Case Study: Real Estate Buyers Beware

buyers bewareTwo apartment complexes in Dallas, Texas had been sold to California buyers, two individuals who had never owned apartment properties before and had no real estate experience.

In making these purchases, the buyers had relied on representations and promises made to them by others in whom they had put their trust.

After owning the subject properties for about eleven months, the buyers turned in desperation to Protea for help.

The next day the then management company of the properties was terminated by the buyers, and Protea took over. What Protea then discovered, was many times worse than it had expected.

Protea’s President, Godfrey Traub, acting more like the attorney he had once been than as an apartment manager, was determined to unravel how his new clients had got themselves into such a financial mess, and he started investigating the history of the purchases.

It turned out that the buyers had been promised turnkey acquisitions, by which they understood that others would locate and approve the property/ies to be purchased, perform the necessary due diligence in respect of the properties, use their expertise to confirm that the price/s to be paid were reasonable market prices, negotiate the terms of the purchases with their seller/s and arrange for any third-party financing necessary.

All the buyers had to do, or so they thought, was to provide the cash equity required, and they would then have a decent investment in two apartment complexes in Dallas, Texas, which would give them a reasonable return and which would appreciate in value as the years rolled by.

To relate in detail what Protea’s investigations revealed would need many more pages, and so we mention only a few of Protea’s findings;

Real Estate Buyers Must Have Proper Due Diligences

The subject properties had been advertised as comparable to apartment complexes located in areas of Dallas which were much higher class areas than the subject area, which was and is one of the worst areas of Dallas, an area crime-ridden with drugs, gangs, prostitutes and violence. The comparables provided to the buyers ranged from ludicrous to insane, but the buyers were Californians and had no local knowledge;

One of the properties was infested with bed bugs;

Almost none of the residents at the properties had their backgrounds checked, and as a result, many of these had criminal convictions, including felonies, were drug dealers or prostitutes;

The two properties were in horrible physical condition. Protea estimated that about $340,000 was needed just as a “patch up” job to keep them habitable:

Local inspectors had been warning that the properties were going to be condemned;

Virtually no due diligence had been performed prior to the purchases. No engineers, plumbers, electricians, pest controllers, roofers, foundation companies and environmental companies had been hired to inspect and report on the properties;

Certificates showing that the properties had received their latest Dallas multi-family licences could not possibly have been obtained in a lawful manner; and

Expenses in Order

The monthly revenue being received from tenants was insufficient to even cover the monthly operating expenses of the properties, let alone enable the buyers to make the mortgage payments on the properties.

There were other extremely suspicious elements involved, but what Protea discovered led it to the unarguable conclusion that unless the buyers were prepared to advance at least $800,000 to put the properties into proper condition, they should hand the properties back to their sellers, and that is what the buyers then did.

It had not been possible for Protea to “manage the properties out of trouble”, but at least Protea’s advice to the buyers had “stopped their bleeding”.

Back in California the buyers commenced a lawsuit in relation to their purchases of the subject properties.

Godfrey Traub was recently deposed as a witness in the lawsuit, as was Huyen [Wee] Reed, who had supervised the properties for Protea.

The moral of the story for any reader of this case study, is this. If you intend purchasing any real estate, make sure you use a reputable company to first have a proper due diligence performed of the real estate in question.

Protea is such a company.