Too good to be true?

17 Replies

Hi all,

A realtor/investor reached out looking for $12k to help fund a deal and promised a net return of $24k to be paid 60 days after the property has been rehabbed and listed for sale. We have since defined the listing date to be 4/10/2018. So by 6/10/2018, I would walk away with 100% ROI.

I asked her why they are not going to a lender for the entire cost instead, and she responded that they have already borrowed all the money that they can, and needed this last bit to close. Is this too good to be true; to receive 100% return on a 3 1/2 month Loan? Or does this happen fairly often in this industry?

You have to ask for numbers and verify them.  

@Roman M. I've gotten the property address and it's a listing from the MLS. I've done my comps along with the ones that she provided, and they come in over $100k lower than the stated ARV. I researched the realtor, and she has been a realtor for over 5 years, with 30+ properties closed.

Her LLC was just created back in December 2017, and she is listed as the registered agent, although the property (albeit a physical address) listed as the LLC's mailing address, does not show that she is the owner (could be renting).

Surely a realtor with a track record wouldn't risk jeopardize her name for a measly $12k right? Since we have clearly defined the date parameters, I would be walking away with a return regardless if the property sales, as the LLC promises to pay out-of-pocket by then. The only concern is that, being a newly formed LLC, there is nothing to go after.

@Minh Le

Don’t want to sound insulting here with these questions but these are things I would wanna know...

Is this all through Email? 

How many times have you sat down and had coffee with this person? To make me feel comfortable I would want to have at least 3 solid face to face connections with them. 

Do they have a solid Biz that they cannot just hop town with your cash? 

Will you be on title as a second loan? 

How many times have they done this before with other folks?   Can you call those people as references? 

Could be a totally legit deal but, from the limited information you gave, seems a bit fishy...

Assuming you are not actually lending money on the property as a 2nd or third mortgage (because 100% interest in 3 months maybe considered usuary in your state) and you are investing money in her LLC where she is promising you 100% return on your money in 3 months. As an investor of the company you don't have any guarantee of this return. Your money will be at risk like hers (if she has any in the deal) and if the property doesn't sell for she told you, you will only be entitled to your % share in the company.

Unless of course you have some amazing partnership written agreement that had took all little details in consideration and you know for sure that you getting $24,000 returned to you no matter what happens.

Her RE license is not at risk because it's a business transaction with you in partnership and business goes bad sometimes. 

Just be aware and don't let your guard down. Check the numbers and not only what you can sell it for, see what she owes to other people or lenders on this project and how much money needed to complete the rehab so you don't end picking up the pieces of this deal.

@Joshua D. Yes, so far it has just been via email. We just started going back and forth last night. I do plan to meet her in person today so that I'd know who I am doing business with.

Good point about being on the title as a second loan, although I'm not sure of the ramifications with that. Is it considered to be added protection for me, to where I have recourse in the case that stuff goes south? Or is it a liability, and I'd be on the hook for worse comes to worst? The latter point is what I want to avoid. 

She sent a document template which lists her LLC as the Second Party, and I would be the First Party. Does that have an effect on anything? It also states that neither parties should be liable for any obligations of the other party. The document clearly defines that the Second Party is responsible for contributing all monies needed to repair, maintain, advertise, market and any other expenses as well as the mortgage payments; whereas I, as the First Party, would just contribute the $12k.

@Roman M. Thanks for the additional insights. The risks are what I need to know more about as well.

Below is what is stated, regarding distributions, in the Joint Venture agreement that she sent:

10. DISTRIBUTIONS (A) The first party will be paid a total of $24,000.00 60 days from property listing date of April 10, 2018. If property does not sell within the 60 days of listing the first party will be paid by second party from personal funds.

Again, the LLC is fairly new, so I'm not sure how much recourse there is if they do not pay. Is there additional language that I can ask her to include to give additional protection?

I would do 2nd mortgage with the interest as high as allowed by your state to secure your investment and the balance of the promised return should be in your JV agreement in the LLC. This way your initial investment is secured by real property

Has the agent done flips before?  What happens if the rehab costs are double what she thinks?

Is she providing any collateral?

Typically a bank loan has origination costs- Is she getting your loan for free?

Will she allow you to run her credit?

Can you verify that she owns her own home? and others?- very easily pulled up in public records (she should be able to pull it up for you while you are together  (1 minute)

(**********************************The odd thing about it for me is that she is willing to give up $12000 of profit, when she could just put the expenses on a credit card until the home sells, or take a cash advance which would stll be cheaper ********************  something may be off here. 

@Christine Kankowski She is working on another flip at the moment, which she got off market.

No collateral provided right now.

I can't find any other properties that she or her LLC owns outright, but if she does off-market deals, those properties may not list her as the owner on a short-term basis.

Yes, I did find it odd as well that she is willing to give 100% return in such a short turnaround. That was why I asked if things like this happens in this industry. I will ask some more about why she is not using other alternative means when I meet with her today.

Anyone else having issues with tagging people when posting on the phone?

"If property does not sell within the 60 days of listing the first party will be paid by second party from personal funds."

What personal funds would those be if she's currently tapped out? 

"I've done my comps along with the ones that she provided, and they come in over $100k lower than the stated ARV."

Can you expound on this? What neighborhood, home specs, etc. Basically, what makes this home be $100k more than similar comps. See what properties she's recently sold and if any were in her name before. How much she paid and then sold for. You need to get a feel for her track record (she should be able to provide this to you).

@Victor S. The comps were pulled for similar homes, in the same neighborhood, even on the same street.

I will definitely ask about her track record on flips, in a little bit when we meet.

Thank you all for your tips! Will provide update once we meet.

Yes, it is too good to be true. 

Something doesn't add up. Guaranteed 100% return in 60 days and she will pay from personal funds. If she has $12K in personal funds, why wouldn't she put the money in to get the 100% return 60 days later? I would only lend that kind of money if it was secured against something, such as the property itself. 

I could see lending $12k to finish the rehab, but not to close the purchase. If she's strapped now, what's gonna happen with the rehab, right?

When I lend in situations like this, I do so holding personal property as collateral - usually a car, rv, boat, bike, etc.  My secured interest is $24k, not $12k, due in-full June 30th.  Having a $12k 14th mortgage on this house will be worthless.  

I vote no for a first-time lending deal @Minh Le .  

Let's see if @Jay Hinrichs has a sec.  He invented belly to belly lending I think ;)

@Joe Splitrock It does seem too good to be true. I'm still wondering why and how anyone would offer this. I never would!

I just met with her, and she was very easy to talk to. She was all about closing the deal. I pressed her about why not putting the $12K on a credit card (as per @Christine Kankowski  advice) to save that 100% that she is offering, and she prefers not to deal with credit cards. She is one of those credit card-aversed person (older lady, thinks credit cards are evil). She explained that one of her investors pulled out, which is why they are short of the $12K, and they do not want to go back to the lender for the extra amount.

The margin on the flip is large enough to where she can offer this crazy return. Purchase price is $450K and rehab is roughly $40K. Her projected ARV is $780K, but comps are showing $670K. Even if it sells at $600K, which is easily done, they are still making a great profit.

I asked for a lien position, as per @Roman M. 's advice, on the property, and she agreed to it. I also asked how she will be able to pay me back by June if she doesn't even have the money to fund this deal, and she responded that she still has ongoing flips that will be closing by then, and other real estate deals that she does as her job. Deep down, the real answer is that she doesn't want to dip into her funds now if she doesn't have to; rather give up some of the profit than going out-of-pocket.

The money is to be deposited to an escrow account, held by a title company that has been in business for a long time, so that offers some assurance. She answered all of my questions openly and honestly, even when I pressed her on personal info. Either she is truly genuine, or an extraordinary liar. Whichever it may be, I am drinkin' that koolaid...

Waiting for the updated agreement now with the lien position added. Will keep yall posted!!!

Cool - if she has ongoing flips, ask her to give you the addresses and the escrow/title office information so you can confirm. THis is super easy if she is truthful.

Updated 28 days ago

Alos, make sure your payment is to escrow account

@Steve Vaughan   I don't know just rolled in from 30 hours of flying in from Singapore.

I suppose if she gave a mortgage or trust deed.

without it its just a personal loan to some LLC..

but who knows maybe its one of those rare opportunities.. in Oregon it would be usury.

don't know about that state.

Originally posted by @Jay Hinrichs :

@Steve Vaughan  I don't know just rolled in from 30 hours of flying in from Singapore.

I suppose if she gave a mortgage or trust deed.

I feel ya on the long flights. Tokyo, Somalia, Manila, Shannon. At least you gain a day on the way back. Going over 2 are gone! 

If I were Minh I'd still look into a car or something as additional collateral. Thanks for chiming in, Jay!