Predatory or just business?

[JS Burnett]

I need to talk about something that happens at real estate education and networking events that nobody in a position to stop it wants to talk about.

New investors show up. They are told the market is full of opportunity. They are encouraged to act fast before the window closes. They are sometimes explicitly encouraged to liquidate retirement accounts for down payments. And they are handed numbers by wholesalers that do not reflect what the deal actually costs or what it will realistically produce.

I had a debate about this recently with a lender who was defending the practice.

He conceded within the first few minutes that due diligence is essential. He conceded that most wholesalers in these environments don't know real numbers. He could not however agree that presenting unreliable numbers to financially inexperienced people in environments designed to encourage fast decisions was predatory.

I want to be specific about what predatory means in this context because the word matters.

It does not require malice. It requires a structure where one party has information the other doesn't, profits regardless of the outcome, and operates in an environment where the information asymmetry is unlikely to be corrected before the check is written.

The lender gets their points at closing. The wholesaler gets their assignment fee. The new investor gets whatever the deal actually produces which is frequently not what the numbers on the flyer suggested.

When I made this argument clearly and directly the debate stopped being a debate. Threats were made. Industry contacts were called. Claims were made that I had threatened him.

I had not threatened him. I had made an argument he could not answer and he responded accordingly.

Here is what you need to take from this.

Every number you receive from anyone who profits at closing regardless of your outcome needs to be verified independently before you commit anything. Not because everyone is dishonest. Because the structure of these transactions does not require honesty to generate a profit for the people presenting the numbers.

Know what is real. Find someone who does not profit from your decision to tell you whether the numbers make sense. That conversation is worth more than every education event you will ever attend.

[Jay Hinrichs]

its called Caveot emptor .  There is no question though that RE for whatever reason folks think is the way to get rich and retire.. irrational exuberance.. And then presented in a format right out of MLM marketing structures.