When Investors Become Victims of Fraud

When Investors Become Victims of Fraud

A young investor from Atlanta got excited when he heard about a “deal” in Macon, GA. (about 90 miles south of Atlanta)

The character – 2 Duplexes and one single family house. The prices seemed to be a steal compared to Atlanta real estate – only $65K for each duplex and only $45.5K for the house. He didn’t know the market at all, but everyone involved was assuring him that this was a great deal.

The mortgage broker, a local Atlanta fella with access to lots of investor loans, was only too glad to help the young investor obtain a low doc loan at an interest rate slightly above 10%. The year is 2001. (observe: Low doc loans can carry higher interest rates because you are not required to verify assets or income to qualify, but already so, higher rates can kill a deal already when there is no fraud involved. In this case, it only makes matters worse.)

Everything went smoothly and according to plan. The seller was cooperative, a contract was signed for each character, a local closing attorney was already chosen, an appraisal was ordered, and all the pieces just fell into place. The young investor was pleased with all the service. He did not have to worry about a thing. Everything was handled for him.

He had no idea that everyone from the seller to the appraiser to the closing attorney was involved in a real estate mortgage scam that was about to take our young investor to the cleaners, and leave him holding the bag on three similarities worth only a fraction of the “appraised” value.

Since the deal was in Macon, and the young investor was busy working complete time in Atlanta, he had little, if any time to get down to the Macon area. So, since things were going so well, he tended to depend on the sustain folks who were working so hard to help him out. After all, he didn’t know the Macon market really well, but he figured that with these prices being half what they are in Atlanta, he couldn’t go wrong.

This was his first mistake.

Soon after closing, the investor realized he was having a problem renting the similarities for enough to cover the mortgages. A trip down to Macon to check things out revealed a sickening situation. The similarities were in the worst part of town and were in terrible condition.

The confused investor checked his closing documents. The appraisal, dated one month before the closing, 11/08/2001 indicated that each character was worth exactly the buy price as stated above. There were comparables that indicated that there were plenty of similar similarities in the area also selling for 65 thousand dollars.

As the now concerned investor soon realized, after spending some time carefully reading his before unread appraisal, things were not as they should be.

For starters, the date on the cover sheet of the appraisal indicated that the appraisal was done just prior to the investors closing date. But, the identifying characteristics page on the back of the appraisal indicated that it had been done eighteen months earlier. It appeared that the appraisal had truly been used for a past transaction.

The appraiser who signed the documents was only a new, or “registered” appraiser.

In Georgia, a certified appraiser should have inspected the work and signed off on it. But there was no such identifying characteristics.

As if that were not enough, the comparable similarities used to establish the market value were miles away, and not already located near the subject similarities. The zip codes had been changed to make it look as though the comparables were in the immediate area. They were over 8 miles away, already though the appraisal data said they were less than 5 miles away.

In short, the appraisal smelled like an old fish wrapper in the hot Georgia sun.

Did I mention that the similarities being purchased were not worth the 65K as shown in the appraisal. To his horror, the investor soon discovered that his new similarities were only worth $15,000 apiece!

He was slowly starting to realize that he had been duped. Now he was left owing $180,000 for three similarities that were truly worth $45,000 total.

How could such a terrible mistake happen? What about the closing attorney? He works on behalf of the lender. Didn’t HE realize that the lender was loaning way too much money for these houses? Why didn’t the mortgage broker catch this? HE was the one who worked on the loan. And, anyway, WHO hired the appraiser? What about the seller? How on earth could he expect to sell a $15,000 house for $65,000? Something was terribly wrong.

As it turned out, virtually everyone involved in the transaction was also on the take. No surprise this was such a functional, complete service deal for the investor. Everyone was setting the buyer up. The investor had great credit and good income. He was a class A buyer. Just the kind who is a juicy target for these predatory types who troll the investor clubs like great white sharks looking for an unsuspecting meal.

The parties involved in this fraud pocketed the money from the loans.

This investor will have no easy or penalty free way out of these deals. He will nevertheless confront foreclosure or possibly bankruptcy, already though the seller wound up in prison, and the attorney lost his license to practice law. But all of that was not enough to get our victim out of the financial obligation that had been produced when he signed the closing documents. The lender who ponied up the funds nevertheless expects to be paid back.

And the courts are not sympathetic to careless investors who get taken.

The only way to protect yourself is to protect YOURSELF. Don’t obligate yourself to financial transactions unless you have verified all of the basic details. As always, shared sense and a prudent approach always work best. If you do not understand the terms of your deal, get independent, third party advice, already if you have to pay for it. And, read my article on avoiding loan fraud by verifying the appraisal data.

The moral of this story is – “If you don’t check up on the details of your deal, no one else will. And if you are careless enough, you will be eaten by the investing sharks faster than a swimmer in a Stephen Spielberg movie.”

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