Last year, someone attempted to open two new credit cards in my name. Recently a friend had a caller “from Medicare” attempt to gain his new Medicare number. How does larceny – and it exists everywhere – play out in the world of real estate investing?

IF IT SOUNDS TOO GOOD TO BE TRUE

High current cash flow AND a huge gain on sale with NO investment risk? Most real estate investors are sufficiently aware that when it sounds too good to be true – run away! Unfortunately, the artists of scam are sufficiently sophisticated; fraud is not always obvious even to the best of analysts.  

PONZI SCHEME. Mr. Okum owned 1031 Tax Group. Investors placed the proceeds from their property sales with this group, serving as their qualified intermediary. Okum proceeded to “borrow” the assets to live the high life. As long as new money came in, it was paid out to replace the old money (when the investor was ready to close on their replacement property). Once money slowed coming in to the QI, there was no money to honor the demand from the investors. The firm collapsed, and Okum has passed away while in jail, where he was serving a 100+ year sentence.

LAWYER IMPERSONATION. Kay Creasman, past Chair of the Real Estate Section of the Virginia State Bar (and a good friend and law classmate), has found that “fake profiles” in real estate transactions are rampant. Proceeds from a sale are redirected, usually by a phony email which appears to come from the appropriate party, to an account controlled by the criminal impersonator. Phone confirmation, while a good step, is not infallible (as a phone can also be hacked).

SOMEONE LIED. United Dominion Realty was bidding, where a hard deposit was required, on a large package of apartments assembled by the RTC after the 1986 financial crash. There was a 240-unit complex in Nashville, which was critical to the value of the portfolio. When we went to inspect the property, we discovered—even though the original loan proceeds had been advanced to the developer—only 120 apartments had been constructed!

BOTTOM LINE

History is no guaranty of the future. Good properties can be overcome with spillover neighborhood crime. Great sponsors can become addicted to money, power, prestige, alcohol, drugs, young women, and gambling. 

Attractive sales people will tell you what they believe you need to hear so you will write a check to invest. Sometimes, but rarely, do they lie when they know the truth. More often it will be the case that they just don’t know what they need to know… but they don’t know they don’t know it!

There are great investment opportunities in real estate – even in hot markets  – but don’t buy into the lie that every real estate investment is wonderful because some have generated wonderful returns. Dig deep and wide in your research.