Explosive Rental biz -Lessons Learned with dishonest partners

2 Replies

Investment Info:

Other other investment in Cedar Falls.

Purchase price: $350,000
Cash invested: $100,000
Sale price: $5,000,000

This was a Real Estate holding and building company that I invested in and took a 1/3 interest..... grew it 300% in a year... then was surprised by my partners scams.

It started with two partners (them) needed a third partner (me) to help them take their business to the next level, while reducing the time for the modular homes to be be constructed.

What made you interested in investing in this type of deal?

We all met at an ambitious Mastermind Event where we paid $25,000 to attend. Maybe this motivated us to put fear aside and do some deals together!

My buy in was a some cash ($100,000) and my expertise in exchange for 1/3 interest.... and a 1/3 of the monthly cashflow.
The challenge , the way they ran the business, it was almost impossible to understand the health of the business.
I still was not sure what the month CF on the existing properties was!!!

How did you find this deal and how did you negotiate it?

I relocated to Iowa from Arizona and help them revamp the entire financial system and building process, resulting in construction times from 96 days to 33 days. These were very nice modular homes bought on large semi trucks and pieced together on site. After they were set on the solid pads, then the completion vendors came in to make the home look nice and hook up all the electrical, water, plumbing, drywall patches, carpet work, and such. We had to figure out how to grow the biz.

How did you finance this deal?

We invested cash and took on traditional investor loans.

I uncovered that there was a bit of cash out financing going on to free up money for more houses.... essentially pulling out all the created appreciation profit, and leveraging it to buy more new homes.
The issue was they were using a crooked Appraiser, who was producing much higher appraisals than what the properties were worth. No wonder why they valued my great credit!

This created a house of cards, ready to tumble.

How did you add value to the deal?

In the end, I helped the two partners create systems in their business that allowed them to scale fast and triple the number of houses in our portfolio. Then I taught them how to move the assets around to package them for sales as small 4-8 houses per package for sales to passive investors (essentially a rental portfolio).

But.... alas.... greed always creeps in (a human trait I suppose).

What was the outcome?

I asked for my money back, and they surprisingly agreed.

Later they sold packages to our mastermind's group of "NEW" members who ended up with bad deals... including really bad tenants, resulting in alot of vacancies. I found out that they packaged old properties with the new, so lots of house issues caused the houses to be un-rent able in the harsh Iowa winters.

I tried to provide some coaching on some ways to save their investment, but in the end several people went bankrupt!

Lessons learned? Challenges?

My lesson learned was to ensure the company has standard corporate bylaws, and have a honest non-partner be on the board of directors to help guide the company.... and honest practices.

The two partners were Banned from attend any future mastermind events with the group.

People still wonder why those of us with hard cash, looking to partner will probably never end up diving into real estate?  Talking about take action, can’t educate forever. You were able to save yourself, but why didn’t you warn the “NEW” Mastermind group members? Instead, some honest, hard working people went bankrupt smh. 

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