Real Estate Investing RED FLAGS You MUST Avoid (LAWSUIT)

this is the BiggerPockets podcast show 7 34. yep I I've learned that lesson more times than I should have learned that lesson but this this was definitely the biggest learning of that lesson um they'll see setting unit goals right I think going going big just because you can right setting a unit goal I don't know that a unit goal I think that's I don't want to say that's an ego thing right because I think that it's good to have goals but I don't think you should get caught up in goals just because the number sounds cool right what's going on everyone this is David Green your host of the BiggerPockets real estate podcast the biggest the best the baddest real estate investing podcast in the world here today with my stellar co-host sidekick and partner in fighting crime robba solo Rob how are you today you know what feeling extra chipper because I think after being sick for 16 days David I think I beat it I think I beat this I think I'm back to my usual self let's talk about the things I've seen you overcome in this short period of time that I've known you and we've been hosting a podcast you got into fitness and then like destroyed your lower back and spent like months basically as an invalid you had like 75 cc's of pus pumped out of your throat in what was probably the most painful throat condition ever we recorded a podcast where you really couldn't talk and you use one of those like voice synthesizers that people hold to their neck just to be able to say something at all people had no idea the stair bruise yes the worst bruise I've ever seen in my life which is saying something with my sports and law enforcement background your butt looked like a version of a different Galaxy with all of the intricacies they're in never have I seen a bruise like that and somehow you survived that too well you know you know I'm really yeah I love Interstellar so any Galaxy I can get going I'm always a fan of but yeah man that that was probably the the worst one lesson learned here for everybody don't walk down wooden stairs when it's raining wearing Crocs because I did that and I slipped and I was angry at myself because I was like that hurt that's gonna leave a mark and then the next day everybody was like oh my you need to go to the doctor and I was like uh it's fine I'll probably be okay A month later it finally cleared up and we also can't forget David when I became the co-host of the Bigger Pockets podcast I had covid my the first audition the first like show I ever did I think it was with Kendra Hall I had coveted and they were everybody was like can you do this I was like oh yeah I feel great and then the inside I was like dying so we've still never seen the full strength of a solo world you're put on notice it's coming so wooden stairs rain and Crocs became an intersection of a perfect storm that led to you receiving the worst butt Brews in the history of humanity and that is a good segue into Today's Show because in today's show we interviewed David Pere who pulls back the curtains and shows the warts of a deal gone wrong that you rarely ever get to hear but this is bigger pockets and we bring you more value than everyone else David shares some of the examples of how a perfect storm hit a deal that he had that was a lease option which you'll learn more about what that is in the show all the things that went wrong but most importantly how he countered them bounced back and built a portfolio much bigger than he had before this happened this is a rare one-of-a-kind opportunity to see what happens in real estate that isn't the good news that everyone shares now part of that's because the last eight years there's been nothing but good news as the whole Market has just exploded and even if you made a million mistakes the rising rents and the rising costs of the asset could cover them but a lot of that starting to change and you're going to be hearing more and more and more of stories like this one of deals gone wrong and money that was lost because you can lose money investing just like you can make money and it is even more important to not lose money than it is to make money in real estate so you're gonna get that today Rob what were some of your favorite parts of today's show well I would say this is a really interesting deals specifically because he sort of checked all the boxes it seemed like he ran his due diligence the deal looked and and really penciled out to be a good deal but there was just other circumstances that sort of led to the the wheels falling off the bus if you will so I think stick around until the very end because we get into some of the lessons that David learned that could possibly have helped him avoid this and I really just appreciate the honesty he's he's a he's a rock star so it is really nice to hear rock stars kind of be vulnerable and then put it all out there so I think this is for any of you that have ever made a mistake in real estate I think this episode will make you feel better and think hey it's okay sometimes we make mistakes but we're going to be better from it that's right and if you appreciate listening to a podcast that shows you the Bad and the Ugly and not just the good you don't have to set up a GoFundMe and send money directly to David Green all we need is for you to leave us a five star review and whatever app you listen to this podcast before we get into it today's quick tip is when you're evaluating a deal remember it's more than just the deal there's a person on the other end and when you're using creative financing off Market opportunities a lot of the techniques that are being talked about right now you are absolutely increasing your risk for what can go wrong in order to counter that risk consider bringing in a lawyer a property manager other people to look at the deal and not doing it yourself and then handing it over and saying okay guys here's the deal go make it work Dave's story talks a lot about how certain things that were going wrong would have been cut earlier if he had brought it back up to look the deal over so consider who your team's going to be and get them involved early get them involved often don't be a solo hero alright let's bring in Dave today's guest is a friend of Bigger Pockets as well as myself and many other Bigger Pockets personalities he has 115 units across 15 properties including single family multi-family and an RV park as a fun fact David was homeschooled and still considers networking to be his superpower so for all of you other homeschoolers out there there is hope here today to talk us through a deep dive of one of his biggest investing mistakes and the red flags he missed along the way allow me to welcome David Pere David welcome to the show thanks for having me brother it's good to finally be here it's nice to have you back now I believe you and Rob were just sort of getting acclimated the two of you have not met yet is that correct I was a I guess you could call it a temp guest on one of the unaired interview uh trial runs when Rob was uh testing but I was it was never aired so it is unofficial that is the only conversation Rob and I have ever had no that's not true that first of all that hurts because we talked at BP con and I said military millionaire and you're like yeah wow so that first of all daggered to the heart but second of all welcome back in an official capacity well I appreciate it and I apologize no apology seated all good man David has hung out with Brandon and I in Hawaii several times in fact I think that's where we got to know you and so you're sort of a well-known personality amongst the BP ecosystem but I realized like oh Rob is somewhat new here he's kind of like the kid that just transferred into school and jumping in in sixth grade and we've all known each other since second grade so I wanted to get you guys introduced here anyway Dave you have a very interesting story that we are going to dig into today there is a property that you bought it has created enough drama that you could write a book about it someday and maybe that's already in the works I was lucky enough that I was sort of there at its conception when you were first starting to look at this deal and you ran it by me and there were some things that you were thinking could go wrong and then many more that you probably didn't see that could go wrong and then just twists and turns that no one could have expected from a seller that was less than scrupulous so we are going to get into all the juicy tea as the young kids are saying today green tea if you will they say that you spill the tea we're going to Spill the tea did I just sound like an old guy that doesn't know a little bit yeah let's get into the tea fellow kid well if you spill it I suppose you got to get into it when you're cleaning it up I could probably try to defend that but we're just gonna move on we're all we're all entirely too old to try to figure out what their the actual phrase is let me bring in my stepson here real quick and he'll illustrate maybe let's give me the juice right give me the juice and spill the tea they're both Beverages and that's why I got them mixed up someone in the comments on YouTube please uh differentiate for us how this is supposed to be done and do it kindly all right Dave let's hear when you first found this deal to tell us what it was and what made it look so dang good yeah so I guess I should I should probably frame that this would have been my third like real you know big like investing transaction right so I had at this point I had house hack to duplex I bought some raw land that was next to my primary but I don't really consider that like an investment deal I owned a 10 unit which was actually the best deal I've ever done to date I believe I bought that thing crazy terms like 85 Bank 10 seller carry you know whatever it was a great deal uh this was transaction three but the reason that I got into this and I think this is kind of important to note for people is I had gotten sucked into the whole like 10x your goals doors buy more go go go go go go like mentality that you know you hear a lot of investors get into and so I had decided like I'm gonna buy three doors and then oh well I should 10x that let me buy 30 doors this year and then in this year I had already purchased 10 and so I'm looking for another 20 and and this thing kind of my agent brought this to my attention and it was it was like 35 with another potential five in construction but it was a mixed-use building it's 64 000 square feet it's four stories it's a uh you know 25 well 20 current residential with five in construction permits pulled being turned into airbnbs internally and another 15 mixed use uh and this is in for anyone who's familiar with the area Branson Missouri which I kindly refer to as like old people Vegas so it's like if you took Vegas and you took all the like gambling and uh inappropriate adult stuff out and made it just like shows and musicals and stuff and so there's like a murder mystery theater in this building and a wedding venue and a escape room and a uh a thing called the Johnson strings which was like a family of seven that played stringed instruments and had like a little mini Amphitheater in it and it had a uh at one point it had three commercial kitchens so the the history on this building is uh that it was a steakhouse it was the Majestic it was the largest Steakhouse in the state it was a the bottom floor was 20 residential apartments for employees and then the floor above it was all supplies the top two floors was three commercial kitchens and seating and then it went out of business like five ten years before this changed hands a little bit and at this point it had one remaining commercial kitchen and a bunch of you know tenants various commercial tenants 20 residential units and some space on the ground floor that was either rented or in the works of being rented by various tenants like a Caldwell Banker was signing a lease or had signed a lease uh various you know tenants like that so that's kind of the like backstory is I'm looking for more doors more deals this thing gets brought to me by my real estate agent it's off Market the gentleman is looking to do a lease option transaction purchase price 2.795 with a uh he was asking for two hundred thousand dollars down we talked back and forth to like 150 000 down and just went back and forth on terms right so lease option for anyone not familiar basically you are purchasing the right to execute a purchase at that purchase price so I would be saying hey we'll give you 150 in the next three to four years and I believe this was a three-year option um sorry it was a three-year option we have three years to purchase the building at 2.795 should we come up with the mortgage we close at that price and if we don't then you know we can just walk away without our option fee in that timeline and that's kind of the premise leading up to this thing so that lease option is pretty cool we don't see this happening a lot because the Market's been so hot sellers haven't had to do that type of thing but now as things slow down we're starting to see them pop up more basically what you're saying here is you agree to buy the property for a certain price several years down the road you paid money for the right to be able to do that which was your lease option fee if you choose not to buy the property the seller keeps the money if you choose to buy the property the money goes towards the purchase price or whatever you just buy it at the terms you have these were very popular in the past but I think a lot of the reason that they stopped being so popular was inflation became so rampant sellers wouldn't want to wait to sell your property in three years at today's price it used to be real estate was normal and it just slowly appreciated or didn't appreciate so you could do this before we move on to here more about this deal I want to get Rob's perspective because I'm trying to put us in in Dave's position as he's hearing this deal like rather than the benefit of hindsight as you're in the moment and you're okay you're being posed with this uh multi-use lease option tell me like you got to feel good about the lease option that tends to benefit the buyer here so Rob what would you be thinking when you heard about the multi-use aspect of this property my mine would be racing as it was as David told us about this because I've always wanted that it's like I have shiny all object syndrome and so for this it seems like you can execute so many creative things Under One Roof and I guess the other thing that sounds really appealing to it is that obviously from a valuation standpoint the more money you make the more valuable the cap rate is on this building so that would be something that plays into it which is what are all the different types of businesses and income streams that I could create from one building to ultimately increase the overall valuation of it I knew you were going to say that and that is just the difference between Rob and me right there because you hear that and your mind explodes with opportunity and creative options and like I could make it worth more right I hear that and I'm like that is not a well-traveled path that sounds like a lot of work to have to figure it out that's going to take away money from all the other things that I'm trying to do I don't like multi-use options because there's a higher ceiling but there's a lower floor right I tend to to be drawn towards a well-traveled path that I can buy this thing set it on its way there's a very established trade route I know exactly where it's going to go I can forget that I own it and I'm good but this is important to bring up because as especially newer investors are out there looking for deals looking for something creative trying to put this together analyzing everything they can get their hands on we know what it's like when you get that re bug and just the world's your oyster it can be misleading to look at an opportunity at with which is multi-use or value add or something and only see the benefit of it you only see the upside you don't see what could go wrong so uh I remember Dave we had a conversation about this because you had some of those initial thoughts in your head so before we get to that I want to ask you what did you love about the deal and then then let me know what do you remember about our conversation and what we're your concerns about the deal yeah absolutely so uh and there's a few more Rob to play into your because it sounds like you think the way I do the gross stated current monthly rents was 34 000 right so over one percent rule right off the bat there were still several commercial spaces not rented uh the five residential spaces were under construction right so four we're gonna be Airbnb with a fifth one uh that they hadn't actually identified as whether they were thinking Airbnb or office but it was a space big enough to put a studio so nothing crazy but a space um and then there were some other things option you know potential right but it as the numbers were presented to me at least broke even but should have cash flowed about seven thousand dollars a month or uh actually should have been a little bit more than that and I'll get to the 7000 number how I came to that uh when David and I talked um so what happened is as we're talking through this I'm fact checking a lot of this right and this gentleman was also out of state and very mom and pop numbers you know his accountant just a lot of typical mom and pop things that you encounter where as you're digging into stuff you're like well that's actually off by a little bit let me tweak this let me tweak that and I came back to him and I was basically like hey so you know it looks like these two leases are actually uh projected leases right perform a typical stuff like these are not current these are potential or signed but they're not they haven't started yet so can you give me the like no joke current rent roll who paid this month accurate you know whatever and they came back and it was about uh I think it was 27. so the net on that would have been about seven and that's where it was and this is when David and I I think I reached out to him and there were like three other people and I wasn't you know for David's uh reference here he never saw the numbers right like this isn't like uh here's all of this stuff please like I never did that to anyone and I wouldn't recommend anyone do that what yeah what I would do to people or do with people if I was ever going to somebody for a fact check was like hey I ran all of this and here's what I came up with I have one or two minor concerns or I'm at this point do you see any like major absolute stopping red flags and you know maybe there's a couple concerns but unless the person is just like unless like everybody I talk to is like absolutely no then it's like okay there's a couple concerns here but like this isn't just like a you know off the rails I'm an idiot type of deal no not at all and that's a good point you bring up we should highlight this when you are going to someone for advice the wrong way is to just dump like info dump every single thing you have on them in a big long email or a message or hold them hostage make them hear about this like I would never go to Rob and say like hey here's everything that I'm doing tell me if you should if I should buy this deal right hey but but you can though just so you know you can appreciate it you can always vent to me you can always do that one time and then they'll never take the call I would imagine that is uh an invitation to David to do that not the audience just yeah I'm saving you right now Rob I'm saving you yes yes yes yeah so what you what you do want to do is go to someone else and say is there something I'm missing right because it's never what we what we knew could go wrong that hurts you it's what you don't know that could go wrong that can hurt you as well as uh is is the way I'm looking at this correct right when I'm when I'm analyzing this am I using the right set of data is this the right formula right like something like that because if you have the wrong formula even with the right inputs you get something incorrect and if you have the correct the wrong formula or the other way around the wrong inputs with the right formula you can also mess it up so that's the stuff we're looking at uh but I want to ask Dave is as you're looking at this deal I remember you being super excited about it it was almost like a game changer like if if this thing works because you weren't quite sure this could Propel me to a completely different place in life and that always adds some extra juice to the the right when it's not just the deal being a validines merits when you're thinking about the change it can make in your life I'm not saying that's wrong I'm saying it gets more complicated like if you're looking at a deal and you know if I buy this I can quit my job if I buy this it's generational wealth if I buy this it gets me out of X problem that I have different stuff starts creeping into your decision making process that's like rooting for this to happen right and like uh the real estate radio guys we had them on and they told a story about how they would buy properties just solely for the tax benefits they weren't cash flowing they weren't good deals but they were saving money in taxes and that was influencing their decision making and ultimately they they went bankrupt they lost all those properties from that so tell me what's going on in your life at this moment that's affecting your framework as you're analyzing this this opportunity yeah I mean I'm in the Marine Corps and I am not I'm getting promoted yeah I'm not rich I'm getting promoted which you know I mean is great but uh for anyone who's been in the military the more you get promoted the less fun you have right the more office you do and uh you know there's there's not a way to say this part without sounding like uh I don't know that this ever comes out the right way but you know the war ended right and so I'm not like a sit on the couch twiddle my thumbs bum type uh not to say there's anything wrong with that I suppose but for me as a the type of marine that most or a lot of Marines are as you get promoted in War's end uh the Marine Corps is not as much fun as when you're young and you don't have the same purpose yeah like you know Afghanistan and and combat and training and and and like the purpose and the adventure and and the excitement was a whole lot more appealing than like training and in like you're not going anywhere you wanted Call of Duty not office duty basically I can always count on you see look at that this is why you got that Dundee award all those years ago so you're so what you're saying is that your mind is going to a place of I don't like where I'm at like the walls are closing in on me that's funny you just David did send me a Dundee award it was for like best bur book or something which is funny because it's the only burbuck that was written other than the Imposter books but uh and that's an office reference so you don't like where you're at in your job the walls are closing in you can see this is not a path that I'm gonna be happy to stay in of course our mind starts looking for alternative options here and then this deal crosses your desk in that moment right yep okay so as you're considering it tell me what you're thinking yeah and I guess one other piece that I didn't mention yet in this uh because we did say you know not rich uh I didn't have 150 000 put down so I brought a partner in which I will not mention who or what relation said partner is to me because he retained we managed to sell well the LLC was set up he managed to remain anonymous through a four-year lawsuit including a in-person trial where he was not even in the state for so uh success but um he was a two-third I was a one-third he brought 100 I brought 50 and my 50 came out of a HELOC so you know uh that was how I was able to put this in without being rich quote unquote so uh just throw that out for context so people aren't like wow he said he's a broke young enlisted Marine but he put 150 down no not not quite I was creative um but yeah so that's I mean that's kind of the frame set right and so as we're thinking through this it's like okay what's the my Logic on a lot of this is and it for the for the record has worked out well way more often than it has failed me which is the whole point of this logic right it's I think it's like Nasim calls it like the barbell method but it's you know what is the risk of Ruin if this goes absolutely wrong what's the worst case scenario and in this the worst case scenario was essentially we lose our lease option maybe a little bit extra but that's pretty much it and the best case is magnitudes more and you know that the building ends up being worth 5 million or it cash flows twenty thirty thousand dollars a month or you know and and as we were running all the math and all the numbers as long as what we had been presented after I'd gone back and corrected some stuff and he came back and this that and the other and I'd walk the building as long as what we had been led to believe and what the inspection and what the numbers and the rent roll and the accounting and everything was accurate then this really didn't seem like a big like Risk right you take over the building you can control the asset and as long as you don't royally mess everything up and then in the negotiation and in the contract we negotiated a lot of things that like foreseen issues right so we negotiated like hey you got 45 days to finish those four Airbnb units or you owe me sixteen thousand dollars or I think it we dropped it to like 8 000 or something like that you got 90 days to replace the commercial roof or you owe me a hundred thousand you've got uh two weeks to Crane two HVAC units onto the roof after the commercial roof is finished and then or or after we close to get the top floor HVAC ready so that we can rent the top floor out and you know or you owe me this much and so there was most of the things that were risks that were you know identified were put into the contract as hey within the first 90 days seller is going to do x y z and if he does not he is going to owe the buyer you know eight thousand hundred thousand ten thousand whatever and so and that was I think a lot of that was actually from conversations with you and other people where it was like cool well you know this might come up here's how you can mitigate you know make sure that it's in the contract that they will pay you X if they don't do y so that it happens one way or the other because if they're not going to do it then you have the cash to take it down yourself so it sounds like you were pretty aware of what could go wrong and had a contingency plan in place like every good Marine would for if a happens we're gonna do B so we thought right so okay David I have a couple of questions on this option on the lease option because you said you put 150 000 down and the way we talked about it earlier on the podcast is typically with the lease option you say to the seller you're like hey I'm gonna pay you this amount to reserve the right to buy it at this price in three years from now so 150 000 was the down payment how much of that was sort of the fee associated with the lease option actually I guess realistically he just counted the entire thing as both the down and the fee so the whole thing went towards Equity um was the way that it had been drafted so so it was the the note was almost drafted and this is part of what came up in the lawsuit was how poorly all of this was drafted it was drafted almost as if it was a seller carry it was much it read much more like a seller carry with a temper with a with a down payment and a interest rate at a monthly payment then a lease option except for the fact that we had the option to just walk right so it was it was almost as if it was a seller carry with a three-year balloon except that we had the option to walk away from the lease so if I'm hearing you right are you saying it looked less like a lease option and more like you put a deposit down on a property and you could forfeit your original deposit if you chose not to complete the purchase in three years versus a lease option I mean they're very similar in the execution is that what you're getting at yeah it's so and it's not that that was what we discussed so much is that that was just it was very poorly written and executed and I was not Savvy enough with this stuff to know the difference and he drafted all the contracts on his end and because he and I had negotiated everything verbally and he sent it over and I was like yep those are the terms we talked about I just was like yeah cool and it turns out he wasn't as Savvy as I thought and which you know ultimately worked out for me when we got into court stuff because the judges like well this doesn't look like what you're saying it's supposed to say and you drafted it so you can't you can't say it doesn't mean that because you wrote it so right that happens too A lot of times you negotiate terms they sound good but no one ever actually sits down and pencils it out in a model or in a spreadsheet and so they don't actually know logistically or tangibly what those numbers work out to and then once they see that after the fact there's a little bit of like panicking and like wait that's not what we talked about and it's like well it is you just didn't do your due diligence beforehand so the other question I have about this because that sounds like a lot of logistics to just deal with the seller and negotiating sounds like they're collaborative they're playing ball and so not really a big deal there but on the flip side of this you're really taking on a really big business you know we've talked about it's creative so many ways that you can make money in cash flow did you give any thought to the actual Property Management of this overall business like who was it's not just a property manager that you're going to hire for it right it's not like a commercial property manager inside of Airbnb property manager who was the one that was actually gonna sort of run this operation yeah there was a on-site property manager who had been working with this gentleman and she was going she had offered to stay on as a full-time manager and she had a maintenance guy and she was full-time there and when I went and looked through the property you know I walked through and I met with her and she showed me everything and she seemed awesome right she knew everything about the place um and I will one of the when we get into Lessons Learned one of the things that I will will talk into is that I should have immediately brought my actual property manager and my team through with me instead of going with her and I can either confirm nor deny because there's no proof and this didn't come up in court however uh from my understanding there was a under the table kind of agreement on a you know maybe or maybe not uh consulting fee for that property manager if she helped sell the building and so she was incentivized to make things look really good when I walked through with her and when we took over the property manager that I thought I was getting was not the property manager that I got right so it was within the first two or three weeks that I fired her and brought my team in and uh yeah I mean it should have Woulda Coulda I guess right I should have brought my team in immediately um it's bummer right because that was part of the issue was and I don't know how much we want to get into that part right now but I mean like there were there were literally tenants in the residential side that when my property manager walked through said oh yeah we don't pay rent and she was like uh well this like he says you are on a lease and you're paying rent and they were like well yeah we were just told that if we said we were paying rent that we could just stay here for a while for free until the new owner took over and eventually would evict us whenever that timeline took place wow like oh wow that's cool okay so it sounds like this is about the time you know we'll start kind of falling off the bus here so I want to get into that but just to sort of summarize where we're at this is what what deal is this in your pipeline like how many deals had you done before this three like legit Investments and then like some raw land and some other stuff so this is like not super far along yeah okay cool and then the purchase price for this was a total of how much uh By the time we would have closed 2.795 okay 2.795 you put down 150 000 you brought in 50 000 you had uh another partner that brought in a hundred thousand and this was a 20 unit mixed residential uh mixed residential use property in which we were still waiting for four short-term rentals to be completed is that right so 20 residential side and another 20 to 25 once the construction was done and then another 15 potential commercial space so like 40 total 35 great and then you sort of worked out with that seller sort of timelines and Milestones of when things had to be completed otherwise they would owe you money overall yeah great okay so let's let's uh let's dive into sort of when things start uh well one of the the cracks in the foundation start appearing can you tell us a little bit about that yeah I mean month one uh you know so so some of the some of the big red flags came I mean right out the gate right and ironically uh I'm still stationed out in Hawaii so the first like major red flags are happening while I'm on a one-week cruise that you can book while you're in Oahu and it goes to all the islands and so I'm like on this cruise ship and I'm trying to enjoy this Cruise while I'm firing a property manager and getting calls from commercial tenants and we're like two and a half three weeks into this thing and I'm like what in the world is going on like none of this is making any sense there's no way this is realistic like text messages and things that I'm getting I'm hearing are just insane right and so what's happening is to summarize the amount of money we collected well I didn't get the prorated rents for the first month from the seller which was in the contract and then he was like oh yeah no we we agreed to something different I I must have messed that up with the contract I'm like the contract says otherwise and we didn't agree to that so I need that and I never got um so that was like red flag number one I'm like there's like seventeen thousand dollars coming to me and you want my first month's like you know monthly like payment but you're not giving me the prorated like that's a very significant chunk of money to not give me at this point um and then on the first the rent collected was to the tune of like seven thousand dollars or eight thousand dollars less than what the stated rent roll for the previous month had been am I I'm like okay something's off like that's a a huge number and it's because one of the you know quote current commercial tenants that was like forty five hundred dollars isn't paying so I call I get a hold of them and they're like we don't have a lease there I'm like you know or they or we we broke our lease and did he not tell you like that was like last month or whatever and like you know like all these there's a lot of like weird things that I'm starting to like hang on like this was not no I did not get told that like this number clearly states that you are a current tenant that paid last month like the bank account shows that money hit the account like that doesn't add up at all um then my property manager starts going through and like the rents that were told to us aren't accurate not all the tenants are paying and they were told they said they were paying you know like some of that issues and so overall it was like seven or eight thousand dollars gross less came in and then the seller is making decisions talking to tenants uh having people do things and like having the lady that I fired do repairs in the property even though I'm telling him like Hey I do I fired her I want her out of the building I don't want her in the building I don't want like nobody like what are you doing you I signed this lease option I have control of the building I don't want you to touch anything I don't want you to talk to anybody like this is my asset for you know the time being like that's why we paid you 150 000 so that I could take control of the asset and it was just like this weird transition period of like okay something's off numbers don't add up he owes me this money right off the bat that he's not giving me and he's hiring these people that I fired to do work that doesn't need to be done on a building that he no longer has control of and he's telling me he's helping me but every time he hires them for something it hurts me somehow so it was that was where I was like like alarm bells are going off and that's like the first like I'm on this like Cruise I'm like going to Maui I'm gonna like see Brandon this next day I'm like yeah that's a mess man so you are really putting out fires really quite immediately like as soon as you you close on this thing you're super excited you're finding out all this stuff that you heard about is either untrue or inaccurate or you don't have all the information how are you holding it together at this point because I think at this moment most people would probably be freaking out right I don't know lots of uh Marine Corps dealing with crap yeah yeah this is probably a lot less substantial than some of the stuff you've seen yeah I mean you know what what can you do right I mean losing losing it doesn't really solve anything so you just try to figure it out um and also I think part of it is that I don't know that I really believed that it was happening like I'm just like there's no way like that this is legitimately what's going on like you can't actually be meaning to do XYZ like surely this isn't the real deal and uh yeah I mean the flash the bang on this bad boy was real quick so I mean as we get through the timeline on this uh the like closing date to date I file lawsuit is less than four and a half months part so well so at this initial step though Dave you have to be feeling some betrayal some confusion like if like your brain's trying to make sense of what's happening so either it is as bad as you're thinking it is in which case you've been betrayed you cannot trust this person they have some motive you didn't know about like a side deal with a property manager or side deals with contractors and then your brain's like well now I gotta dig in and figure that out or you're just misinterpreting the whole thing and if you give it some time it'll work itself out so you're sort of in that stage where you don't know have I been had or am I just being paranoid right now is that more or less what you're kind of dealing with yeah and I'm trying to get my property manager into like like Jerry get in there and like please like and Jerry's confused he's like you're dropping me into hostile territory here or is it hostile territory I don't really know yeah a Jerry's a female but uh yeah she's uh she's running in there and yeah guns Ablaze and like what are we getting into and she's like calling me like and then she starts calling me and telling me that okay that's what I was getting at so Jerry is what helped you figure out which of these two roads it was she went in there objectively looked through everything and then she reports back and she's like all right boss I got some Intel what do you guys call that a sit rep so tell us like what did what was Jerry's report to you uh Jerry was basically like why didn't you bring me in sooner so so Jerry starts talking to the commercial tenants and I figure out that the former property manager God bless Jerry's by the way can we just take a brief moment to just say thank you so much out there because you'd probably still be trying to Wade through this and so would I if we didn't have people like that in our life Jerry showed up at the trial four years later for me sat outside for four and a half hours came in and testified for 40 minutes uh with no reason to other than she's still my property manager to this day yeah so awesome okay so she goes directly to the tenant she's like I'm not dealing with the previous owner I'm not dealing with the current people it's all corrupt I'm going right to the source and I'm going to talk to the locals on the ground I'm gonna figure out what's real I'm using all these military analogies as we're getting into this thing so she goes and she gets the Brass Tack so what did she find out well uh a couple of very interesting things so the The Murder Mystery Theater is still actually there as a tenant and and awesome um I won't name them but uh they're great and so they were giving us a lot of inside scoop and one of the things is that the former property manager and the seller their relationship is much more intertwined through things than I had been LED on to believe so apparently so I knew that there was a lease signed for a paintball place to be built in the back part of the park so this place has a it's five acres it's a massive parking lot in the back corner of the parking lot there was going to be an outdoor uh paintball place put up that was a lease that was future dated from March and so we we closed on this in September so for March uh there was going to be starting in March they were going to begin construction and the opening and begin paying in March and I knew that that was signed that was executed that was whatever what I did not know until we got Jerry in to talk to this other lady is that the paintball lease was in fact the property managers company and that it had been funded by the seller and that there were actually two leases like that in the mix of all of this um that were you know property managers LLC funded by seller that were just like like oh great no wonder they keep meddling with things because they still have a vested interest in this building in ways that I was never made aware of and no wonder this lease was written to where they can start building their paintball place immediately but don't have to pay rent until March and so now I'm dealing with a tenant who's starting to like block off sections of the parking lot even though they the the lease clearly says that I have to approve the plans before they can do anything and she's like well this I'm talking to the owner I'm like he doesn't own it he has no control of this building anymore I do um that's a whole other piece I mean that whole paintball thing we could go way Rabbit Trail but I'll just sidebar as uh former property manager called my property manager called the police daughter twice over the timeline of me basically telling the city like I haven't approved her plans do not give her a permit and then she was like she like spray painted on the door of a closet inside the building like property of paintball such and such District nine paintball and I'm like the closet's not part of your lease what are you doing in the building um so there's like all kinds of weird uh deals she started construction on a space inside the building that she didn't pull permits for because she thought it was part of a lease that she had that um yeah okay Dave so reality hits things come to light Jerry is sort of your boots on the ground that helps you get to the bottom of it you realize that there are falsified numbers falsified leases this rent to own situation and Lease to buy became sort of commingled and Confused the property manager was fired I understand they flooded the property and then they cut electrical wires to sabotage what was going on any other details there yeah just I mean you know a whole bunch of things that along with all that other sabotage stuff that just wasn't you know ever really brought to light in the court case uh but things that were just really weird going on that you know neither never brought in the biggest things that as far as like quote sabotage or uh whatever that really played into this is that all those things I mentioned at the beginning in the contract were never done and were never paid so 100 days into this thing the units aren't done the roof's not done the hvac's not done the and these things are you know causing tenants to leave or space is not to be able to be rented or roof to leak or whatever and this guy owes me 110 hundred and twenty thousand dollars for the things that aren't done in the contract and hasn't sent the money hasn't done anything with it won't sign an addendum to change anything in the agreement I won't waive the monthly you know rent to or or payment to himself in lieu of that and I'm just at a point where I'm like clearly this dude is just trying to basically tank this deal to keep my lease option fee and move on like get me to move on so we can do it again which is a clear breach of contract but luckily these things were in the contract yes so you did what you had to do and you brought this to court four months in when did you finally settle what was that court process like four years and some change later we finally settled so we filed well I guess four years from the purchase so I guess three and a half years after filing it settled four years after purchase and the reason for that is just covered right so we started and then you know we had a court date or a deposition day trial date in like 2020 and there were a lot of missed deadlines I don't know that the other side of the the other party actually hit a single deadline throughout the entire trial in fact the other party missed a deposition and the judge actually made them pay for my attorney's time which my attorney said he's never seen happen um that the judge actually grants that on on since he's been an attorney so uh you know that kind of puts in perspective how many deadlines they were missing and for what kind of excuses and then you know because of that and how backed up things got in the court system with all the pandemic and in person out of person judge you know type Rules and Things we just kept getting pushed because we just weren't the most important thing on the docket and then so four years of this which is a great lesson to be learned that even when you cover yourself in the contract that doesn't necessarily mean you're good to go there still are consequences and a price to pay when you get caught up in a bad deal or a good deal gone bad or however you want to describe this so what were some of the lessons that you learned from this four years at about 40 000 ish in legal fees throughout that which we recouped but you've still got to Fork it until you recoup it and you gotta hope you're recouping it's not guaranteed yeah that's valid yeah yeah so you gotta know you're in the right right you gotta you gotta your gut's gotta be in the right place um a lot of lessons right tons but uh you know big one right always have your attorney look over anything that's uh unusual or you know I would say most things but especially any unusual contracts that you're dealing with if it's not something that you deal with on a very regular basis have your attorney look over it the number of times my attorney has told me that if I had had him look at something sooner it would have saved me money is is uh is uh yeah I've learned that lesson more times than I should have learned that lesson but uh this this was definitely the biggest learning of that lesson um let's see uh setting unit goals right I think going going big just because you can right setting a unit goal I don't know that a unit goal I think that's I don't want to say that's an ego thing right because I think that it's good to have goals but I don't think you should get caught up in goals just because the number sounds cool right like set up set a passive income goal set up Financial Freedom goal set up net worth goal set up set up personal goal but I think the the doors and units thing kind of turns into like a bragging match online and people get wrapped up into it I got sucked into it um and it's you know just it is what it is right I had no business buying this building at that point in my investing trajectory I would say the other piece of this is don't pull your punches when you get hit in the mouth right I mean we haven't told this but through this four-year process when when I purchased this I only had 12 doors two other properties and by the time this lawsuit closed I'm out of the military uh million dollar net worth financially free not taking another job I have over 100 Doors you know again not that doors matter but you know the point being like I stayed consistent I kept investing I didn't let it deter me from everything else but I stayed simple I pulled back and I started going back to the basics always have your team walk through deals the tried and true team always have them walk through everything with you don't just take the other person's word have your property manager come in have your team go through and then I think this is the biggest one and David you already alluded to this or maybe it was Rob we already talked about this briefly but document verbal agreements immediately after making them so there were a lot of things that we negotiated through this process and we would have a phone call because we were you know long distance we'd have a phone call we'd negotiate all this stuff and what I failed to do was immediately follow that phone call with an email saying hey great call today we talked about XYZ please reply confirming that this is what we agreed to and so when we got into all this mess there are still things that I wasn't able to bring up because I never got a written confirmation that we had agreed to it such a good point this comes up all the time with real estate sales where the agents will have a conversation One agent will say something the other one tells the client it never gets put in the contract it doesn't even get put in an email it turns out that one side doesn't want that to be the case and they conveniently forget it being said or claim it wasn't said and now people are scrounging through text messages or making character assassination attempts because they're mad like it just does not matter what is said it matters what is recorded if it is not written down it doesn't exist and like I'm glad you learned that lesson early in your career and that you can share it with everyone else because I know the vast majority of people were just naive we're like they said it it goes recorded in my brain as a term that we've agreed on you move forward as if it's the case and then when the other side realizes they don't like how this is going they claim it wasn't said and there's nothing you can do yeah I would also say I would also say David I mean David Pere um you said that you had no business buying this deal I don't know if I believe that honestly I mean if you had three under your belt and you were sort of ready and excited to take on so I mean I think that real estate should scare you a bit and it should cause us to get into uncomfortable situations obviously this one did not work out the way that it was supposed to the way that was intended but there are a lot of other scenarios where it would have worked out and the fact that it didn't I would never you know want you to feel like you made the mistake that you shouldn't have believed in yourself you know and ultimately I think you have a lot of good lessons from this you've obviously bounced back you're crushing it now and honestly probably the reason that you're crushing it now is from all the stuff that you learned from this deal so there's always a little silver lining there in my opinion that's a valid point right because I mean had this not ended up the way that it ended up it very well might have been you know had it had it been the deal that was actually set in front of me and not as we're about to get to what the court case says it was then yeah yeah it is very easy to look at these and say see that's why you shouldn't do real estate because things can go wrong you couldn't be more wrong with it like you just have to accept when you're in any Endeavor you go in if it's snowboarding you're gonna fall on the snowboard if it's weight lifting you're gonna pull a muscle if it's a sport at a time you're gonna make a turnover that does not mean you shouldn't play the sport it just means you learn from how you made the mistake you get better and you go forward and the points that you score in the future are much better than if you never played at all so thank you rob for for pointing that out um so yeah how did this lawsuit end up working out yeah I was gonna say so we only have an hour so obviously this story is way crazier than we were able to get into so if anybody really wants to dig into the details I I told the producer and I think they are going to link to the case notes down below which is where you can pull the full public record of the court case uh because I am totally cool with that being out there because it's public records so why not um so we won uh hands down we got our we basically we got made whole right so we got our money back close interest over the time period which is a win except for the whole like four years of stress and headache so but it's basically a free education in legal uh and we won so we there were four counts that we sued for and we won three of them and the fourth one was um basically so here's how it broke out we won breach of contract was awarded to us fraudulent misrepresentation was awarded to us negligent misrepresentation was awarded to us and then the fourth count would have been unjust enrichment but that was uh barred from being included in the trial because it was deemed that there was a contractual agreement and so that if we hadn't won the breach of contract because it was deemed there was no contract then we would have gone into that count so ultimately basically played out as and you can read through the context and read through all the all the comments from the judge and the and everything and it gets pretty crazy but basically it reads out as we did we were supposed to they didn't so we were made really good lessons there glad to hear it man I'm glad that you came out you were made whole and then in all of this was there more compensation I know you said that your lawyer's time was compensated for but did you at least come out on top for like maybe just a little ahead or not is that not really how there was an interest amount accrued over the time period um whether that keeps up with inflation or not you know who knows I haven't done the math so it's something there's something I've been saying a lot of lately to different in different formats and mediums money can be taken from you can make every single decision to the best of your ability and things can still go wrong in this case an unscrupulous seller sabotaged your deal we analyze deals we don't analyze people it's very difficult to get to the point where you could have seen that coming and there's lots of other cases where mistakes happen that just cannot be avoided sometimes just from Rolex and sometimes from inexperience you can lose money what you learn going through these experiences will stick with you forever and those can be converted into much more money in the future which is why I tell people to focus on learning over earning but the knowledge that you gain through going with this deal will give you confidence skills approaches put systems in place you're never going to not bring Jerry in on a deal earlier you're never going to not bring lawyers in on a deal like this again it's going to allow you to have confidence to scale to bunch of bigger deals with which it has in the future and that's the lesson that I would like everyone to take from this I also want to thank you for just you know pulling back your shirt and sharing the warts because we always hear about the good deals we don't always hear about the rough ones now before you go because I do want to have you back to get your full Investing story in a different time I want to call out that this property is still a line item on your property tracking spreadsheet there are no numbers on that line item but there are some words can you tell us why you keep it there even though it's totally off your books now are you looking at that that line item right now by chance I I may or may not have means and resources I wasn't a marine but I've got other mediums of use here oh I was just if it's in front of you you'd be able to read it because I I don't have it pulled up oh I can read yes but I would like you to I'd like you to read it and then I'd like you to tell us why you put me let me pull it up so I can read it make sure that I actually say the words right otherwise you know it doesn't have the I'll read the words for you if you like and you can interpret it it says the word say and and this is on my property tracker that's on my net worth tracker that I update every month the most important metric to track in my opinion uh it says no longer in existence just left it here as a memory of the lawsuit one and Lessons Learned and I I mean that's exactly why it's there right because I want that to always sit on my property tracker so that every it's in a different color than every other property that is highlighted on my tracker so that every time I pull up my deal and I'm doing equity and and debt and tracking my properties and yada yada it's just always a reminder I love that dude thank you I think I genuinely thank you because you're obviously crushing it you're a seasoned person you're a friend of the of the BP family and so I know it's really hard to come in and tell these types of stories but believe me when I say this has helped so many people out there who have made mistakes and like won't forgive themselves for it you have clearly moved on from this and learned from it and I think a lot of people can really just like you know realize that sometimes we make mistakes it's cool we get better from it we remember them we learn from those lessons and we get better all right well thank you Dave we went a little long so we're going to get you out of here any last words before we uh we let you go how can people find out more about you yeah uh I actually just created this this is the first time this is ever going to be done so I'm excited uh I love Bigger Pockets right so um this is actually from a friend of a mutual friend of ours gave me this idea for this URL so uh but I I don't know I never know what to say here when I talk podcast so I just I wanted to give away a free copy of my book right so I I wrote a book no BS guide military life for service members and vets so if you're a service member or a vet you're listening to this and we can when I come back on sometime we'll talk more about all the military stuff but I just want to give it away right so if you want a free copy of the book or you know a service member or vet and you want a free copy of the book the best way to get a hold of me and this page has all my Social Media stuff is to go to and this is what I'm excited about the best podcastguest.com and you will be able to download that free book that's funny that's really good Rob how about you how can people find out more about you and that beautiful creative wonderful mind of yours uh you can find me over on YouTube at rawbilt Instagram at Raw built and uh that's it what about you I'm at David green24 just about everywhere including YouTube and I also have a new website coming out pretty much when this airs I think davidgreen24.com all right we're gonna let you get out of here Dave appreciate your time thank you for sharing the story we'll have you back on in the future this is David Green for Rob putting the dues paid in due diligence solo signing up [Music] foreign [Music]

Channel: BiggerPockets

Views: 19,771

Keywords: real estate investing, real estate red flags, red flags when buying a house, invest in real estate, how to invest in real estate, lawsuit, investing in real estate, rental property, income property, investment property, passive income, cash flow, mixed use real estate, mixed use real estate investing, financial freedom, financial independence, investing mistake, property management, home buying mistakes, biggerpockets, biggerpockets podcast, podcast

Id: osG-h0mgScU

Length: 59min 4sec (3544 seconds)

Published: Thu Mar 02 2023