Real Estate Investing Basics

Don’t Get Conned! 11 Crucial Questions to Ask About New Investments

Expertise: Business Management, Personal Finance
80 Articles Written
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You want to hear a horror story? As early as 1999, a forensic accounting and financial fraud investigator told the Security and Exchange Commission that it was legally and mathematically impossible for Bernie Madoff to deliver the gains he was promising.

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He was ignored.

As we all know, it turned out that Madoff was a crook, and lots of investors lost millions in the largest Ponzi scheme of all time. Investments are always a gamble, and where there are gamblers there are crooks. These are shark-infested waters.

So, how do you spot a deal that’s “too good to be true” even when the SEC can’t?

Well, your first clue is that the deal looks too good to be true. It also helps to understand the SEC isn’t there to look after your interests. They are guessing at all of this data the same way you are. You need to protect yourself against crooks.

To that end, here’s what you need to ask about a potential investment opportunity if you want to avoid being a sucker.

Don’t Get Scammed: Ask Yourself These Questions About Potential Investment Opportunities

1. Does This Help Me Diversify?

Diversity. The first commandment. This is sort of a reverse-engineered security system. If you own investments in a lot of places, if one of them turns out to be a junk, you aren’t sunk.

This doesn’t really protect your swimmers from sharks, rather, it makes sure that you have so many swimmers in the water that if you lose a few, your species will carry on. Again, think survival. If a swimmers breaks away to look for big opportunities in uncharted waters, afford to lose him. This way, you can take risks in a calculated way to maximize returns and give yourself lots of security against unforeseen economic shocks.

Related: Investors: Don’t Fall Victim to the Biggest Scam in Real Estate

11 Crucial Questions to Ask About New Investments-cup and balls scam

2. Am I Caving to Pressure?

We learn this one in high school. If you’re being pressured to do something that you don’t think is good for you, don’t do it! This is such an old scam it’s a cliche. They use this bogus trick in every finance movie from Wall Street to the Wolf of Wall Street. In Boiler Room you watch a man’s life come undone because he invests with crooks following a classic scene in which the protagonist pressures him to buy big into stocks that are a scam.

This one is easy, if you’re being pressured to buy, it’s too good to be true. Hard Pass.

3. What Evidence Do I Have?

Don’t invest in anything until you see evidence. Would you invest in stocks sold on real estate in heaven? I know you’re a believer, but don’t be a sucker.

Related: The Real Estate Guru Trap – How It Works & 4 Ways to Avoid It

4. Is It Written in Greek?

If you don’t understand the business model, the revenue stream or the way in which the business generates a return, don’t put your money in. If you can’t make sense of it, it’s because it doesn’t make sense.

5. Am I Being Asked to Accept a Shady Commission?

If you’re told you can receive commissions for bringing in other investors, you’re being taken for a ride. You need to be licensed to receive commissions on investments.

You aren’t allowed to sell side bets in a casino unless you are the casino. The world of high finance is greedy. If the investment is sound, they don’t need help selling it. This is illegal, which means the business in unscrupulous. They will screw you over.

Young bearded man in glasses showing OK gesture and blinking at camera with overconfidence

6. Can I Get a Deed of Trust?

Always collect a paper trail. If you lend somebody money, get it in writing. If these guys disappear, it will be hard to get anything back. It will be impossible without documentation. If a company doesn’t have letterhead, then it’s not a legitimate company.

Related: The Investor’s Guide to Vetting a Fixer-Upper: Major Systems to Inspect

7. Is This Business on File with the SEC?

You can get in touch with the SEC and make sure they’ve filed. And you should.

Once again, legitimate businesses take legitimate steps to be legitimate. Trustworthy companies are going to be transparent companies. You want outlines of the investment’s projected growth and the use of funds; you want to know what the managing company’s president ate for lunch. Make sure the company clearly outlines what you are entitled to as an investor.

8. Background Check: Are These People Credible?

You need to do more than a Google search here. Investigate the people who are handling your money. Banks do a credit check. So should you. Find out whom they’ve worked for. Get a damn resume!
You need to be vigilant. This is your ship and as the captain, you’re going to sink with her. It’s not unreasonable to want to who is managing your funds, unless they have something to hide. If a bank won’t clear them, it means they aren’t safe.

9. What Do the Experts Think?

Time to call in the cavalry. If you’ve done your due diligence and you’re ready to veto an investment, you need to get a real pro to look at it next. A real tight lawyer. The kind of person who likes saving money the way you like spending it.

Two heads are better than one and even if an investment is tight, there still might be some nonsense in the fine print. Spend a few dollars and get a pro to double-check your work. Some of these guys write insane salaries into their contracts so make sure your lawyer has your best interest at heart. Don’t use your money to make money for other people.

woman in business attired seated at desk looking at laptop computer with arms raised in wonderment and disappointment

10. What Does a Veteran Investor Think?

As long as you’re getting a second opinion from your lawyer, why not get a more experienced investor to take a look as well. They will see things you cannot see. They will ask questions you will not ask. They may even want to buy in. If they think it is worth investing in, there’s a good chance they are right.

11. Don’t Invest What You Can’t Afford to Lose

OK, this isn’t so much a question as it is a strong suggestion. No matter how well you play your cards, you can still lose to the luck of the draw. Don’t invest money you cannot afford to lose. A pushy salesmen trying to take your life’s savings is a conman. Invest with someone who understands your interests and your limits.

Bottom Line: If you do not know what you are doing, you don’t want to be sitting at the table. Gamble within your means. If you want to play a little home game with low stakes, that’s exactly where you should start. Only sharks survive among sharks. You can sharpen your teeth, but it takes time. Be patient. LEARN. Get help. If, after that, an investment still confuses you, it’s time to cash in your chips and walk away.

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Have you fallen victim to any scams or heard any horror stories about investors who have?

Warn others in the comment section below!

Scott Royal Smith is an asset protection attorney and long-time real estate investor. His law firm, Royal Legal Solutions, helps thousands of real est...
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    Johnny Nguyen Investor from Portland, OR
    Replied about 1 month ago
    great tips Scott on reviewing a deal. it has to make sense. also stay away from multi level marketing businesses (MLMs)
    Anthony Gude Developer from New Jersey
    Replied about 1 month ago
    Worse yet, the liability of a due diligence error extends to civil penalties and beyond. These 11 questions make up a necessary vetting procedure, and skimping could cost you your business and business livelihood.