My Biggest Mistake in Real Estate
Hi Friends,
If you have been following along lately, I am continuing to tell stories of my most fantastic Real Estate fails in celebration of Ken Corisini’s newly released book (Check out Chapter 17, it’s me!): “Profit Like The Pros”.
As I mentioned in my last post, while this book is all about our most profitable deals and biggest wins, I think there is a lot to learn from our failures as a community. I love to share mine widely, not only to keep my ego in check, but also to be transparent as a fellow investor and mentor in the field.
This story below, is interestingly enough, the acquisition story of the same home in the book, that later turned out to be my Best Deal Ever! Showing that you never know how a story can truly turn out.
Shall we dive into my most epic fail yet?!
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It was the Fall of 2015 and I was still on a high from returning from St. Louis with House #2 in the can: furnished and fully rented out. My excitement was infectious and I already had a friend interested in partnering in my next deal! One day, I stepped into a deli to grab lunch when I ran into a local acquaintance, whom I had coached a few months back on turning his first investment into an Airbnb. Let’s call him Keith. As Keith and I were catching up, I was bursting about my recent success and told him how I was already looking to acquire the next one with our mutual acquaintance. He said he would love to partner on a deal too and that he had 10K that he could provide up front, with more on the way.
Even though my last buy was 72K, I had my eye on 2 bedrooms (instead of 3) which were more in the 60K range. I also had another 50K in the bank but was looking to do a partnership because it was the last of the Life Insurance money I had received from my mother’s passing and I felt a huge responsibility not to squander it. Even though I had not needed to rely on my mother financially for some time, once that safety net was gone, the money held an incredible weight. It essentially had to go towards providing for me for the rest of my life. Oh yeah, no pressure.
Keith and I made an informal handshake deal and I was off on the hunt to identify properties. In the days leading up to the purchase we had a few discussions to hash out the details of the ownership split: how he would manage the property, we would share profits, etc which we detailed in an partnership agreement and a promissory note -- one he conveniently never got around to signing.
In a flurry, I quickly found two homes (3mins from one another) and I coordinated the closings to be the same week. Why fly out to St. Louis to furnish twice, right? Since both were to be cash closings, we were able to close quickly in just 14 days. Inspections flew by without major issue and we were booking our flights. As our travel dates neared, there was a hiccup with title and an unknown settlement date. Instead of letting this ground us, I had a genius idea to take the risk and rent the property from the owner (and furnish it) in hopes that it would eventually clear. We rented the home for 2 months for $420, and made over $1600 the first month and $1700 the second! It finally closed at the end of the year.
Since I was the most flexible party and wanted to hit the ground running, I flew out early and stayed late for a grueling 2 weeks of non stop, 16 hour days -- shopping, furnishing, and fixing that almost broke me. Up until this point, I had paid for all the inspections, and when we landed in St Louis, Keith decided it would be easier accounting wise if I just covered all the furnishings (around 4K) which I agreed to. When it came time to close, without warning, he pulled the rug out from under me and told me that he didn’t have the $10,000 he had originally promised. This put me in a really uncomfortable position. I scraped together all the cash I had to pay the full 52K purchase, on top of all inspections, closing costs, furnishings, etc. Keith assured me not to worry, the money was on its way.
Luckily the home was off to a great start and rented well and steadily. He was doing a decent job managing with my guidance and I was free to manage the rest of the homes in my portfolio. I followed up with him regularly, every few months, but he always conveniently had an excuse: had an accident, had to buy a new car, etc. I knew his Airbnb property had experienced an 18% equity gain, as did everything in Boulder at that time, and he was talking about selling it, so I set him up with an Agent and nudged him down that path. I was hoping that he would finally come up with, not only the 10K, but put up the full 28K from half of the house and up front costs. I was looking forward to building back up by emergency fund/nest egg.
Months went by and I decided to check in with my friend who was selling his home to see how it was progressing. She was surprised to hear from me, because it had sold 3 months prior. What?! Of course I had not heard a peep from him, despite him guaranteeing I would be reimbursed. When I confronted him, he made more excuses about having to give money to his family. It got heated, at this point it had been a year since we purchased the home and this influx of funds seemed like my last opportunity to get a large chunk of money from him. To add insult to injury, he said I wouldn’t understand because I had money. Although I had busted my tail to create a successful business, I did not come from money and now with my mother gone and my father never being a support, I no longer had a safety net and really felt it.
I told him that I could no longer honor his 50% ownership of the home if he was never planning to put a dime into it. I tried to get him to give me over control of the listing and management but when he refused I had to get creative. Now I understand if I lose some of you with the measures I had to take but tell me, what would you have done in my shoes?
First I gathered the paperwork to change the name on the deed to solely be mine, which is surprisingly easy. Next I went to Airbnb trying to get them to remove his listing, which they wouldn’t do, even with my documentation. Instead, I created a new duplicate listing and when the next guest checked out, got the handyman to go in and change the door code. I let him know and at this point he was forced to give up, cancel his remaining bookings (which I offered to honor) and take the listing down. A short moment of relief.
I should have known this wasn’t the last I would hear of him. A month or two later, while I was traveling with some friends in Costa Rica, I received an email from his lawyer. Really?! He’s going to sue me for what? To recover half ownership of a home he never paid into? I didn’t really think he had a case but I also didn’t have a lawyer and I was terrified of now losing a home that I invested nearly 60K into. Over the next two months, I enlisted the best law firm in Boulder, who insured it would all be fine, while I agonized in the stress of it. I spent countless hours pouring over emails to gather any proof or documentation that I could. It was terrible and yet I knew I had to do all in my power to save this.
In the end, I was able to deduct much of the last year of profit in maintenance, start up costs, operating expenses, etc and only ended up shelling out $2,000 to him as a concession for management help. I bitterly handed it over, with a bruised ego, upset that he ever got a cent but grateful beyond words that the home was mine1 00% and no one could take that away from me now. I knew this home was a great deal and it was an incredible waste for him to burn our bridge of a relationship and partnership, on top of losing the income stream. This home has consistently profited over 10K/yr and as of the time of this writing, nearly doubled in appreciation, being worth nearly 100K today.
The takeaways I want to share:
Always have everything in writing. Contracts are key, and make sure they are signed. I was lucky to be able to use the promissory note even though he neglected to sign it but I’d still make sure to have everything signed before moving forward in the future.
Partnerships are great, you just have to pick the right partner. Do not let this ruin your ability or desire to work with friends. Throughout this process, lots of people wanted to say, “aw, well you can’t do business with friends.” I don’t believe it. I now own 3 homes with friends, in easy, flowing, positive communication spaces. Partnership can make the stress, responsibility and weight of investing easier.
Thanks for reading this long tale! I have a desire to let it go once and for all, and I hope that the act of writing helps me release it.
To make solid contracts, without paying an arm and a leg, I use Rocket Lawyer (use the links below to create an account).
Here are some Contracts that you might find useful:
-Bill of Sale - useful for the exchange of personal property, furniture, vehicle.
-Event Rental Agreement - If you do location rentals. Renting your space out for events.
-Lease with Option to Purchase
-Management Services Agreement
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