Real Estate Scams: How to Protect Yourself

Real estate scams are nothing new. They are also not difficult to spot. Although most victims won’t fall for buying the Brooklyn bridge or property on the moon, …

Real estate scams are nothing new. They are also not difficult to spot. Although most victims won’t fall for buying the Brooklyn bridge or property on the moon, there are many variations of real estate scams. Victims tend to be those that have little real estate investment experience or that neglect to perform even casual due diligence. Although it’s easy to get swept away with ideas of how your life could change with a windfall of cash from a real estate investment, it’s also relatively easy to protect yourself from scams if you know what to look for and where to look.

 

Spot real estate scam promoters

Have you ever noticed that the most successful people you know never talk about being successful? Have you noticed that those with money rarely talk about how much money that they have or make? The number one thing scam promoters have in common is a focus on their lifestyle. This can include driving fancy cars, indulging in fancy dinner meetings or wearing expensive clothes. If you see someone spending exorbitant amounts of money on lifestyle expenses, it may not be the kind of person you want managing the expenses of an investment project.

 

Beware of “no work” and “no risk”

You should not go into any potentially high returning investment thinking it will involve zero work. Higher returns are generally equated with higher risk and that includes the chance that you may have to get more involved at some point. A promoter selling a high-returning investment as “no work” and “almost guaranteed” should be an immediate and powerful red flag. As with any investment, you should be willing and able to get involved if the investment does not go as planned.

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Use professional services: title insurance, inspection and escrow

Investors should perform some key due diligence before investing in a project. This could include obtaining a title insurance report (do they own it?) and having an inspection or feasibility study done (is the property in good shape and/or is the development feasible?). In addition, you should always use a third party escrow service to ensure that all contractual requirements are met before funds are released.

 

Have an attorney review your contracts

Speaking of contractual requirements, it is imperative that you have an attorney review your contracts before moving forward on any deal. Many investors attempt to avoid the high short-term cost of using an attorney in order to save a few dollars. Don’t make this mistake. There are ways to limit your attorney costs without forsaking the contractual protection that they provide. You can use templates and attempt to address issues yourself, but you should ultimately have the agreement reviewed by an attorney. They may offer suggestions with which you do not agree, but you will at least be aware of the potential risks that you are taking.

 

Don’t be pressured by timelines

A common trick used in real estate scams is timeline pressures. The fear of missing out on a deal has compelled many investors to push forward on investments without conducting the proper due diligence and contractual work. While “paralysis of analysis” is a common problem that keeps people from becoming active investors, the fear of overanalyzing should never be justification for letting important due diligence slide.

Tip: Make a due diligence checklist before you start looking at investments. Resolve not to move forward with any investment project without having completed your checklist.

 

Do background checks

Most investment opportunities are only as good as the people running them. That being said, it is a worthwhile investment to investigate the principals of a project before investing. This could include a criminal background check, a credit report, a Google search for their name and investigation of references. In any investment project or business, perseverance tends to be the quality that is most predictive of success. Odds are high that things will not go exactly as planned.

Tip: Find out how much the principals have invested in the project. This is the most important thing that banks look for when deciding whether or not to lend money on a particular deal. People, in general, will do more to protect their own money than they will to protect yours. Make sure that your incentives are aligned.

 

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