Personal Development

The 4 Signs Of The Real Estate Con Man (And How To Avoid Him Like The Disease That He Is)

Expertise: Business Management, Real Estate Investing Basics, Personal Finance, Personal Development, Real Estate News & Commentary, Mortgages & Creative Financing
101 Articles Written
Real Estate conman

We all know there are bad people in the world.

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Whether its bad people conning you by pretending to be the IRS, pretending to be a fake charity, or pretending you just won the sweepstakes.

But what about people conning your money out of real estate deals?

Well, as a CPA unfortunately I see this all too often.  Just to be clear, in real estate, just like any other investment, there are good deals and there are bad deals. Sometimes, there are good deals that go bad due to market conditions or other outside forces (for example bad management).

These are just inherent investment risks. Just like the stock market, your money in GE stocks can go up or down. Lots of money can be made and lots of money can be lost. This is also the same with real estate, whether you invest in rentals, flips, notes, or tax liens

What I am talking about today are not the “bad deals” or the good deals that went bad. Bad deals happen from time to time and is part of the risk that is associated with investing.

What I am talking about are the bad people who have intention to con people out of their money.  The situations where deals are set up to fail from the beginning, or worse yet, where an investor later finds out there was no deal at all to begin with.

The 4 Signs Of The Real Estate Con Man:

Here are a few red flags to watch out for when evaluating a potential investment:

1. Must Act Quickly!!!

Ever heard someone talk about the “deal of the century” that is about to close in the next five minutes?

You may have come across these deals that are “too good to pass up.” A deal that leaves you no time to investigate but just enough time to write a check?

A client recently told me that her realtor introduced her to a real estate developer who was offering a note investment at an interest rate of 45%. The only catch, you guessed it, was that the money needed to be wired by the end of the day.

This did not pass the smell test for me and I advised the client that more due diligence needed to be done before an investment decision is made. She did not like the idea of passing up on this great opportunity since other notes she was considering were paying a lot less at 10 to 12% interest rates.

In the end, I convinced her that if this investor was truly that good, he would be needing money down the road again and it would make sense for her to do her due diligence on him and his company now so that she can be more well-informed when his next note opportunity came along.

2. Unrealistic Returns

Aside from the urgency of this last opportunity, the other suspicious thing that stood out on this offer was the high return that was promised by the borrower.

This is not to say that it is impossible for someone to pay 45% interest rate and also be profitable, but it does beg the question as to why the borrower feels the need to offer a 45% interest rate when market rate for similar products is well under that at less than 20%.

Getting you to focus on the large extraordinary return on investment could be a tactic to get your focus away from the inherent risk of an investment.

3. False Sense Of Security

With any investment, one of the main things we want to know as investors is what is the worst case scenario?

If it’s a flip property, we want to know what happens if we can’t sell it. Will it generate cash flow if we need to hold on to it in the long term, and can we service the debt.

In a syndicated deal, we want to know what happens if the apartment deal goes bad and how to get our money back. In the world of note investments, one of the most important things we need to understand is the secured asset.

I am always surprised how often I see people invest in “notes” that are secured by nothing more than someone’s promise to repay. Just because someone promises to pay, doesn’t necessarily mean they will.

Just because someone signs a personal guarantee, this does not necessarily mean you will get access to their personal name (Hint: most con-artists will already have moved all their assets out of their name before you even know your money is gone).

You may or may not agree with me on this but personally, I want all of my note investments to be secured. Of course, first position is generally better than second position and so on and so forth. I once met a gentleman who told me that I could help him fund his flip project as a lender but because I was not lending more than $100k, that I did not need to be on title.

In fact, he made me feel like I was unreasonable to even ask to be on the title. Fortunately for me I smelled something wrong with his proposal and just a few months later, I found out his business was shut down and he was under investigation by the SEC.  If you feel something is off, it probably is, and you may be better to save your money for the next deal that comes along.

4. Unnecessary Complexity

We have all taken classes on creative financing for real estate.

For me, those things are always a good time and I enjoy getting insight and hearing how other investors use creative ways to get into real estate. If you will be investing in a creatively structured deal, please make sure that you fully understand how the deal is structured and how your money relates to this investment.

Most importantly….read the documents. As a CPA, I like to read contracts and agreements for my real estate clients because 1. they tell me more about the deal itself and 2. it helps me to understand how and what we need to report on the tax returns to get the most benefit for the client.

What I find shocking is that time and time again, I have clients who tell me they purchased a piece of real estate only to find out after reading the contract they have only purchased an option to buy down the road. Other times I have clients tell me they are investing in a secured note when the note clearly indicates there is no asset or collateral tied to it.

If you are involved in creative real estate deals, make sure that you are reading your contracts and agreements to confirm you are signing what you think you are signing.

As much as we all like to jump into the next big thing in real estate, make sure that you do it in the most prudent and informed way.

When it doubt, do more research and rely on your team and your advisors to help guide you through the decision process.

Have you ever been conned into a deal?

Leave your comments below!

Amanda is a CPA specializing in tax strategies for real estate, self-directed investing, and individual tax planning with over 18 years’ experience. She is also a real estate investor of over 10 years with a focus on long-term hold residential and multi-family assets across multiple states. Formerly a tax advisor at the prestigious accounting firm Deloitte in the Lead Tax Group, focusing on tax strategies for the real estate industry and high net worth individuals, and at an international Fortune 500 Company in the high-tech industry in the Corporate Tax department, Amanda’s goal is to help investors with strategies designed to supercharge their wealth building. Amanda’s highly rated book Tax Strategies for the Savvy Real Estate Investor is amongst Amazon’s best seller list. A frequent contributor, speaker, and educator to some of the nation’s top investment and self-directed IRA companies, Amanda has been featured in prominent publications including Money Magazine, Realtor.com, and AllBusiness.com. Amanda was a speaker at Talks at Google and is a 40 under 40 honoree by CPA Practice Advisor, showcased amongst the best and brightest talent in the accounting profession. Her firm Keystone CPA, Inc. was awarded a two-time winner of the Top CPA of Orange County Award by OC Metro Magazine. She is certified by the CA State Board of Accountancy and is a member of the prestigious American Institute of Certified Public Accountants (AICPA) with clients across the nation.

    Susan Goldthorp
    Replied about 5 years ago
    This is a great article and a reminder if it looks too good to be true it mostly likely is! Unnecessary complexity is particularly pertinent, especially for new investors.
    Amanda Han
    Replied about 5 years ago
    Thanks Susan. Yes….unnecessary complexity sometimes is put in place simply to confuse people.
    Sharon Tzib
    Replied about 5 years ago
    As always, Amanda, excellent advice. The lure of the high interest rate should have the effect of making one very suspicious, but many times it makes people lose all their common sense. Greed is a powerful motivator and the downfall of many.
    Amanda Han
    Replied about 5 years ago
    I couldnt have said it better Sharon!
    Amanda Han
    Replied about 5 years ago
    I couldnt have said it better Sharon!
    Priscila Argaez
    Replied about 5 years ago
    Great article Amanda. It’s very important to be knowledgable about real estate and how it works to avoid being conned.
    Amanda Han
    Replied about 5 years ago
    Thanks Priscila! If we can help even one person avoid being conned then we have done well on this BP forum =)
    Seth Williams
    Replied about 5 years ago
    I love this kind of article. It’s one thing to point fingers at people and slap the “guru” label on them (which I’ve found is a rather vague label – since everyone seems to have a different definition if what this means). It’s another thing entirely to start adding clarity to what this means, what the real symptoms are and why these people are a problem in the first place. These are 4 solid guidelines to work with – thanks for sharing Amanda!
    Amanda Han
    Replied about 5 years ago
    Thanks for reading Seth! Its interesting that the word “guru” in the real estate circle has such as negative connotation. Not all guru’s are bad….we just need to decide for ourselves which ones are the ones really there to help us with our investing.
    John Marion
    Replied about 5 years ago
    Point four, Unnecessary Complexity, is something I run in a lot with new wholesalers who are supposedly being mentored by real estate guru. I have learned to ask the wholesaler if they have the property under contract and directly control the deal. Unfortunately, some wholesalers lie about this and then when I get more information I discover that others are involved in the transaction, the property is not actually under contract yet, or a series of steps need to be taken to make any traction on moving the transaction forward.
    Amanda Han
    Replied about 5 years ago
    I agree John. If I cant understand what someone is pitching me in the first 3 minutes of the conversation I move on from that deal.
    Ed
    Replied about 5 years ago
    I’d like to add my own tip: Make sure you carefully read the agreement, whether it’s a partnership, note investment, etc, until you understand the potential downside. And understand your options if the projected returns don’t materialize. I once signed a partnership agreement that essentially read like this: “Profits will be distributed according to the percentage of ownership shares.” The mere prospect of losses was only mentioned once in the entire agreement, whereas it should have been mentioned every time the word “profit” was mentioned. Nobody likes to think about losses, but they are a very real possibility. I’m now paying the price because I believed the rosy projections that a profit was all but assured. Never get so confident and comfortable with expected profits that you don’t exercise good judgement.
    Amanda Han
    Replied about 5 years ago
    Cant agree with you more. We should spend as much time in analyzing what happens in the “worse case scenario” as we do in the “best case scenarios” before putting our money up in a deal.
    Mary B
    Replied about 5 years ago
    Excellent advise, Amanda. Always perform due diligence no matter how much they state ”time is of the essence”. Always read the contract or have someone that you trust be there to read it on your behalf. Yet as real estate investors (no matter which type) you should learn how to read the contracts. In Pennsylvania there is a law requiring contracts for real estate to be written in short words ergo not hoardered with a ton of legal terminology. So as more deals are done you should become more familiar with the NCNDA, Offer to Purchase and Option to Purchase Agreements etc. Thanks a bunch for the article, Amanda.
    Amanda Han
    Replied about 5 years ago
    Thanks Mary for the great tip!
    Shaun
    Replied about 5 years ago
    All very good points. Having to act quickly (generally so fast it would preclude doing much due diligence) and ridiculously high returns are huge red flags. I pretty much dismiss something that is paying over 3x the market rate (like your note example) or the “I need to know right now” types. I hate needless complication in things. That being said you shouldn’t be as dismissive. Your profession exists because of the governments compelling need to make everything ridiculously complicated for absolutely no reason. 🙂
    Amanda Han
    Replied about 5 years ago
    well…if taxes are simplified just enough to keep CPAs around and not be changing every minute of the day…that would be an ideal works =)