Why You Need a “Why”

BEGINNER’S  CORNER:  REAL  ESTATE  SCAMS

 

Why You Need a “Why”

 

 

by Vena Jones-Cox

 

In the last few months, I’ve come to deeply respect the importance of the “why” in our real estate endeavors.

 

See, I’m always trying to discover all the reasons that students (and myself, as well) manage to trip themselves up despite lots of education and, in many cases, even a workable plan. And number 1,243,412 on the list is: there’s a WHAT and a HOW, but not a good WHY.

 

People come to real estate for a variety of reasons ranging from passion to desperation. Once they get here, it’s fairly easy to learn what you should do and even how you should do it. For instance, if you want to wholesale properties, you need to look for junkers with motivated sellers and a lot of equity (the what), and the best way to look for them is by sending out x letters to y people (the how). Because thousands of folks have trod this particular path before you, it’s relatively simple to follow, and easy to avoid the pitfalls.

 

The important question isn’t whether you know how to do what—it’s why you want to do it in the first place. Without a good “why”, the how and what is unattainably difficult.

 

Your “why” should tap into a deeper vision about your life. If it’s “I wanna get rich” or “I have to figure out a way to pay my bills,” it’ll be awfully hard to keep trudging through the daily “to dos”, especially during those times when there’s no check in sight. It’s too easy to give up when the surface rewards—i.e., the profits—aren’t rolling in.

 

What’s your real “why”? Is it that you passionately desire to spend your time working for a cause, raising your family, connecting with your spouse? Is it that you have a vision of the perfect home in the perfect climate? Is it that you truly want a lifestyle that you can have only if you’re financially independent? What does your ultimate “why” really look like?

 

Because when you can envision the things that you really and truly want from this whole real estate thing, it’s a lot easier to get up in the morning and do what needs to be done to get it.

           

More Real Estate Scams than You Can Shake a Stick At…

 

I know that I’ve discussed this topic repeatedly over the years, but just this week I got THREE separate emails from Inner Circle members questioning deals as possible scams. In all three cases, I believe that they were correct. I’ll outline them for you, changing a few of the details to protect the innocent.

 

Scam #1: Cash Back at Closing.

One student was offered a property in a newly completed subdivision, with the come-on that if he bought it at full market price, the owner would rebate him 10% of the price in a few weeks. The total cash out would exceed $20,000. Tempting? Yes, but…

 

What’s the Problem?  This “rebate” would happen without the knowledge and consent of the lender.  When a bank makes a loan to purchase a property, their expectation is that the money does, in fact, go to purchase the property. IF it were possible to find a lender today who would agree to a cash-out purchase money loan—and there’s not—all of the details would be reflected in the closing statement. In this case, the closing statement would say that the purchase price of the property was $385,000, and that a loan of $375,000 was made to Joe Student, and that the proceeds of the loan went to Owen Owner.

 

Anytime the “truth” about a deal—in this case that Owen Owner actually gets $355,000 and Joe Student gets $20,000 of the loan—isn’t reflected on the HUD-1 at closing, you can almost bet that it’s bank fraud.

 

What’s the Rest of the Problem? In addition to the going-to-jail thing, I see two other significant problems with this deal. First, Joe Student has to trust Owen Owner to actually send the check, because I can guarantee you that the deal won’t be written down anywhere. And since Owen is in the middle of committing fraud against an institution, I’m not so sure his ethics are such that I’d believe the check would ever arrive.


Second, in this case Owen has apparently sold several of the houses in his subdivision this way, which means that the REAL price that people are agreeing to pay is $365K, not $385K. If Joe student needs to sell the property anytime soon, it’s unlikely that he’ll be able to sell it for what he owes.

 

What would make this deal OK? One thing and one thing only—that it was done with the full knowledge and consent of the lender.

 

Scam #2—Help Me Steal from My Bank

In this instance, the student was approached by another investor with this scenario: the Investor (let’s call him Irv) had borrowed $200,000 to buy a property which he later transferred into a friend’s name. The friend didn’t make the payments, and now the loan is in default.

 

Irv negotiated a short sale at $150,000 with his bank, and now wants Joe Student to buy the property at the lower price, rent it to Irv for two years, and then sell it back to Irv at $175,000. The student was also offered a $10,000 cash-out refi the same day (extremely unikely), and Irv agreed to escrow six month’s worth of payments at closing.

 

What’s the Problem? Not to put too fine a point on it, Irv is stealing from his bank. He borrowed and agreed to pay back $200,000; now he’s paying back $150,000 AND getting the house for $175,000. There’s no law in place that I know of that covers this specific situation, but 1) would you want to explain what happened to the jury and 2) would you really want to be in a deal with guy who did this?

 

What Would Make this Deal OK? If it were a traditional short sale WITHOUT the leaseback/resale to Irv.

 

Scam #3: Money Laundering?

I got an email this morning from a student who offered an apartment building at $165,000, and almost immediately got an offer for $450,000. The offer was not actually from a buyer, but from a real estate broker or wholesaler (it’s unclear which). There are no circumstances under which this property is worth $450,000.

 

What’s the Problem? One of four things is going on here. Either:

   a. Illegal money is being laundered via the purchase of the property

  

   b.  An out of state bank is being defrauded—they’ll loan $400K or so on this property, the buyer and his partner 

       will take out $250K in cash, and the bank will never get payment #1

 

  c.  A really unethical wholesaler has convinced a buyer from outside the area that 12 unit buildings in Ohio actually

       sell for $450K, like they do on the coasts, and the buyer is trusting enough NOT to do any due diligence

 

   d.  It’s a variation on the “Nigerian Scam.” We’re seeing more and more of these related to real estate. The buyer is typically a “successful businessman,” often from England. He doesn’t have the time to look at the property, so he’ll just send you a check. Oops, the check was for $50,000 too much. That’s OK, just send him a check for the difference. You do, and his check never clears.

 

“d” is becoming very common on properties listed for rent or sale on Craig’s list, so be careful of tenants or buyers who want to overpay for what you’re advertising.

 

What Would Make This OK? Not a single thing that I can think of.

 

Good for each of the students whose B.S. detectors went off when presented with these seemingly great opportunities.

 

Remember, if it sounds too good to be true….

 

Copyrighted by Vena Jones-Cox. Reprinted by Permission. National Speaker Vena Jones-Cox has appeared at past MREIA meetings and has been a full-time real estate investor since 1989. She focuses on high-profit, low-hassle strategies that leave her the time and freedom to enjoy financial independence. All told, she’s bought over 600 properties. Vena is also the host of public radio’s “Real Life Real Estate Investing” (Wednesdays at 5 pm est  at wnku.org), a live weekly program that addresses all aspects of real estate investing. She is past president of Cincinnati REIA, Ohio. Email: regoddess@att.net  or visit www.regoddess.com