True Story: A company based in Lodi, California has been sued by investors in Los Angeles Superior Court who claim they were suckered into buying what what turned out to be worthless OREO properties.
(An OREO refers to Other Real Estate Owned – the accounting term for “other” properties banks own because they had to foreclose. REO is the term that has been mistakenly used for foreclosed properties, but an REO is the Real Estate Owned intentionally by the banks.)
The suit claims the company, Fortuno Enterprise, sold investors OREO homes at under-market prices and then promised to help re-sell them for substantially higher prices.
The 24 plaintiffs in the suit bought a combined 41 OREO properties in Ohio and Michigan for prices ranging from $25,000 to $31,995 each.
The homes were worth $5,000 to $7,000 at the most. The suit claims that “after relying on these representations, Plaintiffs purchased the homes to find that they were not inhabitable and required extensive repairs.”
“The Fortuno Enterprise also promised to find a buyer for the properties at a substantial profit to plaintiffs. The so-called buyers were unqualified and often failed to make payments thereby creating a hold-over tenant requiring eviction,” the allegations continue. “For other plaintiffs, no purchasers could be found and the houses were unmarketable in their current conditions.”
The bottom line is that local investors are now stuck with worthless properties that need substantial repair and are located out of state in undesirable neighborhoods. How could these investors have protected themselves?
RealWealth was actually contacted by this company several years ago. We could smell the fraud through the telephone lines.
Here’s how we knew it was a bad deal:
1. The company was selling the properties “as is.”
No rehab was done. An OREO typically sits vacant for over a year. During that time, most of the moving parts get stolen and squatters are known to light fires in the living room to keep warm at night. They also tend to use any room as a bathroom. How could they be resold to an owner occupant at a higher price when no rehab was done?
2. The “sale” was actually going to be seller-financed.
Seller-financed means the investor would hold the note. Just like a bank, the investor would take the property back if the buyer defaulted. A property in “as is” condition would not be a property we’d want to take back.
3. No local expert to inform investor about neighborhood quality grade.
There was no local expert involved to inform the investor of the quality of the neighborhood or the condition of the property and there was no local property manager to help oversee things while marketing for an end-buyer.
4. Fortuno offered us a very large referral fee.
They told us they were buying the properties for $5000-$7000 and would sell them to us for $12,000. We could then turn around and sell them to our members for $25,000. We knew immediately that this was fraud and passed on the deal. However, we noticed that other groups were actively selling these properties.
Greed is a powerful force. Both the sellers and the buyers were looking for a quick buck, without considering the consequences. However, I’m sure many of the investors were new to real estate and didn’t know how to perform due diligence.
Here’s a few ways they could have protected themselves:
1. Real estate sales data is public information.
Investors could have found out quickly from on-line records that Fortuno had marked up the properties.
2. Technology today allows us to get information at the click of a button.
It’s quite simple to get a satellite image of the neighborhood, a street or even a home. Or we can use old technology, like the phone, and ask a local person to drive by and take some photos.
3. Ask a local realtor for a free CMA
Any local realtor will give out a CMA for free, which contains information on comparable sales and the estimated value of the property. Zillow.com may not be always accurate, but will give a list of recent sales in the area.
4. Always get an inspection!!
Why would anyone buy a property sight unseen without first getting an inspection? For $350 they could have had a professional check the condition of the property and make a list of all the needed repairs. An independent appraisal could also be ordered for $350.
5. Make sure you’re qualified to invest.
End buyers need to be qualified, or the chances for default are imminent. Haven’t we all have learned something from the subprime meltdown?
There are many simple ways to protect yourself in real estate. It is a hard asset you can see, touch and feel. You can hire independent inspectors and appraisers to evaluate it. If you bypass these common practices, you will get in trouble. As an investor, you are expected to know the basics of investing. This is what the judge might say in this case.
Remember that RealWealth offers free consultation to our members. Let’s take 5 minutes to review whatever deal you are considering. Contact us here.