It was a little over two years ago that I was asked by a real estate investment company to help them secure mortgages for their clients. It was also a little over two years ago that I told them under no uncertain circumstances would I help their clients secure mortgages.
The company’s offering was very impressive, at first. I literally watched one Monday evening as more than 20 people handed over in excess of $3,900 each, to become a member of the company’s mentorship program. It was clear that people who attended their seminars believed that the company had the knowledge to help make each of them millionaires.
*Before I go any further however, let me make one thing perfectly clear – I have no knowledge of anyone who joined this company or invested with this company either making or losing any money. Although I assume that there will be quite a few who lose a substantial amount of money with this company.*
The problem I had with this company was as follows. They promised to help clients pay off their mortgage in as little as seven years, based on a strategy that I taught them (and they modified) less than a week before they started promoting the program on television, radio, and in the newspaper. A weeks worth of knowledge is hardly enough time for them to portray themselves as experts the way in which they did. The strategy involved leveraging people’s homes and using the money to invest in what they considered to be a highly secure investment, but realistically was a highly risky investment. The investment vehicle they were using were secured second and third mortgages against residential properties that the company owned.
These mortgages are where my biggest problem resided. When I began to ask questions of the company’s owner, who at the time I had unlimited access to, I began to more often than not find myself in front of the gatekeeper instead of the owner who actually had the answers to my questions. When I began to ask the gatekeeper the same questions, I was met with the same canned answers that were being given to clients. “So and so has this many years experience, owns this many properties, knows what they are doing, etc.”
Well the fact of the matter is, the owner of the company did know what they were doing, and that was convincing people to leverage their homes to lend mortgages to the company at below market interest rates. Not only that, but the properties they owned often had more money borrowed against them than what the property was actually worth. How did this happen? The company convinced their small, un-knowledgeable, private lenders who had borrowed nearly all of the equity from their homes on the promise of high returns, that the houses they were lending on were actually worth what the city tax assessment valued them at. In other words, the company borrowed from people who didn’t know any better, because the banks sure as hell were not going to lend them the money! At the time, houses were consistently selling for less than what the city valued properties at. In many cases $500,000 houses the company owned, which the city valued at $600,000, had $575,000 to $650,000 worth of mortgages on them.
If a house is worth $500,000, and has $500,000 worth of mortgages on it, and you lend the owner another $100,000, how secure is your money? The answer is not secure at all. Why? Because those who lent the original $500,000 are in line ahead of you to get their money back if the homeowner ever defaults. If you lent them $100,000 all the company would have to do is default on the loan, and they would walk away with your money and all of the equity in your house. My thought, anyone who tries to convince you to leverage your house, so they can buy more houses, should be shot. Not only is this incredibly risky, it is downright stupid.
Here is the kicker though, it took me almost two years and many title searches to figure out what that company was doing. I work in finance, have an economics degree, and understand mortgages better than anyone. If I didn’t understand what this company was doing at the time, how could the clients who had far less knowledge than I understand? The answer is they couldn’t, and they didn’t, because they were duped into risking all they had in an investment scheme that was designed to have them fork over their money with as little objection possible.
Don’t get caught in the same situation.
Go to the Alberta Securities Commission website for details on how to prevent yourself from being scammed by real estate investment companies.
