By Ozzie Jurock
This article appeared in The Vancouver Sun on December 15, 2001
Whenever real estate markets 'heat up' or become visibly better to everyone, the 'marketers' come out of the woodworks. You know, you go to a seminar and are told that in this city or that city in The United States, Europe or elsewhere, there is this great deal. While some of them are legitimate, 'caveat emptor in big letters' on the rest. We all have heard of the spectacular crash of Eron mortgage, because it was so big, but there were and are others. Others designed to separate you from your cash. We always wonder why people rush out and buy this stuff. I guess in part it is, that everyone would like to be rich. We are conditioned by our upbringing and by observing the world around us that richer is best. Besides, being rich will prevent you from being poor. Now that part is a universal truth.
Another almost-universal truth is that real estate is a good way to get rich. We take this idea in with our mother's milk. We also like someone else to do the work, some guru to follow and that's where they get us.
That's why the scams and sham work so well. People already want to be rich. They already believe in real estate. Someone comes along and sings a seductive song and there it is. People simply hand over their money because they believe. And it's this belief that is so easy for the Scam/Sham people to instill. It's an art and it's a mystery to those of us who can't do it, but it's easy for those who can. It is a very simple step for the victims. Instead of making all the individual judgments about the safety and viability of the investment, and these can be dozens or sometimes hundreds of separate value judgments, all the victim has to do is make the judgment that the other person knows what he's doing and is a good person who will take care of them. Once this judgment is in place then this particular universe will unfold the way it inevitably must. The victim will pay over the money and the perpetrator will spend it.
This kind of business has a very colorful history. 'Florida swampland' is a phrase that has become a part of our language. It is another way of saying, 'worthless, overpriced land that will never have any value'. This is an example of distance making the heart grow fonder. It's difficult for a dishonorable con man to profit in his own country. All you have to do is look at those desert tracts in Arizona and California to see what we mean.
For the perpetrators there's an answer to the problem. Actually, it's easy. You sell the Florida stuff to Californians; the Arizona stuff to Floridians; The California stuff to New Yorkers; and anything you have left over you sell to Canadians.
There just doesn't seem to be any limit to the gullibility of people. They tell the story that in California, land speculators would tie oranges to the Joshua trees (a kind of large cactus) and then sell the land to new arrivals as orange groves.
So how do we filter out the bad deals? You've got to ask the right questions. And if you don't get the right answers you have to walk away.
The questions you should ask yourself are:
Answer to Question #2: You almost never find that they have a verifiable track record for success in this area of activity.
Answer to Question #3: You will find that more than 80% of the companies that raise money this way wind up going broke and the investors lose all their money.
Okay, let's say that you are a persistent little devil and you get past the first three questions. You then have to make sure about this:
Is it a Limited partnership? It is seductive ... my losses are limited, right? Yes, but so are your rights. Most of the losses of the past came in this kind of investment. Ask: What are the fees? What about the financing, is it non-recourse? Collateral security required? How do I get out, when I want to? How is the cash flow distributed?
Do you own your own unit? If so, what did the developer pay for it before they packaged it to you? What is the rental value? What are other units in the same local area selling for ? (Yes, fly there). Who will look after the property management?
Be careful. Scams and shams about. It is the old, old story of the Sardine and the Shark. There is no power on earth that is going to keep them apart - not because of the strengths of the Shark, but because of the weaknesses of the Sardine.
E-mail this story to a friend Print this story Save This Page to del.icio.us
Recent Articles by this columnist:
Debunking the Myths of Yuletide Home Selling
Mortgage Interest Rates - Whither Do They Go?
Should You Sell Your Old Home Before Buying a New Home?
What's a cap rate anyhow?
Developers ignore Feng Shui at their peril
All articles by Ozzie Jurock
Check out this week's Jurock Real Estate Insider Special deal
Have a real estate question? Ask an Expert