Front Row Seat to a $4,000,000 Real Estate Scam!

I got swindled by a con man even when I knew better.  This is a true story that happened during the early stages of my real estate investment career.  I’m writing this to first tell you how it happened and then how you can avoid falling into the same trap.

It wasn’t millions of dollars, but $12,500 would have paid for one hell of a great Vegas vacation!  Especially back in 2005 when I was single 26-year-old. Or I could have used it to pay bills- whatever.  Anything but to have trusted a guy with my money that would never return my calls and emails again. 

I even bought the scumbags lunch before handing him over my money…

I can still feel the tense anger and stupidity even today.  There were red flags. Even my father said, “You will never see that money again”.  But my thoughts were blinded by the idea of making 10X on my money.  When something is too good to be true… Yah I know.

It wasn’t so much the greed, I really wanted to learn how to invest with the big boys

A fellow real estate investor told me about an opportunity that he and others were investing in with a big shot developer.  We all piled in the conference room in a swanky lawyer’s office. The secretary, a young and attractive woman, asked if I would like a coffee or water.  I didn’t drink coffee at the time, but I said coffee please.

As I slowly sipped the hot coffee, I felt important and part of something bigger.  The main guy strolled in about 10 minutes late.  His demeanor was smug.  Almost as if he was making an exception to allow us to give him OUR MONEY.  First mistake, the deal was in North Carolina. I knew nothing about North Carolina other than it was warmer than Michigan.

*Photo is of a similar development

The second mistake, overlooking the fuzzy details on the project.  He showed us an aerial photo and a grainy video of him in a helicopter overlooking a 100-acre parcel of land.  The deal involved him purchasing the undeveloped agricultural land and then dividing the 100 acres into 10 or 20 separate parcels after it was rezoned to commercial use.

He named off multiple sales and lease agreements he already had with Home Depot, gas stations, etc. But the big reason for all the excitement was a new highway that was being developed and the exit was right at the corner of this property!!

I thought, “Wow this guy is a genius and I’m lucky he is going to show me how to be rich and famous.” I was sold with a grainy video, an article on the new highway, and a fancy office that wasn’t even his own.  No hard facts like purchase agreements or how he was Really going to get the project actually done.  I didn’t even think to Google his name or do any vetting of my own.  

Long story short. The property was never purchased, and the guy skipped town. A total of 26 people were victims of this scam for a total of over $4M dollars.  Some lost everything they had.  I was lucky, since I didn’t have much back then anyway.  I probably would have given him more if I did.

What could I have, and others done differently? 

Here is a brief checklist and this is in no way everything you should do. 

1.       What due diligence is available to vet the key persons?

2.       What are some red flags to look out for?

3.       What questions should you be asking?

Now some of you reading have already invested with me on various real estate projects.  I just Googled my name as well.  

Which is the first step… You can learn a lot through a Google and Facebook search about a person’s character.  You also can avoid having to sit through someone’s long winded pitch when you can clearly see from Google, they have no experience.

Other than Google, you can also pay for service to do a background check.  Now, just because there are court cases doesn’t mean they are at fault.  In the real estate and debt world, ending up in court is routine.  Make sure to read the documents carefully and know who the Plaintiff and Defendant in the case is.

What’s their track record of success? 

The key person is the glue that is going to keep things together and see that your money safely lands back in your pocket.  But how can you know if this person can do what he says?

Investing in real estate isn’t easy and it's very time consuming to do it right.  Just because you’ve read a book and watched HGTV “Flip that House” doesn’t make you qualified.  Until you have been in the real estate trenches, you really don’t know what you’re talking about, even if you have found the best deal on the planet.  There are plenty of ways to screw it up and make yourself and your investors liable for more money or lawsuits.

Ask for details on previous real estate projects.

If they are hesitant or give you a run around, then it’s a good chance they either don’t have the experience or their experience has turned out poorly.  You need hard evidence including addresses of deals done.  It’s easy to look on County records for the names of previous owners of properties to see they actually owned the property. 

The best people to work with come from referrals from people have worked with the key person in the past. 

I was referred from a trusted friend, but he and I never worked with this person. Ideally, you want to be introduced to someone that has a history of taking deals full cycle.  Meaning that the person referring you to the investment has invested their money and that money was returned with a profit. 

Red flags- The project itself.

Time is the killer of deals.  The shorter the time frame the less issues can come up.  The longer the time frame the more likely emotions are going to get the best of people.  This is especially true when it comes to large rehab projects.  Here are some common issues that come up as time drags on.

  • The key person underestimates the time and effort involved. 
  • They run out of money and resources. 
  • Contractors walk off on project mid-way through
  • The city has their hands out looking for large fines

All this begins to weigh down on the key person. The initial excitement wears off and they are left with a huge time-wasting nightmare.  This is why you want someone that is a grizzled real estate veteran that has the staying power to see a project through.

Here are few questions to ask to avoid getting in the middle of a potential nightmare.

  1. What’s the time frame?
  2. What happens if your projections or exit strategy doesn’t work as intended
    1. ​Rents don’t increase
    2. You can’t refi in a year and cash everyone out
    3. The market decreases in value
    4. There isn’t an end buyer for the project
  3. How much of the key persons money is in the deal?
  4. How easily can a key person skip down?
    1. Do they have a family that is in the area?
    2. How long have they lived here? Did they move here recently?
  5. How does the contract read for the dreaded “Capital Call”
    1. Are you possibly on the hook for more money?
    2. Are you personally liable for anything?

Personally, I avoid any new development projects or investments that are dependent on appreciation. 

For example, if you are reviewing a multi-family investment and they say that they are going to raise all the rents and then refinance.  I would be very cautious.  If it was that easy, then why didn’t the previous owner do it?

In conclusion, real estate is one of the best ways to grow your wealth.  It’s a time tested and the right strategy can work in boom and bust economies.  You don’t need to be afraid to invest but you do need to be smart with how you invest. 

I’ve learned this a few times the hard way.   However, with the right amount of due diligence, you can have your cake and eat it too!

Kind regards,
Kyle Zimpleman, Managing Member

Real Estate Bio