Friday Financial Foul Ups: The Fine Print of Rental Properties

This week’s Friday Financial Foul Up will feature a submission by Jesse from Personal Finance Firewall. On his blog, Jesse talks about his “burning” passion for personal finance and how he has bettered his financial life since January of 2009.   Jesse can often be found on twitter (@pffirewall) as he has a ton of followers and a lot of influence in the tweeting community. I hope you enjoy his story about purchasing a rental property (BS: Something I may consider doing some day as a means to diversify).

If you would like to add your own financial foul up to this series, please contact me here.

Last year, I was given the opportunity to invest in a rental property. To me, this was a great opportunity. The information I was provided about the deal seemed solid, the company backing the deal seemed wise and trustworthy and I was very excited that I was able to participate. The opportunity did kind of fall into my lap though, and I didn’t want it to stress me out if I didn’t qualify so I took a somewhat lax approach to the whole process.

The Situation

Here are the details of the opportunity. A company in Florida would buy a group of foreclosed houses and sell them to large investment firms or wealthy individuals. Those investors tell the company, “I need 50 houses” so the company would by 50 foreclosed houses for the investors. Ever so often, an investor would come back and say, “I can only buy 45 of them” so the company would be stuck with 5 foreclosed houses they needed to unload. So they started selling these leftovers to little investors. Since they owned the houses and couldn’t buy more big groups of houses till they got the individual houses off their books, they offered incentives to the little investors to buy the houses.

The company buying the houses also ran a property management company so the deal was, as a little investor, I buy a single home in Florida (I live in Utah) and let the management company take over from there. The management company would do what a management company does, maintain and manage the home, keep tenants current, collect rent, etc. and I would sit back and let the dough roll in. The incentives offered were cash, particularly $5,000 upon closing and an additional $5,000 in an escrow account in my name to cover time when there was no tenant or any repairs to the home were needed.

Where I Fouled Up

I currently own my own home, but I am no Realtor and have a serious weak point for all the bank, property and contract mumbo jumbo that usually is dumped on you in this kind of transaction so instead of researching and asking a ton of questions, I just took my contacts word for everything and pretended I understood everything that was happening because like I said, I didn’t want to be stressed out over the deal. So I signed where I was told to sign, handed over all the information required and the deal actually went through. I was very excited! I also found out the home already had a renter, and everything was just peachy.

My mistake was that I didn’t fully understand everything. I didn’t know what the management companies fees were and I didn’t ever look to make sure the incentives were in the contracts I had signed. When the deal closed, the company gave me the $5,000 incentive cash but each time I asked about the escrow account with the other $5,000 in it, I was referred to a different individual that “handles that sort of thing”. Apparently, no one had a clue what I was talking about and there was never any escrow account with that cash set up for me. Then, when rent started to come in, some of it was missing! It turns out that was the management fee, 10% plus additional fees for new tenants and lease renewals.

What I Learned

Always read over things you are signing and ask as many questions as you can think of. Get outside opinions and never just take someone’s word for it when they are potentially on the recieving end of your money. It turns out these management fees are pretty reasonable compared to market standards, and the rental property has been a great asset but I still have negative feelings towards the transaction and the company when in reality if I had read the paperwork more thoroughly, I probably could have gotten the additional $5,000 in writing and negotiated for a lower management fee.


Do you like this series? Check Out The Previous Foul Ups:

Foul Up #15 – Paul (Fiscal Geek) – Unsuccessfully Restoring American Muscle
Foul Up #14 – Mrs. Micah (Mrs. Micah – Finance For a Freelance Life) – How Getting Married Wrecked My Finances
Foul Up #13 – Evan (My Journey To Millions) – Speeding Up Payments on Loan Interest, Not Principal
Foul Up #12 – Elle (Couple Money) – Stretching Yourself to have a Comparable Car to Your Friends
Foul Up #11 – Revanche (A Gai Shan Life) – Sibling Bailouts Cost More than Just Money
Foul Up #10 – Brad (Enemy Of Debt) – There’s Nothing Interesting About Interest-Only Loans
Foul Up #9 – Jason (Redeeming Riches) – Buying a Car with a Balloon Payment at the End
Foul Up #8 – David (Money Under 30) – Being Too Eager to “Move Out” and “Move Up”
Foul Up #7 – Matt (Debt Free Adventure) – Upside Down and Paying The Price
Foul Up #6 – Brian (MyNextBuck) – Overdue Books Prevent Me From Renting an Apt
Foul Up #5 – Kelly Whalen (The Centsible Life) – Poorly Planned Vehicle Purchase Costs $24,000
Foul Up #4 – Stephanie (Poorer Than You) – Signed My Life Away at Age 17
Foul Up #3 – Deliver Away Debt – How I Wasted Over $10K and 11 Months
Foul Up #2 – Brian (MyNextBuck) – Quick Fixes to Weight Loss
Foul Up #1 – Brian (MyNextBuck) – How I Didn’t Earn $3000 in Free Money

9 Responses to Friday Financial Foul Ups: The Fine Print of Rental Properties
  1. corrin
    January 22, 2010 | 10:46 am

    That’s a hard lesson to learn, but you’re still bringing in extra income and you’re more aware of the ins and outs for future investments!

  2. Jesse
    January 22, 2010 | 11:13 am

    Exactly Corrin, sometimes you have to do things the hard way to make it count and learn from it I guess.

  3. hey
    February 21, 2016 | 12:16 pm

    Touche. Great arguments. Keep up the good work.|

  4. th8 farming base 2015 new update
    February 26, 2016 | 12:10 pm

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