Don’t Bet the House
~ By Gerald Rome, Colorado Securities Commissioner ~
With the “on fire” real estate market in Colorado, and with housing supplies low and demand high, it is easy to become caught up in the idea that real estate investments are sure bets to make you money. However, don’t just roll the dice when investing in the real estate market. While it can be a profitable business, if you don’t do your homework, you may end up with snake eyes rather than a winning seven. Real estate investment fraud has made our top ten list of investor threats every year for the past ten years! We continue to see these kind of losing bets because investors are lured into them with promises from unlicensed and unqualified con men that your funds will be “secured” by the real estate, giving investors comfort that they will at least see the return of their principal. And when those promises are false, you end up losing your investment, and you usually lose big.
The most common fraud scheme we see is investing in real estate investment property. These investments demand a large amount of up front money in order to purchase properties. They come with guarantees that there will be a large increase in value when the property is resold, and that investors will receive a high interest return on contributions.
In many of the schemes, property values can be inflated, and oftentimes investors are told that until properties sell they will be rented out in order to generate a steady flow of income. Unfortunately, the risk that is very rarely relayed to investors is that the property value goes down or does not match what was represented, and even the rental income that should be generated rarely materializes. One recent case in Colorado involved a Woodland Park man who, despite having had his securities license revoked, continued to solicit investors to purchase distressed properties to resell. Even though investors were promised 10 percent interest secured by the real estate, multiple deeds of trust were stacked on the same property, making them worthless. And the investment funds were used for personal use and to pay off previous investors in a classic Ponzi scheme.
So what are some red flags of a real estate scam , and how can you avoid becoming entangled in one? First, always check the background of the promoter. Are they licensed? Be wary of any offers that seem to be representing an inflated appraisal or use of “straw buyers” to get the deal rolling. Any proposed circumvention of purchasing guidelines should be a cause for concern as well, even if the promoter claims it will make the process easier or more lucrative. Finally, be extra cautious of any deal that involves purchasing a large number of properties at once, or where the borrowers are located in several different states. In order to prevent becoming a victim of such a scam, always do your own due diligence when it comes to an offering. Be sure that whomever you are dealing with is properly licensed to issue securities by visiting www.investor.gov. Finally, if something doesn’t feel right in your gut, you should probably listen to it. Don’t gamble with your investments. And you can always call to check out a securities offering with the Division of Securities at (303) 894-2320.