How I lost 200k investing in Rehab project

42 Replies

I was new to Real Investment, and wanted to learn it so I can generate decent retirement income out of my lifelong savings. I attended REIA meetups(2015) run by Matterhorn Group in Chicago, run by Bob Brock, peter kitchin and GD Chaplin. They used to advertise lucrative rehab opportunities with them where one could invest with them and make 25% to 30% profit in matter of 10-12 months. They presented themselves as pro of the RE industry

Being new, I wanted to join with successful rehab experts like them, so I invested 200K with them to rehab one high-end property that would be sold for 1.8M with rehab cost of 1.1M. Rehab would finish in 10months. I could get upto 50K in profit. Not bad, I thought. 

But once I invested, nightmare unfolded after a year. They could not city permit to tear down old property for over a year, The person with experience was fired as partner. The General contractor was fired. The builders took up additional loans exceeding market value of would-be property, while keeping me in total dark. It took them 16months and 1.6M of debt to finish rehab and put it to market. Unfortunately, I had not recorded my mortgage deed to facilitate additional rehab loans, so I ended up as last person holding a loan and lien.  I requested the borrowers to return my loan and offered them waiver on interest and other incentives. But they refused and played hardball.  Eventually, main lender took them to foreclosure for non-payment of loan obligation. Their loan was worth more than actual market value of rehabbed home. They initially listed the property at 1.8m in 2017. Since than, they reduced it to 1.5M but found no buyers for 18 months.  Now property is foreclosed. With it, my life's savings is gone.

I doubt that property acquired for 550k, would cost 1.1M to rehab to create a market value of 1.4M. No transparency, no accountability to lenders, no communication with investors, no reporting, stalling inquiries, not responding to phones, texts  or emails was their modus operendi.  It affected my mental health so much I had to undergo medical treatment and physical therapy.  I tried to hire a lawyer but I could not afford cost of litigation, on top of losing 200k.

Scamsters like these give bad name to RE industry and keep people like me away from investing in it.

Wow, that's an unbelievable story @Kirti Patel and I applaud you for having the guts to post it here on bigger pockets. I really hope others can take a few notes from this and avoid these tough life lessons on their own. 

We forget how easy it is to be lead astray in this world that is RE investing, and even with the help of forums like BP there are no guarantees that we know what we're getting ourselves into. 

That being said, this sounds like it's a part of your past. Are you simply observing things from afar now, or have your aspirations to invest in real estate returned? 

seems that Chicago has some of that going around the Equity build charges by the SEC sound similar in nature.. 

that's one tough city to operate in..

... so I invested 200K with them to rehab one high-end property …

Unfortunately, I had not recorded my mortgage deed

Now property is foreclosed. With it, my life's savings is gone.

Horrible story, @Kirti Patel .  A several really good lessons here.  

For one, this is a business that's absolutely full of hucksters. And all too many of them come to REIA meetings to fleece newbies. In general I would say that the good part of REIA meetings is meeting local people. The person or people at the front of the room should be treated as highly suspect.

For another, never, ever invest all your life's savings in one deal.  My rule of thumb is no more than 10% of your nest egg in any one deal.  I've done some crap deals that turned into a total bust.  And it was painful to see that money disappear.  But it was only a small slice of my nest egg.

Finally, know what you're doing when you get involved.  You would not have had a "mortgage deed" in any case.  You would have had a mortgage or deed of trust, depending on what's used in your state.  You should have recorded this when you made the loan, with the assistance of a title company.  You mention it was not recorded: "to facilitate additional rehab loans".  I suspect the borrower told you that.  That would have been a huge red flag.  If that's what happened the borrower was telling you right then and there "I'm going to screw you".

Originally posted by @Jon Holdman :

... so I invested 200K with them to rehab one high-end property …

Unfortunately, I had not recorded my mortgage deed

Now property is foreclosed. With it, my life's savings is gone.

Horrible story, @Kirti Patel .  A several really good lessons here.  

For one, this is a business that's absolutely full of hucksters. And all too many of them come to REIA meetings to fleece newbies. In general I would say that the good part of REIA meetings is meeting local people. The person or people at the front of the room should be treated as highly suspect.

For another, never, ever invest all your life's savings in one deal.  My rule of thumb is no more than 10% of your nest egg in any one deal.  I've done some crap deals that turned into a total bust.  And it was painful to see that money disappear.  But it was only a small slice of my nest egg.

Finally, know what you're doing when you get involved.  You would not have had a "mortgage deed" in any case.  You would have had a mortgage or deed of trust, depending on what's used in your state.  You should have recorded this when you made the loan, with the assistance of a title company.  You mention it was not recorded: "to facilitate additional rehab loans".  I suspect the borrower told you that.  That would have been a huge red flag.  If that's what happened the borrower was telling you right then and there "I'm going to screw you".

Jon we have all been there myself included..   IL  is a mortgage state and one frustrating place to do real estate from my perspective.

only attorneys can draft the mortgages and you cannot deal with the title company direct it has to go through an attorney.. its the most protected escrow process state I have ever seen.. And agents they just hand everything over to the attorneys they have no clue how escrow works since the attorney and title companies wont let them.. 

But it sounds like this investor would have been junior anyway and probably wiped out in the foreclosure.. I have seen a lot of this one BP were investors have no clue as to the repercussions of being a junior.. its OK if you know what your doing .. but for the average investor who has never lent money or new to the game junior position investing is highly risky for exactly the reasons splained above.  

@Kirti Patel Thank you so much for sharing your story. Some valuable lessons to unpack in that one. I hope that at some point you will give real estate investing another try even after this horror story. I wish you the most success if you do decide to continue.

My first REI deal was also a similar disaster except it was a development project. But I and other LPs sued the GP and eventually got back the investment plus legal fees. It took almost 10 years but we were made whole (not counting time value of money and opportunity cost!). Valuable learning experience though!

I hope you find a way to give them some consequences even if you can't sue. You can try small claims court to get something. Sue each individual partner in small claims for 30K. You can write a letter to the Attorney General. Complain to the BBB. Anything to get it out there that these guys are not legit.

Sorry to hear of your loss here - that's a lot of money to lose, and if it was all your life savings that's equally tough. 

Thanks for posting your story, though. People need to hear the downsides of real estate. As someone who lost over $100k in new construction (you can listen to my podcast on BP if you want to hear more about it, in my signature below), and about the same as you if you factor lost appreciation, losing that kind of money is a very tough lesson. In my case everything turned out roses, but it took 20 years! I learned some really valuable lessons, some of which I still use to this day, so I consider that money spent on my education :)

Well, I am not try to do a told you so at all, just trying to let others know to do their homework....

A very quick google search found....on the first results page:

-document about Peter Kitchin bankruptcy, small red flag

-a thread on BP from 3 years ago By User Dale Stevens mentioning these guys and discussion that he has found at least 12 victims of theirs. People whose deals went bad. One User Emily G said she was a private lender to these guys and they defaulted. Huge red flag. 

https://www.biggerpockets.com/forums/92/topics/201887-chicago-investment-club-leaders---feedback-needed#

-numerous other "companies" these guys have been running in the same business. RJB Investments, Integrity Wealth, Chicago Wealth Group, Concord Investments, etc. When the same people are involved in the same industry over and over under different names, that is a huge red flag that they are not legit. They burn people and reopen under a different name.

@Kirti Patel Your courage is amazing for sharing this story.  I will pray for your mental health.  I am sorry this has happened to you and wish you the best of luck.  Please remember there are more important things in life than money.  You have become a much stronger person.

Sorry to hear this, one of the reasons why I rather do everything myself (at least starting off) cause I might get the math wrong but I won't have to worry about not knowing what I don't know and getting screw over by someone else

Incredible!  I’m so sorry this happened to you @Kirti Patel   And thank you for sharing this.  I hope your health is getting better.  Your life is far worth more than the money.  Karma for those scumbags 

@Kirti Patel Thank you for sharing your story.  I am sorry to hear about your loss. Last year I was in a second position on 2 properties in Phoenix with an investor who had been investing by flipping houses over the past few years. I was invested over 250k between the 2 houses and after the rehab was completed, he was not selling the houses. So eventually I sat him down with one of the hard money lenders that I use who asked him if there was any money left in the deal for him. When the Phoenix investor said no, we asked him to sign the quick claim deeds and took over the properties. We ended up selling the properties for a loss of about 70k.

Lessons learned:

1. Do your due diligence when partnering with people. Talk with others that they have partnered with.

2. Check out their prior deals to see the quality and the overall deal.

3. Read the contract thoroughly especially the part that says if things don’t go as planned what will happen.

4. Have mentors around you who can help you know what to do when you get stuck and don’t know what to do.

5. Don’t put all your investment money in one deal. If one deal goes bad, it will be easier to recover if you didn’t put all your money in a single deal.

6. If you get bucked off a horse, you got to get back up on that horse as quickly as possible before the brain categorizes it as a trauma and the aversion sets in. Last year I lost 70k between 2 deals. Later in the year last year I acquired 2 or 3 deals that I will make about 70k each (just my portion) and several that will be 40k or 50k each. 

I share the last one with you not to brag or minimize your experience at all but to give you hope that if you were to get back into real estate, it is possible to make up for the losses.

I felt a punch in the gut just reading that horrible story. So sorry. I can only hope the OP makes a full recovery and doesn't give up investing in RE. 

Thanks everybody who has replied to my post and offered valuable advice and insight that will others like me. 

In hindsight, I realized I had made several fatal blunders. 

1) The borrowers(referred as they in this post) ran REIA, and acted as mentors to dozens of attendees. As a newbie, I was looking for industry experts and mentors. So I easily fell into their influence and trusted them without any basis

2) When they presented this tear-down-rehab deal, that was too good to be true, I did not do due diligence. To get permit to tear down a property takes over year in Chicago. They never had done such project in Chi ago. They had never rehabbed a high end single-family home property that was worth 1.8M. They flooded the REIA every week with dozens of such high-end deals with 25-30% returns offered to investors, with turnaround in less then a year. Like a kid in a candy store, I fell for it.

3) I should have got a lawyer involved during loan closing. I had provided down payment to buy property that would be rehabbed. Since I did not provide full capital for rehab, they had to acquire additional financing to fund the project and had requested me not to record the mortgage so that they can offer lender of substantial sum to have a priori claim.  It seems they used this loophole to borrow way beyond potential market value of the rehab and they hid it from me.  They would not even give me the names of other investors and lenders on this and other projects.

4)This property was held under LLC. LLC has no other asset. They have no skin in the game. So litigating against a LLC would only drain me financially. Even if I succeed in litigation against LLC, they can easily file for bankrutpcy of LLC and evade liability. I donot want to lose anymore than what I already have, hence I am trying to avoid costly legal proceedings

Thanks everyone for your support, and advice

It's not much of a consolation @Kirti Patel , but it doesn't sound like you would have been in any better position even if your money was a first position loan.  Instead of them, you would have been stuck with a deal that doesn't pencil, and you would have had foreclosure costs in a mortgage state, and potential liability if/when you took title.

I lend to rehabbers and know that sinking feeling when a borrower stops communicating:(

Thinking about it more, you would have probably gotten some of your money back, it still would have been a big mess.