re: bad investments

127 Replies

Hi Friends,

My husband and I have been working with a company to invest out of state in Indy. The process has been horrible and arduous. The property has a great cash flow and a good cap rate, but the company keeps changing information on us. First, their agent says the owner will put in sump pumps to deal with the large puddle in the basement. Later the owner says no, she put in drains. Then they say they will fix windows and then decide that no, they will not fix windows. Finally they say they will take care of any mold issues and later come back and say they will "help remediate" mold issues if they are found. We don't know if there are mold issues because even after this now 45 day escrow, their Contractor somehow forget to turn in the sample. I keep telling my husband that this is a nightmare property, but he likes the cap and cash flow. I am looking for feedback from some experienced investors. I have bought two houses I lived in (and didn't have these issues), but this is our first investment property. Would you invest in this? With the constantly changing guarantees and possible mold? Thank you, Laurence

no, we have not yet closed on the property. We were waiting to hear what the mold test said. The lender is now saying he is going to charge us extra to hold the interest rate. But the reason we have not closed is that the company's contractor didn't submit the mold test.

@Laurence Walsh-Hodson I wouldn't. I think if you are going to invest with a turnkey company the most important aspect is finding people you can trust. Paper cap rates are cool to look at, but the headaches aren't always worth it. Plus, if they keep changing their story now, they'll likely do the same managing the property too.

@Laurence Walsh-Hodson Long distance land-lording is tough.  If you don't trust the people representing you in the deal I would walk away.  Especially if they are selling you one of their own properties they manage?  If that's the case they might be pandering to the current owner and letting you take the hit.  If it feels wrong it probably is.

Originally posted by @Rodney Kuhl :

@Laurence Walsh-Hodson I wouldn't. I think if you are going to invest with a turnkey company the most important aspect is finding people you can trust. Paper cap rates are cool to look at, but the headaches aren't always worth it. Plus, if they keep changing their story now, they'll likely do the same managing the property too.

 Thanks Rodney.

Originally posted by @Michael Thompson :

@Laurence Walsh-Hodson Long distance land-lording is tough.  If you don't trust the people representing you in the deal I would walk away.  Especially if they are selling you one of their own properties they manage?  If that's the case they might be pandering to the current owner and letting you take the hit.  If it feels wrong it probably is.

 I appreciate your point of view Michael.

Walk.  If you think they're hard to deal with now, you'll be amazed at how bad it'll get after closing.

I would suggest that when you encounter these sort of issues, you add them as contingencies.  Once it's written down that you will not buy the house without repaired windows or without sump pump installed, it gives the contractor no outs to change their mind later.

@Laurence Walsh-Hodson imagine what will happen with your rents always changing the story about why your not getting. Place is prob in not the best shape by your description. I would move on, plenty of people who are reputable. I am a little north of Indy, but willing to help if you need a second opinion, or some to look the deal over.

@Laurence Walsh-Hodson  I agree with you, this sounds like a nightmare property.  I'd convince your husband to walk away from this property.  I don't know if you are working with the same turnkey company, but I have heard of similar issues coming up with a turnkey company in Indy on several occasions.   Tell your husband, the numbers are probably optimistic to begin with, and will never pan out with this company.  Run!

Originally posted by @Larry Fried :

@Laurence Walsh-Hodson I agree with you, this sounds like a nightmare property.  I'd convince your husband to walk away from this property.  I don't know if you are working with the same turnkey company, but I have heard of similar issues coming up with a turnkey company in Indy on several occasions.   Tell your husband, the numbers are probably optimistic to begin with, and will never pan out with this company.  Run!

 Thanks Larry. That's what I'd like to do.

I agree with everyone.  Where there is smoke, there is fire.   This is probably a good one to walk away from.   Better to find out now than after the closing.     

Just because it looks like it will cash flow well on paper doesn't mean it will cash flow well in real life. Bad properties in bad areas rarely do. If you're having this much trouble with the turnkey operator I would probably just move on.

You have plenty of reasons to walk at this point. This company seems very unprofessional to me. If you are having this much trouble before closing and there is much more profit in it for this company in the beginning (commissions, fees for sale and then again commission and fees for renting out), it will definitely be worse when there is less in it for them (only the monthly management fee). Inconsistencies and not doing what was promised is very unprofessional. How are they building trust with their out of state investor if they cannot even stick to their word? Please make sure that whenever anything is promised, or is a contingency, you get it in writing. That is the only thing that will hold and protect your rights. Real estate contracts and anything related to them must be in writing, anything that is not - will almost always not be held in court. Additionally, Mold is a really big issue. Many tenants will not be comfortable entering a house that has had mold recently. When we do open houses that is one of the questions we get the most and it is something you or your property manager MUST disclose if asked about it even if the problem has been taken care of.  You will also have to disclose it upon sale. A simple remediation may not be enough, are you ok with possibly having to face a recurring mold issue? Unless you are getting an amazing deal, mold is always a red flag and an expensive problem to fix. There are plenty of properties nationwide with great prices near what you are likely paying with similar or better cash flow that don't have mold and have professional companies managing them. Find a trustworthy company that can invest for you first. Above all, as previous posters have said, if it feels wrong, it most likely it is - trust your gut. 

Nada

@Laurence Walsh-Hodson   the way you posted your question there is only one answer.

and you have gotten that answer.

From my point of view it depends.. if this is a low end rental,  then I don't like basements at all for those. to many things to worry about. 

And if its in Indy it could be a very old house... so its pretty hard to make those Inspection perfect without spending a ton of dough which to a very large extent goes contrary to those that fix and flip homes be them turn key or retail.

what are you paying that is the real question.. is this a 125k home that is in a great area and few things fixed and it has chance at appreciation or is this a 40k rental that will always be a 40k rental it does make a difference.  Are you buying out of state just because the rentals are cheap ?  There are plenty of markets in the country that offer cash flow you may want to check similar prices in different markets to decide.. at mid west cash flow prices IE low end C class rentals it does not really matter the city they will all just trundle along with little or no up side.. does not matter how good an economy is as your always pulling from the bottom of the rental pool which will always be there.

IT ALL boils down to the team providing it and the PM so if that is bad up front usually in my limited experience in this space says it won't get better.... Although inspectors do kill deals and inexperienced investors freak out with inspection reports.. Mold is NO issue every house has mold you just take clorox to it  LOL... thats the end of that story. And your tenants will cause the mold usually

@Nada Mohamed  I totally disagree with your position on Mold very few if any houses have never had mold somewhere sometime... and clorox cleans it.

We deal with it in virtually every property here in Oregon which is mold central.

I have learned that trust in the people on the ground far outweighs any proforma. These homes can swing from highly profitable to disasters in a heartbeat. The only thing keeping you on the profitable side is an excellent team on the ground. And I dont think it matters whether its the 40K rental @Jay Hinrichs refers to or the $125K in the nice neighborhood. I know people who lost their shirts on A type properties just as much as the lower end stuff. The only consistent thing I hear is that a good PM can make an average property perform great and a poor PM can make a great property a loss maker. This business has a large people component to it. They are the tenants and your manager. The manager chooses the tenants and deals with them. You are 2000 miles away with no control. If the company you are buying from will also manage, then run. If not, you can have them cut some more off the price to make up for the headache. But be sure you get everything they promise to do inspected by YOUR inspector. Pics are not enough.

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