The Top 3 People Most Likely to Rip You Off in Real Estate Investing

by | BiggerPockets.com

Today we’re talking about the top three people who might rip you off the most when you invest in real estate.

The Top 3 People Most Likely to Rip You Off in Real Estate Investing

1. Contractors

In my opinion, the biggest ripoff is contractors. I mean, these guys can be absolutely ridiculous sometimes, and I’m sure that most you investors out there will agree with me. They will sometimes lie, cheat, and steal. I’ve literally lost over $300,000 over the last five years to contractors. It is ridiculous. And a lot of you out there probably won’t be willing to admit that you’ve lost money to contractors. Well, whatever. I’m here today telling you that I do 10 deals per month, and to this day I lose money to shady contractors.

Related: 4 Massive Financial Scams Sold to Americans on an Everyday Basis

Now, how I’ve minimized my losses is I’ve hired project managers and I’ve incentivized those project managers to make sure that they come in on budget. I ensure they get the flip or the rehab done as quickly soon as possible. Then they make a certain percentage from every sale that we make. And as you can imagine, this pretty much keeps costs low, keeps timeframes short, and makes sure they are incentivized to make money on every property we flip. So, that is how I go about minimizing my losses and dealing with contractors directly on a one-on-one basis where I’ve got those project managers dealing with the contractors.

2. Accountants and Attorneys

The second one is accountants and attorneys. Honestly, I can’t tell you how much ridiculous money I have spent on legal fees and accounting fees to folks who pretty much check their watch every single time I send them an email. The only thing I can tell you is thisL Try and build a very strong relationship with a trustworthy accountant and attorney.

Still, when you are just starting your business, meaning you don’t have that much money available or you don’t have that much net wealth, it’s my opinion that you really don’t have anything to lose. So why would you spend tens of thousands of dollars on legal and accounting fees? You should spend that money on doing deals, on buying and rehabbing a house, on investing in marketing, on investing in branding yourself, whatever it may be. There is no need at that point to spend money on legal and accounting expenses.

3. Appraisers and Building Inspectors

And the last, but not least is appraisers and building inspectors. Why? Because appraisers these days are more worried about job security than they are about giving fair value on a property. The undervalue every property by $10-$15,000 because they don’t want Fannie Mae knocking on their door if that homeowner goes into foreclosure. What happens if that homeowner goes into foreclosure ,then whoever appraised the property their profile gets looked into? So many of these guys are more worried about that happening, and they undervalue the price of every property instead of giving fair value.

Related: 4 Types of All-Too-Common Real Estate Scams Making Headlines

As for building inspectors, these guys are paid to find faults. Even if you build a house from scratch, they’re still going to find some faults and there is nothing you can do about it. So guys, I’ve got no tips for you there except to sell on your terms. If you can’t beat it, you have to eliminate it. This is something that I’ve done with my company. If you don’t trust me, don’t invest with me. If you don’t trust the price that I’m presenting the property to you for, don’t buy it. Someone else will or I’ll keep it. If you don’t trust the quality of workmanship that I’ve done on a property, don’t buy the property. There is nothing I can do about that. Because I know what’s going to happen—the appraisals won’t come in and the building inspectors will find faults, even though those faults have nothing to do with the sustainability and how self-sufficient this property is going to be for the long term.

What do you think of this list?

Feel free to agree or disagree in the comments section below!

About Author

Engelo Rumora

Engelo Rumora “The Real Estate Dingo" is a successful property investor, motivational speaker and serial entrepreneur that quit school at the age of 14 and played professional soccer at 18. He is also a soon to be published author along with becoming a TV personality in his very own real estate house flipping show. To find out more go to engelorumora.com . Engelo Rumora has been involved in over 400 real estate deals and founded five businesses in Ohio. The most successful is Ohio Cashflow, a company that specializes in providing turnkey properties in several Ohio markets. The newest venture is List’n Sell Realty, a real estate brokerage based in Toledo, Ohio and soon to be known as the #1 discount broker in the country.

51 Comments

  1. Ann Bellamy

    Inspectors: “these guys are paid to find faults.”
    If you sell to end buyers, you’re pretty much stuck with inspectors. They have to show the buyer they are doing their job, so have to find some stuff. Leave them some easy fixes to find. Not the kind where you have to rip out the walls and rewire. Missing threshholds, loose steps going to the back yard, etc.

    • Engelo Rumora

      Thanks Ann,

      We sell to investors and only allow for “our trusted” inspectors to do the inspection.

      They are firm but fair and don’t “pin” stupid S#$% that have nothing to do with the sustainability of the property.

      I like your idea about leaving some things unfinished.

      Thanks again and much success

      • Dan Heuschele

        I would never purchase a place from a seller that only allows their “trusted” inspectors to inspect the property and I find it surprising that anyone would.

        I will sell you a property at 20% lower than the appraised value of my “trusted” appraiser if you want.

        Really??? Some people actually agree to this? I guess a sucker is born every day.

  2. Marcus Robert

    I’d have to say that in my experience I would have to put real estate agents and brokers as #1. Contractors as #2, Lawyers and Accountants as #3. Home Inspectors and Appraisers are flat fee so I really haven’t experienced being ripped off from anyone of those individuals or companies. I have been lied to in the most unscrupulous manner by Real estate agents and brokers. Not only lying, but concocting a story so believable and then when verifying it is farthest from the truth. My 2 cents! Marcus

    • Engelo Rumora

      Thanks for your comment Marcus and sorry to hear.

      I have heard on a few occasions that real estate agents are starting to get a stigma just like second hand car salesman.

      Not good for the industry at all.

      I own a brokerage so will have to fight that stigma with my real estate agents

      Much success

  3. Susan Goldthorp

    I am sure the people on this list will also have similar stories to tell about shady investors! They are out there too. Doesn’t matter what camp we are in we all should operate with honesty and integrity and be smart enough to work out when we are being taken for a ride.

    • Engelo Rumora

      Thanks for your comment Susan,

      I’m sure they would but it would be harder for an investor to rip them off than vice versa.

      Honesty and Integrity are two hard traits to find in people these days.

      It took me 5 years, 30+ folks fired, $500,000+ in “stolen” money to find 10 good people lol

      Thanks again and much success

  4. tim boehm

    As a former contractor I must say this “right on” But I think lawyers should be number one. When I was working for other people I never had time off, my wife worked 4 tens and on Friday worked with me to complete my jobs. In all the time I was in business I never advertised and had more work than I could do in a thousand years, my reputation was by word of mouth.
    But as you said some contractors rip people off. So I’m looking over a job and another contractor shows up, I didn’t want the job in the first place but I told the client (who I had done 100’s of thousands of dollars of work for) I would look at the job and give him an estimate of what he should be charged for the job. So I ask this contractor how much he’s going to charge for the job and he says “just much as I can get.” Many dishonest people in this profession and much incompetence. All my life I have had to repair work that if it had been done correctly the first time would have saved the homeowner thousands, in most cases just $5 to $10 more spent on good flashing and correct exterior finish.

    • Engelo Rumora

      Thanks for your comment Tim,

      It’s funny that you agree even tho you are a contractor 🙂

      To date, we have lost $500,000+ to shady contractors.

      It is what it is and we just keep moving forward.

      One of the best moves I ever made was getting project managers on board and incentivizing them for coming in under budget and on time.

      Our losses have since dropped dramatically.

      As for attorneys…

      Got a bill for $20,000 last month hehe

      I do have 2 good (For now) attorneys tho

      Thanks again and have a great day

  5. Randy Johnston

    Inspector: “Even if you build a house from scratch, they’re still going to find some faults and there is nothing you can do about it.”

    The thing with building a house from scratch is that there are so many things that can go wrong and some of those problems are just plain missed prior to going on the market. This leads into those contractors who are not 100% above ground and are always looking for a shortcut that may not be “up to snuff.” Home inspectors usually know where to look when inspecting a newly built home and will usually find those problems. I’ve known a lot of home inspectors and found the majority of them to be very honest people, but that doesn’t mean that they’re going to hold back on some of the smaller problems.

    Every home has issues and just because an inspector finds something, doesn’t mean it’s a deal-breaker if it doesn’t get fixed, especially in the current market.

  6. gordon forbes

    This article is called “People Most Likely to Rip You Off!” and you have the following phrase concerning yourself:
    “If you don’t trust me, don’t invest with me. If you don’t trust the price that I’m presenting the property to you for, don’t buy it.”

    I’ve found the people most likely to rip me off always say “Trust Me, Trust Me, or take a hike”.
    Whatever it is you are selling… I’m gonna pass.

    • Engelo Rumora

      Thanks for your comment Gordon.

      Trust me…

      I’d never want to sell anything to someone like you.

      Especially since you’re comment (after watching a brief video blog) is directed straight at me even tho you don’t know who I am, what I do or how high my ethics are.

      Feel free to pass on my future vlogs also

      Much success

  7. howard klahr on

    Number 1 on this list should be those that provide claim to provide investment advice for a fee. Mentors, advisors, so called partners that collect obscene fees up front without providing any meaningful value or services in return that prey upon those less inclined cost investors far more than all of the categories listed in the article combined.

    • Jim Watson

      Does help to shop. There are some good ones. The first fee paid financial advisor we talked to provided zero useful information. The second one has been great. She’s found ways to save money and helped plan our non RE retirement income. One year she found a way to reduce our taxes due. However she knows nothing about real estate so we keep that off the table! The ones that DO rip you off don’t charge a fee. They do recommend stock (and other investments) because they make a commission. Local guy recommended a “great stock” to buy. Glad we didn’t listen. The company went broke a few months later. Good luck

  8. James W.

    1 – Contractors
    2 – Realtors

    But just one time or two – once you rehab a house from the ground up you know the actual market cost of doing the same thing again.

    I find it surprising that at times the realtor wants to sell your house for much lesser because its easier to sell, and they want to get done with it and make the remaining money somewhere else.

    • Engelo Rumora

      Thanks James,

      We still loose money to contractors.

      Had one not too long ago pinch $5,000 worth of materials after working for us for over 1 year lol

      Crazy stuff.

      Many agents chase volume and $10,000 more of less doesn’t really affect there commission much.

      Thanks again and have a great day

  9. That’s well said & a great blog post. These three people will rip off us in our real estate investment. And building inspectors will always be ready to find fault in our real estate investment. Definitely we have to be careful with these guys.

  10. Bernie Neyer

    Property management is the worst and when you purchase someplace other than where you live, you have to have one.

    I was looking for another management company and found one with a contract so onerous, it would have been easier to get out of the mob than that contract.

    Also not mentioned in this are tenants. They will cheat and Rob you as well.

    • Jim Watson

      Amen! I bought 2 SFO’s out of state. I left my phone number with neighbors. One called me w/ reports of the police showing up a regular basis. PM got terrible tenants. Had to do lots of repairs. Sold both houses and invested locally. One trick is to ask how many properties the guy/gal you work manages. Local PM#1 made my life difficult. Almost sold all my rentals. The guy I worked with “managed” 400 properties. Who are we kidding here? He didn’t have time to find the problems and talk w/ tenants. I now work w/ a guy that personally manages 90 properties. Says he treats each property as if it was his own. I believe it. He solves any problems quickly and cheaply. Makes good recommends. Finds out if tenants intend to move so I can plan ahead. Also got much higher rent on the first turnover. I don’t have to do anything. Money shows up as an auto deposit. Worth the 8%!

  11. Javier Marchena

    It depends on what kind of contractor and accountants you hire. If you go out trying to find the cheapest of the bunch, you will get ripped off. They will give you a low price to get the job, and try to get money thru additional services. You need to stop selecting the cheapest guys.

    In your list, you forgot to mention Wholesellers, Property managers, RE Agents, other investors, a partner, etc…. the list should include everyone involved on the RE business. There is bad guys and good guys in every trade…

    It is try and error for me, in every trade.

    • Engelo Rumora

      Thanks Javier,

      I haven’t found “price” being the solution.

      I’ve paid top dollar in the past and still got S@#$.

      “Price is what you and value is what you get”

      As you mention it just comes down to “trial and error”

      Have a great day

  12. I agree with most of the above and want to add my two cents. My RE attorney charges me a flat fee for a closing and I know what it is up front. If it takes him two hours or 20 hours, it is the same flat fee. Sometimes attorneys are more interested in “getting along with” other attorneys and their buddies at the title office than they are in vigorously protecting their client. But investors really should not be getting ripped off by attorneys.

    Agree with your comments on contractors. My rule: find a great contractor and always keep using him. He is fair and upfront with me for 6 years now. He needs to make money so he can fix his truck and buy supplies for the rehab. Don’t chisel them down or make them do bids 3 times. If the furnace in my rental goes out on the weekend, and it is below zero, don’t fight with him over the bill. Despite what you hear on the news, it is getting near impossible to find good people that want to work. The good contractors know that.

    Appraisers and building inspectors are more stupid than they are dishonest. Locate good comps for all your flips. Keep all receipts. Get building permits when necessary. Before the market got better, I had several sales fall apart because of incompetent inspectors. I refused to make some of the repairs because the guy did not know what he was doing. They buyer went away and I sold the house to someone else. These folks are a part of doing business.

    Since I am a Realtor, perhaps other realtors feel they need to be honest with me. I recently had a realtor warn me away from one of her listings because of water issues that were not readily apparent. It was a bank foreclosed junker sold as is. She really didn’t have to warn me to the extent she did, but I did not bother with writing an offer and going through an inspection. Realtors are trying to sell property and good ones provide a service that investors need from time to time.

    In 15 years, I have yet to find a wholesaler that either knows what they are doing or consistently finds good deals. I have heard they are out there, but I don’t know where they are. The ones I talk to just want to find newbies that they can sell junk property to. As soon as they find out I have been around the block, they run the other way.

    Accountants, of course the bills are too high. But good CPAs are worth their weight in gold by saving you tax money and by keeping you out of jail. Like everything else. Find someone smart, reputable, and one that knows real estate and performs a lot of real estate tax returns.

  13. Mike Gojcaj

    My two cents….Realtors and Inspectors are 1 and 2.

    50% of the agents we come across are broke, and completely in the dark about assessing values, and upgrades. Paying a 5k commission to someone who isn’t qualified to me is the BIGGEST ripoff. Same goes for inspectors, many times these people are retired cops, fireman, or autoworkers (I’m in Metro Detroit) making side money. They have no certifications, and make ridiculous assumptions about the condition of the property.

    If you have basic construction management skills and are hands on with your property, I don’t see how a contractor can rip you off

    • Engelo Rumora

      Thanks for your comment Mike.

      It’s hard to be hands on with every rehab/contractor and keep tabs of every check you write when you have 32 properties on your books and 12 rehabs going like we do right now lol

      We still get heavily screwed by contractors from time to time.

      Actually just fired 2 crews this week 🙁

      I like Detroit.

      What areas are you investing in?

      Thanks

  14. Dan Heuschele

    I would eliminate inspectors off your list (I am not an inspector) as I want them to find everything there is even if it is minor. To find it means they are thorough. They get paid the same if they find stuff or not and if they find stuff they need to document it which takes time. To say someone is ripping you off when they are thorough and finding issues (even if they are small items) is not accurate; they are doing their job and doing it well. So IMO the inspector based on your rationale for including them on the list should NOT be on the list.

    I have seen inflated prices from contractors but I get multiple bids and while I am not always happy with the price for the most part I do not feel very ripped off by contractors. My one big exception is after an out of state natural disaster we hired a contractor with a good reputation. He had too much work and kept telling us he would get this done by so and so. Nothing was getting done. We had to go there and manage the progress our selves. I think the contractor had no intent on not working our issues but when push came to shove the local investors always got priority. So contractors may deserve to be on the list but in most cases (natural disaster aside) you have choices on contractors and means to find out customer satisfaction levels.

    I have a good tax man. He is very expensive but I feel his knowledge warrants his pay. Again you can research your accountant and lawyer to get ones with good reputations.

    The place I feel most ripped off is the appraiser. I have had some pretty good appraisers but I have had some that are so bad that I have to question their qualifications. They spend minimal time. I had a rehabbed triplex appraise way below market. A big issue was he gave an upper of $10K for a 1300′ detached unit (in coastal So Cal)against his comps. I appealed and got a $60K adjustment (which was still below market). The appraiser should have been fired. I had another duplex that had been completely rehabbed at a cost of >$40K that was appraised on straight appreciation from the purchase price (literally you could take the purchase price and add the market appreciation index and you would have arrived at virtually the price it appraised at – no consideration for the rehab). A rehab duplex used in the comps got $40K upper without having better anything than my rehab. When I appealed the appraiser disappeared so I go stuck with the appraisal. Where is the accountability? I could have done his appraisal literally in 15 minutes. So the quality of appraisers vary but I have no ability to choose competent appraisers. There is not a feedback site to even indicate competent appraisers. For my contractor, tax man, inspector there are sites like Yelp, Angies list, etc. that provide feedback on their past work. Good luck getting that info on the appraiser. Again I am not indicating they all are bad but I am claiming there are some very bad ones out there and their accountability is minimal.

    My vote for biggest rip off is the one with minimal accountability, no feedback site, no power to choose based on qualifications, etc. The bad appraiser can result in a loss of thousands of dollars.

    • tim boehm

      right on some of those appraisers aren’t worth a shit. Once when I questioned on about an appraisal that was ridiculously high he said “I did a drive by” Well the place had pulled a permit and the homeowner had done what we in the trades call a homeowner remodel. the kitchen floor sloped 6″ in 15 feet and the walls wren’t square so each cabinet stuck out 1″ from the next. The work was pure shit but the moron appraiser just looked at the permit and made a judgement without even going inside the house.

      • Dan Heuschele

        Yes. some appraisers are so lazy. I find it interesting that you are complaining about too high appraisal and I am complaining about too low appraisal but they are both the result of the appraiser not spending the time it takes to do a proper appraisal.

        I will add in that if they find a minor deficiency such as missing fire alarm (tenants remove them if they beep when something gets burned and then they get “lost” (not put back after the smoke has cleared)) they charge too much for coming out to “re-inspect”. A photo should suffice (and I have had a couple of appraisers accept photo documentation) especially if the property does not have the slum lord appearance (a landlord that spends as little as possible maintaining their units). My units are virtually always rehabbed prior to refinance and are in nice shape. Every unit had fire alarms per code. However, it is not unusual for one to be missing at the time of the appraisal.

        The amount that is charged for the “re-inspection” is such a rip off. If there was a site that provided customer feedback on the appraiser the re-inspection charge would be more reasonable and the appraiser would be more inclined to accept photos because I would add a positive comment for the appraiser who worked with me and a negative comment for the one that over charged for a 5 minute re-inspection.

        Again I am not implying that it is all appraisers but I do not like the fact that the bad appraisers have no consequences. similar the ones that accept a photo are basically removing a revenue that benefits them in no way as there is no place I can say appraiser “John” was wonderful and worked with me when he found a couple of minor issues. So he does not get extra benefit for not being a jerk and lost some decent money for 5 minutes of work. If I was an appraiser it would be very tempting to be the jerk that charges to re-inspect every little item.

        • tim boehm

          Dan
          The reason is I buy houses in need of repair. So banks send out appraisers to give them an idea of what shape the house is in. The last one I looked at, the bank was asking 299k but the place wasn’t worth 100k, roof was done wrong and leaked like a sieve, windows were all leaking, and it had recalled siding. This list just touches on the highlights. If the house had been finished out I might have gotten 299k for it but that would have cost me at least 150k in materials alone.

        • Dan Heuschele

          I think both the under and over appraisal have the same root cause that the appraiser wants to get paid for as little work as possible. I would not be surprised if your appraiser took the footage, number of bedrooms and bathrooms and produced a price range of comps. Then a quick drive by and write up the info. Voila a great wage for easy work with no consequences for a poor job. Did you appeal your bad appraisal?

          I am confident my duplex appraisal was based solely on the price the property was purchased at and the market appreciation (because if you used that method of appraisal it literally would have produced almost the exact value in the appraisal depending on how compounding was calculated (continuous or yearly)). I had actually seen every comp he use. I suspect he had seen none of them. He did visit our property so he knew it was in very good condition but he likely assumed it was purchased in the current condition as he gave no upper on the rehab and our unit was in nicer shape than every comp. He gave one of the comps $40K upper for its rehab which was inferior to ours. I appealed but the appraiser literally disappeared. The appeal included an item by item comparison to the other rehabbed Property (the other property had a more open layout and better cabinets, every other item was better in our rehab (better floor, windows, equal counters, ours had exterior new stucco other property did not have anything done to the outside stucco/paint).

          I would disappear also if I was as inept as he was; get paid then run.

          I am convinced these lazy appraisers would be soon out of work if there was a way to provide appraiser feedback as I can prove the ineptness of some of my appraisers. The property I got a $60K upper on appeal when a local competitor heard my complaint on the initial appraisal offered me (jokingly) $50K over the appraisal. I know if I said yes he would have purchased the property as the initial appraisal was around $85K low (so after appeal it was still around $25K low but on this cost of property (~$650K) it is close enough).

    • Engelo Rumora

      Thanks for your detailed comment Dan,

      I disagree on the inspector side as they find faults that aren’t faults thus not doing their job correctly.

      “The faults” they find are also based on their opinion many times and the code changes often to which they don’t keep up to date on.

      Thanks again and catch you on the next video blog.

  15. Andrew Kusuplos

    Being in contacting in one aspect or another for 35 years.
    It’s my belief that contractors prefer to work for individuals
    that are not as “versed”,therefor increasing their bottom line!
    Just my humble opinion,
    Andrew.

    • Dan Heuschele

      I do not disagree in general but in my market the property tax increase is capped at a small percentage (I believe 3% annually) due to prop 13. So any refinance to take equity out likely will not result in a low enough appraisal to lower the tax base but could significantly impact the cash out especially at 75% LTV.

      Example purchase a property for $300K with 20% down ($60K in, owe $240K), Rehab it at $50K. Market value with market appreciation and sweat equity should be around $500K but the appraisal comes in at $400K (largely does his appraisal ignoring the rehab). At 75% LTV you can borrow only $300K but you owe $240K and have $110K ($60k + $50K) into it. Due to the low appraisal it is not possible to pull the entire initial investment as you needed an appraisal high enough to get $240K + $110K = $350K. At 75% LTV you needed the property to appraise at $467K (which if the appraiser was any good it would have done easily). So the BRRR failed to net the initial investment due to incompetent/lazy appraiser.

      I recently had a appraiser disappear after doing the appraisal so even with disputing the appraisal I was stuck with an appraisal from an appraiser who had vanished and could not be contacted. The same appraiser had appraised another of my properties and I appealed and got a $60K adjustment before he had disappeared (I suspect market would have been closer to a $90K adjustment but it was close enough). Most inept appraiser I have ever dealt with. I would disappear also if the appraisals I did were off by at least $60K.

      I think appraisers in general are not good but this one was so bad that it is shocking.

  16. David Blattner

    As an attorney, I take exception to your including attorneys in this list. We are not all bad. Most of us are honest and work hard to protect our clients. However, you have omitted one key player from your list – hard money lenders. In my experience, they are the biggest rip-off artists in the business.

  17. David, I defended attorneys in an earlier comment on this topic. Good ones can save you a lot of expense and headache.

    I do not use hard money lenders, but I understand why they exist. I believe they are pretty upfront about what they charge, what their fees are, the prepayment penalty, the points, etc. If investors truly have a monster deal with no other way to fund it, then hard money lenders could be an invaluable resource. If you can make $50 thousand, and a hard money lender charges you $12 thousand, you are still ahead by 38M.

    I don’t think many newbie investors realize that hard money lending is really only for a quick rehab or a flip. It cannot be a source for a long term rental or financing your buyer with a rent to own or land contract. In short, hard money lending really limits your exit options drastically.

Leave A Reply

Pair a profile with your post!

Create a Free Account

Or,


Log In Here