortgage?

    @Clayton Mobley, @Jay Hinrichs, @Andrey Y., I would especially be interested in your thoughts.

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