HOLD OR EXIT DEAL CENTRAL TEXAS

[Miguel Torres]

A friend and former coworker  who I’ve spoken often with about real estate moved to central Texas. As a new investor, and him being a bit more experienced I agreed to give him 10K to invest for me in a rental home. He would arrange the purchase of the property and manage it through his company. 

After flip flopping between various properties, we finally settled in on a duplex that had 1 unit occupied.

Early in the deal, I told him that my credit was going to dip because I was borrowing the money from credit cards, so I was concerned about not being able to get a mortgage. According to him he had a connection at a bank he works with and a guy who would still do the loan. Come time to close on the property, the connection at the bank had not done anything with the property and the loan fell through. 

My friend then made a deal with his business partner to lend me the money privately with a 1 year balloon payment so that I could buy time to refinance and get a proper mortgage on the property. At some point I realized that it was an assignment deal which was purchased for 40k and then sold to me for 60k. I was ok with this because he assured me that repairs were done on the home and and that it would appraise for 70-75k because that was the going rate for duplexes in the area. 1000 went to set up an LLC in Texas, and other monies went to various expenses which left 6k going toward the loan leaving a 54k balance.

I asked about certain repairs and things to be worked on that he assured me we’re taken care of. Over time I started to see that the home looked barely touched and was in “fair” condition with some real visible signs of wear and tear. I was paying for repairs left and right out of my rent profits and was basically breaking even every month. Also tenants were changing because people were leaving due to the disrepair.

Months later I began the refinance process and when it got to the appraisal the home didn’t appraise for the target amount. It appraised for the premarkup price which was 39K. Around this same time I started to realize that my friend misrepresented or lied about questions I had asked him regarding the property. I came to find out that the house was on a drug infested block, with boarded up abandoned homes next door.

He said that the appraisal was off because they used the wrong comps and urged me to get a new appraisal with a different appraiser. The second appraisal came in at 49K of which the bank will loan 39K which leaves me short for the outstanding 54k balance.

I finally had enough and expressed that I felt I was walked into a bad deal and I was mislead about the entire thing. My “friend” then began to make the conversation about me questioning his character. After a back and forth he said if something was misrepresented then it was unintentional and he apologized and asked for an opportunity to make it right.

His proposal to make it right is he will reduce the outstanding balance by 9K to bring it to 45K, and he will loan me the 6K difference between the 39k the bank will loan and the 45k outstanding. Oh, but the 6K will be on a 2 year balloon.

My other option is to let this ride out and by December they take the house anyway and I get nothing.

the final option he offered is that someone said they will take my 39k loan over and give me 2K to walk away. Now there is one caveat. My lawyer had him sign a personal guarantee on 8K before we entered into the deal. The home is now renting for 461 in one unit and 475 in the other unit, bringing the overall rent to 936. Of which about half goes to expenses. The repairs keep coming. I would like some feedback from experienced real estate investors on what is the best way to move forward.