The Perils of Investing in Real Estate
After much thought I decided to rerun this blog. It is an oldie and an extremely interesting unbelievably true story.
Arlington – June 11th 2012
Over the last ten years or so I have met with many people who have given up on investing in the securities market. They have decided to take matters into their own hands and invest in real estate to create the income and equity growth they need that frankly the securities market has not been able to deliver to the average buy and hold investor over the last twelve years.
I find it funny that I myself have been investing in real estate for twenty two years and for the last ten years I have sold most all of my properties while the market has been high. I am not trying to make it seem like I am the all knowing and all seeing oracle of real estate, but I in reality have been trying to get my head out of the trap.
I will explain the reasons for my exit from real estate investing. During the housing boom my tenant base went away. Our brilliant government leaders wanted everyone to own a home. So much so the mortgage companies were allowed, if not coerced into funding the purchase of a house to anyone who could fog a mirror. By doing so, this kept the economy growing at a break neck pace by creating more and more spending. But that is another story we can address another day.
When my tenant base went away, I was left with the worst people to rent to. Please do not get me wrong, I did have about five fabulous tenants. Otherwise, I constantly had to file for eviction, clean up, repair, replace carpet and paint the properties. The only people that were making money was Home Depot, my handy men, the carpet store, Tarrant Appraisal District and my lenders.
The definition of insanity is where you repeat the same action expecting a different outcome. I am a little slow but I finally got it and I have been trying to stop the insanity ever since then. I started repairing my properties and putting them up for sell. In some cases I sold the properties “Contract for Deed” which is a glorified lease, but leaves me out of the repair equation. After all of my efforts I reduced my property inventory to four houses.
One house I purchased in 2006. It was a bank repo and was priced seventy thousand dollars below the tax appraised value. Sounds like a screaming deal doesn’t it? My goal was to live in it while I gutted and remodeled my existing house. Sell it out right and make a little money in the process. My wife went for it.
This is my bank repo house that I purchased in 2006. It is a nice house in a quiet neighborhood.
We moved back to our original house in 2009. I switched gears and began painting and prepping the bank repo to be sold thinking I would get a nice chunk of money back. But the housing boom had busted and the house sat for two years and the value was worth closer to what I had paid for it. My game plan to make a nice chunk of money did not work out.
After two years of trying to sell the house, I was about to throw in the towel. I was contacted by a young realtor who asked if I was still interested in selling the house owner financed. I was game for anything by then. We sold the house under a “Wrap Note Contract” which is almost the same as a Contract for Deed.
The buyer was a young Asian man who had bad credit. We wrote in the contract an incentive to refinance the wrap note in the near future with traditional financing. If he could do so, we would reduce the purchase price.
This is the Master Bedroom in its nice clean pristine condition prior to the sale.
The buyer put $19,000 down and paid $1,760 per month. He paid me with a cashier’s check on or before the first of each month. Sounds great huh? Oh, by the way, I did run a background check on this young man, I obtained copies of his last two years tax returns and copies of his driver’s license and social security card.
Everything was going along swimmingly until a couple of weeks ago. I received a call from a police officer from a city outside of Arlington. He said they had a search warrant to enter the house and asked if I had a key to let them into the house so that they did not have to kick in the door. I told them that I think that I still had a working key and would be there in fifteen minutes.
There were four officers. They were very courteous. I was able to unlock the door to the garage from the back yard. The tenant had rekeyed all of the other locks. The door from the garage to the house was left unlocked. The officers asked that I go back outside and let them search the house with guns drawn. The senior officer came out within three minutes and asked if I had a weak stomach. Me thinking that I had seen it all said sure no problem.
Well I had not seen it all. The whole upstairs had been converted into a commercial style marijuana farm. It was amazing.
This is the Master Bedroom after the conversion into a commercial grade Marijuana Farm. The Mylar was used to cover the walls and windows. The racks held up the network of electrical, air ducts and light fixtures. The gallon buckets are the Marijuana plants that had been stripped and left behind. The gold boxes in back were the ballasts used to control the lights.
The walls were covered with sheets of Mylar and black sheets that kept all of the light from escaping outside of the house so that the neighbors would not be alerted. There were steel racks built for a green house that held up a network of ducts, fans and very expensive light fixtures. Two bedrooms were used to grow the seedlings and the other two rooms were used to grow the adult plants.
This is a picture of the ductwork used to blow cool air through the light fixtures.
The marijuana plants left a strong spicy grass clippings stench that kept everyone choked up. In fact we later found a plethora of cold and allergy medications that my tenant used to combat the allergens created by the plants. There were 51 adult plants that had been stripped the night before. Apparently they were tipped off in advance.
They used pool timers to regulate and shorten the perceived daylight times to make the plants grow faster. The purple boxes are more ballast for the light fixtures.
There was also an incredible amount of high growth fertilizers both liquid and granule. He had installed a high quality water filtration system, a guess nothing is too good for his cute little weeds.
What really ticked me off was the large number of wholes cut through the upper walls and ceiling that the ducts were run through to pipe the hot air the lights to the stand alone A/C System. The attic was insulated as to not leave an infrared signature for the helicopters to see during a fly by. It seems they thought about everything.
The ductwork was run through holes cut through the walls from room to room. The pulleys were used to hang the light fixtures so that they could be adjusted for optimum light exposure to the plants.
According to the police the house was used for growing only and my tenant stayed only long enough to farm the marijuana plants and resided elsewhere. Each adult plant would produce one and one half pounds of marijuana per quarter, which would equate to $3,500 per plant per quarter. My tenant was on his way to make one million dollars a year. His capital investment was what he had paid me and approximately one hundred thousand dollars in equipment.
Through this experience I have learned more than I would have imagined about growing marijuana.
My house was the typical house an Asian pot grower would look for, a large two story box like house with a two car garage with an electric garage door and a private sale of the property where the deed was not yet recorded with the county.
The Asians also tapped into the power line underground to circumvent the electric meter. This way the $4,000 per month of electricity use never shows up on the utility bill. Yes, these upstanding drug growers stole electricity too.
I am told there are two more houses in North Arlington just like mine. Landlords, you may want to inspect your properties. There are many more outside of my tenant’s circle of growers in South Arlington.
I may end up spending $10,000 to $20,000 to clean up and repair my property. I will also lose potential income during the remediation process and the time lost while trying to sell the property again. So far my rate of return on this house is a big negative.
I have many other stories and experiences like this from other properties I have rented and sold owner financed. I have threatened to write a book about them. With this recent experience the thought has crossed my mind again. If the book is to be good enough, I might actually make some money on my real estate experiences rather than my real estate investments.
I have spoken to many realtors, real estate investors and guys who raised money for private placement investments in real estate. I have heard many of them use the term real estate is a safe investment. Folks, real estate, like most investments has its measure of risk. I have found that there are many unknown pitfalls such as my story today that will rob you of your profits and capital.
I have many experiences investing in real estate where I made money, but I have many experiences where I lost money. Though I still own a couple of properties; I will use the general securities markets and my businesses to earn a return on my money.
To avoid financial perils such as this contact me first.