How I lost 200k investing in Rehab project

[Kirti Patel]

I was new to Real Investment, and wanted to learn it so I can generate decent retirement income out of my lifelong savings. I attended REIA meetups(2015) run by Matterhorn Group in Chicago, run by Bob Brock, peter kitchin and GD Chaplin. They used to advertise lucrative rehab opportunities with them where one could invest with them and make 25% to 30% profit in matter of 10-12 months. They presented themselves as pro of the RE industry

Being new, I wanted to join with successful rehab experts like them, so I invested 200K with them to rehab one high-end property that would be sold for 1.8M with rehab cost of 1.1M. Rehab would finish in 10months. I could get upto 50K in profit. Not bad, I thought. 

But once I invested, nightmare unfolded after a year. They could not city permit to tear down old property for over a year, The person with experience was fired as partner. The General contractor was fired. The builders took up additional loans exceeding market value of would-be property, while keeping me in total dark. It took them 16months and 1.6M of debt to finish rehab and put it to market. Unfortunately, I had not recorded my mortgage deed to facilitate additional rehab loans, so I ended up as last person holding a loan and lien.  I requested the borrowers to return my loan and offered them waiver on interest and other incentives. But they refused and played hardball.  Eventually, main lender took them to foreclosure for non-payment of loan obligation. Their loan was worth more than actual market value of rehabbed home. They initially listed the property at 1.8m in 2017. Since than, they reduced it to 1.5M but found no buyers for 18 months.  Now property is foreclosed. With it, my life's savings is gone.

I doubt that property acquired for 550k, would cost 1.1M to rehab to create a market value of 1.4M. No transparency, no accountability to lenders, no communication with investors, no reporting, stalling inquiries, not responding to phones, texts  or emails was their modus operendi.  It affected my mental health so much I had to undergo medical treatment and physical therapy.  I tried to hire a lawyer but I could not afford cost of litigation, on top of losing 200k.

Scamsters like these give bad name to RE industry and keep people like me away from investing in it.

[Jon Holdman]

Horrible story, @Kirti Patel.  A several really good lessons here.  

For one, this is a business that's absolutely full of hucksters. And all too many of them come to REIA meetings to fleece newbies. In general I would say that the good part of REIA meetings is meeting local people. The person or people at the front of the room should be treated as highly suspect.

For another, never, ever invest all your life's savings in one deal.  My rule of thumb is no more than 10% of your nest egg in any one deal.  I've done some crap deals that turned into a total bust.  And it was painful to see that money disappear.  But it was only a small slice of my nest egg.

Finally, know what you're doing when you get involved.  You would not have had a "mortgage deed" in any case.  You would have had a mortgage or deed of trust, depending on what's used in your state.  You should have recorded this when you made the loan, with the assistance of a title company.  You mention it was not recorded: "to facilitate additional rehab loans".  I suspect the borrower told you that.  That would have been a huge red flag.  If that's what happened the borrower was telling you right then and there "I'm going to screw you".