JF2188: Fake Rent Checks With Jack Gibson #SituationSaturday
Jack is the President & Co-Founder of High Return Real Estate and also a returning guest from episode JF1252. Before he started into real estate, Jack started off by selling products for a multi-level marketing company, taking him 9 months to make his first commission check of $14…and after sticking it through and learning the business his business is now generating around 20 million in sales. In this episode, he goes into a sticky situation that he recently ran into by working with a company and finding out he was receiving “fake” rent checks.
Jack Gibson Real Estate Background:
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“The number one lesson I have learned is to trust, but verify” – Jack Gibson
Theo Hicks: Hello, Best Ever listeners. Welcome to the best real estate investing advice ever show. I’m Theo Hicks and today, we are speaking with a repeat guest, Jack Gibson. Jack, how are you doing today?
Jack Gibson: Great, Theo. Thanks for having me back. Appreciate the opportunity.
Theo Hicks: Thanks for coming back. I’m looking forward to our conversation. So today is Saturday which means it is Situation Saturday, so we’re going to be talking about a sticky situation that Jack was in, what happened, lessons learned moving forward, so that you can apply that to your business and not get in the same situation in the future in your business. But before we get to that, let’s talk about Jack’s background. So he’s the President and Co-Founder of High Return Real Estate. Make sure you check out his first episode, which was Episode 1252, where he talks about his turnkey portfolios; right now, his portfolio consists of 60 turnkey properties. He is based in Indianapolis, Indiana, and you can say hi to him at his website, which is highreturnrealestate.com. So Jack, before we get into your sticky situation, could you tell us a little more about your background and what you’re focused on today?
Jack Gibson: Yeah, I got started in entrepreneurship when I was 19; I’m 42 now. I was going to college, living in the dorms. My parents said, “Get good grades, study hard.” They checked up on me, went to all my parent-teacher conferences in college, if that gives you any type of idea of what household I grew up in. It was great, but there was high expectations.
One day, I get this flyer while sitting in my dorm room about an opportunity to sell nutrition products in a multilevel marketing company. At first, I thought, “Man, this is probably a scam, this isn’t gonna work, how am I going to sell this?” So I just threw the flyer to the side, and then I don’t know, something hit me and I said, “Why not just take a look?” This is how opportunities are found, is that you really could just take a look and research and see. So I looked into it and I was excited. So I signed up, and that business today– it was a rough start. I think it took me nine months to get my first commission for 14 bucks. So I was selling some products and making a little bit of money along the way, but I didn’t get my first official commission check until nine months in. But from that point, I started figuring things out and that became a million-dollar business by the time I graduated college. So I’ve been doing that ever since, and now I think this year we’ll probably hit close to $20 million in sales in that operation. So it’s been amazing.
So that allowed me the opportunity with a cash flow business like that with very little expenses to be able to invest into real estate, and that’s when I started about five years ago with a turnkey property myself. So I bought from a turnkey buyer.
Theo Hicks: Perfect, thanks for sharing that. So let’s talk about your sticky situation. So I’m just gonna let you tell us what happened. Tell us your story, and then once you’re done, I will jump in with some follow up questions. The mic is yours.
Jack Gibson: Yeah, I just finished this book by Keith Cunningham, I thought it was fantastic, called The Road Less Stupid. I feel by sharing this, I’m sharing the road more stupid. But look, I’ve found that sharing transparently and sharing your successes and your failures and your mistakes and your stupid decisions and all of the bad things that happened to you along the way – that makes you more relatable. People really like that, because they probably all have their own similar story, maybe at various levels of stupidity, and have bad, sticky situations. But that original turnkey buyer that I bought from was called OceanPoint, and they sent me a mailer, and at that time, I had just done a trip into Indianapolis about three hours from my house here in Michigan, and I was looking into just buying a property that was already done and already performing. Their price to rent ratios were incredible, so I started buying up properties. I got up to 15 units with the owner-operator and I was getting really nice rent checks, over 20% returns. So naturally, we built up a really good trust, a lot of relationships with people over the last 20 years of doing business, and they know how I show up and I said, “Look, this is working for me. This is a good operation; I went in and checked it out. I’ve met him a few times, I’m getting rent checks every month,” and I started posting that on social media and just telling colleagues, friends, family, neighbors, and I sold $5 million. I referred $5 million in cash business in the first 12 months just from that.
So that was about– I don’t know how many investors maybe 20 to 30, somewhere in there, and we had about 130 units, including mine altogether. So it turns out, none of us got inspections. Maybe there was a couple of people that did and those did check out, but the vast majority of us that bought, including myself, we didn’t get any inspections. We just trusted the owner, and it turned out a lot of the rent checks were fake. So he was operating a Ponzi scheme almost, and we didn’t even realize it; none of us. So once everything crashed, and eventually that’s what happens in those types of situations; it’ll eventually crumble. They run out of money to keep paying investors, or whatever happens. Once we all realized the condition of our properties and how much they had been neglected, it was just a disaster. So everybody was looking to me to fix their situation, and I took responsibility for that. I look back now and I’m like, “Man, I ruined two years of my life taking on so much responsibility.” But that’s when you operate at a high level of integrity, you take full responsibility and just figure out what can we do? How do we get out of this?
So over the course of about the last two years, we just went back in and got contractors, fixed up all the properties, found new management, and then we found another management company after that, because the next one didn’t work… The contractors, a lot of them screwed us over again. So it’s just a really tough situation because we were left with essentially all these properties that were in bad shape, that were not performing, and we didn’t have the connections and trusted resources to be able to fix them back up and get them performing again. So it was that whole process, literally… And the bulk of it, I got done in about 24 months, and I still have my very last property today, three months later.
Theo Hicks: Wow. So Oceanpointe, how do they operate? You said that once you figured out what was going on, you got new management, you got contractors in there… So you bought the properties through Oceanpointe, and then were they also full service, they were managing it as well?
Jack Gibson: Yeah. Well, when you buy a property at a tax sale for $10,000, and then you sell it for $40,000 with a promise to do $20,000, $25,000 worth of rehab on it, then instead of doing $25,000 worth of rehab, which to get the bones of the property fixed up, which of course be the major cap-ex items – the roof, the foundation, the electrical, the plumbing, when you don’t do any of that and you just put lipstick on a pig and make it look good on pictures, and then you’re sending rent checks out, he was able to hide the lack of quality of the property. So we would look at the pictures, the pictures looked great, but what we found out later is that not one property had working plumbing or electric. Not one property was fully functional. Almost every property needed a new roof, too. So those are very expensive items, especially if you’ve already “paid for them” when you bought the property. So now you have to do that all over again. So now you have to put another 20, 30 grand into a property, and now you’re way over market value.
Theo Hicks: Yeah. Were the properties supposed to be renovated already when you bought them?
Jack Gibson: Yes.
Theo Hicks: Okay. So you were told that hey–
Jack Gibson: Well, some of them, but a lot of them were — you’re buying them pre-rehab; say you’re buying it for $20,000 and you give them $20,000 in rehab, or whatever the case. Maybe you bought it for $30,000 and you gave them $30,000 in rehab for a duplex type thing.
Theo Hicks: So probably what’s happening was this, he was saying, “Hey, I bought this for 10 grand, you buy it for $40,000, and I’ll do 30 grand renovations,” but instead of doing the renovations, he was just paying you rent checks from that 30 grand.
Jack Gibson: Exactly. You got it.
Theo Hicks: Okay. So once you figured out what was happening, you told me that it took you some time. Well first, before we get into that actually, before I ask you questions about how you found the contractors, how you found the property management company and maybe tell stories about how you had issues there too, tell me from the time you figured it out to after you talked to all the people – how did those conversations go? Did they call you? Did you call them? What did you say? How did they react?
Jack Gibson: One day I, all of a sudden, got five to ten texts or emails from people that were “Will you buy my property back, or can you help me sell this?”, and I’m like, “What happened?”, and every single one of them, their rent had dropped by about 70% to 80%. So what happened was he didn’t actually have a property management license. It had been revoked a year or two or more before. So he was operating under the management license of another broker. Well, that broker got really uncomfortable with what he was doing. In some cases, not even turning water on for tenants; that’s documented. We know that to be a fact. So now, he pulls the management away. So now you’re left with “Okay, who’s actually really paying?” So all of a sudden, it just dropped like a rock. Everybody’s messaging me and I’m like, “What just happened?” So then we realized that it hit the fan. Everything had just collapsed all of a sudden.
Theo Hicks: So you said you realized… So did you — at that point, once you started getting all these texts, did you call this guy? Did you go out to the property right away and see that they were in complete disarray? How did you actually 100% knew “Okay, this is bad”?
Jack Gibson: Well, we had some suspicions that things weren’t on the up and up, so at that time we were making plans with a new property management company to switch everybody over. So we knew that something wasn’t right, but we did not know by any stretch that it was to the level that it was at, because everybody was still getting rent checks. So if they’re still getting rent checks, we’re like, “Okay, I mean, we have no reason to believe that this isn’t real tenants paying. Why would anybody pay out fake rent?” Well, he was paying out fake rent to get people to buy more properties, to lure them in. So as long as the sales kept going, then he had enough money coming in to keep paying off the fake rents. Well, when the sales all of a sudden just dried up, his main guy stopped selling because he realized what was going on. Well now, he doesn’t have any income to pay out the rent.
So yeah, when that happened, I was calling him, texting him, but he wasn’t answering. He just went dark on everybody. We lawyered up and FBI has been to his home, and under indictment and probably got about 20 to 30 lawsuits coming at him right now. So that’s pretty extensive, the level of hot water he is in, but that didn’t do anything to make us whole. We had to figure it all out on our own.
So I went into town, got some contractors that I didn’t know, I started getting quotes from them. We had so many properties all at once that there just wasn’t a lot of time — we were under duress, so we didn’t have that much time to vet them as well as we would have liked. We’re just like “Here. You go here, you go here, you go here and let’s get these done and get these back performing again”, and that didn’t work, because they just took advantage of the situation and they didn’t really do a good quality of work. So then, finally I met up with a contractor. He’s my number one guy to this day. He is just an awesome guy. He’s a structural engineer and he went into every property that we still could salvage and he got them squared away.
Theo Hicks: How did you find this guy?
Jack Gibson: It’s funny. He bought a house on land contract from me… Because I was going to buy one of his houses that he had for sale. He had some back taxes on it and whatnot and he wanted to get that cleared. So he fixed up the house that I sold him on the land contract, did a great job, and I said, “If you ever do some jobs with me, I got plenty.” So it was about a few months and then finally came back, he’s like, “Yeah, I quit my job. They don’t appreciate me. I’d love to go to work for you.” So I just started giving them jobs left and right, and he slowly – I was very cautious this time around, but I gave them small jobs, and he did that well, and then started feeding him bigger and bigger jobs until the trust was established, and now I trust him as much as I do pretty much any human being on the planet. This guy, I can send him money and I know what I’m getting.
Theo Hicks: What about the property management? So you said that you had your suspicions before everything hit the fan, and you were already working with a management company to transition over to, but then you also mentioned that just like the contracting issues, you had issues with the next management company as well. So I’m assuming that that’s the management company you’re talking about. So maybe walk us through what happened there, how you found them, what the issues were, and how you ultimately found the management company that you’re using today.
Jack Gibson: They’ve done some acquisitions for us in terms of being able to find us houses that we could then sell, do a rehab and sell to investors. So we had a relationship with them, and they had property management experience, having their own portfolios in Indy. So they decided to start the management company to try to help keep investors happy that we needed to transition over promotion point. So they just couldn’t get the job done. I think they put a good effort in, but they were in way over their heads with the skill sets that they have organizationally. So I just had a lot of investors that just weren’t happy with the communication and the tenant placements weren’t being screened right.
So we went to a national company called Great Jones and they’ve been incredible because they have systems, they have technology, they are fully staffed, they have and so many resources, and they don’t mark up any construction. So that’s a very different approach and model compared to all the other property managers that we had interviewed in Indy. They all make– most of their money is by marking up tenant turns, marking up maintenance calls, marking up any construction costs… Which I don’t have any issue with that. That’s certainly– they’ve got to make money somehow. But with Great Jones, they have enough volume where they could just make the money off the 10% management fee and the tenant placement, and all the other stuff is just at the cost that they’re quoted. So that really puts all of our investors that we moved over there in a much better cash flow position.
Theo Hicks: If you could summarize for the listeners, what would be your top two to three to five lessons learned that you applied moving forward after going through this entire experience?
Jack Gibson: Well, I think that number one, the most important lesson is trust, but verify. So if we would have just done that and gotten these inspections, then we would have seen what kind of properties that we were dealing with. But I always tell– because I have younger guys that come to me because they know I have a pretty big real estate portfolio, and now it’s performing; it’s awesome. The rent checks that are hitting today are– it’s very exciting, but it took a while to get to that point. I tell them, “Look, you got to make sure that– there’s three major mistakes that you got to watch out for. If you don’t make these mistakes, then you should be in a really good position buying real estate.” Number one is don’t pay too much for the condition of the property. It’s okay to buy a property that needs a lot of work. You’re probably going to get your best equity position on those types of deals, but you got to make sure that you understand the market and understanding what’s out there and that you’re not overpaying… Because the stuff that we see, nine out of ten of them were passing on, because they’re just way too much, they’re not realistic for how much actual work the property really needs to get it to be a quality long-term property.
So then the second part is you got to be really careful with your contractors. There’s some great contractors out there and there’s some real shysters. So you can pay for a contracting, and then if you have to pay for all that same work a second time or even a third time – man, that’s crushing. So just having good quality contracting partners is critical, and then I think probably the third and most important thing for the long term performance of your property is the property management. They’re gonna make or break you on the cash flow with how they screen and place tenants, how they take care of their tenants, all the things that they do to get your property and keep your property performing.
So if you’re really paying attention to those three things– I mean, it’s not easy. If it were easy, everybody would do it. It’s much easier to just go buy stocks and just pray that they go up. That’s a lot easier proposition. However, I don’t like that plan because I’m not in control and I can’t control that much what’s happening, and the Board of Directors makes a decision and I just don’t have any say. So all I’m doing is just buying and praying that it goes up. Whereas with real estate, if I buy smart and get it rehabbed smart and have the right teams behind it, I’m gonna make some really nice cash flow every month and it’s going to be consistent.
Theo Hicks: Perfect. Okay Jack, is there anything else that you want to mention about this story, about your business that you haven’t talked about already before we wrap up?
Jack Gibson: Well, I think, it’d probably be good for me to at least show a little bit of positivity in terms of what we offer. Yes, we’ve made mistakes, but not only did we– I feel like, we stepped up to the plate in a big way and we took money out of our company and I took money out of my own account to help investors get funded… Some of them I gave back all of the commissions that I made when I sold the properties to the Oceanpointe, and partnered up with them. I gave all the commissions back and then some to the ones that really needed it in a bad way.
So I feel like, as far as doing business with us, we’re going to operate in the highest level of integrity. If something does go wrong, we try to stand behind it. Obviously with real estate, it’s never going to be perfect. You can do your best to put everything together the right way and it doesn’t mean you’re guaranteed, of course, any positive returns at any time, but you can put yourself in the driver’s seat where you have a really good strong chance of it…
But we learned a lot of lessons. We’ve got an awesome team and a lot of systems in place that helps us to make sure that the property is a very quality property. I mean, we put it through third-party inspections. It goes through the Great Jones test. They’re going in and they’re picking the property apart and finding all the things that need to be done prior to a tenant being placed. So there’s multiple steps of quality control to make sure that what happened with Oceanpointe never ever comes close to happening again. So those are the properties that we sell to investors. We are working very hard on scaling and creating our own portfolio, much more so now than before where we were focused more on the turnkey sales process. We still do offer turnkey properties, but we want to build up our own rent checks and our own holds. It’s shifted in terms of our focus. So if we do release a property, it’s something that we would be willing to hold for ourselves for the next ten years.
Theo Hicks: Perfect. Well Jack, I appreciate you coming on the show and being willing to share your story with all the listeners, as well as tell us your lesson. So just to quickly summarize the story… You bought turnkey properties from a person who ended up being a fraud, and once you found out that they’re a fraud after you and some of your colleagues had invested, you grinded to reverse the issues, to find contractors to resolve the issues, to find a new property management company, and then after all that is said and done, your top takeaways are one, the most important takeaway was to trust, but verify. A specific situation is applied to turnkey rentals is that make sure you’re actually doing the inspections and that not trusting the operator.
And then you also talked about the three mistakes to watch out for which was don’t pay too much for the condition of the property, which means, number one, you don’t necessarily have to buy a turnkey property because you can make a lot more money buying a property that needs a lot of work, but at the same time, just because the property needs a lot of work, it doesn’t mean that the price is still right. So make sure that you’re still buying right, understand how much money you need to invest into that deal so that you’re not overpaying. The second one was be careful with your contractors because just because you find someone who’s the cheapest option, if they don’t end up working out right, you have to pay someone else. So it’s better to pay maybe the middle of a higher option once then pay multiple people two, three, four times. And then lastly, you talked about how the property management company makes or breaks the cash flow at the deal. So again, Jack, really appreciate you coming on the show. Best Ever listeners, as always, thank you for listening. Have a best ever day and we will talk to you tomorrow.
Jack Gibson: Thanks, Theo.
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