Securities & Exchange Commission HQ

I often see forum postings from real estate investors looking to raise their own investment funds. These are often newcomers that are frustrated by their inability to obtain financing for what they’re sure are smoking hot deals. The banks have told them ‘no,’ hard money lenders laughed in their face, private lenders turned them down, and friends and family members have told them they’re crazy. There has to be some easy way to raise capital. Right?

Thinking that they’re being creative, resourceful, and acting like a true entrepreneur, they set out to find people to back them. They spend hours, if not days, crafting a perfect pitch to attract investment funds. They post internet and newspaper ads promising investors a great return secured by real estate. They’ll advertise a rate that is significantly better than the paltry yields offered by banks. Brilliant idea – or is it?

Big Brother is Watching

The moment that wanna-be tycoon placed that ad where it can be seen by others he or she violated a major securities law. By posting a solicitation for money and promising a return that individual just made a public offering. That offering now falls under the jurisdiction of the Securities and Exchange Commission and is regulated by the Securities Act of 1933. That offering must be registered and a number of requirements must be met regardless of how small the amount of money involved.

I know this from first-hand experience. I too had that brilliant idea as a new investor. I had a great investment opportunity and was determined to raise the required capital. I was fortunate in that I worked in the financial services industry at the time and had access to people who actually understood how to do this. I had the investment opportunity and I had access to people with money so I took the steps to do it right.

Exceptions to Regulations

The regulations do allow for certain exemptions from the onerous and extremely costly filing requirements. These exemptions do not mean that you can just proceed with your plans; they must meet some very stringent requirements that are best left to professionals. This is not a job for do-it-yourselfers and there is no fill-in-the-blank legal form you can buy. With that in mind, I retained the services of a competent  attorney and created a limited partnership. Because I was soliciting high net worth individuals that would be considered accredited investors, we created a private placement offering. Since it involved fewer than thirty-five investors and sought to raise less than $1,000,000, this was a filing that fell under the Regulation D exemption of the Securities Act of 1933.

Ultimately the investment got off the ground and it was somewhat successful. I say somewhat because it earned a profit. However, that profit was not commensurate with the amount of effort involved. The greatest return was actually earned by the attorney that drew up the agreements. The total fee involved was just short of five-figures and more than any of the investors earned on their investment.

So if you’re thinking that it would be easy to just raise your own money by placing an internet ad somewhere – think again. That ad may result in a letter from your local SEC office that begins with ‘Greetings’ and ends with you wishing you never thought of that ‘brilliant’ idea.

The government solution to a problem is usually as bad as the problem. – Milton Friedman, Economist

Photo Credit: Scott S.

This Article is Copyright © 2004-2011 BiggerPockets, Inc. All Rights Reserved.

Raising Your Own Real Estate Capital – Sure You Want to do That?

Striking Back

In Part I of this story I outlined problems that I was having with a small town property manger and in Part II I told of my discovery that others were having problems as well. To recap it quickly: The PM was collecting rents but not forwarding them to the owners and he was charging for repairs that never happened or padding the bills for repairs that did take place. The pattern that emerged indicated that he was doing this primarily to those that lived outside of the area.

This article details the steps taken after I discovered that the PM had no intention of giving me the money he had collected on my behalf. He had placed a tenant in one of my rentals, collected rent and security deposits, but did not send me any money nor did he return numerous phone calls or emails.

Steps Taken

The first step was to stop the bleeding. I met with my attorney who drafted a letter to the PM informing him that he had breached the contract and was no longer managing the property. The letter included a demand for immediate payment of all money collected. As expected, that letter was ignored. The tenant was notified that all future payments were to be made directly to me.

Next a complaint was filed with the Nevada Real Estate Division. As it turned out there were already a number of complaints against him. Though I had checked with the RE Division before hiring him there were no violations on his record. The state does not give out information on pending complaints, only violations. With the collapse of the real estate market there is a huge backlog of cases. Had I known of the pending violations I never would have hired him.

The next step was to initiate a small-claims action. It was easy to file and I was given a hearing date of August 5^th. I assembled my case with the help of my attorney but represented myself since this was essentially a slam-dunk. The case was called but the PM didn’t show to defend himself. I merely had to establish that a contract did exist and that rent was collected. Since no defense was provided by the PM, I won by default. Fortunately for me the State of Nevada has a Real Estate Recovery Fund that is meant to reimburse victims of theft and fraud by real estate agents. This fund uses a portion of agent license fees to provide money to repay victims. I am currently in the process of seeking reimbursement.

Not Stopping There

Had I been the only victim this would have been a civil matter. The PM could have made any number of excuses and malicious intent would have been difficult to prove. However, my local real estate agent had connected me with a half-dozen other victims. This made it a criminal matter.

I went to the Sheriff’s Office and filed a complaint. I also contacted each of the other victims and suggested that they do the same. What really surprised me was that a number of them “didn’t want to get involved.”  Would they have felt that way the PM had robbed them at gun point? Fortunately a number of people stepped up to the plate and did the right thing. In a town with very little crime this case has become a big deal.

I have been acting as a liaison between the victims, sheriff, and the investigator for the real estate division. This coordinated effort has kept everyone working together to stop this guy. It’s a given that the PM is going to lose his real estate license and be subjected to substantial fines. The detective handling the case for the Sheriff’s Office is preparing to bring the PM in shortly.

What most likely started as a case of a property manager “robbing Peter to pay Paul” had spiraled out of control. The PM will not only lose his license and be out of business; he will probably land in jail or at least be placed on probation and have a criminal record. The state will likely seek restitution of the funds they pay to the victims. If he’s not already at bankruptcy’s door, this will surely push him over the edge.

There are two morals to this story: 1) Some people shouldn’t be in business. 2) Don’t mess with a BiggerPockets member!

Revenge is sweet and not fattening. – Alfred Hitchcock

Photo Credit: Richard Warren

This Article is Copyright © 2004-2011 BiggerPockets, Inc. All Rights Reserved.

Fall of a Property Manager – Part III

Most people have heard of schemes in which a lender is defrauded by someone who uses an inflated appraisal to obtain a loan for much more than a house is worth. This type of scam generally requires the cooperation of several people. In addition to the person running the scam you need an appraiser who provides the inflated valuation, a real estate agent who goes along with it and, frequently, phony buyers. Sometimes the buyer is a victim in the scam but it is usually the lender that is left holding the bag when the other participants disappear.

However, in an unusual case of “man bites dog”, the usual victim becomes the scammer. Unlike most of these schemes, which involve small-scale criminals, this one involves some of the biggest names in the real estate industry.

The Particulars

A lawsuit has been filed in U.S. District Court in Arizona against Countrywide Financial, KB Homes and LandSafe Appraisal Services (article) accusing them of artificially inflating home prices. This is definitely a new twist. This allegedly took place in the Arizona and Nevada market. According to court documents the scheme netted $280 million between 2005 and 2008.

The lawsuit claims that KB Homes steered buyers to Countrywide Financial who, in turn, used LandSafe Appraisal Services to provide the incorrect valuations.  Some of the appraisals may have been inflated by more than $80,000. Talk about being upside down!

The article didn’t have a response from any of the defendants, nor could I find any elsewhere. If these allegations prove to be true it could cause a lot of problems for Bank of America since they purchased Countrywide.

Housing On Steroids

Manny Ramirez Suspended for 50 Games

It’s bad enough that we have been suffering from the collapse of a runaway housing market that came crashing down. Like a baseball player who was caught using steroids, we now see that some of the housing gains were “juiced” as well. It remains to be seen how widespread this is, perhaps it was just an isolated incident. Somehow I don’t think so.

This breach of trust could make it difficult for builders in the future. Will people begin to look at them they way they look at car dealers? The housing industry could learn a lot by watching what Major league Baseball is going through with the steroid scandal. The builders need to get out in front of this problem and make sure that it doesn’t happen again.

You can observe a lot by just watching. – Yogi Berra

This Article is Copyright © 2004-2011 BiggerPockets, Inc. All Rights Reserved.

An Inflated Appraisal Scheme With A Twist

I was just reading an article about how Mortgage Fraud is now a specific crime in Missouri, but couldn’t help but think to myself whether or not this law goes far enough. While I haven’t read the law itself, a $2,500 fine and/or jail is just not going to cut it. The loans must still be written off by the lenders, and of course, what happens is the banks eat up the cost, and the general public funds the bailout.

We’ve been bailing out banks due to the housing bubble for months now, and funding the crimes of those people who engaged in mortgage fraud and who in the end, couldn’t afford, or simply didn’t want to pay their mortgage anymore. I was thinking about all of this and came up with an innovative idea that would likely stop 90% of future mortgage fraud. Is it something that would ever go into law — not a chance — but if it did, it could change the fate of lenders and could prevent the average citizen from having to pay for the stupidity of others.

A Thought Experiment to Create a Law that Properly Punishes Mortgage Fraud

Those people who specifically committed this crime should NOT be let off the hook for the rest of us to pay. I believe that the law should mandate some kind of recourse beyond simply imposing a fine and/or jail. Frankly, I think the law is extremely weak. While it may have some teeth when dealing with real estate professionals who endorse such crimes, if the law looked deep enough, it would actually hold people responsible for their default.

Why not write a law that requires people who commit mortgage fraud and who default on their loan, to be responsible for a long-term payback of that loan?

If they couldn’t afford the loan in the first place, you’re asking how exactly they’d be expected to pay it back, right?

Why not add the ability for banks to garnish wages for people who commit mortgage fraud?

Actually, we can take it even further and also garnish the wages of those professionals who allowed or encouraged you to commit this fraud. Basically, you put the professionals on the line for the money in addition to the guy who directly engaged in the fraud . . . that would be a deterrent, wouldn’t it!

Landlords can go after renters who stop paying the rent and owe them money, with a garnishment. Why shouldn’t the banks or the federal government be able to go after the money that were screwed out of by the lying consumers/professionals?

While they may not be able to recover all of the money that was lost due to this mortgage fraud, at least they’d continue to bring in funds, ad-infinatum, from the guy who committed the crime and the “professional” who allowed it to happen.

Not only would this act as a deterrent from committing mortgage fraud, but it would also place a big red flag on someone’s credit saying that they are now paying off a loan that they lied to get. Essentially, the law could create a scarlet letter. Any future lender would then know to scrutinize your application EXTREMELY closely before giving you the benefit of a doubt and loaning you any money.

Wrap Up
Would such a law ever come to pass . . . I think it is extremely unlikely. But, if it were to, I believe we would see the virtual end of mortgage fraud as we currently know it!

Any thoughts on this little thought experiment about dealing with Mortgage Fraud?

This Article is Copyright © 2004-2011 BiggerPockets, Inc. All Rights Reserved.

Creating a Mortgage Fraud Law with Some Bite – A Thought Experiment

First came the subprime mortgage crisis; now comes the cases of alleged fraud.

An amazing story Tuesday out of Southern California where the state attorney general has busted an alleged mortgage scam that may have bilked thousands of SOCAL homeowners out of millions of dollars.

And, California Attorney General Jerry Brown told me, in some cases, signatures of homeowners were actually forged on the mortgage documents!

How it worked

According to the attorney general’s office, at least six companies operated by one family enagaged in “predatory lending” by pushing the alleged victims into “illegal and unconscionable loans.”

Brown blames this scheme on the worsening mortgage crisis, which, he says, is creating a number of “fly-by-night” operations.

Brown told me he has never seen anything like this–and the man was even once governor of California, so he’s been around a bit.

The alleged victims were often targeted because they lacked command of English. They were promised one fixed rate on a mortagage but, later in the day, they would be visited by a representative of one of the companies who often had forms with incomplete information.

They would promise that, once signed, the proper numbers would be inserted back at the office, Brown says. If the homeowner declined, says Brown, in some cases their signatures were forged, often with improper spellings of their names.

Many lost homes

Brown says the scheme robbed many homeowners of their homes because they could not afford the paymens.

Arrests have been made and more may be still to come.

Growing California Mortgage Scandal?

Brown thinks so. His office says that in the coming weeks, “Brown intends to bring additional legal actions, both civil and criminal, against other mortgage lenders and foreclosure consultants who are taking advantage of homeowners across California.”

Doubt this is the only state this is happening in!

Let us know if you have heard of such practices in YOUR state or community.

This Article is Copyright © 2004-2011 BiggerPockets, Inc. All Rights Reserved.

California "Mortgage Fraud Scam" May Be Tip Of The Iceberg, Says State Attorney General Jerry Brown

It’s become commonplace to see advertisements of all type promoting some new foreclosure rescue company that is the savior of those in distress and about to lose their home. These companies appear to have all the answers to the distressed homeowners mortgage issues, and for absolutely free, they will save you and get those nasty banks off your back!

Last week I had the great displeasure of learning a bit about the inner workings of such operations, and believe me, they’re not helping anyone but themselves. A client of mine noticed a short sale listing in his neighborhood boasting a price of 130k under the homes tax assessed value, which is pretty incredible. I found it hard to believe the lender had approved that price, since they’re almost certain to do better than that at auction. The home had sold for over one million three years ago and is on the water; it carried 1.3 million in debt, and was listed at just 878k.

My client was very interested in making an offer on this home, so I contacted the agent, and then the foreclosure rescue company (as directed by the agent) that was apparently mediating between the lender and homeowner. I’ve been involved in a few short sales and I’m quite familiar with the process, so I asked the foreclosure co. when the offers would be presented to the lender; I was told, they would not.

He (the company owner) was bold enough to tell me that he would hold all of the offers, and then submit his own offer to the bank for just 500k. Now all of this was being done without the seller’s knowledge, or the listing agents. The foreclosure company was attempting to acquire the property for ½ price, then “accept” an offer from one of the sellers for over 300k more. The idea was apparently to manipulate the escrow company into some type of a dual close with two sets of docs (the lender only seeing one set), which would never happen at an honest escrow company.

Now some of you may even feel this is an ingenious way to make a fortune, and I have to disagree; there are several things that concern me here (aside from the overall dishonesty of it all). Mainly that the seller is being mislead, and believes the offer she accepted and signed is to be presented to the lender, and the listing agent (after I informed him of what is happening) is turning a blind eye to whats going on, and believes that as long as he submits the offer she accepted to escrow, his job is complete. Also, the agents that are spending their time and money showing this property and writing these offers are doing so in the belief their offers will be submitted to the bank, which is exactly what the listing says. That is a lie.

They also lead people to believe the lender has approved the listing price, when in fact they have not (there are of course too many MLS rule violations to even get into for the agents participating in this process).

Then there are the major issues. The seller will be reported to the IRS for capital gains tax purposes by the lender; if you borrow one million, and the lender accepts payment of just 500k, then in the eyes of Uncle Sam, you made 500k on the deal. So that seller may end up on the tax hook for the money that went into the pocket of the “rescue” company. Also, the lender may still pursue the sellers for the money owed, and attach liens to other properties or assets they may have.

Many company’s do make legitimate profit buying homes from lenders at lowball prices, and selling them for profit. Theres not a thing in the world wrong with that. The types of company’s I’ve just described are attempting to play the middle, and use no money of their own. They are creating additional problems for people already in distress and that is wrong.

So if you are involved in this practice, I beg of you to stop preying on people and destroying lives and making the mortgage crises worse (not that you will listen). The lenders are already going broke, and stealing a little more from them isn’t being a business genius, it’s being a thief. Until people stop viewing the theft of money from banks as a victim-less crime, our economy will continue to suffer.

If you’re a seller, in need of a short sale, contact the bank directly. These sales need to have their approval to move forward or you will never close. You can, if you choose, have your agent deal directly with the lender (you must write a letter of authorization) and submit all offers to them.

The lender will pre-approve a listing price, as well as a commission for the agents involved (it’s typically lower than average commissions). Never go to someone and think you can hand them your problem and they will fix it for free, it simply doesn’t happen that way. If you want it done right, you must do it yourself. If not, then your troubles have only just begun. Don’t fall for the farce of foreclosure rescue.

This Article is Copyright © 2004-2011 BiggerPockets, Inc. All Rights Reserved.

The Farce of Foreclosure Rescue (scams)

The following information is about what the U.S. Senate is up to. If any of this becomes law, it will have a direct and severe impact on my business.
There are very good and honest investors out there and BiggerPockets has been a great place for new & seasoned investors to get together and let others know how to do things the right and honest way.

• Legislation Expected to be Introduced Soon.
• Measure Likely to be Modeled After Minnesota Law,
• But May Contain Additional Restrictions Harmful to Investors Nationwide

February 22, 2008 (U. S. Senate)

Wisconsin Senator Herb Kohl has announced plans to introduce legislation aimed at curbing the rise of ‘foreclosure rescue scams’ – using a model which may include restrictions that could be harmful to all real estate investors. The measure is likely to contain some or all of the following provisions:

• Ban on leasebacks-to-owners
• Ban on upfront foreclosure consultant fees
• Ban on all “subject to” transactions
• Limitations on an investor’s ability to purchase or take an equity interest in a home in default
• Ban on all advertising related to “Saving Homes from Foreclosure”
• Restrictions on real estate seminars, which could even apply to Real Estate Investor Association meetings

Also noteworthy – in the Minneapolis / HennepinCounty area alone, foreclosures have increased more than five-fold since the 2004 passage of the Minnesota statute.)

On behalf of real estate investors at the national level, the National Association of Responsible Home Rebuilders & Investors (NARHRI) is already tracking this legislation. NARHRI Executive Director John Grant says that NARHRI will offer alternative legislation from the Commonwealth of Virginia, which has the support of the local realtors, lenders, consumer groups, and which recently passed the House unanimously.

NARHRI expects to see intense political pressure for passage of the legislation before members of Congress leave in the fall. NARHRI indicates it will be providing updates on this effort as circumstances warrant.

This is a very serious in my opinion. It is very frustrating to know that there are legitimate, honest and good investors, mentors and teachers that will be affected in a harsh way.

Please, spread the word on this to everyone you know in the business. It is our job to protect our business. If we sit back and say nothing, there will be no voices to be heard and this could actually become law.

Thank you!

This Article is Copyright © 2004-2011 BiggerPockets, Inc. All Rights Reserved.

U.S. Senate Plans to Consider "Foreclosure Rescue Scam" Legislation. Its Time to Speak Up, Investors!

According to the Associated Press, Massachusetts yesterday endorsed legislation in its Senate to help homeowners faced with the prospect of foreclosure, and to put a stop on fraudulent and harmful practices by the mortgage industry.

Mortgage brokers would have to obtain a license to work in Massachusetts and mortgage fraud would become a felony. The measure would crack down on deceptive advertising, give homeowners a last-minute opportunity to avoid a foreclosure auction and require borrowers to educate themselves to risks.

The Senate bill also proposes the creation of a state subsidy for businesses that pay portions of employees’ housing costs. Buoniconti said the goal was to have the state eventually contribute $1 for every $2 spent by businesses that help their employees pay for homes.

It is great to see that some of the states are finally starting to act, but I hope it is not too little, too late. The aftermath of the recent real estate bubble has resulted in record foreclosures across the nation. This was easily predicted as an obvious result to poor lending practices and worse government oversight of the lending industry.

This Article is Copyright © 2004-2011 BiggerPockets, Inc. All Rights Reserved.

Massachusetts Senate Proposes Mortgage Fraud Protection

Earlier today I read a discussion about someone in New York City who was looking for a real estate buyers agent to help them find a co-op. In their search, they found a realtor who agreed to help them, but required $495 up front to work with him. I, like many other people I asked about this, was up in arms about the down payment request, and decided to do some homework to find out if this was indeed,”kosher”.

My first thought was to contact the local board of realtors and got in touch with the Manhattan Board of Realtors. No one there was able to tell me if this was indeed legal, but recommended I contact the National Association of Realtors (NAR). I called up the NAR and asked a few people about this situation. Again, not one person there was able to help me out. Astonished, I asked who might know what the law/rules were in this situation, and was told to contact the State board. Like a busy little bee, I called the New York State Board Of Realtors and posed the same inquiry after telling them of my misadventures calling the other boards and getting nowhere. What did I find out?

NOTHING!

“Unfortunately, there is no one here who can answer your question,” I was told. The person who knew the answer wouldn’t be in until Monday, but I could try his email and maybe he could help me out in the remote chance he checks it.

Essentially, I found out that there is one person in the entire New York/National Association of Realtors system who knows if it is okay to charge a retainer fee. Is it only me, or is that just really hard to understand? The National Association of Realtors is a huge monster; it lobbies the US Government, has a massive marketing budget, and is a powerhouse in the world of business and real estate, yet one man holds the key to their secret information!

I experienced the wrath of being a Realtor first-hand for a few years while in California. In order to reap the (in my opinion) sole benefit of joining this group, access to the MLS, I had to jump through hoops, spend a small fortune, and join multiple local boards of realtors. It was an extremly frustrating process!

I stand baffled by the situation, and wonder how it is that there isn’t but one sole in the organization who can answer this mystery.

This Article is Copyright © 2004-2011 BiggerPockets, Inc. All Rights Reserved.

Can Real Estate Agents Charge a Retainer? Don’t ask the National Association of Realtors!

I just saw this and had to share it with everyone. It is REALLY SCARY how easy it is to scam people out of their money that are desparate for housing!

This Article is Copyright © 2004-2011 BiggerPockets, Inc. All Rights Reserved.

Renters: Beware of the Fake Real Estate Agent Scam (video)

Last week we talked about the emergence of the selfless real estate agent. Today, we’re going to look at a piece of dirt who makes the rest of the agents out there look bad.

A real estate broker in Shakopee, Minnesota was charged with with 15 felony counts of identity theft; in addition, she filed $3 million in fake loans.

According to Freeman, “in one case, she promised to buy a piece of investment property for someone, said ‘Don’t worry. I’ll pay the mortgage and pay the rents and give you your share.’ She collected the rents, didn’t pay the mortgage and didn’t give the person any money.”

This is yet another warning to everyone to be careful out there. There are so many dubious people out there just looking to scam you, that you really need to protect yourselves. With that in mind, anyone considering investing in real estate has got to be sure that they have a real estate attorney handy.

While your lawyer can’t do too much to stop someone from stealing your identity, they can be sure that the deal you’re considering is legit, and serve to protect you by reviewing all of your paperwork. They are your first line of defense!

The part of this whole story that is most astonishing is, because this is what some call a “white collar crime,” she has not been taken into custody. She also still has her real estate license and won’t lose it unless she is convicted.

Looks like another failure of government to step up and do something. Here’s an idea . . . lets temporarily suspend her license . . . no, that would just take too much paperwork . . . we’ll just let her keep serving in a position where she can steal more money and identities.

I’m not sure who I’m more appalled at, the thief, or the authorities who fail to stop her from doing it again.

This Article is Copyright © 2004-2011 BiggerPockets, Inc. All Rights Reserved.

Real Estate Agent Steals $3 million and Keeps Her Real Estate License

It seems like I’ve been on a bit of a roll today, highlighting many of the downsides of the real estate world. Sadly, there is just more bad news to tell you about.

Apparently an attorney in Westchester, New York was arraigned today for stealing almost $100,000 owed to her client, a homeowner that she represented in a foreclosure sale.

Last January, she allegedly received about $312,000 on behalf of the homeowner, then told the client that she deposited nearly $97,592 of that with the Westchester County Commissioner of Finance, saying it was “surplus” money remaining after payment of the outstanding mortgage, taxes and other expenses related to the foreclosure.

Rather than depositing the money, however, for personal and business expenses.

She was arrested today following an investigation by the District Attorney’s Public Integrity Bureau. She managed to pay the bail of $7,500 cash or $20,000 bond. She is due in Elmsford Town Court on Wednesday.

Not only are they sharks, but real estate lawyers are also finks, I guess.

Now . . . I could have told you that before all of this happened, couldn’t I?

This Article is Copyright © 2004-2011 BiggerPockets, Inc. All Rights Reserved.

Now We Can’t Even Trust Our Real Estate Lawyers?