By Kathy Fettke
Kathy Fettke gives insight on a recent fraud investigation
Real estate, like any investment, can attract lots of scammers. How do you really know who you’re dealing with? You see ads everywhere for “turnkey” rental properties, but what does this really mean, and how do you know who to trust? The owners of the Bay Area Equity Group, a turn-key property provider located in Campbell, California, were recently arrested on suspicion of fraud. I saw these guys at a real estate expo I attended last year and they seemed like nice enough people. What happened?
Real Wealth Network has over 14,000 members now, so it’s pretty easy for us to get information. It turns out that one of our members purchased property through the Bay Area Equity Group. I asked him about it and here’s what he told me he thinks happened:
In the Beginning…
– They started out with good intentions.
– They made guarantees of 15% returns on rental properties in Detroit, MI.
– They offered to cover repair costs in many cases.
– They wanted to offer the best deal in town.
Testimonials on their website raved about what a great deal it was. “No worrying about property management! No vacancies! No repairs!” Who wouldn’t want that? In reality, that type of situation can exist, but usually only in a triple net lease situation where the tenant agrees to pay all expenses and repairs. It cannot work in a situation where the seller takes on such enormous responsibility for thousands of clients .
Here’s what our member thinks happened next:
– Operating costs ended up being higher than expected.
– They started to get behind on making owner distributions
– They realized they couldn’t meet the guarantees.
– They didn’t want to let their investors down.
How Ponzi Schemes Begin…
Often times operators need to rely on new money to feed the old promises. In this case, our member suspects this is what happened:
– Allegedly the owners started to buy distressed property, perform a minimal rehab, and then resell far above market prices.
– Proceeds from the sales allegedly went to pay for the former guarantees.
– It still wasn’t enough.
– Desperation kicked in. Allegedly they started to sell the same property twice to different people, but only record one sale.
Our member told me, “Earlier this year, I had spoken with the guy currently behind bars and explained how reneging on commitments (guarantees, payments) made during the property purchase would undermine confidence in the company. He believed, probably rightly so, that if the company didn’t make such across the board adjustments, the whole company would go under. According to the lawsuit, it was his partner who relied on the above more desperate title fraud approaches to raise cash and keep the company going.” Whatever the reason, no one wants to get stuck in a situation like this, and they don’t have to. There are so many ways to protect yourself when buying real estate. I asked our member what advice he’d give. Here’s what he said:
10 Ways to Protect Yourself
1. Do not invest all your capital or entire retirement in one geographic area, especially a distressed location.
2. It’s best to avoid highly distressed regions if you are a first-time investor.
3. Use a reputable title company or attorney to make sure the property is properly recorded at purchase.
4. Always purchase title insurance to ensure clear title.
5. Be leery of turnkey deals that isolate the owner too much from rental property operations and financials.
6. Prior to purchase, insist on hiring your own property inspector.
7. Determine how the appraiser was selected. I suspect that Bay Area Equity Group was trying to influence the appraisal process.
8. Visit the property (or at least visit the area initially so you understand what you’re buying).
9. Look up public records so you know who currently owns it, how much it sold for before and if it has an IRS tax lien or other liens.
10. Ask for a scope of work done prior to purchase, and verify it with an independent inspector.
Real Wealth Network has been vetting out property sellers since 2003. These are just a few of the items on our checklist. If you’d like to receive the full duediligence checklist or receive a list of companies that passed our scrutiny, simply visit www.RealWealthNetwork. com or call 888.RWNetwork
About the Author: Kathy Fettke is the CEO and Co-Founder of Real Wealth Network. She specializes in helping people build multi-million dollar real estate portfolios through creative finance and planning. Kathy is also host of The Real Wealth Show and is a frequent guest on CNBC, FOX Business News, CNN and CBS MarketWatch.