Imagine this. The client (relatively unsophisticated) owns a little renthouse. It goes up in value and down in basis because of depreciation. Their accountant tells them it is not doing them much good and that maybe they should consider trading up. They contact their agent who sold them the house. The agent convinces them that real estate is where all the action is. He convinces them to take $500K out of their house (yes, we are in California) and they put it and the proceeds from the rent house down on a large commercial building in Mississippi. No reason to grown. There are vialble businesses in Mississippi too.
The building has a midsized company with a long term lease, which they liked. Unfortunately, the agent was a residential agent and did little or no due diligence. I haven't determined if the agent was dishonest or just too stupid to know what to do. A few months after close of escrow, the company goes bankrupt. They can't find another tenant and lose the building and still owe the $500K on their home. And, the lender is threatening to give them a huge 1099 for the mortgage forgiveeness and possibly go after them for deficiency judgement. Wow!
It is critical that an agent make sure they get all the financial documents to be able to investigate the quality of your major tenant. And, if you and your client don't feel qualified to review the financials, then hire someone to do it for you. We don't do our own roof inspections, so why would you think you can analyze the financials of a corporation? You can't unless you have an accounting background. And, to top it off, it turns out that the financials that were provided were two (2) years old. Clearly, if someone would have investigated the financial strength of the company, they would have seen the problem coming miles away and would not have closed.
Sometimes, I get negative feedback from other agents when they find out that I testify against agents. I also testify in defense of agents when I get hired on that side. But, based on the facts, how do you feel about this agent? Most of you are aware that our industry has a really bad reputation. Based on the minimal requirements in most states to get a license, I think that we as a whole, pretty much deserve the rep we have. Unfortunately, it makes it really hard for those of us who are really trying to do it ethically and correctly.
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