Partnership Gone Bad: What would you do?

[Shiloh Lundahl]

Here are the facts. I'll try keep it as unbiased as possible to get some honest feedback from other investors.

Last year I met an investor who was flipping houses in Phoenix. I connected with him by email a couple of times and then by phone to ask him some questions. Later he sent me an email outlining a deal and stated he was looking for an investor. The email stated the following:

"Hello Investors! I have a couple deals that I am looking for some 50-50 partners. I will summarize in this email but I have attached the detailed formulas for you to look at. If you have any questions, please feel free to call, text, or email me.

I am looking for partners to help with funding these projects. We just need the gap money (down payment, remodel, and holding costs). For this investment, the investor gets 50% of the net profits at the Sale of the property. I need approx. $117,000 and your potential profit is about $22,000 in about 5 1/2 months. That is a 41% APR"

I am including the documents and contracts in case you want to see what I saw when I decided to invest with him.

Here is the projected ROI that I got in the email:

Now here is deed of trust and the contract that I got when I invested with him:

Now, I recognize that I made plenty of mistakes with this process.  This was one of my first partnerships and I didn't look at the fine print of the contract as I should have.  I didn't realize that this investor, acting as the realtor, would add in a commission when purchasing this from a wholesaler thus increasing the cost of the property.  Then he would get commissions again when selling the property.  And then he would split the leftovers "profit" at the end 50/50.  

Things seemed to be going well at first with the above property so when this investor sent out another property in Scottsdale with the following numbers I decided to invest again with him.

Total investor portion $127,000

Potential Return on Investment (ROI): $22,000

Annual Percentage Return: 35%

Projected Total Days from Buy to Sell: 174

The rehab seemed to go pretty quickly and the houses were on the market within a couple of months of being purchased.  And then they sat, and sat, and sat.  I called the investor regularly every couple of weeks to see the progress on the properties but there was very little progress made.  After several months on the market with very few showings on the property in Scottsdale and still no offers on the one in Phoenix, I started to get nervous and I called up this investor and I asked him if we were still going to be making a profit on the properties.  He said that it didn't look like we were.  Then I asked him if I would be getting all of my investor monies back as it stated in the contract.  He said that I probably wouldn't.  At this point, he was paid commissions on the buy side and he had very little money into the properties himself while I had a combination of 117k and 127k into them for a total of 244k invested with him.  The property in Phoenix had had some showings and one lowball offer.  The property in Scottsdale had only had about one showing in 7 months.  At this time I found out that he had 6 other properties out on the market that were just sitting there and he didn't have any other exit strategies.

Now I have already felt the sting of my mistakes, and there is no need to shoot a wounded man, so I am not so much looking for criticism for investing with him, rather, I would like to know what you would do if you were in my situation and you had just heard that you would not be getting all of your investor monies back and that he didn't have any other strategy besides waiting for them to sell.

Thanks for your comments.