I occasionally write editorial pieces on real estate and real estate investing for the Business Journal Network. I recently provided a column on avoiding fraud scams that appeared in several markets. Here’s the article as it appeared in the Silicon Valley / San Jose Business Journal.

This column emphasizes points that I've emphasized recently in blog postings on fraud and scams. 

Related Posts

• Real estate shell game :: Recognizing fraud
• Real estate shell game :: Part II
• Real estate shell game :: Part III

I got some interesting emails from readers responding to my recent posts on real estate fraud. Here’s one of them (posted w/ permission from the author, with names and minor details changed):

________________________

Chris,

I was approached by an acquaintance, Phil, to invest into a get rich quick scheme. I was to be the buyer and mortgage holder for two houses, but all documents and paperwork would be mailed to Phil’s residence and Phil would be responsible for all mortgage payments and monthly maintenance fees. I was promised a gift of cash in exchange for using my good credit. All was good for several months, and then I started receiving calls from American Servicing Company for non-payment.

Unfortunately, being very trusting of Phil, I did not ask for copies of any documents that I originally signed. Phil kept everything. At this time, I don’t know what to do. Phil does not return any phone calls. As of today, the two residences are unoccupied. Please, any advice is welcome.

___________________________

First of all, I'm not a lawyer and laws/property codes vary from state to state. This shouldn't be considered legal advice. You need to contact a lawyer.

A couple of things that I would do were I in your situation.

1) Don't ignore the mortgage company. Regardless of what happened between you and Phil it appears you’re currently on the hook for these mortgages. Call the lender.

2) Get ready to go to trial. I understand that you don’t have the paperwork, but you must have some documentation that a deal was done...receipts for cash payment, etc. Get these together, along with a written narrative of what occurred, and discuss these with a lawyer.

Now I'm guessing that one of two things might have happened here....

• Non-evil Phil case: Phil got all fired up from attending one of those Rich Dad Poor Dad seminars or some other such motivational pep rally. Then, realizing he had no credit, talked you into backing one of his deals. Phil overpaid for the houses, realized he couldn't lease them out, ran out of money, and buried his head in the sand. Now your phone is ringing off the hook as the bankers are looking for their money, which you owe.  It's possible that Phil didn't set out to rip you off, but he abused your trust and, in the end, skipped town. 
• Evil Phil case: Then again there are lots of ways to rip someone off in a case like this. Example...Phil found a seller selling his house for $100k. Phil offered $110k on the condition that the seller kicked back $10k at closing. The seller got his price, Phil pocketed $10k, and you’re stuck with a $110k mortgage on a house that's only worth $100k. There are many, many other schemes.  It's possible that Phil is a genuine scumball. 

In hindsight (not helpful, perhaps) there are lots of problems that led to this. The most important are a) you got into a deal that you didn't really understand, and b) you can't rely on trust; you need a contract.

This probably isn't much help, but at this point the horse is out of the barn.  Call a lawyer, deal with the mortgage companies, and good luck.

Related Posts

• Why I don't like Rich Dad Poor Dad
• Real estate investing psychology
• How contracts help me to build solid relationships
• Real estate shell game :: Recognizing fraud
• Real estate shell game :: Part II
• Real estate shell game :: Part III

I’ve often stated that one of the most important factors in your success as a real estate investor is your ability to select, screen, and retain quality tenants. This is something that I think I’m pretty good at, which has helped me as an investor.

I was going to write an article about this not to long ago when, bam, I ran into a problem: tenants who stopped paying.

The tenants were a flaky young couple that I knew I might be taking a chance back when they signed the lease in May. But I decided to rent to them and mitigated my risk by signing a short lease (six months, with renewal contingent on timely payment), charged them first and last month’s rent upfront, plus one month’s rent as deposit. I won’t go through the boring details, but they ended up breaking the lease and abandoning the property while they owed me money. If you find yourself in a situation like this one here are some points to keep in mind.

• Property codes, generally speaking, exist to protect the tenant. However, most tenants who end up in situations like this have not followed the law. On the other hand, you have – assuming you’re a responsible landlord. The party who is on the right side of the law (you) negotiates from a position of considerable strength.
• Ensure that you use a current, legally compliant lease contract that includes specific references to the property codes. For example, all of my leases state that tenants are prohibited from withholding payment for any portion of any month’s rent on grounds that the security deposit is security for unpaid rent, and that bad faith violations may subject the tenant to liability up to three times the rent wrongfully withheld plus Landlord’s reasonable attorney fees.
• We all have our own style, but in tenant/landlord disputes you want to be more like Agent Friday (“just the facts, ma’am”) than, say, John Madden. Communicate clearly, calmly, and factually. Quote relevant state property codes, chapter and verse. Read the relevant clauses from the lease that the tenant signed. Use the facts, the contract, and the law as a blunt instrument.  Don't call or email when you're angry. 
• Back up phone calls with written communication – email or a leter. Tell ‘em on the phone, the follow up in writing to tell ‘em what you told ‘em. Keep copies of everything.
• Once you feel a problem brewing, keep a written log of everything. Capture dates and times of phone calls and what each party said.
• Follow the law with regards to notices. You can’t just put deadbeats out on the street; you need to serve them with a Pay or Quit notice with the proper lead times. Consult your local property codes and know what your obligations are.

The idea of all of this is that you’ll be following a rational, well planned strategy. If you end up in front of a judge, either in an effort to evict the tenant or suing for damages, your ducks will be in a row.

This reminds me of my brother. Greg isn’t always right about everything, but if he offers to bet me about something then there’s a 99.9% chance he is. Greg hates to lose, so when he puts his money where his mouth is and offers to shake on a bet then I tend to back down. If you end up in court you want to be like Greg; you should know you’re going to win. Smart, ethical landlords don’t lose these cases.

And if you follow these guidelines then, in the end, the tenant (if he has a rational bone in his body) will often back down. That’s what happened in my case; they paid and got out, and I didn’t have to drag them to court. They saw the handwriting in on the wall.  Sure I wasted some time hammering out threatening letters and trying to chase them on the phone, but all in all it wasn’t a bad outcome.

The title says it all;  I just hate bandit signs.  When I see these things littering our corner intersections proclaiming cheap mortgages or foreclosure assistance I wonder who the poor saps are that actually call these numbers. 

The first thing that I think when I see a bandit sign is "here's a guy who's willing to do something illegal to make a little money."  Not exactly a first impression that inspires me to pick up the phone and strike up a business relationship.

Laws vary from region to region, but in most areas the city comes around periodically to collect these things eyesores.  There's so much of it that I doubt that anyone gets prosecuted for breaking city ordinances.  That might be enough to make you think "hey these guys are getting some pretty good free advertising; I'm missing out."

Well there's another way - a better one.  When I'm looking to find a tenant for a home that doesn't have good exposure to traffic I'll simply knock on a few doors.  I'll pick a nearby house that does have good traffic, and then offer the owner $10 or $20 to plop a sign in their front yard.  You can get a sign from the FSBO center at Lowes or Home Depot for fifteen bucks or so, and some vinyl stick-on letters (recommended) for a few bucks more.  

Advantages:

1)  It's legal.  Ok, I know that not everyone out there is as uptight about the bandit sign thing as I am.  But some folks are - and bandit sign users turn off these potential applicants.  

2) It looks better and makes a better impression:   Bandit signs need to be cheap.  Why?  Because they're disposable; someone eventually will come along and toss them in the trash.  Therefore bandit signs tend to be cheap, flimsy and ugly.  But if your sign is legal then you're less likely to lose it, so you can spend a few bucks on a nice sign with stick-on letters. 

3)  It's an excuse to strike up a conversation with your neighbor.  Sometimes they might know someone who is interested in renting the property.

 Related Link:

• Citizens Against Ugly Street Spam

Yesterday I posted a YouTube video about a sting operation busting some shady "Investment Advisors" who had defrauded a group of investors using a common tactic.  This was a variation on the standard buyer-seller kickback scheme that I previously wrote about.  Here's how it works:

I love real estate.  There are millions of honest, ethical investors out there making prudent, informed responsible investments to secure their financial future, but there are also a brigade of scumballs busying ruining it for the rest of us.  Keep your eyes peeled. 

I grabbed this YouTube video from Chris Lengquist's real estate blog.  This one is a little different from the real estate scam that I recently wrote about but you could consider it a variation on the general theme. 

A couple of rules of thumb:

• If it looks lucrative and easy then you're about to be taken for a ride.
• Beware of "package deals" where an advisor delivers the property, the lending, the appraisal and the tenants.  These parties, if delivered as a combo deal, will always collude against you. 
• Don't sign anything you don't understand.  Loan documents can be intimidating for new investors - but if it smells fishy then ask questions until your gut tells you everything is ok. 
• Any counterparty who is willing to be dishonest on your behalf will cheat you in the end.
• These people in this video aren't necessarily dumb.  The scam artists are pros, and they look for amateurs as their victims. 

Sub-prime mess, foreclosures, sliding home prices - today's market conditions are causing sleepless nights for some but others are smelling the opportunity to make a quick buck.  That's great for enterprising investors because in markets like this one opportunities abound.  But, unfortunately, it also creates a fertile feeding ground for hucksters and sham artists waiting to defraud novices. 

Your mom's advice, general speaking, was pretty good: if it looks too good to be true it probably is.  But it's worthwhile to understand the mechanism of the basic real estate swindle.  There are many variations to this general scheme, but if you're considering a deal that in any way resembles this shell game then hold on to your wallet. 

The scam generally tends to unfold as follows:

If you get caught up in a scheme like this your opportunities for recourse are limited.  The fraudsters tend to prey on unsophisticated investors and convince them to sign loan documents that they don't understand, and the fact that the victim's signature appears all over a fraudulent no-doc loan package serves to incriminate the victim, even though he or she was acting out of ignorance. 

Additionally, the victim often is too embarrassed to go to the authorities. 

These schemes are bad for everyone.  The criminals often strike multiple times in the same neighborhood once they find a feeding ground with the right combination of properties and potential investors.  This is happening right now in Houston, and the problem has become so pervasive that the FBI has commissioned a special unit to crack down on mortgage fraud. 

But by then it's too late for the victims, who lose thousands of dollars and see their credit in tatters, and the communities which start to see zooming tax appraisals (based on the bogus inflated sales prices) coupled with boarded windows popping up from all the foreclosures.  That's an ugly double whammy. 

Related Links:

• Ethics plalys an important role in real estate investing
• New scrutiny for short sellers