All Forum Posts by: Samuel Riehn

Awesome. Your story makes me wish I had a time machine haha.  If only I could go back to my teens/early 20's and change how much money I wasted.  Nice job. 

@Chris Purcell, why would the appraiser have to give a BS appraisal?  The other 2 guys would want a close to market valuation, based on comps and rental income.  But is it absurd to think the appraisal could be slightly higher than what the open market is willing to pay?   Not at all.  If a home goes on the market for $180, because it appraises for $180, buyers can only offer $180.  But most consumer buyers are looking to get a deal. So they offer 5,6 or 7K lower, whatever they pull out of their crystal ball.  Occasionally there is a bidding war that pushes the price above market, but that would favor this strategy because the buyer would offer as high as the bank allows.  Otherwise the seller sells to the highest bidder.  

But the other LLC would pay the higher appraisal price. That's the point. They would submit an offer of say 300K, and when the appraiser says, no its only worth 280K they say ok offer is 280K then. The seller is still winning over the $250 market price.

@William C.

I see your point.  But in their plan, wouldn't Guy #1 have 20% equity AND 20% of the property's value in cash. As opposed to 0 equity and 20% of the property in cash thanks to a refi.  The goal would still be to purchase a property every year, except each property would have 80/20 debt to equity at purchase.  Its a minor shift in thinking, that could still probably be accomplished using my own money, but it would require me to live on beans and rice to save up 20% down on 5 properties in 5 years.

I know its still apples to apples because of the "inflated" value of the rental properties and the "inflated" value of the home under refi. 

Except in their plan if stuff hit the fan I might be able to sell at a 10-20% discount to my purchase price and still break even.  As opposed to taking a haircut selling an underwater refi'd property.  

I do stay in touch with them.  We each have done our own deals since then, unrelated to each other, and just talk about our individual moves and plans for the future.  Typical real estate colleague stuff.  As far as I know they have not tried to move forward with the "rotation" plan.  Glad that I opened the discussion here, so if in the future they try to start it up again I can shut it down.  The way I see it, we are still friends, no money has changed hands and never will.  So no reason to burn bridges.

Hey William, thanks for the reply. You're sorta pointing out why this strategy appeals to me though. With BRRRR method, like you described, if I cash out refi for $280K, I now own a home that is upside down if it wont sell for more than 250 in the open market. That's terrifying to me. I know you have the cash pulled out to put into other investments and keep a reserve, but that's easily where BRRRR can get you in trouble and turn into a domino effect. To me, I'd rather not leverage to the hilt, and instead sell the property to get cash out. In your example, if the open market had a price of $250 on my property and someone came in offering 280K, (assuming the appraiser would allow it, which they often do without being "in the know") of course I would take it. Coincidentally, property in my area may appreciate a little too, simply because of my sale (if I had enough of them to skew the comps). This is what they were offering, and the risk transfers to the buyer who then gets compensated for it with the return of their down payment.

That is interesting, Sam.  Thanks for that! I really had not dug into it much yet, but that is good to know. I'm not an expert in that arena, and I hadn't thought of that. I'll be sure to run it by my accountant and attorney before I do anything.

The deca millionaire is who he says he is, and they are both military so finding information on them was easy for me. They both check out, clean as a whistle.  I will be avoiding this situation, but I don't think they truly intended to flat out scam. They just had a loosely developed plan.  In an attempt to be innovative, they unwittingly stepped into illegal territory sounds like.

Exactly. If this was a planned scam, it was impressively played out.  It literally took years to culminate.

We are both military, and I met him when I arrived on station.  They could have been targeting the next fresh lieutenant to show up, bright eyed and looking for guidance, but again I don't even know if the intentions were sinister.  It could very well be that they came up with this plan, thinking it was brilliant and were just stupid, not evil. 

Hey Joshua, I appreciate the question actually.  Had me thinking all night, "you know, he's right. How did you almost fall for this?"  I think the best answer is several factors.  #1 I did have a level of trust with Mike over the course of several years, we both serve in the military together and without giving away too much about him, he's in a position of authority, not over me, but still high. He is much older than me, and has watched my back in the military, helping me in many ways. So I guess I never questioned if I could trust him, why wouldn't I? He was my mentor after all.  #2, realize that when I tell the story on here that it is after several months, and I have replayed the scene in my head many times, mulling over the details, thinking about it for a long time before I put pen to paper.  In the moment, things were not as clearly red flags as I am able to tell them now. 

 Also, keep in mind I still have never paid a dime, and they haven't tried to push me or even talk about it since.  We continue to work together, and it has never come up.  The strategy had many legitimate elements to it.  Bits and pieces of good business models strewn together, if you will.  So only in hindsight is it so blatantly bad.  I'm not even certain they intended it to be a scam, they may have just had an idea, and brought me in its infancy, only to realize that it needs a lot of work to be legit, and perhaps even legal.

I do continue to invest in real estate, not with these guys, but on my own.  Always looking for creative ways to increase my trajectory.    I'm thankful for everyone's inputs and discussions.