by A. Han
We all know there are bad people in the world.
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 General Electric 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.
