They say keep your friends close, but keep your enemies closer. Well, what if your friend ended up becoming the enemy? That’s precisely what happened to Brooke Beckham, our 2016 Worst Deal of the Year Award winner.
This past January, Brooke had a friend named Leo* looking for investors for a property on Beverly Drive in Dallas, TX. Albeit there was major rehab to be done, it was still a great property with 4,056 sq ft, and located in the prestigious Highland Park neighborhood. The numbers sounded great so Brooke, along with 7 other investors, agreed to a joint venture for this $1.4 million-dollar home. After using $20k of her self-directed IRA to help with gap funding, Brooke left the rest of the process in the hands of Leo. “I’m not a micromanager,” said Brooke. “I have faith people know what they’re doing.” Little did she know what she got herself into.
Rehab was completed on the house, however it had such difficulty selling. “If this doesn’t sell, we might need to go into foreclosure,” said Leo. Brooke scratched her head a bit, but figured there was enough time to sell the house before heading into that dreaded direction of foreclosure.
About 2 weeks later, Brooke was told they were heading into auction. Unfortunately it was not the outcome they were expecting. The house sold for $800k – well below the asking price. “This is not good,” she said
All the investors immediately jumped on a call, and quickly realized the magnitude of the problem. Not only did each of the investors have different stories about the property, but an extra person was listed on the joint venture agreement that brought in an additional $13k to close the deal. The lender also reported different numbers from the original report which resulted in the ROI dropping from 0.58 to 0.38 cents on the dollar.
“Everyone knew that this could only mean one thing – we were heading into foreclosure,” said Brooke.
As everyone was frantically making calls, she contacted her cousin in Florida, who was able to find a viable cash buyer for the property. The buyer flew in 5 days before the foreclosure sale – and immediately bailed on the deal upon walking into the house. Unfortunately the home repair would cost more than originally reported, thus making the deal unviable with creative financing. “There was only $100-$140k worth of rehab in the house,” said Brooke. “There should have been upwards of $300k.”
As the foreclosure loomed over their heads, Brooke received even worse news a mere 48 hours before the foreclosure deadline – the house had been robbed. “Both properties were gutted and cleaned out,” she said. All the appliances and even the free-standing tub were gone.
Looking back on the situation, Brooke admits there were red flags all along. “Trust but verify,” she said. “Trust the investor but verify. Ask more questions. Find out who’s partnered in the deal. This is a business; friendships have to go along the sides.”
Although disheartening, Brooke took this as a wakeup call to change her investing strategy. “I lost $20k, but fortunately I made $19k back in wholesales. So, I no longer do joint ventures,” she said. “I invest in personal promissory notes instead.”
This deal was really unfortunate but she explained how important it is to have people on your side. “Find a mentor who’s been in real estate. Successful people want other people to be successful. They are not going to charge thousands of dollars to give great advice,” said Brooke. “When somebody shows you who they are, believe them.”
Transaction Break Down
After Repair Value: $1,600,000
Purchase Price: $910,000
Rehab Budget: $249,157
Closing Costs and Fees: $120,800
Carrying costs, ins., taxes: $109,200
Hard Money Lender costs: $145,400
*Note: Based upon 65% of ARV with 3 points and 14% interest. An allowance of $5,000 was allocated for miscellaneous fees.
Total Profit Pool: $139,282
Gap Investor Profit After Split: $80,087
Annualized ROI: 35.60%
Estimated Timetable: 9 months
Gap Funds Needed: $299,918
Contact Brooke directly at firstname.lastname@example.org
*name changed for privacy reasons