Investments Gone Bad...

[MonteDobson]

We have made a number of good investment choices over the past number of years and made ourselves and our JV partners some good returns in real estate, but I`ll be the first to admit, we`ve personally made a bad one as well and entrusted another individual/company with our hard-earned money, only to see it disappear. We invested with someone else who was a so-called "expert" in their field and was promising the moon in a booming market. We felt diversification of our assets would be a wise move, but now realize that we need to be more diligent with our own money.

Over the past year there have been a number of investment companies go bankrupt, scam money, shuffle money, or lose investors money all together. It has also come to light that a number of these companies/individuals are trying to continue on operations and/or continue to try and raise money from new "unsuspecting" investors.

In order to help educate and collectively learn from our mistakes and hopefully avoid situations like this in future, I`d be interested in comments/thoughts from others about their investment experiences "gone bad". Past mistakes can be a great learning resource for future investment opportunities. I believe Thomas Beyer already has a post similar to this concept titled "8 syndication mistakes to avoid" but I thought it would be useful to hear from individual investors as well.

Lastly, it would be great to share the company names of these investments gone bad to make sure that it doesn`t happen to others, but not sure of the legalities around that.

Comments anyone??

 

[housingrental]

Don`t slander anyone. Maybe the company you invested with did a fantastic job over the functions they could control.

What company were you investing with and what were the details of the investment that went wrong?

Was your investment lose a result of operators fraud or just market conditions?

What caused the loses?

What could have the operator done differently to have guarded against downside better?

What could have you as an investor done in hindsight differently?

 

[wgraham]

QUOTE (MonteDobson @ Apr 7 2010, 08:07 PM) We have made a number of good investment choices over the past number of years and made ourselves and our JV partners some good returns in real estate, but I`ll be the first to admit, we`ve personally made a bad one as well and entrusted another individual/company with our hard-earned money, only to see it disappear. We invested with someone else who was a so-called "expert" in their field and was promising the moon in a booming market. We felt diversification of our assets would be a wise move, but now realize that we need to be more diligent with our own money.

Over the past year there have been a number of investment companies go bankrupt, scam money, shuffle money, or lose investors money all together. It has also come to light that a number of these companies/individuals are trying to continue on operations and/or continue to try and raise money from new "unsuspecting" investors.

In order to help educate and collectively learn from our mistakes and hopefully avoid situations like this in future, I`d be interested in comments/thoughts from others about their investment experiences "gone bad". Past mistakes can be a great learning resource for future investment opportunities. I believe Thomas Beyer already has a post similar to this concept titled "8 syndication mistakes to avoid" but I thought it would be useful to hear from individual investors as well.

Lastly, it would be great to share the company names of these investments gone bad to make sure that it doesn`t happen to others, but not sure of the legalities around that.

Comments anyone??

Hi Monte,


Not all investments make money at the end of the day.....that is just a fact. Don`t beat yourself up over it too much and learn from it as you have. It sucks ten fold when it is someone else`s money that they entrusted to you. Of all of my investments, the ones with JV partners get most of my attention. I can handle my own property being vacant for a month but I absolutely hate it when my investors property sits vacant so I am on top of it right away... Eats me up!!

Good luck out there!
Wade

 

[MonteDobson]

QUOTE (wgraham @ Apr 8 2010, 12:53 PM) Hi Monte,

I wrote a blog post a while back entitled "How to lose $50k - In no particular order" Click here to read. It outlined some of the things I had learned over the years. I should probably go back and update it.

Not all investments make money at the end of the day.....that is just a fact. Don`t beat yourself up over it too much and learn from it as you have. It sucks ten fold when it is someone else`s money that they entrusted to you. Of all of my investments, the ones with JV partners get most of my attention. I can handle my own property being vacant for a month but I absolutely hate it when my investors property sits vacant so I am on top of it right away... Eats me up!!

Good luck out there!
Wade
Thanks Wade,

We`re not beating ourselves up over this. The point of this post is more to educate, inform and hopefully protect other investors from making the same mistakes, and to avoid the individuals/companies who have put investors money in harms way (and continue to do so).

For example, in the last week, I have heard of (3) fairly respected REIN members (investment companies) who`s houses they bought with investors JV money, are either in foreclosure, or very close too it. And at the same time, I receive an email in my inbox from one of these individuals marketing their next "latest and greatest" opportunity. I get upset when I hear and see these kinds of examples and I feel these individuals/companies need to be held accountable.

We invested in a rather high risk condo-conversion project a few years ago with Liberty Gate Investments (AKA - Dedric Robinson and Associates). All investors across 5 apartment buildings were notified that they have lost all of their initial investment, totaling over $4.8M. The reason this investment failed was due to the fact that the principal over-leveraged all the buildings, poorly managed the conversion from the onset, did not spend the money according to the business plan, and ended up shuffling money from this project to other projects they own. We are still fighting for a successful outcome, but it`s going to be a long road ahead.

Other examples include Shire, Signature Capital and many others.

Live and learn thru others mistakes is one of the goals of this post!

Thanks,

 

[wgraham]

Great points Monte.

Being transparent to your investors is both important and necessary. Things are not always pretty behind the scenes but keeping your investors informed of both the good and the bad and what you are doing about both pays off large dividends in the end. Look the latest example of PR gone terribly wrong with Toyota. If they would have been upfront with there consumers, investors, and government they wouldn`t be in the mess that they are in right now. It is how we handle the challenges that define us and that others gravitate to.

Have we made all of our investment projections. No. Have we exceeded most. Yes. But people don`t remember exceeded they remember the bad ones. They remember I lost 10% here as opposed to I am up 50% over here. Crazy but true. Under promise as much as possible and over deliver when possible. I would much rather put my money behind a guy that I know has been through the battles but kept his head held high and didn`t run for the hills when it got ugly.....that is the guy I want to partner with.

 

[Nir]

very interesting good post! thank you Wade and Monte for sharing and for the excellent points. I`ll find more time tomorrow or during the weekend and share a mistake I made. luckily, although my biggest, it was not that costly..

 

[TerryKruse]

This is more a success story with an investment that went bad. I should mention that I am not complaining in this post.

I made the mistake of not understanding a clause in a mortgage document and letting it go. We gave the bank $30k (interest differential) when we sold the home last year. This was a rookie mistake and with upgrading and great marketing we were able to break even. Not an easy thing to do.

This rental property was our first. We paid too much (not for the home but as a rental property) as we thought tenants would be willing to pay more to rent it. The home was 1440 sq ft up and down and nicley renovated. We were successful the first year but once the market cooled in Calgary we had a hard time renting it for the amount we needed. Tenants did not care if it was 1100 or 1440 sq ft. It had barely cash flowed in the beginning and was harder when rates came down.

We decided to sell. We had 3 years left on the mortgage and the interest differential clause. Basically this means the bank gets the interest they would have, if you had gone to term. The rate was 5.89% so it was too high to get assumed by a buyer. This was also pretty difficult to seller finance - although we did try.

The moral of my story is that:

1. Cash flow is king

2. Pay attention to any documents you sign. Take control and know the clauses in your mortgage. It can get confusing and seem hurried when you get a new mortgage. Talk to your broker to understand all clauses and ask for a change if you don`t like it.

On another note, the next property had a fantastic interest rate - prime minus - and we used the same broker. It cash flows like crazy and would still at a higher interest rate. It has more than made up for the other property.

Cheers,
Terry

 

[Thomas Beyer]

QUOTE (cmduw @ Apr 10 2010, 01:20 PM) ^Very true, real estate investing is risky, just like any other type of investing. There are no guarantees of success. ..
yes .. but some operators are shady .. check here what to look for to avoid those operators where your chance of losing are higher:

8 mistakes to avoid in real estate syndications: http://myreinspace.com/public_forums/Real_Estate_Discussion/62-13817-Real_Estate_Syndications_-_A_Good_Idea_.html

 

[markbrad]

Here`s one for me. It didn`t really end bad, but I was dissapointed! I decided to diversify, and make some quick money. I hoped! This is when oil hit it`s low of $38 or close to it, and natural gas was about 2.82. I knew it couldn`t go much lower, so I called my advisor and asked how I could invest in oil. Directly. Not just shares in a company. He told me about exchange traded funds. Sounds good. No matter what, this was long term money, so if I had to wait a year, no problem, I just knew it would have to come back to $50-$60-$70 sometime. So I bought $5000 oil bull ETF. At the same time I thought nat gas would be a good try too, so put $5000 there as well. I watched prices over the next month and they kept going UP!!! What a genius! About a month later I decided I had ridden it enough and would sell. By my reckoning of the price when I bought in compared to the price when I sold, I had made about $18K in Nat gas, and under $2000 in oil. Well I was right on the oil, but the gas.... Well it turns out a couple of days after I had bought, the price dipped, and caused a negative 5-1 split. This left me in a break even position when I sold. To this day, I still don`t understand how an ETF works, but I do know it needs to continue moving in the same direction significantly to really work, and it is a short term game, not buy and hold!
No one`s fault but my own for not doing the proper research. My advisor didn`t understand them either (and he told me so), but he just told me about them and gave me a website to check out (kinda like Greek to me!) Anyhow, nothing ventured, nothing gained!

Mark

 

[Demerara]

QUOTE (markbrad @ Apr 10 2010, 09:36 PM) Here`s one for me. It didn`t really end bad, but I was dissapointed! I decided to diversify, and make some quick money. I hoped! This is when oil hit it`s low of $38 or close to it, and natural gas was about 2.82. I knew it couldn`t go much lower, so I called my advisor and asked how I could invest in oil. Directly. Not just shares in a company. He told me about exchange traded funds. Sounds good. No matter what, this was long term money, so if I had to wait a year, no problem, I just knew it would have to come back to $50-$60-$70 sometime. So I bought $5000 oil bull ETF. At the same time I thought nat gas would be a good try too, so put $5000 there as well. I watched prices over the next month and they kept going UP!!! What a genius! About a month later I decided I had ridden it enough and would sell. By my reckoning of the price when I bought in compared to the price when I sold, I had made about $18K in Nat gas, and under $2000 in oil. Well I was right on the oil, but the gas.... Well it turns out a couple of days after I had bought, the price dipped, and caused a negative 5-1 split. This left me in a break even position when I sold. To this day, I still don`t understand how an ETF works, but I do know it needs to continue moving in the same direction significantly to really work, and it is a short term game, not buy and hold!
No one`s fault but my own for not doing the proper research. My advisor didn`t understand them either (and he told me so), but he just told me about them and gave me a website to check out (kinda like Greek to me!) Anyhow, nothing ventured, nothing gained!

Mark

Mark,

What you experienced in the Nat Gas ETF is decay due to, among other factors, daily tracking and rebalancing, management fees, interest expenses, contract rollover spreads, etc.. Also, if your product was leveraged (Horizons Beta Pro), you would have amplified the long term decay effect and be subject to the typical volatility of commodities. The 5-1 reverse split did not in itself cause your ETF to lose value (that was a function of the fund managers` desire to stay listed on the TSX and attract hedge and pension fund money), despite the underlying commodity rising in price, but simply was a result of decay affecting a longer term hold.

You are right when you say it is a short term hold and you need a well established trend for it to work; it is typically a momentum play requiring close to impeccable timing to make things work in your favor.

My contribution to the thread is unlike you, my specious investment in a leveraged ETF did turn out very, very bad. If it helps even one investor, my advice is to stay away from leveraged ETFs (bull and bear) unless you fully know what you are doing, or if you like to gamble idly and don`t mind leaving your gains/losses to simple luck.

On a different subject and more pertinent to real estate investment, I am co-owner of a condo with two other friends/ business partners that was purchased near the heights of the Edmonton boom and now sit with a grossly depreciated asset that is barely break even with respect to NOI after only paying interest on the LOC and all other expenses. To make matters worse, we are on a variable LOC that is likely to rise some time, putting us in a negative cash flow situation soon. I am trying to structure a rent-to-own scenario with the current 2 year renter who is interested in the idea, but has no extra money to build his equity portion. Anyone have any creative advice here?

The other partners have no interest in trying to do something about the RTO or any other exit strategy, nor seem concerned with the adjustable LOC. They think quite naively prices will rise significantly in the next 2 years or so to allow us to exit profitably (we need 40% appreciation to just break even by my estimates from comparable listings!!) I have asked the partners if they want to buy me out since they are so confident in the future appreciation but both claim there is no money. It is a $25,000 mistake that I can live with and have learnt much from, with one of the more important lessons being to be very careful about mixing friends with business.

 

[invst4profit]

My most memorable lost investment wasn`t actually an investment in my opinion. I was day trading in technology stocks during there sky rocket days prior to the bottom falling out. Ended up losing close to $40,000 mainly because I believed they would come back and because they dropped so fast. One company I was fairly deep into, and had made major gains in, actually stopped trading at a high point only one day before I planed to sell.....

 

[JoeRagona]

QUOTE (invst4profit @ Apr 12 2010, 05:55 PM) My most memorable lost investment wasn`t actually an investment in my opinion. I was day trading in technology stocks during there sky rocket days prior to the bottom falling out. Ended up losing close to $40,000 mainly because I believed they would come back and because they dropped so fast. One company I was fairly deep into, and had made major gains in, actually stopped trading at a high point only one day before I planed to sell.....


Yikes, that hurts.

My little parallel to this stock storey is: A few years back, I thought I was a hero trading penny stocks during the day and making a few dollars...I did not have 40k in, but I was trying to learn. One day a good business partner of mine came to the office and told me of this company doing wonderful things with cell phones and that they would revolutionize the industry with internet and email combined with cell technology. Like a `mini-computer`. My response was `sure they will - thanks` and I kept on doing my thang.

That little startup company called Research in Motion is pretty popular these days don`t ya think?

 

[manojsingh]

We all do same. About 4-5 year back Indian property market was booming. I went there and got news from my brother that invest in New Delhi capital region (just like GTA). I invested there about $ 200,000 and hoped that I will get it double in 2 years. Even after 5 years prices are same. I did not make any money but I console myself that I learned a lesson may be little bit costly. Hope my mistake will atleast save one person reading this. Thanks

 

[Nir]

Hi, My biggest mistake so far was to accept a criminal as a tenant although a previous landlord met me and told me he is the reason he retired early!
I decided that going forward, no matter what my gut feeling tells me, a negative feedback from a previous landlord will automatically reduce the chances of me renting an apartment to the tenant, to zero. please do the same. regards, Neil

 

[EdRenkema]

Major mistake: taking financial advice from salespeople - need I say more?

 

[surfermoe]

When I was 13 I invested $1,000 with my father to buy a sixplex in the worst part of Halifax ("worst" meaning it was rife with criminals, drug addicts, and welfare lifers).

I can remember him literally fighting with tenants to get the rent every month. He ended up walking into the bank and dropping the keys on someone`s desk.

The lessons I learned from that were twofold:

(1) A property`s location is essential ("location, location, location" is an axiom for a reason)

(2) When a serious mistake is made, one should learn from it and (more importantly) APPLY that learning. My father didn`t get back into rental properties until 20+ years after he made his big RE mistake. If he had applied that learning sooner, he`d be laughing today...

Moe

 

[dleischner]

We used I-Finance (great product in itself) to leverage our RRSPs to invest with a highly recommended individual what was trading FOREX (or so he said). I had several financially educated friends that had been successfully been receiving monies for the past 6 months. He came over to our house twice and made my wife and I feel very comfortable (thought he was very ethical and genuine) with investing our RRSP monies with him. We received cheques for about 4 months before he left to South America with 7.5M of investors money. As a result, he left me with a loan hefty loan payment and no trace of him.

I tried to do a back ground check on him as an individual (before we invested) and from what I did find, he was squeaky clean. With this senario, it`s very difficult to do your due diligence and our agreement was based on a promissory note (which at the end of the day, was only as good as him). Moral of the story, no matter how good the deal (we were receiving 4% a month), make sure you have a non-over leveraged tangible asset to backup your investment. We lost A LOT of money.....

 

[Stephen1151]

I have a very wise uncle who has made his millions in real estate. I had asked him if I should invest outside my area in another province. he had told me not to since i was quite new to the real estate game and it is best to invest in an area that you know and can take care of things if any problems were to arise. Unfortunatley I did not adhear to that advise and listened to the hype and bought in another province. That investment has cost me both time and money but I am holding on until property prices rise again.

The only advise I have is to invest in what you know and what works for you. It is good to take risks but keep doing what works for you. Some have been successfull in investing other places but I think I will only do that again once I have more properties under my belt and can afford the risk.

 

[TerryKruse]

I had forgotten about this one..

A few years ago I was in an office space, sharing the entry with some kind of salesperson - I don`t remember what his business was.

One day he offered me double my money on an investment of $1500. He told me I would get his laptop if he didn`t pay the money back to me in a short amount of time. I even got an official looking document with a receipt for the laptop.

Needless to say, I never saw him again. He also skipped out of his office lease.

You know how they say, if it sounds to good to be true...

Cheers, Terry Kruse