Many Israelis are now buying and selling American real estate, trying to take advantage of a strong shekel and a weak United States real estate market.
However, real estate scams are probably as old as real estate itself, and savvy investors can make mistakes, especially if they are deceived by their attorneys and real estate advisors.
With investors pooling their money into real estate trust funds, there are multiple opportunities for con artists to conceal theft from the trust fund. As the trust fund managers collect monies from an ever-increasing circle of clients, they pay out “dividends” based not on returns, but on new investments.
In one real estate ponzi scheme, investors purchased deeds (interests in land) that were marketed as being secured by California real estate. In fact, the deeds were either unsecured or far more risky than promised. Many of the “investment counselors” were not licensed as required, and the appraisals were inflated. The ponzi scheme promised rates of return of 18% to 22%, with loans not exceeding 80% of the value of the property. It was all a multi-million dollar fraud.
In another case, a Harvard Law graduate, who was a former US Attorney, teamed up with a tax shelter specialist to defraud property owners. The owners provided a limited power of attorney over two residential properties to a relative of the tax shelter specialist. The attorney promised that the relative with the power of attorney was as honest “as the day is long.” A short time later, while the owners were in Israel, the “honest” relative and various acquaintances obtained outside loans on the properties and moved another relative into one of the homes. When the property owners demanded to be made whole, the scam artists threatened to “grind the owner into the ground.” And, when the owners took legal action, the attorney had another tenant manufacture a claim of sexual harassment against the owners.
Sometimes, an enterprising buyer will pay a small deposit to tie up a property in escrow, perhaps for ninety days, while looking for another purchaser. When the transaction closes, the original seller is paid by the ultimate purchaser through the escrow. This kind of transaction is sometimes referred to as a “double escrow,” and often the original seller has no idea about the additional premium collected by the middleman.
This arrangement can become fraudulent where the attorney represents multiple parties in the transaction and conceals the facts from the seller. Generally speaking, attorneys only represent one side in a transaction, especially in a real estate transaction, to avoid conflicts of interest. The attorney should disclose all the facts about the transaction and obtain written consent.
A real estate scam artist often has a certain flair. The scammer gains the confidence of the victim with brash self-assurance and by displaying badges of success: money, cars, and an impressive home. Then, the scammer confuses the investor with a get-rich-quick scheme that is incomprehensible, yet delivered with such bravado that otherwise prudent, successful people write enormous checks to buy something they do not understand.
As a young attorney, I remember sitting in a meeting with a brilliant transactional and tax lawyer who was being sued for fraud in Los Angeles. He was dazzling. He had the entire defense team in the palm of his hand. We thought he was a genius, we admired his character, and we could not believe that he had done anything wrong. As the case proceeded closer to trial and after the defense team considered the evidence, it became clear that like the investors we had also been fooled.
Some simple rules apply: Understand how the transaction works: what is being bought, what is being sold and how the investment makes money. If it looks too good to be true, it probably is. Be careful about trusting strangers. A power of attorney is a potentially dangerous instrument. Finally, always have qualified third parties, who are not interested in the transaction, review the deal.
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