The front page article for today's Sunday Richmond Times-Dispatch describes real estate investments gone horribly, horribly wrong. Apparently, a gentleman named Donald C. Lacey was borrowing money from private individuals and using that money to acquire real estate and renovate it, then resell that real estate for profit. HOWEVER, it appears he did little to no fixing up and borrowed well in excess of the actual value of these properties from multiple investors. For example, one property, 1320 N. 22nd Street, was assessed at $76,500 by the City, but a single individual, Mr. Allan Mullian, had $140,000 of Deeds of Trust against it. In other words, there was way more debt against the property than it was worth. AND no renovation work had been done to the property, it was boarded up and abandoned.
[NOTE: Deeds of Trust are called mortgages in other jurisdictions. They are essentially liens, or debt, on the property, and those liens are supposed to be secured by the value of the property.]
I feel for the investors. It appears they lost LOTS of money. But I do have a question: How can you lend money on a property and never even do a visual inspection of the property? Perhaps this makes sense if you are an out-of-town investor, which it appears some individuals were. But if you live here, and you're lending someone money to buy and rehabilitate property, that just seems to me a glaring and inexcusable lapse, to not even do a drive-by look-see.
But as we all know, hindsight is 20-20. The moral of the story: Make sure you know who you're working with. Make sure you fully understand every step of a transaction: to whom the money is going, for what, when the construction is going to occur, when the subsequent sale is going to occur, the anticipated sales price of the rehabbed property, the basis for the 10%-12% rate of return. And as my father likes to say, "If something looks too good to be true, it probably is."
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