Media stories on real estate fraud often focus on the markets that flew highest, like Las Vegas and Florida.  But there was a story on today's All Things Considered tells of a scam of Akron, Ohio. 

Towns like Akron, as it turns out, were a fertile feeding ground for illicit activity during the boom.  Even during the headiest days property values were appreciating too slowly to make a fortune quickly, so unfortunately there were some operators who combined greed and easy credit into a formula to bilk novice investors and, sometimes, the banks that financed the deals. 

Worth listening to.

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• 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.

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

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