Multifamily Horror Story: How a 1031 Exchange Fraud Turned Into a Three Times Return

DeRosa Group shares a real multifamily horror story that demonstrates the unpredictable nature of multifamily real estate investing. This multifamily case study includes 1031 exchange fraud, property management failure, internal misconduct, and a dramatic occupancy collapse. It also highlights how operational discipline, investor transparency, and a strong renovation strategy can convert a distressed property into a profitable outcome with a three times return.

A Successful Sale and a Standard 1031 Exchange

DeRosa Group acquired an 18 unit property in northeast Philadelphia for one million. The asset produced nine percent annualized returns. When a buyer offered 1.6 million, the sale created a six hundred thousand dollar gain.

The investors chose to reinvest through a 1031 exchange into a 198 unit property in Fayetteville, North Carolina. Seven hundred sixteen thousand dollars was transferred to a 1031 exchange custodian that appeared reputable.

The 1031 Exchange Fraud That Shifted the Entire Project

Weeks before the new acquisition, the custodian stopped responding. Public reports revealed that the owner had been hospitalized following a violent attack. Soon, more investors reported missing 1031 funds. The business was running a Ponzi scheme involving 6.5 million in investor capital.

DeRosa Group’s exposure totaled seven hundred thousand.

Immediate Investor Transparency and Recovery Efforts

DeRosa Group notified all investors right away. The team raised additional capital, secured a short term bridge loan, completed the 198 unit acquisition, and joined a class action to recover principal.

Liquidation of the intermediary’s assets, including single family homes, storage centers, and a mobile home park, returned about eighty percent of principal.

To protect investors fully, DeRosa Group allocated its own equity so they would receive ownership as if their full 1031 funds had arrived.

Property Management Failure and Occupancy Collapse

Once the 198 unit property closed, further challenges emerged. The selected management company had no meaningful presence in North Carolina. Their regional manager resigned immediately. The replacement lived four hours away and rarely visited.

Miscommunication led the on site team to incorrectly tell residents that rents would increase from five hundred dollars to eight hundred dollars regardless of upgrades. Occupancy fell from seventy five percent to forty percent, which triggered a lender required refinance.

Renovation Strategy and Oversight Improvements

DeRosa Group refinanced the asset to secure construction dollars and replaced the property management company. Renovations of five to six thousand dollars per unit supported rent increases of about three hundred dollars per month.

During this transition, internal misconduct by a maintenance technician was discovered. The individual had accepted cash kickbacks, rented vacant units privately, and assigned clean out tasks to unauthorized people. One occupied unit was mistakenly cleared.

The employee was removed immediately and oversight systems were strengthened.

COVID and the Occupancy Turnaround

COVID emerged while the property remained at forty percent occupancy. While many operators paused leasing, DeRosa Group advanced touchless showings, remote leasing, digital marketing, and rapid turns.

Because few competitors were accepting new applications, the property captured a large share of demand. Occupancy rose from forty percent to ninety percent in four months.

The Final Exit and Three Times Return

After stabilization, DeRosa Group sold the property and delivered a three times return. Investors caught in the 1031 exchange fraud also received profit participation because of the equity allocation made early in the project.

Key Multifamily Real Estate Investing Lessons

• Vet every 1031 exchange custodian

• Maintain transparent communication with investors

• Choose management with strong local presence

• Review all outgoing tenant communication

• Apply oversight at all operational levels

• Use renovation strategy to support market rent

• Innovate quickly during uncertain conditions

• Protect investor capital through every stage

To learn the methodology, psychology, and systems behind multifamily real estate investing, DeRosa Group offers a free course on how to buy your first multifamily deal, click here to start learning for free: https://www.derosagroup.com/first-apt