Fishy Frauds In Real Estate Investing Beware
BATTLECALL GUEST EXPERT: Willard Michlin, Kismet
Business Brokers & Real Estate Investor
These articles were published individually at different times. Here they
appear all together, as parts 1, 2 and 3.
Fraud in real estate,
are you being victimized? (Part I)
Rip off artists appear in
all shapes and sexes. They usually are nice looking, well dressed and very
smooth talkers. They, in conversation, tell you about a financial killing they
made, or are in the middle of closing. Then they change the subject. A really
smooth talker never asks or suggests you invest. They wait until you beg and
plead with them to let you in on their great deal. At this point you are HAD.
That means, " your goose is cooked and you are invited to the feast, because you
are the main course." The logical question is how do you know, before you lose
your money that you are going to be ripped off? The answer is independent
research, and lots of it.
1) Find a friend, or a friend's friend who is
an "expert" in the specific field of investment you are considering. Ask lots of
questions and listen to him. Ask him or her how to make sure you are protected.
In the years, 1990 to 1995, eight people I know paid the same real estate
trainer over $5,000 each to show them how to buy real estate for "NO MONEY
DOWN." The trainer claimed she got results. Not one of the students, all of who
got to know each other, after years of trying, ever bought a property for "No
Money Down."
Recently the same trainer is offering to get her students
100% financing on real estate, even with bad credit. The MARK (the name for a
con artist's pigeon) thinks he is paying for an education. The education is that
you are $5,000 poorer and you have the name of a loan company that will charge
you 8.5% on a 1st Mtg. and 11% on a 2nd mtg. I will tell you how to find such a
lender yourself and it will only cost you a phone call.
2) See an
attorney or an accountant to review the deal, especially the paperwork. I have
seen contracts that if you just read it yourself, word for word and think about
what it said you would run like a wolf is chasing you. He is. One simple real
estate contract allowed the con man to take the money out of the joint account
before he did the repair work. He took the money and never did any work. Never
release money until you have everyone's signature on the paperwork and your
adviser has read the whole contract, word for word. If you cannot afford an
attorney, do not do the deal. It is better to not make a profit than to loose
what you already have. "A fool and his money are soon parted." Don't be the
fool.
3) Get to know this person. Who are his friends? Who does he work
with? What information does the real estate commissioner or the "Better Business
Bureau." have on him or her? Ask for the names of people who have already
invested with the "con artist", made their profit, and are out of the deal. Do
not ask anyone who has gotten in but hasn't gotten out yet. Multi-level people
love to have you talk to people that have just entered the group, just before
you have.
One of smoothest people around was a securities investment
adviser in Santa Barbara. He got hundreds of people to invest with him because
hundreds of people had already invested with him. None of them did the level of
homework they should have. The few people, who did do independent research,
smelled a rat and didn't invest. Many of his investors have lost their whole
life's savings; the rest just lost a lot of money, but will recover. If you
think I am trying to scare you, then you are absolutely right. "Money should
come in rapidly and be spent very slowly.
Fraud in real estate,
are you being victimized? (Part II)
The phone range and Peter
was on the other end of the line. "Willard, I have a friend of mine that has a
real estate problem." I said, "Send him over." Two hours later, Jerry sat in
front of me terribly upset. Three years earlier, he had been talked into buying
a 4 unit building in partnership with Smooth Talker, a knowledgeable, smooth
talking real estate salesman. Smooth Talker offered to find the property,
arrange the financing, manage the building and even put up the down payment.
Jerry was told that all he had to do was use his perfect credit to qualify for
the loan and then sit back, wait seven years and the money would come rolling
in.
Smooth Talker also promised that the two of them would do more deals
and Jerry would make over $100,000. What Jerry did not know and would not figure
out until 3 years later, was that Smooth Talker had no intention of splitting
anything and Jerry could kiss his perfect credit goodbye! 3 years ago, Smooth
Talker had Jerry and two other buyers, buy three buildings, located on one
street. The buildings cost $150,000 each. Smooth Talker put up $1,500 down
payment for each property, while at the same time, telling the buyers that he
was putting in $12,000.00 for each. There was an unexplained difference of
$10,500 each.
Smooth Talker also collected a $9,000 Real Estate
commission on each. Smooth Talker also agreed to take the building in as-is
condition, with no inspections and without requiring the seller to make any
repairs. There were, unknown to Jerry $10,000 worth of air-conditioning as well
as other work that needed to be done on the building.
Smooth Talker had
those other two buyers borrow from the Federal Government a remodeling loan of
$48,000 to make the needed repairs. When those other two buyers each got their
loans, Smooth Talker took all the money and said he spent it on Jerry's
building. Let me clarify that. Smooth Talker stole the money from the other two
investors, telling them he used it on Jerry's building. That is still stealing.
My research later showed that he did almost no repairs to any of the buildings,
and what little repairs he did have done, were not even paid for.
Smooth
Talker cheated the poor workers out of their pay. No one could ever understand
what he was doing. He even collected rent, pocketing any cash. When the buyers
wanted an accounting. Smooth Talker wouldn't even supply it. When I came on the
scene and demanded, as a matter of law, an accounting of what was received and
spent. Smooth Talker didn't have any proof of what happen to all the money.
Jerry wanted out of the partnership but Smooth Talker didn't want the
building sold; but he did want to make sure he got his due, if it was. He gave
me a statement showing that he had put in $34,000 (which was not true) into the
building and wanted that before any split of profits. This would have left Jerry
receiving $5,000 and Smooth Talker making $46,400 on the whole deal.
To
avoid being in this kind of a situation, I advice the following, before doing
any sort of real estate deal; a) Evaluate your risk. What is your downside? Have
a real estate expert study the deal. b) Set up operating and reporting
guidelines with your partners. Put everything in clear English. c) Have
everything reviewed by an attorney or an accountant. d) Choose your people
partners with care.
Fraud in real estate, are you being
victimized? (Part III)
Jonathan's Story: Jonathan had the
sadist story I ever heard. You decide how the story turns out. It was 1997 and I
received a call from Jonathan. He had received my letter asking if he wanted to
sell his business any time soon. He asked me to come out and see him. Jonathan
was 81 years old. He owned a woodworking factory that had been going for 40
years. He also owned two commercial factory buildings and had a beautiful
residence that was debt free.
His wife, Janet, also 81, was the sweetest
woman I ever met. They were both healthy and they loved each other dearly. They
had no children or grandchildren. Janet had nieces and nephews on her side of
the family. Jonathan had no living relatives of any kind. When I met Jonathan I
adopted him. Sounds like the perfect picture, doesn't it. It was until 5 years
ago.
Jonathan received a letter from Nigeria explaining that if he would
front them some cash to pay off some government officials, they would pay him
millions of dollars out of what the government owed them. You may have heard
this story. It has been on 60 minutes. In fact Jonathan had heard this story;
the problem was that he thought that his contact was different. They showed him
legal documents, had Nigerian attorneys certify the validity of them and they
did everything else necessary to con a rich old man into believing that his ship
had come in.
Over the next 3 years, Jonathan stopped paying his real
estate loans, borrowed on his factory equipment, ran up $500,000 in credit card
charges and cleaned out his wife's separate bank account, all without telling
her anything. Every payment to Nigeria was supposed to be the last one, and
Jonathan was hooked. When I found Jonathan he couldn't raise what he thought was
the last $10,000 necessary to finish the deal. His creditors were getting very
upset and were ready to sue him.
As terrible as this sounds, Jonathan
was the 3rd person that I have met in the last 10 years that has been stung by
this scam. I cried. I know that at least $500,000 was sent. Jonathan thinks he
sent closer to $1 Million. Jonathan decided that it was fate that sent me to
him. He may be right. By the way my company name is Kismet Real Estate
Investments, Inc. Kismet means Fate, Destiny, Karma, etc in Turkish, Indian, and
Arabic. Time was very short, we had work to do and fast.
His wife knew
nothing of what was happening, and I had to get Jonathan to tell her that they
had gone from being millionaires to destitute in one conversation. Jonathan told
his wife the truth. She forgave him. (Now that's love.) Her one concern was that
she didn't want to loose her home. We were but a few weeks away from the
creditors coming down on his business and her mortgage free house. In one clean
swallow, they would put her into bankruptcy, a one-bedroom apartment and living
on social security, which would have actually killed her. How much can one take
at that age?
I went to work. First I promised Janet that no one would
take her house away from her. She needed to trust ME, a total stranger, to not
put the nail in the coffin. I do not know if I could have made the decision she
had to make. We put her house in an irrevocable trust for her family when she
died. That meant she had to give up ownership of her house, to me, a total
stranger, in order to continue to live in it the rest of her life. Next we sold
his two buildings to an investor who would work with us. The loans on the two
buildings were equal to the market value at that time.
We then found a
buyer for the worse of the two buildings and made a deal with the Small Business
Administration, to lower the interest rate and payments on the remaining
building. Those payments are about 30% of current market rents today. By making
those very low payments, the lender who is on the building and the business
equipment was happy. The result of all this was that Jonathan was able to keep
his factory running and make just enough to pay his current living expenses.
Then the creditors, eight of them, started suing Jonathan, one after the
other. Each tried to take the assets of the business. There was nothing to take.
Some tried to go after the commercial buildings. That failed as they had been
sold. One tried to go after the house. I arranged for someone friendlier than
the bank to buy the bank's judgment at a discount and hold it until it doesn't
make any difference. The bankruptcy attorney said we would never get away with
what we were doing. He said that Jonathan needed to file Bankruptcy. Jonathan
decided that he trusted my ability more than the attorney's advice. It has been
3 years now and all is quiet on the northern front. Jonathan and Janet are now
84 years old, still healthy, and still in love.
Everyone thinks that his
or her problem is un-confrontable and therefore unsolvable. I have found that
someone other then myself can solve my un-confrontable problems in 10 min and I
can do the same for them. It is not a question of being smarter, or more
experienced, though experience helps a lot to come up with easy solutions
quickly. It is really that we all are willing to confront someone else's
problems much easier than our own.
When we are willing to confront our
own problem head on, solutions begin to appear miraculously. What I do is help
people take their mountains and turn them into molehills. The molehills are then
flattened with ease.
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