Made BIG mistake with auction purchase - beware of scams

[Phillip S.]

Fellow investors,

I expect this topic has been discussed ad nauseam on here but I thought I would share my tale of woe anyway to help others avoid making the same mistakes I did.  In August of last year I came across an advertisement for an online auction which described the property as a "fully leased and updated duplex" in Baltimore.  The photos seemed to indicate a property in very good condition with no major defects, both units were tenant-occupied with 2-year leases in place, and the gross scheduled rents were very attractive for the neighborhood.  Of course the challenge in these situations is gaining access to inspect the inside.  With both units being occupied and with only a few days remaining before the auction closed, I took a gamble and placed a bid.  I was the high bidder.

About 6 weeks later after I had closed on the property, I was notified by Housing Authority of Baltimore City that rent payments for the upstairs unit were abated due to violations and repeated failed inspections.  I got a contractor in there immediately to assess the situation.  Come to find out the condition of the upstairs unit was almost uninhabitable due to water infiltration into the living room ceiling and significant mold growth throughout the ceiling.  It was the opinion of my contractor that the problem had been ongoing for some time and the previous owners either knew or should have known and did nothing.  Long story short it ended up costing me $20K to put in a new roof, gut and rebuild the living room, and make other necessary repairs including replacing both electrical panels which were not up to code.   More recently I just spent another $15K renovating the downstairs unit after that tenant moved out.

To add insult to injury I paid above market value for the property when you include all the closing costs, and now I have $35K more in it, not to mention 2 months of lost rent due to the abatement.  Needless to say these guys pulled off the scam of the century.  They put lipstick on a pig (spent a few grand if that on cheap flooring and a coat of paint), placed an above-market tenant in each unit, and then turned around and sold it via online auction where they can hide behind a contract that gives the purchaser virtually no protection and no recourse.  These guys walked away with a huge chunk of change in their pocket with no liability whatsoever.     

Folks this is probably common sense to most of you but my advice would be to NEVER purchase any property that you cannot fully inspect before hand.  I would also advise against purchasing via online auction unless you really know what you are doing.  It is just too easy for a seller to pass on potentially dangerous defects to an unsuspecting buyer and walk away scot-free.