Investors, Beware!

Investors, Beware!

           Rising markets do not cover all sins! I had dinner with a good friend who is a client and savvy investor. He told me he is filing a foreclosure action against a rather well-known real estate investor/teacher who borrowed from him in our northeast Ohio market. We didn’t get into the details of what was going on, but knowing that my friend has a good loan-to-value ratio (LTV) and is in first position, and the borrower signed a personal guarantee, I know my friend will come out of the foreclosure process relatively whole.

            My concern is that all the junior lienholders are going to be wiped out. My bigger concern is that this is the second instance in 72 hours of finding out that a locally prominent investor is not what they represent themselves to be. They are engaged in a series of dishonest activities whereby they are taking advantage of new investors who don’t know any better.

            Based on what I just shared with you, allow me to give you some advice:

  1. Just because you like someone, believe them and want to trust them doesn’t mean you should allow them to cut corners on the paperwork. You still need to do your own due diligence and make sure the deal is actually as good as has been portrayed to you. Verify the actual value of the property, your lien status, the date of recording, and get title insurance and property and casualty insurance protecting you and your investment.
  2. When you start doing business with somebody, begin doing it on a gradual basis so you can test the waters and verify that things are done accurately. Beware of small inconsistencies or half-truths being told by the person who is soliciting your money or proposing the investment.
  3. Whenever possible, get the feedback of a trusted advisor. That person doesn’t have to be a real estate investor. It could be your spouse or significant other. Listen to their gut instincts. As my friend and his wife related to me over dinner, she had an uneasy feeling about this borrower from the moment she met him, and it reminded me of the time years ago when my wife was opposed to my doing a deal which turned out to be the worst, most expensive mistake I’ve made in the real estate space. Listen to and heed such advice.

            Be diligent about your business, even in what appears to be a good market! Trust, but verify.