The $150K “Stolen” Rental Property and How to Avoid a Real Estate Scam


Having your rental property stolen?! How is that possible? This would be a worst-case scenario for any investor, and it was nearly reality for today’s guest. Buckle up as we share one of the wildest real estate horror stories you’re likely to hear!

Welcome back to the Real Estate Rookie podcast! In this episode, which could be mistaken for the latest entry in your favorite crime drama, investor Matt Drouin tells the bizarre story of how he nearly LOST his $150,000 rental property to a professional scam artist. He shares some of his biggest lessons learned from this incident—including how to screen tenants properly, when to get an attorney involved in the eviction process, and how to avoid scams when looking for your own off-market properties.

But that’s not all. You’ll also learn about the many benefits of investing in your hometown, as well as when to branch out and choose a market beyond your backyard. What’s more, you’ll hear about the often-overlooked mixed-use buildings that can be a gateway into commercial real estate investing, and how to take down these deals with creative financing!

Ashley:
This is Real Estate Rookie show number 376. So some people like myself may browse Craigslist to find properties, but today’s guest found his own property listed for sale. You won’t believe how much it was listed for and how he found out about it. My name is Ashley Kehr, and welcome to the Real Estate Rookie podcast, where every week, three times per week now, we bring you the motivation, inspiration, and the stories to help you get started. Okay, so today’s guest is Matt Drouin, and Matt’s. We are so glad to have you on the show. He is a seasoned investor from New York. He believes if you are not a rookie at something that you’ll never grow. He had a newsworthy story to share, kind of almost like Leka’s if you haven’t listened to that episode yet. But he’s going to share with us an eviction that eventually almost cost him his property. So, Matt, thank you so much for joining us today for a little therapy session to tell us your horror story.

Matt:
I have so many horror stories in this business, so this is one of my favorite ones. But thanks for inviting me on. I am excited and terrified at the same time.

Ashley:
Yeah. Well, I’m excited to go over some other things besides just your horror story to kind of get to know your market because you are investing in New York, and I’m sure everybody’s thinking, “How could there be horror stories investing in New York? It’s such a wonderful place to invest.” And then also we’re going to hear about your first mixed-use deal and then how you handle the tenants during this nightmare. So lessons that we can all learn from. So, Matt, let’s get started with this Craigslist house. First of all, I am a little upset with myself that I didn’t actually see it listed for sale, and if it was a good price, jumped on it and bought it. So you want to start off with that day, I guess, as you’re looking at the Craigslist.

Matt:
Right on the clock. I didn’t actually find this on Craigslist. I got a phone call in the middle of the night. It was like 10:30. I was turning down to go to bed and I got a call from an unknown number, and this guy asked me, “Hey, do you own the property at 123 Main Street?” And I said, “Yes, I do. Why do you ask?” And he’s like, “Well, I just walked through it. And there’s a person with a pseudonym that sounds like a fake name, wanting to sell the house for $45,000.” This house is, I sold it recently about a couple of years ago, for $150,000, and that’s how the story started that evening.

Ashley:
So what was your initial thought? You get this phone call, and you’re like, “Is this guy scamming me?” What was your mindset going through at this point?

Matt:
Well, I knew this guy, and I was like friends with him; met him at a couple meetups and that sort of thing. And when he first told me, I was like, “Hey, listen, it is okay. It’s probably just another, a Craigslist scam or a Facebook marketplace scam where somebody stole the pictures on a rental that I had listed years ago and reposted them and is basically just trying to do wire fraud scam in terms of wire me 500 bucks and I’ll send you over a purchase and sale agreement and so on and so forth.”
And so, I tried to brush it off that way, and he was like, “No, Matt, I actually just walked through the property. There was somebody that’s there with groups of buyers and me being one of them, and this guy is trying to sell the house.” And I was like, “He can’t sell the house.” By the way, he hasn’t paid rent in two years, so there’s no possible way he could ever sell the house. He doesn’t have title to it or anything like that. So that’s kind of how that started. And obviously, I did not sleep well that night.

Ashley:
So you mentioned you knew this guy that had called to give you that information. How did this guy know that you owned this house? Had he had seen pictures of it on your Facebook before, or how did he kind of put that connection together after he walked through the property?

Matt:
Well, his instinct started creeping in, and he was like, “This seems a little bit sketchy.” So he looked up the property information on public record, saw that it had a mailing address. He looked up the mailing address, seeing what other LLCs were tied to this mailing address. And so saw one of the LLCs is my main company at the time. And so, that’s what led to the phone call. We were friends on Facebook. Him and I are both really active in the real estate community. So it definitely does pay to get yourself out there and network and build your network of people and your business, not just for being top of mind for potential deals and what you’re looking for, but also for things like this.

Ashley:
So you don’t sleep at all at night; your mind is racing. What’s the first thing you do in the morning?

Matt:
I emailed my property manager right away. It’s a good thing that he was actually a former police officer, so that definitely gave me some confidence. And so, I told them what was going on, and I was like, “Who is this person?” It’s a male. “And I signed a lease with a little old lady back a few years ago. So, what’s going on? Why does this person have possession of the house?”

Ashley:
Had you been getting rental payments from that old lady? Were you still getting a check every month for that property?

Matt:
No, no. The payment stopped. She was literally the sweetest lady I could possibly imagine, good income kept the place up really well. When I first walked through the house to introduce myself, the first thing she said was like, “Oh my gosh, you’re gorgeous.” I was like… People just don’t say. I was like, “Do you say that to all the guys?” But what happened after my property manager did some research with the person? Because this is a pretty large company, and so they got back to me and they said, “Okay, the son called after rent payment stopped, and we started issuing them notices and said that his mother died.”
And then when we said, well, “Who are you? You’re not on the lease if you’re 18 years older; you need to be on the lease. We need to screen you and all that other stuff.” And so he quickly said, “Let me call you right back.” So a few days later, after a property manager followed up with him, they called him back, and he said, “Oh, actually, my mom didn’t die. She’s just really sick, and she’s in the hospital.” So they started going through the eviction proceedings, that sort of thing. This was like in 2019, and actually it was early 2019, late 2018. And then, by the time that we got a court date set, the pandemic hit, and then the eviction moratorium.

Ashley:
Did you try to Google this lady’s name to see if there was an obituary or anything for her?

Matt:
I was almost like… It was so set; it was so sad. I did not do that. I was like, “Okay…” What I did, and the reason why this was sad, is because when she originally moved to the house, she was like, “I don’t have the money right now. I don’t think I can mortgage. Can I buy this house when it’s right?” So I actually built a relationship with her, connected her with NACA, Neighborhood Assistance Corporation of America, which is a nonprofit mortgage loader and generator for 0% down houses, basically for people that are moderate incomes, that sort of thing. So I got her into that program with the full expectation that I was going to sell this house to her and sell it to her for actually a price below market because nobody in her family tree had ever even owned a home before that she could think of. So that’s what was really sad is that that never happened. And then it turned to this nightmare story.

Ashley:
Did you ever find out if she was still alive or not? As to what the truth was there?

Matt:
Yeah, she definitely had passed away, and that was the other sad part too, because she was such a sweet lady.

Ashley:
Okay. So you’re trying to figure, there’s been nobody paying, somebody’s trying to purchase your house, you’re trying to talk to people as to what you should do. What are your next steps?

Matt:
My next step, is I call everybody that I know that is affiliated with the news. My friend Matt, who called me the prior evening, said that there was a dozen people walking through this property that evening. So first of all, I didn’t want anybody getting scammed because this guy couldn’t legally transfer title to anybody. All he could do was collect cash deposits and scam these people. So I wanted to get on the news so that there would be visibility for people to not get scammed. And also, so that I was like, “All right, if this is on the news, then maybe this guy will feel the heat and not do it anymore and maybe even leave because of the amount of heat.” The second thing I did was, like I said, my property manager was a former police officer, so I was like, “Hey, I got the Craigslist ad. I have this person’s phone number. Let’s set up a sting operation.”

Ashley:
That was the first thing I would want to do too.

Matt:
So I went on Facebook Live I set up an appointment here. I was like, “Hey, I have cash. I’m super interested.” That sort of thing. So my property manager was like, “Don’t park in the driveway; park across the street so they don’t see our car and that sort of thing.” So we walked up to this house, knocked on the door expecting to see this guy, and I was like, actually, I had my phone in my pocket to try to get… Now looking back on it, this was probably not the smartest thing to do in terms of, because who knows? I didn’t know. I didn’t know the son or what he was capable of, but I have to tell you, this is what happened, smart or stupid. And so, the guy ghosted us, and I was like, maybe he got tipped off and just basically ended up not getting spooked.
So I texted him, I was like, “Hey.” The pseudonym was because I want to protect the names of the guilty, but the pseudonym was Lexi Hernandez. So I texted him, and I was like, “Hey Lexi, we’re here to see the property. We’re super interested, blah, blah, blah, blah, blah.” And so he was like, “Hey, can we meet back a couple of days later?” So at this point in time, my property manager was like, “Listen, this guy’s just going to ghost you again and that sort of thing.” And so I was like, “I’m sorry, we’re no longer interested.” So 24 hours goes by, and Lexi texts me and says, “Hey, if you want to see the house, I just dropped the price to $15,000.”

Ashley:
Okay, Matt, I’m going to stop you right there because I feel like we’re getting into the nitty-gritty of this story here and we’re going to take a short break, but when I come back, I want to talk about how I missed out on an opportunity to purchase a $15,000 house. So we’ll be right back. Okay, we are back with Matt, and we are talking about how you can get $15,000 houses on Craigslist by illegally purchasing someone else’s house. So Matt, this guy, Lexi, it tells you that he is going to drop the price to $15,000 if you’re still interested. So, what do you say?

Matt:
So I didn’t respond to the text message. A couple of days later, the news story came out on TV, and this was on a Wednesday. And so I was like, “Okay, great, this is out. We can stop the scamming.” Hopefully this [inaudible 00:11:16] went viral on Facebook and social media, and the local networks network sort of thing. And so I got a call from a unknown number, and it happened to be a police officer that worked in the jurisdiction of where this house was. And he said, “Hey, are you Matt? Do you own the property at 123 Main Street?” I was like, “Thank God, I’m getting some help here in terms of rectifying the situation.” I was like, “Yes.” And he said, “Okay, well, great. Do you happen to know the tenant that lives there?” And I was like, “No, not really. I have a tenant; I have a lease signed with the other tenant, his mother, who passed away.” And so on and so forth.
And he was like, “Well, we just picked up, arrested a kid who used counterfeit money to buy a pack of gum at the 7-Eleven around the corner, who got this counterfeit money because he ‘sold an Xbox’ to the tenant that’s in your house.” And so I was completely floored that, and then this got me thinking, so I was like, “Okay, well, I don’t have persons. I mean, I have the person’s contact information; I can get them to you. I’m not sure if it’s a burner phone or whatever.” And so I knew right from then, after I was thinking…

Ashley:
What point did you realize that you’re working with a criminal mastermind here? I mean, making counterfeit money, selling someone else’s house.

Matt:
I know this poor kid who’s trying to buy a pack of gum and got arrested. So I started thinking, and I started putting my game theory hat on. I was like, “Okay, this guy’s collecting deposits to sell a house he doesn’t own. He’s buying property using counterfeit money using this house.” I was like, “This guy can. There’s no possible way that this guy can be living there anymore.” So what I ended up doing is, I ended up calling one of my contractors because my property manager wouldn’t do this. And I think this is beyond a statute of limitations. So what I did was not technically kosher from a eviction standpoint, but I had a contractor change out the locks on the property. We also conspicuously posted signs around the house saying, “No trespassing; properties under video surveillance.” I got a SimpliSafe system on there. If anybody tried to break in, I would be alerted to that.
And we just waited because this guy was getting entrance back in the house and was locked out. He probably would’ve called the property manager and was like, “Hey, I’m locked out of the house. Can you let me in?” We’re just trying to make contact with him. And this guy just disappeared, never came back. Two weeks passed. And so we just ended up keeping this stuff stored in the house, and then after 30 days we just ended up cleaning out the house, repainting it, and I was like, “All right, I’m done with this property.” And I just ended up selling it to an owner-occupant.

Ashley:
So what would you do differently now, looking back at that experience? We’ll kind of go into the details here, but overall, looking back, what are some things that could have prevented this whole thing from happening?

Matt:
Here’s the thing. Is there some things that will happen that are bad despite all of the preparation you put into it? Right. This tenant had perfect credit. This tenant had great income. Character-wise, she called me gorgeous the moment she met me, and she kept her own house up really well. My property manager always made sure to drop by a house and see how they lived to make sure that they kept care of their place. And so, we did everything the right way on the front end. This was one of those things that are just completely unpreventable, despite the amount of preparation you do. And so, I think the things I would’ve done differently is I probably wouldn’t have put my life and limit at risk trying to do the stupid sting operation.
And then also I probably, I should have consulted and listened to an attorney in terms of what the proper process was. I was just scared to death that somebody was going to “buy this house” and move into it. So I wanted to get possession of the property as quickly as possible, despite the legal gray area of changing the locks out with the property. So that was probably not kosher to do in New York State, but I had to weigh the possibility of somebody thinking that they bought this house and being scammed out of, let’s say, $40,000 or $15,000 for somebody who couldn’t afford to lose that.

Ashley:
That actually happened to James Dainard, an investor out of Seattle; he’s On The Market podcast, he’s one of the hosts on there. He actually purchased a property where somebody else had sold it, and they didn’t actually own the property. And he had to go through this whole thing, and the property just sat there forever because they were trying to clear title on it and things like that. But that can really, especially if somebody is pouring their life savings; maybe this is their first investment or this is their first home that they’re buying; that really can be detrimental to them financially and even emotionally if something like that where… They were to be scammed in that sense.
Yeah, so one big red flag: if you guys are on Craigslist and you see a house that should cost $150,000 and it’s only listed as $15,000, that may be a scam. So just be cautious out there. Some of the similarities I saw was one thing that you did do that seemed to really help you, and this is the same thing Leka had done on episode 360 was go to the news and get that kind of attention on social media and things like that. If someone is trying to do that, they’re in their own situation where they want to attract media coverage. What are some ways to actually do that? How did you get the media’s attention?

Matt:
I’m really involved in the real estate community and the housing advocacy community on behalf of housing providers in Rochester. So I was kind of always… And here’s the thing, is to make a friend with somebody that is on the news and being very available, and these people, when they get their news story for the morning, they literally have to get their footage before four o’clock that day. So I always made myself super available. If my friend needed to get coverage on some sort of housing-related story, I would always move my schedule around and be there. So that definitely helped having those contacts. And also, it helped because the story was so crazy; you just can’t make this stuff up.

Ashley:
So the power of networking, you just showed a great example of that right there, and even though you weren’t getting anything in return being useful and helpful to other people upfront, it paid out in the end. But you mentioned Rochester, and we haven’t talked about your market at all. So do you want to give us a little insight of after this deal happened, did you shoot out of Rochester and go across country to invest in somewhere else? But give us a little insight on why you have chosen Rochester as your market, and what are some of the pros and cons of investing in Rochester?

Matt:
Absolutely. Rochester is an awesome place to invest. The problem is that there is, you have really great areas, and then you have areas that are stricken with abject poverty. So a lot of out-of-town investors that call themselves cash flow investors look at properties like a duplex that’s for sale for $30,000, and they run the spreadsheets on it. They’re like, “How could this possibly go wrong?” The reason why it’s so cheap is because nobody wants to live there. At least people with means don’t want to live there. So great areas are great for a blend of between cash flow and also appreciation. I also want to bring people up to speed with… Rochester’s typical story you look at is the downfall of Kodak, Xerox, and Bausch + Lomband, and those titans did lead to a population outmigration in Rochester. But sort of the phoenix that has risen out of the ashes is that we’ve gotten a extremely diversified economy that is undergirded by medical and education.
We have seven universities that are surrounding our city. We have three to four major hospital systems that are world-class that employ a ton of people, a ton of people with great jobs, and also we’re surrounded by abundant fresh water as well, which I think, like, my brother lives in Arizona for instance, and he’s like, “I don’t know if there’s going to be any water in the next 10 years in Arizona.” So I was like, “All right, well, we have the Finger Lakes and we have the Great Lakes.” And stuff like that, and we don’t have tornadoes and hurricanes and volcanoes, and that sort of thing. So I just think it is important for people to come to Rochester if they’re looking to invest from out of town and really, really get in tune with the neighborhoods, because everything’s street by street and block by block in our community, and you really want to be come very knowledgeable about that and buy where people and where you would want to live.
That being said, the reason why I continue to invest in Rochester is because it’s in my own backyard. I know every street, I know every block, I know all of the players that are around town, and that gives you an extreme competitive advantage as an investor, investing in your own backyard. And so I’m a huge advocate for that. And every single market has its own investing strategy that works. And we’re just a blend of cash flow and appreciation; meager appreciation that is two to 3% per year is pretty typical for Rochester. It’s not going to be 10 to 15% per year or anything like.

Ashley:
That. What do you think is the best strategy in Rochester right now?

Matt:
Best strategy: I’m always a fan of buy and hold. Small multifamily properties is a great way to get started in our area. There are properties that will meet debt-to-income to, and also debt service coverage ratio. If you’re getting commercial financing of 1.2 to 1.25 on a lot of deals, so you can put 20% down and investment property in Rochester, and the numbers will make sense. Other markets of the country, you got to put 40% down in order for the numbers to make sense when you put financing on it. So that’s really, it’s a great place to get started. It’s a great place if you live in the area to get started. House hacking through multifamily property is a great way to start too.

Ashley:
Okay, Matt, so let’s say you can no longer invest in Rochester. You already bought all of the property there, and now you need to go out of state into a different market, and you don’t know a lot about it. What are some of the things that you have learned from your own market? With knowing everything about it, that you could take those skills and go to a different market to analyze? What would be some of the things that you would look at to make sure this market would be a good product for you?

Matt:
If I lost everything or if I bought everything and I couldn’t buy anymore.

Ashley:
Let’s go with the latter one.

Matt:
I think, I look at other markets, I passively invest in other markets with other operators to achieve my goals, which is not necessarily cash flow but an equity multiple in terms of being able to double and triple my money over a long period of time. And so, the things I look at in terms of other markets is strong economy. Diversified economy as well that’s not hinged on one company, like, let’s say, Amazon. If Amazon goes out of business, I’ve gone through that before. Every single one of my family members used to work for Eastman Kodak, and Eastman Kodak downside, they laid off my entire family. I’ve seen what that does. So having a diversified industry base, population stability. Also, I would concentrate on metropolitan areas. It doesn’t have to be a huge city. It could be a small to medium-sized city. You have a velocity of population of people moving in and moving out.
So you have people that are buying and selling, and renting in that market. And then, also look at specifically getting granular down to the actual neighborhood is I look at what is the one, three, and five-mile radius in terms of area median incomes on that property. I want to be in the middle or at the high end of incomes in the area. I don’t want to be at the very bottom in terms of incomes for a neighborhood, for instance, or a submarket in a metropolitan area. So those are just some of the criteria that I use just to make heads or tails of it. And then, if I like a neighborhood, I go to Google Street View, you can find a lot on taking your little orange Google man and dropping them down under the street.

Ashley:
One thing with that is to be cautious of is when the date was. So in some of the areas I invest in, it’s from 2020, and that was four years ago. And some of that data has actually changed. There’s different buildings and different things in there, but…

Matt:
That house ain’t there though no more.

Ashley:
So my next question is, where are you getting this data from? What are some resources that everyone can go to actually find the answers to these different data points you’re looking at?

Matt:
Great question. Typically, most realtors have access to this information because part of their membership dues, they pay as part of being part of the MLS, and the local board of realtors is they get access to other tools besides just the MLS to be able to pull actual market data such as incomes and that sort of thing. So that can be a great resource, and some of these realtors may not even know that they actually have these tools at their disposal, but they have a menu of tools that are part of the benefit of being a member of their board if they can’t find the answer. The Federal Reserve website is really helpful for me. Federal Reserve Bank of St. Louis is something I go to all the time to find out information about zip codes in terms of area median income and that type of stuff. But I mean, I think first things first is going to your local realtor and trying to find that data.

Ashley:
Yeah, some other ways you can get the information is also from the census, but you got to remember the last census, big census was done four years ago too, and we got to wait another six years for that. But just looking at different governmental websites and then also going to the websites of large commercial brokers, and even like Crexi, things like that. They’ll put out reports; Millichap will, a bunch of them. And then also On The Market, great podcast to get data. Dave Meyer put stuff onto the BiggerPockets website, especially if you’re a pro member of BiggerPockets. You get all of these exclusive articles that he writes, and most of them are on the data and everything and statistics of investing in different markets too.
So we’re going to take another break, and when we come back, I want to ask Matt about tenant screening. So in his years of experience, what are some of the things, the policies and procedures that he has implemented and getting the right tenants in and how you can prevent putting the wrong tenants in, even though, as we found, he had a perfect tenant in place and still it went wrong. So we’ll be right back.
Okay, Matt, we are back from our short break. So let’s talk about tenant screening here. What are some of the policies and procedures that you have implemented to really protect yourself from having evictions and having bad tenants?

Matt:
Yeah, super rigorous tenant screening is very important to the business model, especially in New York State, which laws have been passed recently that have been very tenant-friendly. So in addition to buying in great locations, you definitely want to make sure that you have a certain amount of rigor around tenant screening. So the systems that we use, we use a property management tool called AppFolio. You can actually input your income requirements and also your credit score requirements that are in there. We go on income; we require at least three times monthly rent in terms of income to qualify for apartments. So we start there. Anybody who’s paying more than 30% of their income is considered rent-burdened by HUD. And so we do not want to rent to somebody that we’re going to set them up for failure and possible displacement because we know what that looks like in terms of how it shatters families.
So we don’t want to be party to that. I think that credit score is definitely a good indication. I don’t run my management company anymore. My partner runs a management company, but once or twice a year, he’ll bring up a application that just doesn’t fit in a box that we have, but other things look good. For instance, we have a tenant that has strong income but they have a low credit score. So he’ll escalate that up to me. And what I would really do is I would do a deep dive on their credit report history and seeing what’s on there. So if they just have low credit because they pay cash for everything, I’m going to take that consideration.
A lot of times, also, people have a lot of student loan debt. We really don’t rate student loan debt very high, medical debt as well we don’t rate that high. But if I start seeing auto repossessions, any landlord collections, utility bill collections, if you can’t pay your utility bill, then how are you going to be able to pay rent? So we will get granular and make policy exceptions once in a while for at tenants that are right on the cusp there that we feel good about.

Ashley:
Yeah, I do the same too where student debt and medical debt, we really don’t take into effect. And I think the important lesson to take away from your screening criteria is that you were able to just spew off your criteria. You actually have a criteria, and that’s what everybody needs to do. If you’re going to be screening tenants, even if you have one rental unit and you’re accepting three applications, those are three different screenings you have to do and have a list of what your criteria is. So each time you can just go through and yes, yes, no, and that first of all makes it so much easier because you’re not going by your gut or getting emotional because their dog really wants that backyard to play in or whatever it may be. And plus then you’re also following fair housing laws, where you’re not rejecting somebody just because you think the other person will be better, even though you don’t even have a basis or a criteria to follow.
So that is something; if you don’t have that right now, sit down and write out what that is. And if you have property management software, you can incorporate your criteria right into the software. So the software will say automatically just this did not meet your criteria or this needs a manual review. So for us, it comes up if there’s student loan debt that is affecting that income, and that’s where we go in and do the manual review and usually end up approving it, or if they meet all the criteria approved, okay, we can continue to move on, but we have a record of all of the screening that we’re doing and we’re documenting it, and documenting it. So that’s a big lesson to take away here is building out that criteria. So Matt, before we wrap up here though, I love diversifying, and so I’ve learned that you have gone into a new asset class for you. So tell me a little bit about this transition and this pivot going into a new asset class.

Matt:
I love multifamily. What we found is that during 2018, 2019, prices started getting out of whack, where we couldn’t make numbers work anymore on multifamily deals. And we still wanted to fulfill our long-term objectives of growing our portfolio. So we started thinking about what asset class do people not like. So I started finding these mixed-use buildings where retail investors, usually these have retail on the first floor. Retail investors don’t like them because they’re residential, and residential investors don’t like it because it has retail. It scares the crap out of them. So I to, I said, I was like, “Okay, maybe we can find a market inefficiency in acquiring mixed-use buildings.” And so we kind of went down that road and told everybody we knew that we were looking for mixed-use properties. And to that end, through that networking, I was at a meetup, and this guy came up to me, and he was like, “I have this off-market broker pocket listing deal. I don’t want the retail in it, but it’s got a good amount of residential units.”
Had about 24 residential units. So we took a look at it, and I really was intimidated by it at first. First thing, the thing needed a ton of work. And secondly, this retail thing was new to me, but the good thing was that both the tenant spaces were occupied on the first floor, the commercial space. And when I was stress testing this deal, I was like, “If those two spaces are vacant, I’ll still be able to pay my bills with the property, the mortgage, the taxes, insurance, the repairs and maintenance, all that stuff.” So that’s really what gave me the confidence to kind of start diversifying into a new asset class. And that’s really what led me to having the confidence to start going into more commercial stuff like office, industrial and other fully retail buildings was from that experience and being able to dip my toes in the water without getting a hundred percent exposure to a new asset class I wasn’t familiar with.

Ashley:
And Matt, just because we love the numbers, how did you finance this deal, and is it any different to finance a mixed-use property than it would be commercial or residential?

Matt:
Yeah, so anything that’s mixed-use is going to be considered commercial. So typically, you’re not going to be able to get a 30-year fixed-rate mortgage on it. It’s going to be something that’s going to have to be with a community bank, typically, or credit union where they have a commercial lending department. This deal, it was actually a package; it was a mixed-use property that had a four-family property that was right behind it on a separate tax parcel, but it was adjacent to it, it shared a driveway. And so, when I was underwriting this mixed-use deal, I was buying the package for $775,000. And when I was running the numbers, I was like, “The big building alone would appraise for $775 all day long.” So I got to thinking, I was like, “Okay, how can I creatively structure this thing where I’d be able to get into this deal with none of my own money?”
Because at that point in time, it’s like a growing real estate investor is always running out of cash. So you start to have to either get creative or learn how to raise capital. And so, I had a hard moneylender that agreed to lend $180,000 on the four-family property. And so how we structured the contract was we amended it and broke it into two different contracts. The big property was going to be $775,000, and the four family was going to be at a dollar, contingent upon the sale and transfer of title of the bigger property. So this is the part that was crazy when we closed this thing, we used a credit union to finance the big property that already had a mortgage on it. So we did a mortgage assignment, saved some substantial amount of closing costs by doing that.

Ashley:
Can you just explain what a mortgage assignment is real quick?

Matt:
Yes, absolutely. So at least in New York State, when you put debt on a property, the local county will collect what’s called mortgage tax. And so a certain percentage of the actual mortgage amount on the property, and you, as the buyer or if you refinance the property, have to pay that. So one slick trick that you can use is you can ask your attorney, is it possible for the bank to assign the mortgage to the new bank so that the mortgage tax that we would pay would be on any additional debt placed on the property above and beyond the original mortgage. So in this case, the original mortgage was like $500,000. So we were able to actually have them assign that. So we saved about $5,000 in closing costs, which was pretty big for this deal.

Ashley:
That’s awesome. I’ve never heard of that. Let’s explain the difference real quick of the difference between that and assuming someone else’s loan too, because assuming the loan is where you’re actually taking over their loan with the same bank, but all you’re doing is having it transferred to your bank and the loan is in your name, everything like that, that’s really interesting. I never knew you could do that. And now I’m definitely going to try it out sometime because it’s what? 1%, right? That mortgage tax in New York State is 1%, which definitely adds up to quite a chunk of change. So that’s a really cool strategy that you used to do that. And so, what did you end up having to put down on this property?

Matt:
So let’s fast-forward to the closing table, right? So the property did end up appraising, I think for $785. We’re buying it for $775. And when it was time for closing, we had the closing for the four-family property with our hard moneylender’s attorney in one office at this attorney’s office downtown. And so we got the check for the $180,000 for the mortgage, and my attorney already had checks cut. He got the check and basically essentially walked the check down the hallway to the other office, where we had the closing for the bigger property. And so the hard money loan proceeds from this property provided a hundred percent of the down payment and closing costs for the acquisition of the total package. And also, we had some loan proceeds in excess about 11,000 bucks. So it allowed us to actually have some startup cash to start figuring out, “Okay, what do we want to do with this thing now?”

Ashley:
I want everyone to take a minute and to rewind that and map all of this out in their brain as to how creative this was to get this deal done. So you have the, what was it, a four-unit, the apartment building and back?

Matt:
Yes, correct.

Ashley:
Yeah. So you have the four unit where he’s going and getting hard money on it for $180,000, but on paper, it actually looks like he’s paying $1 for it. But his hard moneylender is giving him $180,000 for that property, which there’s going to be a lien on it, everything like that. It’s just for the county record; it’s saying he bought it for $1. Then you go to the other property that he’s purchasing for $775,000, the big commercial property, and he’s taking that 180,000 and using that for his down payment on that property and then getting a mortgage for the rest of it. So that’s a wonderful thing about commercial lenders, is if this was a residential unit and maybe you were house hacking it, they would say, “Well, where’s that down payment coming from? I need to see your bank statements, your mother’s bank statements, your dog’s bank statements.”
But in commercial, if the deal still works and the property can support the payments, you can borrow money from other sources for the down payment, and they’re not as stringent as to where that down payment comes from. And way more flexible with getting creative as to how the deal is put together. The bank just wants to make sure that on the commercial end, the rents can support you paying them and whatever other debt you borrowed to make this deal happen. And of course, your monthly expenses. And if it does, they’re usually good to go. So when you’re looking at commercial properties from now on, I want you guys to think of Matt and think of this deal and think, “How can I be like Matt? What would Matt do?” Okay. So, Matt, thank you so much for sharing that example with us. Is there any last things you wanted to add about that deal that made it remarkable? How’s it doing today?

Matt:
It’s doing great today. The original tenants we had has retail, that originally occupied the property was Rent-A-Center, which is a company I have a bone to pick with because they take advantage of low-income people. And also, it was a nail salon that was on the other side, and they were… Pretty sure they were doing human trafficking through that place because there was cots in the basement and that sort of thing. So I booted both of those tenants out, and I got a crumpet shop, which, Ashley, if you come to Rochester, New York, you can know what a crumpet is.

Ashley:
Yeah, I was just going to ask, is it like, here’s going to be, my guess is it’s like a chocolate or a candy or something, a crumpet?

Matt:
No, you have no idea. So it’s an English; it’s like a, think of a cross between…

Ashley:
Oh, like tea and crumpets, right? Tea and crumpets.

Matt:
Correct, yeah.

Ashley:
Yeah. Okay, okay. I still don’t know what it is. I’m assuming like a baked good, maybe? Is that what it is?

Matt:
It’s kind of like that. Yeah. Yeah. It’s crossed between an English muffin and a pancake kind of. It’s savory, so it’s what you put on top of it is what makes it. And I was also able to place a vintage clothing and home goods store next door in where Rent-A-Center used to be. So it’s really changed the complexion of the neighborhood. It was a really fun project. Looking back on it, I lost a lot of hair and earned a lot of gray hairs in the process, which is a completely different show of that story. But fast-forward to today; it is been a joy in my life.

Ashley:
Well, Matt, thank you so much for joining us today. We appreciated you sharing your nightmare horror story with us, talking about screening tenants and also about the Rochester market, in case there’s anyone that’s interested in investing there. They have an idea of where to start when analyzing a deal in that market. So thank you so much. And also mixed-use; you guys know how to get creative with putting your commercial deals together now. So, Matt, thank you so much for joining us. I am Ashley. You can find Matt’s information in our show notes, and also you can find me on Instagram, and we’ll link that into the show notes. Thank you, guys, and we’ll see you next time.

 

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