SCAMS IN REAL ESTATE

LIES, DAMN LIES, AND LIARS

Someone last week hijacked my mail (had it forwarded to their address in Atlanta). Then

someone attempted to open two new credit cards in my name. Our friend, Dr. Fred Chasalow,

had a caller “from Medicare” attempt to gain his new Medicare number. My in-laws received a

call claiming they had money waiting for them from Publishers Clearing House…and only their

bank account and social security number was required to complete the transaction. How does

larceny – and it exists everywhere - play out in the world of real estate investing?

IF IT SOUNDS TOO GOOD TO BE TRUE

High current cash flow AND a huge gain on sale with NO investment risk? Most real estate

investors are sufficiently aware that when it sounds too good to be true – run away!

Unfortunately, the artists of scam are sufficiently sophisticated; fraud is not always obvious

even to the best of analysts.

BAIT AND SWITCH. Edward H. Okum was the master of playing to your greed. One of his

industrial 1031 TIC offerings from Investment Properties of America projected a above market

annual cash distribution. The tenant showed great activity at the facility. But about a year after

the equity was raised, the tenant shut down. The tenant was owned by Mr. Okum! The

property empty was worth but a pittance versus the price the investors paid.

PONZI SCHEME. Mr. Okum owned 1031 Tax Group. Investors placed the proceeds from their

property sales with this group, serving as their qualified intermediary. Okum proceeded to

“borrow” the assets to live the high life. As long as new money came in, it was paid out to

replace the old money (when the investor was ready to close on their replacement property).

Once money slowed coming in to the QI, there was no money to honor the demand from the

investors. The firm collapsed and Okum is now in jail for over 100 years.

LAWYER IMPERSONATION. Kay Creasman, Chair of the Real Estate Section of the Virginia State

Bar, has found that “fake profiles” in real estate transactions are rampant. Proceeds from a sale

are redirected, usually by a phony email which appears to come from the appropriate party, to

an account controlled by the criminal impersonator. Phone confirmation, while a good step, is

not infallible (as phone can also be hacked).

SOMEONE LIED. United Dominion Realty was bidding, where a hard deposit was required, on a

large package of apartments assembled by the RTC after the 1986 financial crash. There was a

240 unit complex in Nashville which was critical to the value of the portfolio. When we went to

inspect the property, we discovered - even though the original loan proceeds had been

advanced to the developer - only 120 apartments had been constructed!

BOTTOM LINE. History is no guaranty of the future. Good properties can be overcome with

spill over neighborhood crime. Great sponsors can become addicted to money, power,

prestige, alcohol, drugs, young women and gambling.

Attractive sales people will tell you what they believe you need to hear so you will write a check

to invest. Sometimes, but rarely, do they lie when they know the truth. More often it will be

the case that they just don’t know what they need to know… but they don’t know they don’t

know it!

There are great investment opportunities in real estate – even in hot markets like today – but

don’t buy into the lie that every real estate investment is wonderful because some have

generated wonderful returns. Dig deep and wide in your research.

Andy Chess