A few months back, I’d shared the details on a real estate investment I made with a partner where the overall deal seemed quite favorable. The cash on cash return was estimated at ~15-20% conservatively, we had a good property manager staying on from the prior seller, the prospects in the area looked good for continued capital appreciation and low vacancy, and there didn’t appear to be any imminent repairs/upkeep required outside of routine maintenance. The first month and a half was fine and we were cruising right along. The property manager hadn’t flaked out, the college kids hadn’t destroyed the properties entirely (they do have this thing about kicking in doors which is annoying, but if they want to piss away their security deposits, more power to them), and no major repairs crept up. Then came the email last week.
Blindsided
The email came from a completely unexpected source and wasn’t something we’d even contemplated when purchasing the property – but perhaps you can learn from this story about how to avoid a similar outcome.
Continue Reading How My ROI Just Shit the Bed
Ridiculous that an insurance company would insure your property without inspecting it first. How can they do business that way? Everything is rigged. I wouldn’t doubt that your insurance broker is somehow involved with the one inspector, who I bet knows the “best” contractor to do the work.
I’ve seen this issue before and one thing I would add is in the paperwork I’ve seen the bank won’t cancel the loan but will be required to purchase insurance and bill you for it. This will cost 2x what you would pay for. There is also a difference between stuff that is a liability issue and a repair one. Most won’t insure a roof over 15 years old, if it leaks they don’t want to have to cover the repair. You could come to them and say hey don’t write in the roof, if there is a problem I will have a new one put on which would drop the insurance a lot. That crack in the sidewalk could be a liability issue if some one walking along at night falls and ends up in the hospital, as a rental this they would try and make you fix while paying for all the permits, red tape and contractors. This will force consolidation of rental units into those with the money or the knowledge (contractors) to do what the system wants. Making many places unsaleable or unrentable.
Do unto others.
Darwin, that’s what you get for using common sense and “assuming” something. Where insurance and banking are concerned, never assume and never apply common sense as they will both come back and bite you on the ass..
It’s all in the contract or fuggaboutit. Even if it’s in the contract and there is the slightest chance they can slip one by you, count on them trying it.
It doesn’t have to be home or owners insurance either.. How about Medicare? IN the past year, I ended up in the local hospital once and my sweetie ended up there for an overnight one time.
For each visit, I’ve been billed $26.84 by the hospital for “something Medicare won’t pay for’. For each visit remember….. I’ve said, fine, send me an itemized bill so I know what this mysterious $26.84 charge is since two people on two separate occasions had to have “it”.
Nope! Wouldn’t do that – just pay it and shut up. Then comes a collection agency for $26.84. I strung them out until it probably cost them $500 to collect the $26.84 and then settled for $15.00.
That was on the first visit. I now have the bill for $26.84 on the second visit and if they thought they lost money the first time around, they ain’t seen nothing yet.
MA
Stick it to ’em, Mucky!! I too have had enormous amounts of fun screwing with Compass Bank over a mysterious $11 charge that showed up a few weeks AFTER I had closed my account. I can’t imagine how much they spent on postage and everything else before they finally gave up. Never did show up on my credit report either… Fuck ’em.
I’ll keep trying, Mike.
Here in Florida, we have a subscription “Do Not Call” service from the State that costs $5 a year. Between that and the free Federal “Do Not Call” list, that should slow down the number of blind boiler room sales calls, right?
Not so you’d notice until I started having some fun with them. Now, if something else has not required my time, when I get one of the jerkoff’s calls, I egg them on. Talk to them, ask questions, see if I can get some free shit, make sure I have their name spelled right, an address and a telephone number (in case we get cut off, of course). I try and keep the call going as long as absolutely possible and then advise the caller that I will be filing a call complaint with both Federal and State authorities (something to keep those assholes busy too!).
At which time, they usually hang up on me. Too late – I’ve got all I need to zing them.
I’ve set up a Excel data base that I keep the info in and an automated script that types up a nice letter and two envelopes to both the Feds and the state Dept of Ag (who handles the do not call stuff) at one stroke of a key. Does cost me two First Class stamps but so far, after checking back with the State Ag, they’ve fined 6 out of 22 outfits that I turned in. The Feds, of course, won’t answer letters or answer the phone which is par for the course.
After I did this for 6 months or so, suddenly the telephone stopped ringing. I don’t even get “legal” political bullshit calls or calls from “Veterans of “X” War Relief” anymore. I suspect someone in the telemarketers association put a big red star next to my number that means “Don’t Tread on This One!” which is what I was after.
Took a little extra time but some of the responses I get after taking up a half hour of their time and tell them they’re gonna get bit on the ass is worth the effort. Seems to have worked too… wasn’t much fun at the start but I really got into it as I went along and ended up having fun laughing at the turkeys without them ever knowing I was jiving them along….
MA
Administrator – I was a bit surprised to see how much the repairs are coming in at as well. I can’t argue that the sidewalks are cracked, etc., but it’s like a 1-2K for this, 1-2K for that; it’s really adding up! Amazing!
Golden – amazing stuff; it’s evident why people don’t gravitate toward real estate as an investment. The returns seem good on paper and low correlation to equities, but it can really suck!
Muck – I don’t even think I saw a contract LOL! We sent the check over to the agent to get the evidence of insurability for closing; it all got wrapped up in time to close, but who knew! Not like I wouldn’t have used this company if I noticed the provision; they probably all have it. But logic went out the window.
Lesson learned,…would be investors in our economy….don’t do it. Hunker down instead, the odds of getting screwed by someone is too great.
Kinda sucks. By hunkering down, you’re losing money to inflation. Bonds will get crushed, stocks return 5% at best long-term (with mass volatility, so risk-adjust return sucks), and while the thesis on gold is one to be admired, the results aren’t guaranteed, nor even holding up to expectations in recent months. Conditions in EU, Iran, US have all deteriorated, yet gold has gone nowhere.
Darwin
The USD had risen 6% in the last two months as Europe has imploded. Gold has held steady in the face of a rising dollar. After Bennie fired up the printing press on Wednesday, gold soared.
YTD return on gold +22%
YTD return on S&P 500 -1%
Got gold?
When a safety inspector shows up it costs me thousands. Every time. Your inspectors are in the same game. If they do not find something they are not trying hard enough. My uncle the ex-cop said he could pull over any car on the road – even brand new – and cite it for something. He said there were thousands of regs and he could always find something
I have some GLD, up probably 50% since entry. Not a ton though.
Paradoxically, over prior 3 month period, when the world has pretty much gone to shit, SPY is up 6% while gold has declined 6%. I would have thought gold would have rallied following circumstances from past few months.
Oh, and to add insult to injury, just got a note from our insurance broker that the insurance company will not accept our extension request. So, we must complete all repairs in crap weather within 2 weeks or we lose our insurance; hence, lose our loan. Joy.
Admin,
Would like to here your take or anybody’s opinion patented gold mines in the U.S.? These are mines the Federal Gov has sign the mineral rights away to private individuals.
If
Darwin – I would have walked away at that point and returned in 6 months tiem when the value of the house had fallen another 20% or so.
Regardless, good luck with your investments.
Darwin: I feel for you, however, I must say:
Cry me a fucking river.
Your post about this business a few months ago was recieved with wise, experienced commentary. So it’s a big suprise that fixing your property whilst planning to charge people to live in it becomes an expense.
You should have listened to Welshman and others…
Just saying.
Land Lordin’ is a bitch.
Bloviator – college real estate hasn’t dropped like the residential market, nor should it. It’s all based on cash-flows in this side of the business, not speculation in capital appreciation that got so many individual homeowners in trouble. If college tuition continues to rise at double the (govt contrived) inflation rate, it stands to reason that landlords on campus can continue to increase rents as well. My partner has been doing college real estate for about 6-7 years now and he has consistently raised his rents 4-5% annually. I would say this market is very much disconnected from residential or even vacation-home rental markets.
Colma – I’m not really complaining about investing money into the property for upkeep and repairs. That’s reasonable and expected. What’s rather annoying is the fact that the insurance company had ample time to perform an inspection and provide us with these citations PRIOR to closing so we could have used in negotiations with the landlord at sale, but instead, they waited until after closing and nail us. The point of this post was to warn others of the potential for this outcome and demand that the timing matches up so this doesn’t happen to them. Frankly, it’s something we had never even heard or or contemplated, nor did anyone else that read/commented on the prior articles. Most of the warnings were around deadbeat renters, damage and such; which has been rather manageable to date.
Yeah, just giving you shit…
You totally got shook down by a legal racket.