From the Shadows to the Light: How to Recognize and Avoid Real Estate Fraudsters

I had the opportunity to work with billionaire real estate owners.

The downside was that they were highly unethical.

One of them ended up in prison for several years as a result of their practices.

But, I learned so much from them.

Don’t worry, they’re good lessons. I’m not looking to head to prison. LOL

I want to share some of those lessons so you don’t fall victim to shady practices.

The amount of manipulation I witnessed was mind-boggling. The short lesson is: Verify everything!

Here’s what to look for.

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They would artificially increase income.

How? They would set up leases with people and businesses that were not likely to pay for very long. But, on paper, it looked great.

Make sure you verify that the leases are legitimate.

Be particularly skeptical if:

-the lease is relatively new. If it is, check the background of the lease holder.

-the rent amount is higher than the rates. If it is, explore why.

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The most common manipulation that I saw was to artificially decrease expenses.

The solution: Use your own numbers for expenses or get quotes.

Some of the ways they artificially decreased expenses were to:

-Cut insurance coverage to unsustainably low levels. This is easy to do if there is no mortgage.

-Cut management and employee expenses to unsustainable levels.

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These manipulations are most effective for multifamily and commercial properties – anything that has its value calculated by its cap rate.

Shaving $100,000 off annual expenses adds $1,000,000 in value for a 10% cap rate. At the time, cap rates were often 2%. At that cap rate, it would add $5,000,000 to the value.

All fake. Be careful.

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The last way they manipulated was to hide important details.

Let me share a story.

One of the investors had purchased a shopping center. She told me that she was suing the sellers because they lied. The shopping center was in horrible condition.

A week later, that same investor asked me if I wanted to buy that same shopping center. She told me that it was a great investment and was in amazing condition.

I guess she forgot that she told me about the lawsuit. LOL

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Besides learning to never buy anything that those investors were selling, I learned how to spot manipulations.

Do your due diligence. Do not rely on the numbers provided by the seller and you will minimize your chances of overpaying.

Even if the seller is not trying to manipulate the numbers, their numbers may be unrealistic. Verify everything.

Happy Investing!