A Big Pyramid Scheme?

18 Replies

Does real estate investing ever seem like a giant pyramid scheme to anyone else? The way loans, lending, payments, and everything works almost seems like a pyramid scheme. Throw in syndications and private money and you can see the similarities. The reason I bring this up is because it seems like there is a very thin line between legal and illegal practices sometimes especially when it comes to borrowing money or raising money to invest. I was watching American Greed and it occurred to me that some things aren’t pure black and white but things get out of hand quick.

Yeah if you look at all the liar loans that were created during the last bubble and selling off the bad loans as mortgaged backed securities . I do see how it could be viewed similar in a way .

Lending has definitely loosened up and I’m sure there is some shady things going on that we won’t hear about until it’s too late/after the fact .

Subprime lending is back and growing just as an example . They say it’s not as risky as last time but they said it wasn’t risky the last time either .

https://therealdeal.com/2018/03/29/us-subprime-mortgage-bonds-are-making-a-quiet-comeback/

I don’t see traditional real estate investing as a pyramid scheme. A pyramid scheme relies on recruiting other people and paying early investors with money from later investors. If someone was doing that in real estate, well I guess it wouldn’t be like a pyramid scheme, it would actually be one. 

With that being said, I also like watching American Greed. It’s unbelievable some times the extent people will go to, and the risks they’ll take, to rip off other people. Doesn’t matter if they’re doctors, attorneys, brokers or any other profession. They all can get caught up in the greed and lavish lifestyle, albeit for a relatively short amount of time. Almost makes you feel like you can’t trust anyone after watching some of the episodes. 

When the crap hits the fan, pooling of money for deals will absolutely function like a pyramid scheme for some unscrupulous operators...they will rob from Peter to pay Paul, many times without bad intentions.

It also takes good internal record keeping to keep from commingling funds.

@Anthony Gayden I wouldn't say Pyramid scheme, however I do see predatory practices daily, Guru's, and some of the bad property sellers ripping off the uneducated population on a regular basis. Almost daily I see properties posted in the BP Marketplace and many other REI platforms with terrible deals and a ton of people asking for additional information or expressing interest to buy, and when you look at the profile of the interested party, it's a new investor trying to accumulate doors quickly regardless of how bad the deal is.

I don't blame the scammer alone, I also blame the scammed for investing while uniformed. I think we've all seen the post that show up every couple of day stating "I have a (X) -Units under contract in an apartment deal, What do I do next?" This is just one of the many post for those caught up in the Greed of REI.

In regards to Syndication solicitations I don't consider the Pyramid schemes, When I've looked into them, they're actually people looking to do Partnership agreements and raisings funds, but because they're not educated or understand the industry they're trying to make money in, they're misusing the term Syndication, these people who have never purchase one single property trying to Syndicate deals once again is asking for trouble one way or another.

@Mike Dymski   having been and worked for the 80s versions of modern day syndicators and having had a front row seat to the melt downs.. your exactly right it starts off very innocently.

usually because they have so many investor in so many deals they don't want the word to get out that they have a bummer.... so lets just borrow from the reserve account of  Del Boca Vista Number 1 it will be short term loan we have the right to do it.. :)  then it just starts to go down hill.

also many times these high flyers are very late to change their lifestyles.. and that adds to the cash flow stress.

I mean I was totally stressed in those days I got wrapped up in a Civil rico with one of them.. I was the selling broker on a deal No ownership interest not an employee etc etc.. they sued every one..

So to this day I personally will never ever have anything to do as a sponsor for syndication .. I have invested in a few with those I trust a bunch.. but I would never do it with a beginner etc.

@Joseph M. Even though we see adverts for subprime coming back like in the Scottsman guide I don't see them happening in practice I have yet to see one in any of my retail sales I have made in the last 18 months.. FHA yes .. but two loans no money down bad fico no have not seen that.

that product is needed in certain markets like in MS the average credit score is 600 you need some version of sub prime other wise half the state will never own a home and probably 70% of the state. Good for landlords tough on buyers.

@Kyle J.   I am with you after watching American greed I don't know how any of us raise investor capital.. I know how I do it.. and I do it with a transparency that is so 100% bullet proof and that's the only way a little guy like me can do it I am thinking.  the American Greed with Ed Okun who stole all that 1031 money as an accommodator.. coming to realize that 1031 is not regulated in any manner that was a shocker... and now you have the guy In FLA who has it Appears based on BP post done the same thing..   anyway I love that show as well.. but usually its investors being too trusting and not getting any verification other than internal reports from the sponsor.. the bank accounts don't lie and unfortunately when you go into many of these deals like Crowd funded deals you have no Access to the bank account.. so really its what ever reports they send back.. its only when you check the  actual bank accounts does reality come to play.

I worked on the bankruptcy case of a person who was featured on an Amercian Greed episode. My takeaway was that if it seems too easy, the payback is too quick, a person rockstars from nothing to a major player in no time, yeah, you oughtta be suspicious. In life, anything that seems too good to be true, probably is.

This post has been removed.

Originally posted by @Tracey Geary :
I worked on the bankruptcy case of a person who was featured on an Amercian Greed episode. My takeaway was that if it seems too easy, the payback is too quick, a person rockstars from nothing to a major player in no time, yeah, you oughtta be suspicious. In life, anything that seems too good to be true, probably is.

one thing I see on that show and I think I have seen them all or pert near all.

of course is the slant were the poor investor is portrayed and they should have known 10% or 9% or 11% was too good to be true.. when in fact for a semi educated investor those returns are normal and easy to get in todays world I mean you can just buy good first trust deeds that bring in those returns.

I don't see that slant on that show that these folks were being too GREEDY .. now the ones that promised 10% in 60 days that I get ..

this is why Maddoff did so well in a negative way of course.. but he never talked about outrageous returns..  

Always know where your money is people!  

People like Madoff did what he did because people trusted him with their money without knowing what it was being used for, where it was going, or what they bought with it.

Sometimes I worry about some of these turnkey operations.  NOT all of them are bad (there are some great ones out there), but I can see how a turnkey operation where people buy blindly, could be an opportunity for bad operators to take advantage.

Some people do bad things when choosing what they feel is the lesser of two bad choices.

Start reading about SEC Regulation D and you'll get to know all about the "thin line." But more than likely you'll be even more confused about where that thin line is haha. 

Originally posted by @Cara Lonsdale :

Always know where your money is people!  

People like Madoff did what he did because people trusted him with their money without knowing what it was being used for, where it was going, or what they bought with it.

Sometimes I worry about some of these turnkey operations.  NOT all of them are bad (there are some great ones out there), but I can see how a turnkey operation where people buy blindly, could be an opportunity for bad operators to take advantage.

 just read the Morris invest threads to understand your concern on quote un quote turn key.

Technically, isn't general life kind of a pyramid scheme in itself? Everyone's got to eat and pay bills and make money and the only way to make money is via someone else, somehow, sooo....

I would say it’s more like a food chain.....

@Anthony Gayden Lol, I thought I was the only one who was fascinated by the people on American Greed and try to synonymize some aspects of it to real estate. 

In some cases in real estate, it can appear to be a pyramid scheme but there is a big difference from a lending perspective and good syndication perspective in that the lenders [HML] and investors [LPs] do, in most cases, get their initial capital back.

On the other hand, people who participate in pyramid schemes usually never got their full initial investments back, yes, some will get monthly payments for a while and when the pyramid starts to crumble, the payments stop. 

It is an interesting discussion overall. 

Well, the major difference is that in a pyramid scheme there is no product, or the product is really just a front for attracting membership, which is the real pay off. With real estate, ostensibly, you own a house, commercial building, apartment complex, land, or some other tangible asset. I can see, however, that REITs could be pyramid schemes with some fancy accounting and work disguising the lack of real ownership - but, for that matter, so could any mutual fund in theory. There are a lot of "side-hustles", legitimate and questionable, that work to insert themselves in the process to siphon some off some of the value between buyer and seller while creating either dubious value or no value at all. That could be anything from RE agent fees for no work performed to worthless home inspections to points for processing loan applications. Not to say that none of those things won't add value - a good home inspection may be worth far more than it cost - only that they are ancillary costs to the main course, which is "I will sell you this piece of property with buildings for $X". 

Ultimately, all investments and monetary systems depend on confidence in the system. If tomorrow everyone decided owning real estate was worthless, then the investments would be worthless regardless if they were a fungible asset or not; conversely, if suddenly the only investment worth holding was Amway (are they even still around?), then membership costs in Amway would skyrocket if they were limited, or sell like hot cakes if they were unlimited. 

@Kyle J. technically what you describe of recruiting later investors to pay early investors is a Ponzi scheme. A Ponzi is what Bernie Madoff was running. It wasn't a pyramid because he was the only one at the top. Every investor was duped. He was showing huge gains to investors on paper, so he only really paid the early investors when they cashed out. Most never cashed out because where else could you get those kind of returns.

@Anthony Gayden in some ways a Pyramid can describe many businesses. Multi-level marketing is one type of Pyramid that is always skirting on the edge of legality. Generally the difference between a scheme and legitimate business is that a business offers something of value. In a Pyramid Scheme, it requires never ending supply of investors to keep paying everyone. There is nothing tangible being sold. In real estate, it is the tenants (customers) that pay the investors. Yes, real estate requires new buyers, but they get value from the purchase by either living in the property or renting it for profit.

Leading up to the crash of 2008, there was speculative buying, where there were no tenants. Investors planned to buy and flip to the next person, making money in the process. The problem was eventually, there was no "next person" and there was no tenant. That is not exactly a Pyramid Scheme, but includes some aspects of one.

Originally posted by @Cara Lonsdale :

Always know where your money is people!  

People like Madoff did what he did because people trusted him with their money without knowing what it was being used for, where it was going, or what they bought with it.

Sometimes I worry about some of these turnkey operations.  NOT all of them are bad (there are some great ones out there), but I can see how a turnkey operation where people buy blindly, could be an opportunity for bad operators to take advantage.

@Cara Lonsdale It's not hard to spot the unscrupulous turn key companies. If they require you to close before the renovation is done, pay for renovation upfront, tell you that you don't need to get an appraisal, don't allow financed purchases, you probably want to run, not walk away from them. Reputable turn key companies don't require you to close until the renovation is complete, you've had an independent inspection, a tenant is in place and the property has appraised for the contract price.

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